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AGL Resources Inc. (NYSE:GAS)

Q22012 Earnings Call

August 1, 2012 9:00 am ET

Executives

Steve Cave - Treasurer and Vice President, Finance

John Somerhalder - Chairman, President and Chief Executive Officer

Andrew Evans - Executive Vice President and Chief Financial Officer

Peter Tumminello - Executive Vice President, Wholesale Services, and President, Sequent Energy Management

Hank Linginfelter - Executive Vice President, Distribution Operations

Bryan Batson - Executive Vice President, Commercial Operations

Analysts

Craig Shere - Tuohy Brothers

Carl Kirst - BMC

Mark Barnett - Morningstar

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2012 AGL Resources, Inc earnings conference call. My name is Pam, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Steve Cave, Treasurer. Please proceed.

Steve Cave

Okay. Thank you and good morning everyone. Thanks for joining us this morning to review our second quarter 2012 earnings results.

Normally, you would expect that Sarah Stashak would be moderating this call, but we are happy to share that Sarah is the proud mother of a new baby boy born this past weekend. We are all very excited for her and we look forward to having her back a little bit later this year.

Joining me on the call today from our distribution operations headquarters here in Naperville, Illinois are John Somerhalder, our Chairman, President and CEO, Andrew Evans, our Executive Vice President and CFO. We also have several members of our management team here and available to answer your questions following our prepared remarks.

Our earnings release, earnings presentation and our Form 10-Qs for both, AGL Resources and Nicor Gas are available on our website. You can access these materials by visiting aglresources.com.

Let me remind you today that we will be making some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve matters that are not historical facts and are forward-looking statements and projections could differ materially from the actual results. The factors that could cause such material differences are included in our earnings release and our 10-Qs, and they are more fully described in our most recent 10-K filings.

We also describe our business using some non-GAAP measures such as operating margin, EBIT, adjusted net income and adjusted EPS. A reconciliation of those measures to the GAAP financials is available in the appendix of our presentation as well as on our website.

So we will begin the call today with some prepared remarks before taking your questions and I will turn it over to Drew to begin.

Andrew Evans

Thanks, Steve. Congratulations, Sarah. Good morning, everyone.

Starting on slide three of our presentation, we reported GAAP earnings per diluted share for the second quarter of $0.28 for the combined enterprise, including the legacy Nicor Gas businesses.

On an adjusted basis, which excludes $2 million of after-tax costs incurred during the quarter related to the Nicor merger, diluted earnings per share were $0.30 which compares to $0.33 in the second quarter of 2011.

The primary year-over-year driver of our second quarter earnings is the addition of the Nicor businesses, the results of which are not reflected in the second quarter of 2011 GAAP comparisons. Our business performed well during the quarter, but did reflect a $0.02 per share negative impact during the quarter due to continued warmer than normal weather.

Turning briefly to slide four, you can see that our year-to-date financial results for the first two quarters. Diluted EPS adjusted for Nicor expenses was $1.47, down from $1.96 for the same period last year. The primary reason for the declines are again, the unprecedented warmer than normal weather which had a $0.13 impact on our earnings results year-to-date.

Weaker results at the wholesale business and increases in the number of shares outstanding following the completion of merger, these were partially offset by the addition of the Nicor businesses.

On slide five, you can see that approximately 77% of the total consolidated operating EBIT for the first six-month of 2012 was generated by our distribution operations segment. Retail operations account for 19% year-to-date, wholesale services 3% and mid stream moderations, 1%.

I will cover some of the major segment variances starting with out distribution business on slide six. EBIT was $26 million, compared to the second quarter of 2011. This includes an EBIT contribution of $20 million from Nicor Gas. The warm weather had a negative EBIT effect of approximately $4 million during the quarter built across our distribution business.

We are starting to see benefits from our shared service model accrue across our entire business and one of the key metrics that we used to gauge this is O&M expense per customer. For the first six months of 2012, O&M per customer was $69, down from $75 per customer for the same period in 2011.

