AGL Resources Inc. (GAS) Analyst Day Call, March 20, 2012 08:30 am ET Executives Sarah Stashak – Director, Investor Relations John W. Somerhalder II – Chairman, President and Chief Executive Officer Andrew W. Evans – Executive Vice President and Chief Financial Officer Hank Linginfelter – Executive Vice President, Distribution Operations Michael Braswell – President of Retail Energy, AGL Resources and President and Chief Executive Officer, SouthStar Energy Services Beth Reese – Senior Vice President and President, Retail Services Peter Tumminello – Executive Vice President, Wholesale Services, and President, Sequent Energy Management Analyst Presentation Sarah Stashak
You all know Steve Cave, our VP of Finance and Treasurer. He is jack of all trades and master of all and my boss. And we have two new members, to add to our management team who came over from Nicor. We have Steve Cittadine who heads up Storage business under Pete, and Mike Pellicci who captains the Tropical Shipping business. And we are, I’ve been asked probably no fewer than 25 analysts and investors when we can have our Analyst Day in Palm Beach. So we'll consider that for next year. Last but not least we have Alpa Patel, who is Director of Special Project and my colleague in the treasury organization.Those of you listening via webcast the presentations we’re making today are available on the website. To access these materials please visit aglresources.com. Let me remind you and this is the most exciting part of the day and I’m sure while you are here I will read the forward-looking statements. We will make some forward-looking statements and projections and our actual results could differ materially from those forward-looking statements. The factors that could cause such material differences are included in our presentation today and in our 10-K filed in February. We 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 the presentation, as well as on our website. John will start us off today; will be happy to take your questions at the end of each of presentation. And we’ve also reserved some time for additional Q&A at the end of all the presentations. If you have a question just raise your hand and we will bring a microphone over to you. Thanks for being with us today and I will turn this over to John.
John W. Somerhalder IIThank you, Sarah and good morning. Thanks for spending some time with us this morning. The real purpose is for you to hear from each of the business units and segments about their plans and their opportunities and their challenges that I want to start out by walking through a summary of where we are. First thing that is very important to look at is what has been accomplished in the last year. You have seen some of the numbers, 4.5 million customers, almost 80,000 miles of pipelines operating in about 10 states with our business units, corporate headquarters in Atlanta, wholesale and midstream headquartered out of Houston, out of Chicago we had both our distribution operations headquarters and the retail services that Sarah mentioned and that we’ll talk about a little bit more. And then also, in Atlanta in addition to the corporate headquarters, we have the retail energy piece, Georgia, Illinois, Ohio, Florida and some other states that Mike Braswell will talk about. A very strong platform focused in the natural gas business. At the same time we were putting together these assets and preparing for the future, we achieved right around a 24% total shareholder return in 2011. When you exclude the after-tax, Nicor merger related cost of $64 million, we earned $2.92 on a non-GAAP basis. Importantly, we also in this time period saw very strong performance and good growth out of our Distribution Operations business and we had a very good regulatory outcomes, not only with the approval of the merger in Illinois, but a little over a year ago approval of the Atlanta Gas Light rate case and then late last year, a very solid outcome related to our Virginia Natural Gas rate case. We saw, even with competitive pressures in some of our retail marketing businesses, we continue to see stability in that business and in the earnings there and good performance out of that business. Even though all those positives were occurring, what impacted us most directly in the short-term was the fact that the natural gas market, we saw the oversupply of natural gas and we saw very low volatility and that seriously impacted our energy market and trading business and Pete will talk a little bit more about that and our Midstream operations, which we’ll spend a little bit more time on.
Importantly, like I said, we completed the acquisition and merger with Nicor on December 9, 2011 and made our regulated company almost twice as large as it was before.And importantly, we do not just focus on those issues. One of our core missions is to make sure we operate a very safe pipeline system. And we can do that for several reasons. It’s not only the fact that we have very favorable rate mechanisms and surcharge and rider programs in places like Georgia, New Jersey, and you’ll hear some more from Hank about plans in places like Virginia, but we also have had for more than a decade a strong focus on those programs. So we have very good programs in place to make sure we deploy those capital dollars, those O&M dollars to make sure we maintain a very safe pipeline system moving forward. I started off talking about total shareholder return. If you look at it either on a one-year basis or a three-year basis compared to our peers, either at LVC average or our peer average over the one or the three-year time period, we’ve been above the LVC average and we’ve been at or near the peer average over those two time periods as you’ll see from these two slides. The opportunities we have moving forward and challenges and risk are fairly straightforward. The opportunity we have is to continue on with the integration and cost savings initiatives related to the merger and the acquisition. And as Sarah talked about earlier, we’ve had very good performance to-date, very much in line with expectations related to the integration of these businesses. And that’s been because of a lot of hard work, mostly by the people that we introduced out in the audience that work with us, Angela, Bryan, Steve and a number of other people who’ve made sure that we’ve met expectations, and things have gone well and continue to go well related to that.
