埃特莫斯能源 (ATO) 2002 Q4 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. Welcome to the ATMOS Energy 2002 fourth quarter and year-end results conference call. Today's call is being recorded. For opening remarks and introductions, I'll turn the call over to Ms. Susan Kappes, Vice President of Corporate Relations.

Good morning, and thank you all for joining us. I apologize for our unusually early call. ATMOS Energy is participating today at an American Gas Association Analyst function in New York. To accommodate the analysts' schedules at this meeting, which begins in 45 minutes, we had to start our call earlier than normal. We will keep our remarks shorter than normal to give you sufficient time to ask questions.

Our call is webcast live over the Internet. If you would like to access the webcast, please visit our website at www.ATMOSenergy.com. We have placed slides on the website that summarize our financial results. We will not review the slides in detail but will be happy to take any questions about them at the end of our remarks.

To discuss our financial results from our Dallas corporate headquarters are Bob Best, Chairman, President and Chief Executive Officer; Pat Reddy, Senior Vice President and Chief Financial Officer; Earl Fischer, Senior Vice President, Utility Operations; Fred Meisenheimer, Vice President and Controller. Joining them from our Houston office is JD Woodward, Senior Vice President, Nonutility Operations. Joining me here in New York is Laurie Sherwood, Vice President, Corporate Development, and Treasurer.

As we discuss these financial results and our 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. Any forward-looking statements are intended to fall within the safe harbor rules of the private securities litigation reform act of 1995. To begin, Bob will review the fiscal highlights of 2002 and the fourth quarter. Bob?

Thank you, Susan, and good morning, everyone. I want to thank you all for joining us at this hour. By now, I hope you've had a chance to look at our earnings release that we issued yesterday evening, and I want to just say from the outset that we were pleased to announce that ATMOS had increased our dividend for the 15th consecutive year. Our new indicated rate for fiscal 2003 is $1.20 a share, up 2 cents from $1.18 a share we paid in 2002. I'm also pleased to announce this morning that we turned in a solid result in a year that was not particularly kind to gas utilities or to our energy business in general.

Our earnings per diluted share were $1.45, 2 cents over our projected $1.43 per share and a penny better than the street's consensus of $1.44. Net income for the year was $59.7 million, which was a 6% increase over the $56.1 million that we earned in fiscal 2001. Of that amount, our utility operations provided for 72% of the total, and our nonutility operations did very well and provided 28%.

For the utility operations, a major factor was a full year of contributions from the assets of Louisiana gas service and the 279,000 Louisiana customers we acquired from citizens in July of 2001. Utility operations and in particular our collection efforts also benefited from lower commodity costs during the year for natural gas. Our average cost of gas in 2002 was $3.81 per million cubic feet, which was 44% less than our average cost of $6.83 in 2001.

This lower gas costplus our stepped up collection efforts significantly allowed us to lower our provision for doubtful accounts, which is down now to about four-tenths of 1% of revenue. The drop in bad debt provision yielded savings of $26.2 million over the year. And I would say that four-tenths of 1% is back to our historical levels of un-collectibles, and we're very pleased in and our employees just did a tremendous job in that area which allowed us to achieve the earnings levels that we did. I'm also pleased that we were able to increase net income despite weather that was 6% warmer than normal and 18% warmer than 2001. Even so, the warmer weather did lower our gas sales volumes from 217.8 BCF in 2001 to 208.5 in 2002.

Pat Reddy, our Chief Financial Officer, is going to review the financial results with you in just a few minutes, but before he does, I want to mention these achievements in our utility operations that are going to have effects well beyond 2002. The first was our successful launch of our new national brand as at moss energy. This reflects a major initiative we've undertaken to raise our customer service to new standards of excellence. We also believe that our strength and identity in And our service improvements will support the expansion of our utility business, and I know we are excited about this initiative.

A second achievement in 2002 was the finishing of all the regulatory and financing work to acquire Mississippi Valley Gas. On October 31, we did receive a final order from the Mississippi Public Service Commission which is now cleared the way for us to close on our Mississippi valley acquisition in early December.

A third success was the agreement we reached with the Louisiana Public Service Commission regarding a rate stabilization adjustment for our Louisiana utility operations, and this agreement will add $15.8 million annually to revenues during the first two years, beginning with this month. Part of the increase is in the customer charge, and the remainder is in the commodity charge including base load, which again effectively lowers our sensitivity to weather in Louisiana, and thus system wide.

Let me now turn to our nonutility operations, and they, too, did very well in 2002. The primary contributor was our natural gas marketing trading operation. In fiscal 2001, we acquired all of Woodward Marketing, and in fiscal 2002, as we expected, Woodward achieved impressive gains. These gains came from marketing wholesale gas from increased volumes attributable to the acquired nonutility assets of the former Louisiana gas service from favorable margins on gas trading and from gains on gas stored in inventory.

In late 2001 and early 2002, our nonutility operations also acquired a number of strategic assets. Woodward Marketing has used these assets to grow its revenue base in existing markets. Furthermore, our nonutility operations continued to grow in the distributed power business. In September, Atmos power systems made their generating plant available for service. It is a 20-megawatt plant built for a large industrial customer in Tennessee. The plant is leased for 10 years with an option for the customer to purchase it. We see good opportunities in this business because many of the traditional constructors of power plants, such as electric utilities and the newer independent power companies, are now unable or unwilling to invest in new plant capacity. In addition, the market for small power plants remains very viable among municipalities and industrial customers.