These numbers are adjusted to exclude rider investment programs where there is a corresponding revenue offset to associated expense. We are also seeing additional improvement for our non-regulated businesses.

Turning to the retail segment on slide seven, we reported EBIT for the second quarter of $14 million, a $13 million increase compared to the second quarter of last year. This large increase mainly reflects the addition of Nicor's retail business to our portfolio. Those businesses are less seasonal than the SouthStar business that historically was the company's entire retail operating segment.

You will find second quarter 2012 results for our wholesale service segment on slide eight. EBIT was down $4 million year-over-year for the second quarter. The largest component of the EBIT decline came from a $6 million reduction in commercial activity versus the second quarter of 2011 due to ongoing low volatility in the storage and transportation spreads.

We also recorded transportation hedge gains of $18 million during the quarter, a $14 million increase over the last year and storage hedge losses of $9 million as compared to $4 million of storage hedge gains last year, a $13 million negative year-over-year impact.

These two factors played a role in our expectations for the remainder of the year for the wholesale segment, and John will talk in greater detail about these items in just a few minutes.

As you can see, we have a significant storage rollout schedule of $47 million that we expect to recognize in operating revenues about equally between the remainder of 2012 to 2013. This is an increase of $28 million over the rollout scheduled at the end of the first quarter of 2012 and $36 million improvement, as compared to this time last year.

Now let's move to slide nine. EBIT of our midstream segment was $2 million during the second quarter of 2012, flat compared to the prior year.

As a reminder, we re-contracted 3 Bcf of capacity at Jefferson Island starting April 1. Due to the continued challenging market conditions and pressure on storage pricing disrupt our average rate for the facility from $0.19 to $0.14. You can see the blended rates for Golden Triangle and Central Valley on the chart at the bottom right side of the page.

Though we have seen a slight improvement in storage rates for shorter duration contracts, we continue to evaluate options for locking in additional capacity in Central Valley and Golden Triangle Cavern 2.

Briefly, the cargo shipping segment reported an EBIT loss of $1 million during the second quarter of 2012. Our revenues per unit were down. TEU or 20-foot equivalent unit shipments and market share are up relative to the same period last year, reflecting tropical strong profile in the region and efficient management of its business.

We were breakeven for the year-to-date period on an EBIT basis for that segment as a result of higher depreciation and amortization expense resulting from purchase accounting fair value adjustments that were required as part of the merger.

Some balance sheet highlights are noted on slide 10. Our long-term debt was at $3.3 billion, which reflects the additional debt issued to finance the Nicor transaction and additional Nicor debt we assumed upon closing the transaction.

Those factors were the main drivers of the year-over-year increase in interest expense. We are generally on plan for capital expenditures this year with a significant portion of our utility capital investment dedicated to rider or surcharge programs with minimum regulatory lag. We continue to look for similar opportunities to deploy capital of property utility franchises.

Finally, as a reminder we provide earnings per share guidance estimated based on normal weather among other assumptions. As noted in the earnings release on a reported EPS basis, our earnings could fall below our guidance range, which is $2.80 to $2.95 per share, as a result of weather and tax year-to-date.

Thanks for your time. I will turn the call over to John.

John Somerhalder

Thank you, Drew, and good morning. As Drew noted, we reported solid operating results during the second quarter despite some continued impact of warmer than normal weather into the early part of the second quarter.

On slide 11, you can see the weather anomalies that have affected our utilities year-to-date with Illinois and Georgia highlighted, as these are the two service territories where we have the most weather exposure. With the unprecedented warm weather that impacted us in the first quarter and the lesser negative weather impact into the second quarter, we have a negative year-to-date weather impact of $0.13 per share. We remain focused on controlling expenses across the corporation and we are seeing positive trends in that regard in several of our businesses.

