埃特莫斯能源 (ATO) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Atmos Energy first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the call over to Ms. Susan Giles, Vice President Investor Relations. Thank you Ms. Giles, you may now begin.

Thank you, Manny, and good morning, everyone. Thank you all for joining us. This call is being webcast live on the Internet. Our earnings release conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com.

As we review these financial results, and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on slide 17 and more fully described in our SEC filings.

Our first speaker this morning is Mr. Bret Eckert, Senior Vice President and CFO of Atmos Energy. Bret?

Thank you, Susan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Reported net income for the quarter was $103 million, or $1 per diluted share, compared with $98 million or $0.96 one year ago. Excluding unrealized margins in both periods, net income was $96 million, or $0.93 per diluted share, compared with $93 million, or $0.91 last year.

Slides 3 and 4 provide financial highlights for our Regulated operations for the three-month period. The continued pursuit of our infrastructure investment strategy drove our quarter-over-quarter growth. Rate relief for our Regulated Distribution and Pipeline operations combined generated about $24 million of incremental margin in the first quarter of FY16. About $14 million of this amount came from our Regulated Distribution segment, with about $7 million in our Mid-Tex Division, and the remainder from our Mississippi and West Texas Divisions. The remaining $10 million came from our Regulated Pipeline segment, primarily as a result of new rates from the approved 2015 GRIP filing.

Additionally, our weather normalization mechanisms, which cover about 97% of utility margins, worked as designed, insulating both the Company and our customers during atypical weather. We experienced a 21% quarter-over-quarter decrease in Regulated Distribution sales volume due to the weather that was 29% warmer than last year's quarter. However, gross profit decreased just $1.1 million.

Focusing now on our spending, as expected, consolidated O&M increased by about $6 million quarter over quarter, mainly due to incremental pipeline maintenance spending, as well as increased administrative expense in our Regulated operations. Capital expenditures increased by $30 million in the first quarter, compared to one year ago, despite the particularly challenging weather conditions in Texas during the quarter, which slowed several Regulated Distribution projects during the period.

However, spending in our Regulated Pipeline segment increased as we continue to enhance and fortify our Bethel and the Tri-Cities storage fields. These efforts will improve our ability to reliably deliver gas to our North Texas customers, and serve the peak-day requirements of the Mid-Tex Division and APT's other LDC customers. We remain on track to achieve our capital budget target of $1 billion to $1.1 billion for FY16, as detailed on slide 15.

Moving now to our earnings guidance for FY16, we still expect FY16 earnings per share to be in the previously announced range of $3.20 to $3.40 per diluted share, excluding unrealized margins at September 30, 2016. And that's shown on slide 12.

The expected contribution from our Regulated and Non regulated operations, as well as estimates for selected expenses for the year, remain unchanged since we announced FY16 projections last November. And we expect the continued execution of our infrastructure investment strategy, coupled with constructive regulation, to be the primary driver for this year's results.

Looking at slide 13, we anticipate annual operating income increases of between $100 million and $125 million from implemented rate outcomes this year.

Thank you for your time, and now I'll hand the call to our CEO, Kim Cocklin, for closing remarks.

Thank you, Bret. Excellent report. We have reported a very solid start to this FY16 and are very encouraged with the expectations for the full year.

Without question, the weather events this past quarter presented a number of challenges. Our West Texas Division endured a record blizzard, while our Mid-Tex Division encountered a series of deadly tornadoes and record rainfall in the Dallas/Fort Worth metroplex. The devastating weather in Texas tested the reliability of our system, and the good news is that the capital improvements we have made to our distribution system, and the extensive training of our field employees, proved to be both valuable and effective while operating safely and reliably during these challenging conditions.

We also achieved very solid progress in the rates arena this first quarter. In Kansas, a settlement was reached and supported by all parties that will benefit our customers over the long term and is now pending action before the Kansas Corporation Commission. In Colorado, we received approval for a System Safety and Integrity Rider, which is a forward-looking infrastructure investment mechanism, effective January 1 of this year for a three-year term. And, in Mississippi, we have System Integrity Rider, which is also a forward-looking infrastructure mechanism. These important changes continue to demonstrate that fair and balanced regulation will continue to support our journey to become the nation's safest utility, with an annual capital investment of over $1 billion.