That also sets up a platform long-term, with scale and with best practices to control our costs, and that works well for us. And that’s one of the core values we look to take advantage of as we move forward. At the same time, I’ll bounce back and forth with the risk and the challenges. We have seen remarkably mild weather across the entire the U.S. so far.And I’m sure you’ve heard this from almost everyone, but we believe that will either be the mildest winter in 80 years or possibly the second mildest winter in 80 years. And if you look at how that impacts our businesses, it’s not a large impact, but it’s an important impact, that impact primarily in Northern Illinois with Nicor Gas and then also with Georgia Natural Gas. In Atlanta the combined effect of that is about a $15 million EBIT impact on our business so far this year. And that’s through roughly today. When we fist saw the numbers in January and saw that variance that’s a little more expected when you have the mild January, but even March has been so mild that we’ve seen a significant variance because of weather, because of the extremely low usage in natural gas in this environment. In addition to that challenge even our utilities have performed very well because of the economic situation, we have seen minimal growth and we’re just down to rate cases; had very well successful outcomes. Do not plan to file additional rate cases, and even though we’re investing in surcharge and writer programs and Drew will talk about this in a minute. Bonus depreciation is very good, it returns that capital to us quickly, but when you look at how much we’re investing in a regulated business, because of that return, because of bonus depreciation. Some of the growth that we see is a little muted in that and Drew will go through some of the examples, still very good. Returning, investing, making our system more safe, more reliable for our customers and either growing our rate base or getting that cash return quickly through bonus depreciation, works very well, but that does limit to some extend our ability to grow our regulated businesses with modest depreciation.
At the same time, we still do have those opportunities and we have good surcharge writer programs and we’ve had success in extending those in places like Georgia and when processing in New Jersey and then implementing that in a place like Virginia.As I talked about, we have had increasing competition in the retail space from other marketers in the Georgia market. We have been very successful though with the programs we have put in place in Georgia, being very competitive and responsive to those programs, maintaining reasonable market share, and now with the combination of Nicor’s retail businesses and our retail businesses, we can take some of our commodity expertise to places like Illinois, and we can take some of our services and warranty expertise down to places like Georgia and some of the other states we operate in and we have that opportunity moving forward. As I talked, probably the biggest challenge we have short-term relates to the low volatility and opportunities in our energy marketing trading and in our midstream business. So we’ve got that challenge, but at the same time, we have opportunities, Pete and the rest of the team have been very effective in looking at the cost structure, reducing that. We have a number of legacy contracts, pipeline transportation storage that we entered into in a more volatile time period when we had to pay more for that capacity. Now we are able to renegotiate that in a lower price environment, which is providing benefits in this time period. So we not only have that challenge, but we do have a number of ways and a number of opportunities to mitigate that and position ourselves very well for the future. Also, even though we’ve seen lower storage spreads in this time period, we do have two very good facilities that are coming online, Golden Triangle Cavern 1 was already in service, Cavern 2 is coming online this year, and Central Valley, very good facilities.
And we have at least seen not so much on the volatility side, but on the simple cycle spread and Pete will talk about this. We’ve seen some improvement in that, summer, winter spread, because of the low gas prices we’re seeing now. We’ve seen that spread move out somewhat significantly, so some positive trend on that issue.And then we’ve already, obviously seen the impact of the weaker economy and how that impacts the Caribbean and construction there and tourists in there. And that impact on Tropical Shipping, that you’ll see some positive trends related to that businesses as well. Our priorities and objectives are pretty straight forward, very much inline with what I just talked about. And that is, continue to show growth in our distribution operations business, a lot of that will be through investment and surcharge writer programs to minimize the regulatory lag. And we will continue to focus on being a low cost, be probably be one or two lowest cost operators, so that we can have good returns between rate cases. Maintain market share on retail and bring together the expertise from both SouthStar, Georgia Natural Gas and from Nicor National to leverage those opportunities across the two new geographies. Wholesale focus on our cost structure, focus on [weak] contracting, capacity at lower-cost and then stick with the discipline we have around risk control and those metrics. Midstream, keep the cost low, make sure that we get those facilities up and operational just like we have, just like we operate very successfully Jefferson Island and GTS Cavern 1, get the other facilities up and operating, that’s going very well. And at Cargo shipping, focus on maintaining a very strong position in those markets, good market share, position ourselves for return to more normal economy there. And as you see overall objective related to continuing to control cost.
