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Nicor Inc. (GAS)

Q2 2010 Earnings Call Transcript

August 3, 2010 9:30 am ET

Executives

Russ Strobel – Chairman, President & CEO

Kary Brunner – Director, IR

Rick Hawley – EVP and CFO

Analysts

Igor Grinman – Zimmer Lucas Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Nicor Incorporated 2010 second quarter earnings conference call. My name is Stacy and I’ll 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’s call to Mr. Russ Strobel, Chairman, President and CEO of Nicor. Please proceed.

Russ Strobel

Thanks Stacy, and good morning to everyone and 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 2010 second quarter financial results and our annual outlook for 2010. When we’ve completed our remarks, we will be happy to take your questions.

Let me now turn things over to Kary.

Kary Brunner

Thanks, Russ, and good morning, everyone. First, I’d like to remind you that this call will include 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 2010 diluted earnings per share were $0.53 per share compared to $0.50 per share for the same period in 2009. For the six month ended period diluted earnings per share were $1.85 compared to $1.47 per share in 2009.

Let me now turn things over to Rick for the discussion of our 2010 results and our outlook for the remainder of the year.

Rick Hawley

Thanks Kary, good morning everyone. Thanks for joining us this morning. Compared to 2009 second quarter 2010 diluted earnings per share reflect higher operating income at our gas distribution and shipping businesses as well as improved corporate operating results partially offset by lower operating income at our other energy related businesses.

The second quarter comparisons also reflect a higher effective income tax rate in 2010. For the year-to-date period 2010 versus 2009 comparisons reflect higher operating income at our gas distribution and other energy related businesses as well as improved corporate operating results partially offset by lower operating income at our shipping business. The six months ended comparisons also reflect lower free tax equity investment income and a higher effective income tax rate in 2010.

Gas distribution operating results for the second quarter and year-to-date 2010 periods were up compared to 2009. Year-to-date comparisons reflect the benefit of the rate relief approved in 2009, partially offset by decreased natural gas deliveries, due to 10% warmer weather in 2010 compared to 2009 and lower interest on customer balances.

Year-to-date gas distribution operating results were also impacted by lower operating and maintenance cost including lower bad debt expense and lower company use and storage-related gas costs.

As we mentioned in last quarter’s call, a bad debt tracker was approved in February 2010 allowing Nicor Gas to recognize $31.7 million pre-tax benefit in the first quarter of 2010, attributable to the 2008 and 2009’s net under recovery of bad debt expense. The benchmark against which 2010 actual bad debt expense will be compared is approximately $63 million.

The key takeaways from an economic perspective versus the bookkeeping that you will see for bad debt is that in 2010 we received approximately $32 million pre-tax benefit for the years 2008 and 2009 and our 2010 annual cost, net of rider revenue and excluding the $32 million will be $63 million.

Finally, year-to-date 2010 gas distribution operating income compared to 2009 reflected higher depreciation expense.

Nicor Gas’s annual outlook for 2010 operating results remains in line with our earlier expectations which as we indicated in our May call we expect to be higher than last year’s levels. While on a weather-normalized basis, demand was modestly lower than we had previously anticipated, we have managed our cost effectively in order to mitigate this impact.

Moving to our Shipping segment, Tropical had a second quarter operating income higher than 2009 off of a 3% improvement in revenues. Higher second quarter revenues were driven by increased volume ships to most of the ports we service and higher average rates.

On a year-to-date basis, while volumes are higher than last year we have experienced softness in our rates due to the effects of challenging market economics in our service territories.

In last quarter’s earnings call, we noted a number of initiatives that Tropical’s management had implemented to offset the negative impact of lower than expected revenues. We are now seeing the benefit of these initiatives reflected in Tropical’s bottom line.

Progress has being made on the revenue enhancement and cost containment strategies that reposition this business for the current economy. Our attention remains on efforts both to minimize the short-term impacts of this economic environment and to position Tropical to enhance its long-term value.

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