Rate outcomes have provided annual operating increases of about $12 million. And we have filed cases, now pending, which seek about $33 million of annual operating income increases. We expect to make between 12 to 15 more filings this fiscal year which will request between $90 million and $100 million of additional operating income increases. Slide 14 provides a summary of our expected FY16 rate filings.

We're off to a solid start, and our performance continues the track record of meeting our commitments to invest in our Regulated assets, growing our rate base and earnings, and maintaining an unwavering attitude to strive to become the nation's safest utility. Year over year, our weighted-average cost of gas has decreased, which will continue to help and alleviate any upward rate pressure associated with our increased capital spending. Our balance sheet remains very healthy and our credit ratings are strong. Our debt-capital ratio at December 31 was essentially flat, year over year, at 49.6%.

We remain focused on spending between $1 billion to $1.4 billion of capital annually through FY20. We believe our internal capital investment opportunities will enable rate-based growth which should generate earnings-per-share growth of 6% to 8% through FY20.

Yesterday our Board declared our 129th consecutive quarterly cash dividend of $0.42. The indicated annual dividend rate for FY16 is $1.68, which is a 7.7% increase over last year. With projected earnings-per-share growth of 6% to 8%, coupled with our dividend yield, we are committing to delivering total shareholder return in the 9% to 11% range through FY20.

Thank you for your time, and now we will open the call up for questions. Manny?

(Operator Instructions)

Brian Russo, Ladenburg Thalmann.

Good morning.

Good morning.

I noticed the rate base slide and the financing needs slide is, as you mentioned, consistent with the assumptions laid out at your analyst conference in November. I'm just curious, was there any impact to bonus depreciation since the assumptions in November, or in November, capture your outlook for bonus depreciation?

Yes. This is Bret. The impact of the extension of bonus at the 50% level really doesn't have any significant impact on us in FY16 or really over the five-year plan.

Why is that exactly?

It has a small impact from a cash basis percentage, but outside of that, the impact on rate basis is very small.

Okay. Also, on the rate base slide, if you just take your rate base plus CapEx minus depreciation, it seems like that calculation is higher than the illustrated assumptions in your annual rate base growth through 2020. I was wondering, what other adjustments are included in that? Just deferred taxes?

It's mainly just timing, Brian, are you taking on a period end or are you taking on cases that are in progress, or approved rate base that is already approved? I think you're just seeing the timing of annual rate making when you've got a fiscal year end in September 30 and you have rate filings throughout the year.

Got it. Understood. The debt to cap ratio at 49.6%. It seems lower than maybe what the assumption is for the full-year or the trend in the debt to cap ratio. I'm curious, is it just the seasonality?

Yes. It is really just the seasonality as you, your short-term debt balances are higher at the end of December than they are at the end of September. That is really just the timing.

As collections come in, as you go through the winter heating season, that balance comes back down. Really just driven by timing. Everything that we discussed with regards to our financing plan is consistent, is what we laid out in November.

And then lastly, I noticed in the non-reg segment, unit margins increased to $0.12 per MCF versus $0.10, is that sustainable?

I think, when you look at the guidance of the $14 million to $19 million, we reaffirm the same guidance that we provided in November. So, I still expect earnings to come in at that range. Some of it is timing as you go throughout the year, but nothing has changed from our previous income projections.

Great. Thank you very much.

Spencer Joyce, Hilliard Lyons.

Good morning guys, and Susan as well. Congratulations on a nice quarter.

Good to hear your voice. Thank you.

Merry Christmas and Happy New Year. It has been a while. Just a couple of quick ones here from me.

First, I know, Kim, you mentioned a couple of special or not special weather items from the first quarter here. Would it be safe to assume there was a bit of additional O&M expense? How was it in the first quarter and maybe if we're projecting to Q1 2017, maybe we will see a little bit of a give back or perhaps pullback in the growth rate there?