Moving to slide 12, let me briefly update you on a regulatory filing that we made in New Jersey last week related to infrastructure improvements at Elizabethtown Gas. As you may recall, our utility infrastructure enhancement or UIE program is set to expire at the end of October.

We have requested approval for a new accelerated capital investment plan called AIR, accelerated infrastructure replacement, where we propose to spend up to $135 million over a five-year period beginning in November of this year. Under the proposed plan, we would replace nearly 150 miles of pipe that is predominantly aging cast iron.

Several of peers at New Jersey have requested infrastructure programs of similar duration. However, it is uncertain at this time how the New Jersey Board of Public Utilities will view our proposal.

The program we have proposed is consistent with our commitment to prudently invest capital on infrastructure programs that have minimum regulatory lag and enhance the reliability and integrity of our distribution system.

I want to take a few minutes to talk about the performance of the wholesale segment. Turning to slides 13 and 14, you can see historical look at our storage rollout schedule along with the chart of current and historic storage spreads, reflecting the year-over-year wider storage spreads, in part due to the market needing an outlet for natural gas supply.

We have continued to improve the locked-in value of our storage rollout by capturing the year-over-year higher storage spreads by injecting gas and by rolling our storage positions to later periods. The storage hedge losses we experienced in the second quarter added to the locked in storage rollout value at the end of the quarter.

As Drew noted, our storage rollout value has improved to $47 million on about 55 Bcf of natural gas inventory. Currently, we expect to recognize about half of these operating revenues in 2012, with the remainder expected to be recognized in 2013. As you can see on the chart, this is one of the strongest rollout schedules we have had in Sequent's history.

In our 10-Q filed this morning we have provided information about the impact of forward natural gas price changes on our storage portfolio. Based on Sequent's current projection of year-end storage positions at December 31, 2012 of about 25 Bcf, a $1 increase in the 2013 forward NYMEX price could result in a $24 million reduction to Sequent's reported operating revenues for this year, but would increase the expected operating revenues to be realized in 2013 by a corresponding amount.

Conversely, a $1 decrease in the 2013 forward NYMEX price could result in $24 million increase to Sequent's reported operating revenues for this year. However, additional lower cost or market inventory valuation adjustments could potentially offset a portion of the positive impact.

I do want to point out that the situation with our transportation hedges is a bit different, however. Due to narrowing basis spreads we accelerated transportation hedge gains of approximately $20 million into the first half of this year, primarily from the second half of 2012 through 2013. As a result, our storage hedge gains were strong on a year-over-year basis, but the portfolio is likely to be challenged for the remainder of the year unless basis widens.

On the whole, Pete and his team have done an excellent job of managing the portfolio to create as much economic value as possible in a challenging market environment. They will continue to monitor market conditions and look for opportunities that capture additional margin.

With respect to our earnings guidance for 2012, as Drew noted, the weather impact we have seen year-to-date could move us below the low end of our guidance range for the year. Other than the weather impact, we see performance in the rest of our businesses that is in line with our expectations.

This is due to a number of positive indicators we have seen through the first half of the year including cost containment and managing our controllable expenses, achieving our merger savings targets and generating incremental economic value in our wholesale business.

Turning to slide 15, you will find our priorities and objectives for 2012. These have not changed from our prior discussion and we continue to make solid progress in all areas. Again, with the exceptional weather we are demonstrating solid results across our business units and we have reason for optimism as we look ahead to the remainder of 2012.

On behalf of the employees of AGL resources we want to thank each of you for your continued interest in and support of the Company.

Operator, I will turn the call back over to you to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Craig Shere with Tuohy Brothers. Please proceed.

Craig Shere - Tuohy Brothers

Congrats to Sarah, and making aside since I have got management on the line that she is clearly of a deserving of her raise, as she was responding to e-mails after just being admitted to the hospital.

Steve Cave

We know. We agree with you.

John Somerhalder

We agree with you.

Craig Shere - Tuohy Brothers

Alright, you realize there is a recording of this.

