AGL Resources, Inc. (GAS)

GAS 
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AGL Resources (GAS)

Q4 2012 Earnings Call

February 06, 2013 9:00 am ET

Executives

Sarah M. Stashak - Director of Investor Relations

Andrew W. Evans - Chief Financial Officer and Executive Vice President

John W. Somerhalder - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Finance & Risk Management Committee

Peter I. Tumminello - Executive Vice President of Wholesale Services and President of Sequent Energy Management

Henry P. Linginfelter - Executive Vice President of Distribution Operations

Scott Carter - Chief Regulatory Officer and Senior Vice President of Commercial Operations

Analysts

Craig Shere - Tuohy Brothers Investment Research, Inc.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Mark Barnett - Morningstar Inc., Research Division

Christine Cho - Barclays Capital, Research Division

Reza Hatefi

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 AGL Resources Earnings Conference Call. My name is Carissa, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Sarah Stashak, Director, Investor Relations. Please proceed.

Sarah M. Stashak

Thank you, Carissa. Thanks, everyone, for joining us this morning to review our fourth quarter and year end 2012 results. Joining me on the call today are John Somerhalder, our Chairman, President and CEO; and Drew Evans, our Executive Vice President and CFO. We also have several members of our management team available to answer your questions following our prepared remarks.

Our earnings release, earnings presentation and our Form 10-K are available on our website. To access these materials, please visit 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 our forward-looking statements and projections could differ materially from our actual results. The factors that could cause such material differences are included in our earnings release and more fully described in today's 10-K filing.

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

We'll begin the call with some prepared remarks before taking your questions. Drew, I'll turn it over to you to begin.

Andrew W. Evans

Thanks, Sarah, and good morning, everyone. I'll begin our prepared remarks today with a recap of the 2012 results, and then John will address our expectations for 2013.

Before detailing our results for the year, I want to address our earnings shortfall relative to the guidance that we initially provided for 2012, undoubtedly the warmest weather on record negatively impacted our 2012 performance. Fortunately, we do have weather normalization for several of our utilities and effectively hedged a significant portion of our weather risk in our retail operations. As a result, even with the historically warm weather, we had a negative impact of only about $32 million on an EBIT basis in our distribution operations and our retail operations businesses.

In addition, while our Wholesale Service business generated higher economic value during the year, in part supported by its storage rollout schedule, mark-to-market accounting on our hedge positions resulted in a year-over-year negative impact to reported earnings. A majority of the economic value captured in 2012 is expected to be recognized in our accounting earnings in 2013. As you know, we expected to generate at least $60 million of savings across the enterprise following the close of the Nicor transaction. We were able to achieve our targeted savings primarily across our distribution, retail and Wholesale Services segment. However, revenues from the combined businesses were weaker than we anticipated across most of our operating segments in part due to market fundamentals that were weaker than we expected at the time of the merger announcement.

Due to the 3 primary factors I just described, our EPS excluding nonrecurring items was $2.46 for the year, which is $0.42 lower than the midpoint of our initial guidance range. As a result, our incentive compensation expense for 2012 was lower than our target levels by approximately $29 million, which shielded our investors by approximately $0.15 per share.

Now turning to Slide 3 of our presentation. You can see that we reported GAAP earnings per diluted share for the fourth quarter of $0.84. On an adjusted basis, excluding $5 million of merger-related costs and additional $8 million accrual related to the Nicor Gas PBR issue, which I'll address momentarily, diluted earnings per share was $0.91, which compares to $0.94 on an unadjusted basis for the fourth quarter of 2011. The primary year-over-year driver of our fourth quarter earnings is the addition of the Nicor businesses. As a reminder, 2011 included only 22 days of contribution from Nicor following the close of the merger.

Turning next to Slide 4. You can see our full year 2012 financial results. Diluted EPS adjusted for Nicor expenses was $2.46, down from $2.92 for 2011. The primary reason for the decline are the -- reasons for the decline are the impact of the unprecedented warmer than normal weather throughout much of the year, as well as mark-to-market hedge gains that were lower than 2011.

A snapshot of fourth quarter and full year EBIT for our distribution business is on Slide 5. EBIT was up $31 million compared to the fourth quarter of 2011. This includes an EBIT contribution of $15 million from Nicor Gas. The primary driver of results for both the fourth quarter and the year were warmer than normal weather for our 2.2 million customers in Illinois. In 2012, the Chicago area had 19% fewer heating degree days than the 10-year average, and this weather impact reduced our EBIT in the distribution business by $24 million.

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