I think, Spencer -- this is Bret. A little of that is timing. We did have an increase as expected in O&M in the quarter. The O&M projected range that we provided back in November is still holding today.

So, a lot of that is just going to be timing and spend. We had some wet weather in some of our jurisdictions that impacted capital and O&M a little bit, but on a full-year basis we expect it to come in at the levels that we previously provided.

Okay. Perfect. And then, more broadly, I know you all have been steadfast in relaying that you are fairly insulated from a lot of the malaise we have seen in the oil and gas markets. Even in Texas, I know the direct exposure of the economy to energy is fairly small, but, can you just hold our hand a little bit more there and let us know how you're doing in the context of what feels like could be a tougher economic environment there in Texas?

Spencer, this is Kim. No, we haven't noticed any changes particularly in Texas. The other major metropolitan areas that we're servicing in Louisiana and Mississippi, Kentucky, Tennessee, Colorado, Kansas, even around the Blacksburg area. Everything continues to be better than what is being reported.

I think there is a whole lot of information coming out of the financial channels right now that everybody is expecting a rocky 2016 for the stock market. A lot of that is driven by what is happening, according to them, in China and some of the energy prices bouncing around but, we continue to be a significant beneficiary of lower energy prices and a strong dollar.

We're controlling everything that we can control and, so I think the other thing is the Fed is probably is going to push back any kind of increase on the rate as well. I think that is going to bode well for utilities. You're certainly in the right space and you're certainly right on target having Atmos as your top pick in 2016.

So far, so good.

Damn right. You are all about it. You have been right for a good while now, for the last three years.

It's a good thing we are on a call, I'm blushing a bit. All right. Again, nice quarter. We'll talk soon.

Thank you.

Charles Fishman, Morningstar.

Just a follow-up to that last question, I realize the insulation you have from commodity prices, but does the volatility help your non-regulated segment at all?

This is Mike, Charles. Our non-reg segment, primarily is focused on a delivered gas business where they are really managing the aggregation of supply in the pipeline and storage contracts to get gas to municipalities, other LDCs, and small industrial. We really not affected by that.

We run a flat book, we don't take any risk in the market. We get a little bit of lift out of volatility, but it is miniscule.

So, maybe the lower earnings from non-regulated, quarter to quarter, which I realize is just one quarter, is really more volume driven than anything else?

It is just timing.

That's business is all about managing risk. And, we're not about to try to take advantage of any volatility. We're going to run a flat book.

As Bret said, and we continue to emphasize at every meeting we have with the analysts, they are plugged in at about $14 million to $19 million in net income this year and every year through 2020. We're not encouraging them to grow, but we are encouraging them to be a value added service provider to the smaller municipalities, commercial industrial customers that need energy management expertise. Which is what they bring to the table and have done so each and every year, demonstrated by their performance in the Mastio customer survey where they come in at number one or number two the last five years.

We're proud of that fact. They do provide an extremely valuable service. The smaller customers that are situated behind our distribution utilities that we serve in eight states. Again, it is energy management expertise for those people that don't have it on staff.

Just a macro view of the industry. We saw a similar company in Salt Lake did acquire, announced an acquisition earlier this week, at a price that was somewhat lower than some of the other premiums we have seen. Do you have any thoughts as far as the industry? Did we reach the peak of maybe some of the multiples?

I don't think so. You guys are better versed at looking at some of the parts than some of us. But, you have to factor in the business model that is being pursued and some other parts that reside in the portfolio.

So, there is a difference, I think, between a peer-regulated natural gas utility where 95% of the earnings are coming from distribution and intrastate pipeline in Texas versus other folks that may have a little bit more spread out with the non-regulated, or they may have some MLP eligible assets in the form of an interstate pipeline, or submit stream operations, or even regulated production.

That is all I had. Thank you. That is quite helpful.

Great.

Stephen Byrd, Morgan Stanley.

Good morning.

Good morning, Stephen.

Most of my questions have been addressed. Just have one or two I wanted to follow up on.