If you look at the risk and the opportunities I hope what you saw is a number of the opportunities and the number of the strengths relate to the foundation of our business and the long term success of our business. A number of the challenges we face are more short term in nature, although we do know as an example volatility in the natural gas market. It may take several years for that to return and we don’t know to what levels that will return.So the good news is we see our opportunities and the foundation of our business long term very strong, we’ve built that over the last several years. We do face shorter to medium term risk and challenges, but through the type of things I talked about you’ll hear more from me to the business units. We’re well positioned to deal with those challenges and continue to grow our business. With that I’m, before we move to Drew, I am going to open it up for questions. So, at this time let’s open it up for questions. This could work pretty well for me. You really do want to hear from the business and that’s great. We’ll also take questions at the end so let’s go ahead and then quickly move to, we’re going to be ahead of schedule. I will move to Drew Evans, the Chief Financial Officer. Andrew W. Evans Good morning and thanks for joining us on the first day of the spring. We feel like we’ve had it in Atlanta and I know folks from Illinois feel like they’ve had it for at least a couple of months, but it’s nice to be here. Sarah introduced everybody and thanked folks but she really is the person who put this together for us and should be available to serve you through about June, once she’ll take a break to reproduce. And we’ll be excited welcome a new potential AGL Resources employee sometime this summer. So let’s see how that goes . I just wanted to build a little bit on what John said, and talk you a little bit about our financial condition, which I think is quite strong, but I’ll start with our strategic priorities this actually is a chart from a last year. And what we’d like to have you better understand is that we continue to be very bullish on our general strategy, and we’d try to maintain some consistency year-over-year, but the cornerstone of it really is centralized service function that is scalable. And what that means for us in the sort of indicative of the transaction that we’ve just gone through, is that we can centralize the areas of finance accounting, IT, engineering, human resources, general council. And be much more affective across the broader based and we would be [approved] just a single utility operator.
And today about a third of the expense that we’ve seen each of our utilities is handled in a centralized fashion. That does mean it’s all coming out of Atlanta, we have bits and parts scattered about now big center of excellence, I think in Illinois. But it really is the scalability that drives the profitability in our business. And if you look at O&M for customers is simple measure, we went quite well relative to our peer group, but you find that it really is dominated by the larger utility, but it is significantly more efficient to operate utility in mass as oppose to an individual jurisdiction.Not without its complications from a regulatory perspective, but certainly the most efficient thing in our minds for providing service to customers. You’ll find also that we’re one of the lowest cost providers in each of the jurisdictions that we serve. We want to be able to enhance those returns by having complementary unregulated businesses. Sequent is probably the best example of this in the near term. One of the things that Pete will show you is that we’ve returned nearly $200 million to ratepayers over the last decade or so, as Sequent been in operation, we’re in sharing situation where we keep some portion, some slightly diminishing portion for shareholders that are able to rebate the customers each year based on the optimization of the assets that are retained by the utilities. We think this is the very complementary model that adds 100 basis points of return for us as we look at the complex and aggregate, but more importantly reduces builds for customers and the rebates have been pretty substantial over the last few years. Another big area because we’re making large investments is that we need to accelerate, returns on the regulated infrastructure that we have. And Hank will talk to you a bit about his efforts in the distribution business to focus on writer based programs, so that we can eliminate the lag between investment and return.
There are a number of important features of that kind of strategy. We’re able to provide good jobs in the jurisdictions that we’re operating in. I think he will talk a little bit about job numbers, but we’re able to maintain much stronger employment by refreshing the infrastructure and that’s very important to the jurisdictions that we’re serving in. We can reduce the lag and bring a little bit more certainty to the returns from a shareholder perspective and it makes a lot easier for us throughout and source capital, and so ultimately it brings our cost down in that mode so very positive activity.On the financial side, we’re very focused on return on invested capital in each of our business units and we’re constantly making adjustments to the level of capital deployments in those areas. We’ll talk a little bit about some of the lower returning investments that we have and what our strategies are around them later today. The bullet probably should be broken into two, but maintaining financial integrity of the business is paramount. We think that having high investment grade ratings with our agencies is critical, and we’ll operate in the mode that maintains those ratings above most [are well]. And then from a shareholder perspective our goal is to grow dividends and earnings in a consistent way. I think our Board as it relates to dividends has taken a very good approach over the last half a decade and we’ve been able to grow dividends at a very modest, but constant pace of a couple of percentage points each year. And that our intent is to continue that track record over a very long period of time. Then ultimately we’re focusing our total shareholder return and just making sure that our employee base is some percentage for safe and efficient operation and also [incented] in the way (inaudible) shareholders as well. Read the rest of this transcript for free on seekingalpha.com