埃特莫斯能源 (ATO) 2016 Q2 法說會逐字稿

Greetings and welcome to the Atmos Energy second quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mrs. Susan Giles. Thank you, Mrs. Giles, you may begin.

Thank you, Selena, 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 22 and more fully described in our SEC filings.

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

Thank you, Susan, and good morning everyone. We appreciate you joining us and your interest in Atmos Energy.

If you would like to follow me on slides 2 and 3 of the slide deck you will see that realized net income for the quarter was $144 million or $1.40 per diluted share. For this current six month period realized net income was $240 million or $2.33 per diluted share. Positive rate outcomes in our regulated businesses drove our growth for the three and six month periods.

Rate release for our regulated distribution and pipeline operations combined generated about $24 million of incremental margin in the quarter and about $48 million for the current six months. However, warmer than normal weather affected all segments of our business.

For the quarter and six month periods we experienced a 21% decrease in regulated distribution sales volumes due to weather that was 25% warmer quarter over quarter. However, our weather normalization mechanisms, which cover about 97% of utility margins, worked as designed during the warm heating season. As a result, gross profit decreased just $2.2 million for the quarter and $3.3 million for the six month period due to the warmer than normal weather.

Additionally, although our regulated pipeline experienced decreased through system volumes and lower storage and blending fees, due to the warm weather in the current quarter, volumes are only down about 1% on a year to date basis. And in our nonregulated segment we experienced higher settlement losses on long financial positions compared to both prior-year periods.

Focusing now on our spending. Consolidated O&M was flat quarter over quarter, but rose about $6 million in the current six-month period, primarily due to increased pipeline maintenance spending as well as the timing of spending period over period. Capital spending increased by $97 million in the first six months compared to one year ago, primarily due to planned increases in spending in both of our regulated segments.

About 2/3 of this increase was incurred in our regulated pipeline segment where we continue to enhance and fortify our Bethel and Tri-Cities storage fields to improve our ability to reliably deliver gas in 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 you will see in the slide deck.

Moving now to our earnings guidance for FY16, with the winter heating season coming to an end, we have tightened our projections and earnings per share range for FY16. As shown on slide 12, we expect FY16 earnings per diluted share to range between $3.25 and $3.35 excluding unrealized margins at September 30, 2016. The expected contribution from our regulated operation, as well as estimates for selected expenses for the year, have been tightened from our original projections made last November.

The expected contribution from our nonregulated operations remains unchanged. We expect the continued execution of our infrastructure investment strategy, coupled with constructive regulation, will be the primary driver for this year's results. Looking on slide 13, we continue to anticipate annual operating income increases of between $100 million and $125 million from approved rate outcomes in the year.

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

Thank you, Brett, very much, and good morning everyone. Very good quarter. An excellent first half. As Bret said, we came through a warmer than normal winter in excellent shape. We were able to tighten guidance, and with the approval of the pipeline GRIP filing in Texas on May 3, we now have generated $71 million of revenues from rate outcomes, and as Bret said, are on target to achieve our target of $100 million to $125 million this year.

We do have filings pending before agencies which seek a total of $56 million, and we expect to file a few more cases before year-end. These results, very importantly, mark our over five consecutive years of successfully executing our growth strategy that we began in 2011 and continues our journey in meeting the very important commitments of investing in our infrastructure to improve the safe operation of our system, to grow earnings at a level of 6% to 8% annually, and to target a total shareholder return of 9% to 11%.

We now will open it up for questions. Selena?

(Operator Instructions)

Chris Turner, JPMorgan.

Good morning. I wanted to check in on the pipeline rate case. I think you last updated us by saying that you would file late this year, early next year. What is the latest on timing thoughts and cap structure request versus your current?

It is pretty much on target is what we have been messaging you with. We intend to file it probably late this year, probably December. The cash structure we're targeting is still in the 57% to 58% equity component, which is what we anticipate having as we work through our financial plan for funding the capital budget this year.