John Somerhalder

That’s why I let Steve say that. He is responsible.

Craig Shere - Tuohy Brothers

So, in the press release and prepared comments you all mentioned mitigating impacts offsetting the weather headwinds that included the Sequent opportunities, cost containment and merger synergies. Can you provide some more color on the trends and cost containment and merger synergies?

Andrew Evans

Craig, this is Drew. I would just say that what we were experiencing is very consistent with our expectations. We really try to target O&M for customer as an important measure. It’s important from a shareholder perspective and a customer perspective. It really just falls right along the expectations that we set for ourselves at the beginning of the year and they are unfolding very similar to how we established our goals for the year.

Craig Shere - Tuohy Brothers

So, it’s just an overall original expected positive trend not a change that is offsetting the unexpected weather?

Andrew Evans

No I would say they are perhaps little better than we had initially expected, but we are not going to go over correct this. It relates to weather. It’s really not prudent internally for us to overly reduce cost with respect to something that really is just, it’s temporal. It's perhaps this year and we will have to see how the balance of the year unfolds from weather.

We didn’t anticipate coming into Illinois with such a warm winter. I don't think that we brought it from Atlanta, but I don’t think that it will persist through many more seasons. This is a long-term investment for us.

John Somerhalder

Craig, as Drew mentioned, if we just look at, compared to our expectation, with the merger closing late in December and the holidays, we started slightly later than we had originally anticipated, but what I say that with the run rate we are seeing now and what we have already accomplished through the first half of year that it is trending in a positive direction.

We think the results for the year will be on the positive side of what we originally have projected, which is a positive sign, but as Drew said that’s separate and apart from the weather impact, but we do see that positive trend in that area.

Craig Shere - Tuohy Brothers

Jumping over to Sequent, we have had this discussion last quarter and I guess I will ask the question again to see if there is any more color. I don't know if Pete is online, but I understand that we have this really anomalous all-time record storage position that just cratered short-term gas prices and as we start to get our arms around that problem, the seasonal spreads and an anomalous condition really widened.

But the question always was, is this a reflection of any recurring opportunities that Sequent could have going forward or is it just kind of a one-time shot because we are still seeing going out of ways ongoing flat volatility compared to historical low regional basis differentials and really not significant seasonal basis differentials outside of what was just discussed.

John Somerhalder

Craig, Pete is here, but I would like to just give one view on that before Pete gets to it. You talk about a one-time event. We have actually seen this same type situation several years in the past where we have had the spread move out.

You are right, it doesn't move out in future years. It pretty much moves out right in front of you in the current year as you see high storage levels and the need to use storage to absorb some of the supply. Now, this year pushed out a little harder than many years in the past; but back in, I think it was 2008 or 2009, back in 2006, we saw similar situations.

That's kind of the counterbalance to our storage position compared to just having a warm summer weather or cold winter weather where the storage is more valuable just to balance the market. So, it's kind of the opposite.

So, we see the opportunity on either side and we have seen this opportunity in each of those areas multiple times in the past. But you are right; the forward curve usually doesn't pick that value up until you actually get to where you see a more immediate storage overhang or the opposite could occur if you see shortage of storage and volatility for that reason, and Pete has a more direct exposure to that.

Peter Tumminello

Yes, thanks John. That was great. The way I would just add to John's comment is that we have seen this every few years when you come out of a very warm winter and the way we look at it going into this winter if we have another warm winter, we could see even more extreme spreads next year due to the severe overhang of natural gas supply.

If we have a very cold winter, we are obviously hedged on that storage, we will take that out of the ground and realize those earnings and then our transport portfolio would benefit at that time. So, in a way, there is a little bit of an internal hedge in that. If there is a warm winter, we are going to benefit again next year with widening spreads and if there is a cold winter, we will benefit on transport.