Over time you all have done a great job in reducing the regulatory lag quite a bit. Just looking at your regulatory calendar coming up, how should we think about your further efforts to limit that lag?

I guess it is less than 5% of your CapEx. At this point you have a 12-month lag which is phenomenal. But just curious, where should we be thinking about in terms of, if things go well in terms of your upcoming filings? How should we think about further reducing that regulatory lag?

Stephen. It's Bret. As we reaffirm, we still expect that regulatory outcomes on an annualized basis will be $100 million to $125 million in FY16. We continue to focus on the execution of our capital spend, and continue to partner with the regulators in our annual filings.

A lot of what we got now is continued execution. Kim highlighted the new mechanisms last year that we got in Tennessee and Mississippi, we added a new mechanism in Colorado, for infrastructure that went into effect on 1 January and then he commented on what we're doing in Kansas.

So, it is just a continued effort of what you have seen in previous years. We've always focused on finding ways to continue to reduce regulatory lag. But things are continuing to progress as we expected.

We are measuring this in baby steps and very incremental bite-size pieces, and I think, the resolution that we achieved with our customers and the staff, and now being reviewed before the KCC in Kansas is something that we think is a very positive step in the right direction.

As Bret said, we pointed out, the forward-looking infrastructure mechanism in Colorado and Mississippi both identified for capital. We feel very good and every filing that we make, we're trying to educate the staff and the regulators that we're talking to about the continued need to reduce lag in order to facilitate the investment in this journey to safety we are on now.

Spending about three times the depreciation rate can only be done as long as you have a manageable lag process that we are continuing to focus on. So, we feel good and we will continue to try to do better.

That makes perfect sense. My last question, and I think I've got a good sense for the answer but I feel compelled to ask it anyway.

Just following up on the M&A environment that we are seeing, it is clear that there is still a lot of capital available. There's still likely to be strong valuations for really high quality, high growth companies.

I'm curious in terms of your reaction to the continued pace of M&A activity. How do you think about that in the context of your own company versus your own standalone growth plans?

Well, we have been in the camp that we thought the M&A activity would not slow down. It started to heat up at the end of 2015 and just continued through 2016. I think you will see a continuation of that activity in this space.

I think, the companies that remain on the board have to be extremely attractive and have some very good business models and bring to the table some platforms that don't exist for some of the folks that are going up and down shopping aisles at the present time. We've got a great plan. We've got a great strategy.

I think there's a lot of good companies out there like us as well. You've got to have a better handle than we do. You've got to think, trees don't grow to the sky.

The multiples where the companies are trading seem to be extremely rich, but we continue to represent, that we are an attractive opportunity for prudent investors with the metrics that we are throwing out and we're committed to deliver and that the results we are putting forth, justify putting us in your portfolio.

Well said. Very much understood. Thank you.

Thank you, Stephen.

Mark Levin, BB&T.

Very solid quarter. Very difficult market environment. Just a quick question.

It may be entirely too early to answer it, but I will throw it out there anyway. The 320 to 340 guidance that you reaffirmed, maybe you can, having gone through, at least one quarter, give us some idea of how you feel about that range. It is reasonably wide, maybe two or three factors that you think are critical toward getting toward the upper end, and the two or three factors that would lead you to the lower end of the range?

Hello Mark. It is Bret. You heard earlier, we did reaffirm that guidance of 320 to 340. We look potentially to tighten that guidance later in the year but we absolutely remain on track as you said. The first quarter was a solid first quarter. It came in right in line with our expectations and we still remain very well-positioned to achieve that 320 to 340 guidance range.

This is a difficult market environment, and we are up a little about 10% year to date, we will take it.

You guys are doing everything you can. Great.

We are battling fast and furious. I'm going to keep it up.

Thank you and congratulations on a good quarter.

Thank you, Mark.

We have no further questions at this time. I like to turn the conference over to management for closing comments.

I just want to say that a recording of the call is available for replay on our website through May 4. And again, we appreciate your interest and thank you for joining us. Goodbye.