And really, as we have talked about, we're going to file everything right down the middle of the fairway and not ask for any outside that we don't have in place right now. There really isn't any change and we are on target to do everything that we have been talking to you about. If there is any changes we will have any updates at the AGA Financial Forum coming up in May, but we do not anticipate having any.

Okay. And is the right way to think about that case, that you have recovered most of the capital return on and of already through the GRIP mechanism and most of the wild card or uncertainty, from our perspective, that will flow through to your bottom line versus what you currently are getting is on the cost side?

We will have an update to the rate base numbers, obviously, and we will have all our investment that we have made from the time of the GRIP filing this year through the end of that case, and then we will be filing another GRIP filing after the case is filed. There will be additional increments to rate base in the case.

Okay. Great.

And then can you remind us of when you expect to next be a cash taxpayer based on your current estimates and the changes with bonus depreciation late last year? And then also maybe give an update on your expectations of using your ATM issuance mechanism that you recently launched in terms of timing this year and maybe next, as well?

First on the cash taxpayer, we don't anticipate being a cash taxpayer in the current five-year plan through 2020. So it will be after that before we start to pay cash taxes. As far as the ATM, Chris, the plans are consistent with what we disclosed at our November analyst day. We expect to do $300 million to $400 million over the five-year plan and $50 million to $100 million on an annual basis.

Okay. And would that be somewhat evenly spread throughout the year or would you do that at certain points?

I think we're going to stick with the $50 million to $100 million as you go through that period. I will tell you that all of our financing plans have been contemplated and included in our tightened guidance range for FY16, as well as our guidance that we have out there in 2020.

Okay, great. Thanks.

Spencer Joyce, Hilliard Lyons.

Bret, Kim, Susan, good morning.

Good morning, Spencer. Who is the Derby winner this year?

Well, I'll tell you, that's why I had to chime in. I'm on the favorite. I kind of like Nyquist this year.

NyQuil? (laughter)

Almost. Nyquist.

In any case, just one broad big picture question from me. You all have been very clear about why you have avoided latching on to some of the major midstream projects that we have seen here out east a little bit, and at least from my vantage point, it seems like the environmental contingent is becoming more organized and a bit more vocal and we have seen delays for Constitution, PennEast, almost any named project we have seen delays at this point.

I'm wondering if you have seen any of that public sentiment shift into some of your smaller diameter, shorter-hull projects, or is it really just business as usual as far as your pipe in the ground goes?

None of that consternation is translated into any of the projects that we have got and the capital investment we are doing. The regulators and our customers understand how important it is for us to continue to pursue that investment to make our system as safe as possible and continue to -- our journey of becoming the nation's safest utility.

We are also not trying to clear new right-of-way or go through areas that have not -- that don't have pipe in the ground right now. It makes a significant difference when you're trying to put those new systems in and trying to clear a path for them and there is a great deal of opposition that goes along. And then you have got the size of the pipe itself, those things are talking 36-, 42-inch pipe and unfortunately you have got some stuff that has been in the news here lately, Bethlehem Township in Pennsylvania with the Texas Eastern incident last week.

So it's pretty much elevated the opposition, but for us, we continue to operate in a -- under the radar. And people see the need -- and it is small pipe in most situations where we're dealing with it. So, no.

All right. That sounds great, and good color there and glad to hear it is business as usual. That is all I had, we will see you in Naples.

Okay, Spencer. Look forward to it.

Faisel Khan, Citigroup.

Hi, good morning. It's Faisel from Citigroup.

Faisel. Where have you -- I thought you were doing the Geico commercials or something. We haven't heard from you in years.

Yes, it has been several quarters since I've asked a question, but think of where the stock has gone, too. So it's probably a good thing.

Yes, we've got a good run.

Yes. Just a couple of questions for you and I will get out of the queue. Just on the -- with the amount of rate cases you have going on and going forward, if you can just remind us what the history is, the ask versus the settled? So what percentage you usually get from the ask for these rate cases when you settle them?

Keep in mind, Faisal, we have annual mechanisms that cover about 93% of our filings.