The only other thing I will add is, this summer we are seeing the heat were dispersed throughout the country than last year where we saw it mainly in Oklahoma and Texas, and that storage is being able to return a little bit more this year as well, which isn't a rollout schedule issue that will show up more in our day-to-day cash values, but we are seeing some benefits this year relative to prior years as well.

Craig Shere - Tuohy Brothers

Sound good. One last question. All these issues kind of surround a little more the salt dome storage and I understand that you guys are holding back a little bit on further expansions in the salt dome storage until you can see improving pricing in the market out there.

How do you feel about the opportunities on your inherited depleted reservoir storage and have you reconsidered at all possibly moving forward with that even while the salt dome situation lays in limbo?

Peter Tumminello

Craig, as you are aware, we just put into service our Central Valley storage facility in California, the 11 Bcf facility out there and although storage across the country is challenged, there is some unique things about California that we actually like. We are seeing some volatility in the California market.

We are also seeing in California there has been a denial of some new projects to get built due to some regulatory constraints in historical San Bruno. So that's going well. Related to North Louisiana, on the Sawgrass facility, which is our 50-50 joint project, right now, we are just going to be kind of in a hold pattern there.

We are going to keep the project alive. We are going to continue to test market interest, but really don't have much of a spend on that. We will evaluate that over time and have it available for us if the market does come back.

John Somerhalder

But Craig, you are exactly right. With the seasonal spreads showing (inaudible) where value coming back first as opposed to kind of the extrinsic value in the volatility. It would be more likely that the rates would come up on the lower turn reservoir first and with those costs lower, that is at least an opportunity we have but at this point, we are not seeing the market that would support us moving forward either the reservoir or the salt cavern expansions.

Operator

Your next question comes from the line of Carl Kirst with BM C.

Carl Kirst - BMC

Thanks, good morning everybody. Actually I had just one clarifying question off of storage. I think Craig hit the ones, the high points that I wanted to go through, but what was the actual volume that was re-contracted back in April?

John Somerhalder

It was 3 Bcf.

Carl Kirst - BMC

It was 3 Bcf and with the re-contracting, it went from an average rate of $0.19 to $0.14, is that correct?

Andrew Evans

That’s correct.

John Somerhalder

Carl, it was three out of I think a total of little over seven and it did represent some of the higher priced contracts rolling off because of the timing of when those were entered in, at the peak of storage values back three or four years ago.

Carl Kirst - BMC

Just a couple of other quick questions. Can you remind us, this is on the distribution side, we saw $69 of O&M per meter down from $75, certainly a nice drop. Is there a target there and at what point is that one year out, two year out, three year out that you think you can hit that target?

John Somerhalder

Carl I will start out and then Hank and Drew can weigh in on it, but from our standpoint there were certain synergies and a lot of them are related to shared services and allocations to the business. When you look at our employees out, actually taking care of the pipeline, taking care of our employees, those numbers are staying relatively flat.

So, we are reducing costs where we can through the efficiencies of shared services and some other areas. We are in line at this point, as Drew indicated; it's a good indicator that we are in line with what we talked about with the merger savings that we targeted.

Really moving forward though and Drew's numbers represented a half year. So, you can kind of double that number and say that's kind of the run rate we expect, close to the run rate we expect to be on.

Really when you get past that our real goal is to keep that in line with that or more flat to that so that that will allow us to keep costs for our customers low and allow us to achieve allowed returns between rate cases.

So, not a big expectation of negative trend on that now that we have got it down to the level we wanted and if you benchmark that with the industry, it compares very favorably with the rest of the industry. Certainly, we believe in the top quartile by all measures. Hank?

Hank Linginfelter

Yes, I would just add to that, Carl, that we will see over time, as we have in every transaction, additional value creation through synergies, whether it's standardization which we have an exercise around that across the enterprise for operations.

That yields more efficient operations also the ability to capture supply chain benefits over time and systems integrations where we can do that that gives us spreading those fixed costs over a larger footprint. We have done those over and over again in the other transactions.

