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Nicor Merger Smooth, But Weather Hurts Results, Says AGL CEO

The integration of Illinois-based Nicor Inc. to form the largest distribution-only natural gas utility operation in the nation went off without a hitch in the first quarter (see Daily GPI, Dec. 8, 2011) but financial results were pressured by unseasonable winter weather, AGL Resources Inc. CEO John Somerhalder told financial analysts Tuesday.

"The Nicor integration remains on track and staffing across the organization is largely complete," Somerhalder said. The key impact on earnings however was the weather, and CFO Andrew Evans said if normal (10-year-average) winter weather had prevailed, net income per diluted share would have been at least 11 cents/share higher.

In December 2011 AGL and Naperville, IL-based Nicor received approval of their merger from the Illinois Commerce Commission (ICC), the final regulatory nod needed to create a natural gas distribution behemoth operating in seven states. First announced in 2010, the marriage created a holding company with seven regulated gas distribution companies serving 4.5 million customers in Illinois, Georgia, New Jersey, Virginia, Florida, Tennessee and Maryland and with a rate base of $3.8 billion. The combined company, with a wholesale gas business, delivers 4.7 Bcf/d. Storage operations collectively total 31 Bcf in capacity with expansion potential to 90 Bcf.

However, in the first quarter of this year, weather in the traditional AGL utility territories in the Southeast and East was 21% warmer than normal, and in Nicor's territory in Northern Illinois it was 19% warmer than normal, reducing overall corporate holding company profits by $13 million before interest and taxes.

In response to an analyst's question about impacts on AGL's three merchant storage operations, including the new one being developed in California by a unit of Nicor, Somerhalder said widening single-cycle storage price spreads helps all of AGL's operations, but he acknowledged that for its salt dome facilities that thrive on multi-cycle operations, the price spreads "have not come back as strong." In California the situation is perhaps the most positive, he said.

"In California we have seen lower hydro availability this year, additional outages on nuclear units there and increased pipeline maintenance, so we are seeing higher prices and a little higher volatility that could result in opportunities for higher turns of service," he said. Longer term, there is the potential for "a more balanced market to drive the additional value that we should be able to achieve out of the salt dome," the Jefferson Island Storage & Hub near the Henry Hub in Louisiana.

Central Valley Gas Storage north of Sacramento, CA, is a "low-cycle facility," so it should see benefits going forward into the next storage season, said Peter Tumminello, AGL's executive vice president for wholesale services who is in charge of Sequent Energy Management. "I think we'll see benefits to both our types of storage, but more so to Central Valley and to Sequent."

Somerhalder noted that an extreme amount of gas is in storage nationwide for this time of year with reservoirs nationally that already are about 60% full. But the excess storage "obviously has depressed current prices, but this is not the first time we have seen something like this," he said. "We've seen it several years in the past, as in 2006 and 2008 or '09. That's an opportunity we have had in the past and it is one we could have in the future."

In the current surplus situation more generation plants are drawing on gas in storage, and in the gas fields the rig counts [drilling for dry gas] have been greatly reduced. "We see over time the most likely scenario is that the market will come back in balance where we don't have this storage overhang," he said. With lower costs that come out of this for storage comes lower rates that will attract more customers and incentivize them to sign longer-term contracts. Thus, Somerhalder said, this is where the balance will return.

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