Yes, these are not traditional filings. Normally, in a general rate case, you handicap the filed form out versus -- the request versus the achieved at about 50%, but so many of our filings right now, as Bret pointed out, 93% are covered by annual mechanisms that really have -- are very prescriptive and there is not a lot of controversy over the computation and the methodology that is utilized to increase either the O&M or the rate base adjustments. And then you have plug and play ingredients normally associated with the cap structure that may or may not change and the return component is normally settled. The depreciation rate is also settled.

We have got the $56 million that we are seeking right now that is the filed for request. The best target that you can have for your model I think is to look at the $100 million to $125 million that we targeted for FY16 that we're at $71 million now, and we're very confident and comfortable that we will reach the target that we have provided. As we get closer through the next two quarters you will see those amounts will continue to materialize, and as they become final we make them immediately available so you can get them into your model.

Got you. Okay. Makes sense.

If you look at slide 27 you will see a detail of each of those mechanisms by state, by jurisdiction.

Yes, no, I see it. I was just wondering, are you in for, for example, for the mid-Tex cities, R to RRM, is that $26.6 million -- is that part of this process you are talking about where it is an automatic --

That is not automatic, but it is pretty prescriptive. There is normally adjustment in the ask for that type of filing and what we achieve because that does go through some negotiation process.

Faisal, this is Mike.

The other thing that we'll see in terms of the difference between an ask and a rewarded amount relates to assumptions that are made and debated around things like employee costs, how pension costs are treated in that, that at the end of the day, may affect the awarded amount, but does not affect us on a net income basis at the end of the day.

Okay. Looking at the continued rate base growth of the Company going from $5.5 billion to $9 billion, is there anything that would cause that growth rate to slow for any which reason? Also, is the deferred taxes and the implementation of the new tax laws, is that baked into that number too?

It has fully been contemplated in all of our numbers, yes.

You'll be the first to know, Faisal. We take that commitment extremely seriously. We have advertised that we are going to grow rate base at 9% to 10%, which we absolutely have to do to meet the commitment of growing earnings at 6% to 8% on average.

We built up what we hope is a lot of trust and credibility with our shareholder base and with the street, and we take that as seriously as the dividends. If there is ever any change to that and if there is any retraction or reduction to the growth rate that we see, which we don't see for the next five years, and we have got a very good financial strategy to back up the investment for the next five years and we will continue to increase that.

So we are very confident, and again, we can't over emphasize the fact that we're not just advertising these rates at 6% to 8%, we're actually performing and throwing them off and we have got over a five-year track record of meeting that commitments. We fully expect to do it and we understand how important it is to message any change as soon as it becomes available. We're not going to hide the ball on anything like that.

Makes sense. Thanks for the time. Appreciate it.

See you Monday.

Will do.

Charles Fishman, Morningstar.

Good morning. You lowered -- you narrowed your guidance, but you lowered the upper end of your guidance, $3.40 to $3.35, yet the upper end of regulated operations stayed the same, the upper end of nonregulated operations stayed the same, share count stayed the same, can you explain to me your thinking on that of how you go about doing -- or why you did that, lowered the upper end too?

Well, when you tighten guidance, Charles, you have got to move the upper and the lower end. The midpoint of our guidance is still the $3.30 that remains unchanged, which is about an 8.2% growth rate over the $3.05 weather adjusted operations for FY15. So it was just a matter of coming in six months into the year when 70% to 75% of your earnings are behind you and providing a bit tighter of a range of guidance for the street.

Okay. I see what you are doing. You're focusing on the midpoint and then just assuming a variance from that. Got it. Okay. That explains that.

We're also trying to focus on trying to help you tighten up your model.

Thank you. That's always appreciated.

The next question follows up tightening up the model. Effective tax rate went down -- guidance on effective tax rate went down 100 basis points. Can you provide a little more color on that?

That was Trump -- because he's the Republican nomination.

(laughter). Okay.

It's just -- really just the ebbs and flows you see in a year plus there was a new stock compensation standard that was adopted and that impacted tax rate -- effective tax rate a little bit. And you will see that disclosed in the 10-Q.

Got it. Okay, thank you very much. Good quarter.

(Operator Instructions)

Mark Levin, BB&T.