You will continue to see us go after those as well and it's a multi-year effort. It's not something that happens real quickly except for the things that you have already heard about that we have done so far.

Carl Kirst - BMC

Great. Yes, Andrew?

Andrew Evans

I would just say we have a little bit of difficulty in answering this question because we can't consolidate the Nicor financials from the previous year into our own. It wasn't something that we reported.

We were generally about $150 of O&M per customer on a combined basis last year, but our run rate for O&M is considerably lower for the combined businesses as we sort of approximated then it was last year.

The other issue is that not all of the benefits of being a combined business are showing up exclusively in the distribution business. As shared services goes, there is a very significant reduction in our cost of operating the unregulated subsidiaries.

It's just a little bit masked by the fact that performance in wholesale and to a lesser degree in retail and actually more related to the weather than anything else really don't sort of give you good guidance here, but you can take both reported financial statements from both corporations, do some summation and you will get a pretty decent approximation of where we stand year-over-year.

Carl Kirst - BMC

No, that's good. I appreciate that extra color. It's a good point. Then maybe just one last question with respect to the New Jersey infrastructure program and I don't mean to read too much into the tea leaves, but John you sounded a little more cautious or hesitant and I didn't know, has the staff of the PUC made any commentary with respect to others who have ruled on this.

I would just think, given the fact that this is replacing an infrastructure program that is maturing and given eventually seen in the industry over the last few years that it would almost be kind of a no-brainer, but I didn't know if you had gotten any contrary signals from the Utility Commission?

John Somerhalder

Now, let me start out and then I have Hank and Bryan Batson here. But I mean, clearly at that time we are just making the filing, I think it's appropriate for us to express it that way. But you are right.

This is very consistent with what other companies in New Jersey have done, even in terms of the longer duration. It's very consistent with the high priority of continuing to upgrade our pipeline system, which we have done in many jurisdictions.

We have done here in this jurisdiction. This will allow us to continue to do it. So we feel very good about it, but I will let Bryan add anything to it.

Bryan Batson

Carl, this is Bryan. I guess what I would add is all the utilities up there have filed similar filings and the State of New Jersey clearly has an appetite for making sure its infrastructure is safe and reliable and updated and it also sees the benefit of the jobs and things that are being created.

Obviously, you can never predict or should predict what a regulatory body would do. I think the question with the BPU will be delving the most into is, how long? We filed the five-year program; others have filed that.

Is that the right number for them? Is it four year? So I think it's more what does the program look like. I think there is an appetite in that state to do this. So I don't sense that there is a resistance to do it.

I think they are trying to find out where is the right place to land for the utilities and for the customers and the balance and I think that's more of a question that's before the BPUs.

Operator

[Operator Instructions]. Your next question comes from the line of Mark Barnett with Morningstar. Please proceed.

Mark Barnett - Morningstar

Just a quick question on probably talk a little bit about your budgeted O&M and then synergies over the next few years, but I guess in looking in this year and obviously in your budget for the guidance numbers that you had provided, is there any softness on the regulated side that could help you meet that or are you generally kind of set on your O&M trajectory for the year. I know this is going to depend a lot on where the weather shakes out for the next two quarters?

John Somerhalder

Let me start out and Drew can add more to it. But if we look at our cost run rate, cost of the entire company. Like we say, it’s coming in fairly close to what we had estimated and what we use to establish the guidance range. We see a positive run rate trend and the potential for some positive on that, but not a material number at this time, but it is positive.

On the rest of the margins in our distribution and operations business, the weather has already impacted us in the most significant time period, the first quarter and part of the second quarter. However, like you said, the real remaining impact is we are always sensitive to that same weather impact across our businesses for the fourth quarter, not to the same extent as the first part of the second quarter.

So that’s still the one factor. We could have a positive or a negative from the weather in the fourth quarter and we always point that out when we are talking about where we are relative to our guidance. So, that’s really the impact we see in the remaining year.

However, when you look at the Sequent business, you see the strong rollout schedule and you see the fact that we have seen so far this summer, some additional hot weather, other than certainly what was projected and across more of the country.

At the same time, we have got these transportation costs where we have had earlier hedge gain that we have got to cover now these transportation costs. So, we see in total with our wholesale business positive so far this year and the potential for positive the remaining part of the year.

So, probably more on that side of our business is where we see a chance if we have continued opportunities in that area. We see a chance to and hope to continue to see some positive. Drew, you would add to that?

Andrew Evans

To focus on your question directly, we are exceeding our expectations in terms of our abilities to make for a more efficient operation. I think that that run rate will certainly continue through the balance of the year and more importantly, when we look at sort of system integration, the real issues of integration as opposed to cost cutting.

We are very pleased with the way we are able to integrate our businesses. We are really going to focus on margin growth through the next couple of quarters to see how we come out. But I think at the end of the year, we will be able to tell you that we have exceeded our expectations for our ability to bring the companies together and reduce expenses in total.

Mark Barnett - Morningstar

Okay, thanks and shifting gears just a little bit. Generally, looking out at the weekly storage data, obviously, it's still a pretty strong comps versus last year and historically but the rate of builds is slowing down a little bit and I know some of that's coming from gas burn from generation.

Since you are out in the market so much, do you expect, obviously, gas prices are low, there is still going to be a lot of gas churn during the third and probably the fourth quarter. With the drilling pullback there is a little bit of the gas generation burn.

Do you think that that's a trend that's kind of flattening and that’s going to continue or is there a lot of gas out there waiting for resolution of the infrastructure problem? Just how do you see that balance playing out over the near to medium term?

John Somerhalder

This is John Somerhalder. I will take a first crack at that and then the Pete will add more expertise to it. I think the surprise for the entire industry has been, we all expected that there would be more power generation burn because of the lower gas prices.

The surprise has been that that's been even higher than what many of us and most people in the industry expected and on top of that the weather has been considerably hotter, which further added to that. So we have seen the storage spreads narrow more than what we had anticipated up to this point.

At the same time, we are getting ready to head into a time period where power generation is not as significant part of the load as we get to later September and October. So there are projections that say it could fill up again rather quickly.

Especially, since if you look at production, the other thing that's happened is production, even though the rig count has come off significantly, production hasn't fallen as quickly as some people had predicted. So that's a long way of saying, we really don't know, but there are dynamics where even though we have narrowed that storage overhang so far through this summer that it's possible we still could see pretty tight storage at the end of the year.

Peter Tumminello

Yeah, and I will just add that we have had a very warm summer. So although prices kicked in significantly greater power generation, weather has had that impact too. So the wild card is, as you hit September and October, whether or not that rate of build that has slowed, whether it will significantly accelerate or not and then you have got the wild card that’s regional.

You have issues in Western Canada where you are almost full already in storage and you are starting to see some bottlenecking of supplies out there versus the Gulf Coast. We still have some room in that, reduced injection provides more flexibility in the system, but the wild card to me is going to be weather as we just go through the balance of the summer and we could get to the situation where we get full early if the weather pulls back some.

Hank Linginfelter

There are some natural limits to the amount of gas that can be stored in the ground. So the rate of growth and storage has to decline relative to the slope of that line last year. We build inventories significantly faster and at significantly lower cost than we did at this time last year. That could bring a little bit of volatility to our earnings in the third quarter, but generally the total storage level is going to be about equal at the end of the year.

Our storage plans don’t change much in terms of its exit level towards year-end and it’s interesting to see.

Mark Barnett - Morningstar

Thanks for all the comments and congrats and best wishes to Sarah. Thanks, guys

Operator

With no further questions in queue, I would like to turn the call back over to Mr. Steve Cave for closing remarks.

Steve Cave

Alright, great, thank you. Thanks everyone for joining us today. As always feel free to give us a call if any follow-up questions you have. Have a good day.

Operator

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

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