Hello. Hope you are doing well.

Two very big picture questions. The first has to do with something that I am sure is not envisioned by many at this point with natural gas prices around $2.10 Nm. But is there a point at which -- or is there a gas price at which you could point to or maybe theoretically come to whereby regulators would be less inclined to be as constructive as they are?

Put another way, is there a natural gas price point where the customer starts to feel it in a more material way and the regulatory environment might not be quite as accommodative as it is today?

You can hypotheticate all you want on prices for sure, Mark, but we haven't picked a price point. We do anticipate with our five-year plan of having an all-in -- we have assumed an all-in gas price of $4.50, -- $4.50 to $5.50 through 2020, which if you look at the forward screen, that is clearly within the realm of reasonableness and (multiple speakers) conservative.

There are some other factors. The cost of money is another thing that is helping the investment along with gas prices, the customers are not expected to experience any increase in the bills that they have paid since 2007. We really haven't run the what-if scenario on that. We pay, obviously, very close attention to gas prices and are able to do some things as a result of working with the regulators to hedge positions so that we are usually one or two years ahead of all the price changes.

Sure. Sure. So to me it sounds like -- even if it were -- gas would have to do something monumental -- it would have to be monumentally higher?

It would have to be like $8 to $10 I think.

Yes, right. So a completely different schematic. And then the second question, because you can't get off an LDC call without asking the M&A question, but maybe I will approach it from a different way. Are you seeing any opportunities -- obviously, your equity has risen magnificently, and for good reason, but you do have an equity currency. The cost of debt is relatively cheap -- is very cheap actually.

Are there opportunities out there as a buyer? Now I realize going and trying to buy an LDC and finding a cheap LDC at this point might be challenging. But are there any other opportunities out there that you guys are considering or would consider given the strength of your equity and the cost of debt?

We have been very consistent in emphasizing the fact that we think multiples are extremely expensive. You never say never, but there is nothing on the block that we would be interested in paying over and above, or even close, to what is going off the board today. If you look at our investment of $1 billion to $1.1 billion of capital every year, that with the regulatory lag, that we experience with 94% of that investment beginning to earn within six months of the end of the test period, that $1 billion to $1.1 billion that we are putting in the ground is helping us on this journey of becoming the nation's safest utility. So it becomes immediately accretive. You don't have the integration issues if you go out and overpay for an asset which you are doing right now.

You have regulatory issues and complications of dealing with what you pay over book, how you deal with goodwill, how you integrate a culture, you do systems. There is a whole host of issues, social issues and financial and operational issues, when you buy an asset. We did that, we have a wonderful asset -- we have a wonderful portfolio. We are in jurisdictions where we want to be. We are extremely comfortable with who we are. We know who we want to be. We have got wonderful skill sets. We don't really have to look across the landscape and I think bet the future on trying to integrate an asset under the current market conditions.

That makes absolutely perfect sense. And is your -- just when you think about the industry as a whole and you put your crystal ball on and think about the next 6 to 12 months, is your expectation that we will continue to see more deals, or do you think that there will be a pause given the run in the equities?

No pause. There is going to be more deals. You have got people out there that -- [Sabine] gas is a very attractive story. They want to get it in their portfolio if they do not have it right now, and natural gas, obviously, it is the future for energy in this country. Energy is a very fundamental food group of a healthy economy.

Once we get past November and the elections I think with where gas prices are and where exploration efforts are in the country and the ability -- it is an affordable all-American product, so it makes all the sense in the world and there is good reason -- I think the multiples are going to stay where they are at in the space as well, because I think interest rates will probably remain very low, but I think people are seeing a lot of value right now and continue to see value in natural gas.

That all makes sense. Congratulations on a great execution.

Thank you, Mark.

There are no further questions at this time. I would like to turn the floor back over to Mrs. Susan Giles for closing comments.

Thank you, Selena. I just want to say thank you for calling. A recording of this call is available for replay on the website through August 3, and we hope to see many of you at the AGA Financial Forum in a couple of weeks. Thank you again for your interest in Atmos Energy. Bye-bye.