Looking now at just the fourth quarter, the increase in our nonutility gas trading margins is one of the key factors that contributed to our results in the quarter. For the quarter, we reported a net loss of $5.6 million or 14 cents a share, and that compares with a net loss in the previous year's fourth quarter of $7.6 million, or a loss of 19 cents per share. Now I'm going to turn the program over to Pat Reddy who will recap our financial results, and when he's finished, I'll be back to say a few words about our outlook for fiscal 2003.

Thanks, Bob. Good morning. As Bob said, we had a se very successful 2002. I'm going to keep my remarks about the details of the year and the quarter rather brief in the interest of time. Bob summarized the key developments, and our news release and slides for this presentation can provide you with more supplemental details. However, I do want to focus on some key financial items and add a couple of details that you won't have available until we file our 10-K later this month.

Recapping our financial results for fiscal 2002, the drivers as Bob said were the contribution from our acquisitions of LGS and the rest of Woodward Marketing and our effective utility collection efforts that lowered our provision for doubt doubtful accounts and bad debt expense. Offsetting these improvements was the warm weather along with an increase in operation and maintenance expenses. We were especially pleased by the contribution from our nonutility operations, mainly marketing and trading. Nonutility operations contributed $16.7 million to consolidated net income in fiscal 2002, compared with $6.2 million for 2001. Net income from nonutility operations was up 169% and represents 28% of consolidated net income for 2002, and of equal importance, the nonutility was able to maintain an increase of independent short term credit line to support trading activities.

Recapping our 2002 fourth quarter results, that quarter showed improvements over that of 2001. We had an expected net loss of $5.6 million, compared with a net loss of $7.6 million for the same quarter a year ago.

Operation and maintenance expense during the fourth quarter went down compared with the fourth quarter of last year. O and M for the fourth quarter was reduced by $13 million, and the provision for doubtful accounts, dropping from $9.6 million in 2001 to a negative $3.4 million in 2002. Excluding the provision for doubtful accounts, core O and M expense increased $11 million, primarily due to higher labor costs and medical benefits and pension costs, and you'll note that we've added a slide this time to show our expectation for pension and medical costs in 2003.It's also worth noting that during the fourth quarter, gas trading activities contributed an increase of $5.8 million from contract optimizations and spreads on physical deliveries.

Turning to our capital expenditures, during fiscal 2002, they were $132.3 million, up from $113 million for the same period in 2001. The $19 million increase was primarily due to the acquired LGS assets and the full ownership of Woodward Marketing. Spending was slightly above our original estimate of $122 million, due to the purchase of additional billing software licenses and integration expenditures for our Mississippi Valley Gas acquisition. For fiscal 2003, we are continuing to project total capital expenditures in the range of $153 million to $160 million. Spending for our existing operations during 2003 is expected to be $135 million to $140 million. The increase is primarily due to $8 million in higher capitalized benefits. We also expect to invest an additional $18 to $20 million during 2003 in our Mississippi Valley Gas operations.

A topic that's on everybody's minds these days are pension and post retirement benefits. And the high cost of pension and post retirement benefits have hit us like they have all companies, and our costs in these areas have gone up. The projected increase in 2003 is approximately $6.9 million. Our pension plan assets have historically earned in excess of a 10% return, but because of the deterioration of the financial markets, we have lowered our assumptions for the return on our pension plan investments from 10% to 9.25%, also assuming a discount rate of 7.25% and compensation expense increases for our labor force of 4%, and again, information -- additional information is available in our slides, and these increases have been factored into our guidance for fiscal 2003.

Turning to medical benefits, in 2002, those benefits went up approximately $10 million, and we expect another increase in 2003 of approximately $3.4 million. In response to these increases, we have revised some benefits programs to help control costs, particularly prescription drug coverage. When combining the pension, post retirement benefits and employee medical, dental and other benefits expense, we are forecasting a year-over-year increase in total benefits expense of approximately $12 million. Actual benefits expense in 2002 was 15 million, and projected total benefits expense in 2003 is projected to be about $27 million, and again, if you couldn't write these down quickly enough, they are on the slide on our website.

Turning back to the shelf registration statement that we filed in December of 2001, we have in place the $600 million shelf registration which was declared effective by the SEC in January of 2002 and subsequently approved by five state utility commissions. We will use also $150 million bridge loan facility to provide the initial financing for Mississippi valley acquisition. That's for the $75 million cash portion, and to repay Mississippi Valley Gas's existing debt in the approximate amount of $45 million. In time, we will replace this short-term financing with long-term debt under the shelf filing. We also will issue stock to provide the $75 million of ATMOS Energy shares part of the consideration in the Mississippi valley transaction.

I'd like to talk for just a minute about our gas hedging activities on the utility side of the business. We typically hedge about 20% of our flowing gas requirements using our own underground storage facilities and contracted pipeline storage and this is often referred to as a natural hedge in our business. We also use financial derivative to cover another 30% or so of our gas requirements. For the 2002-2003 heating season, we expect to hedge with storage and financial contracts between 45% and 50% of our flowing gas requirements at a weighted average cost below $4 per MCF, and this, of course, will help to buffer the increased cost of gas to customers and help with our collection efforts. These hedging activities have either got en, publicity or tacit approval from the regulatory commissions in each of our states.

With regard to our weather insurance, this coming winter, we will have in place for the second year of a three-year policy that protects our earnings against unseasonably warm weather. We can receive a payout if the weather during the six months of the heating season in Texas and Louisiana is warmer than normal by 7% or more, with a break even at 11% warmer than normal. The annual insurance premium which we hope to eliminate eventually, is about $4 million.

Now I'd just like to close by giving you some earnings guidance for 2003. For the 2003 fiscal year, we reaffirm earnings in the range of $1.52 to $1.58, assuming nor normal weather and no unforeseen requirements of Mississippi Valley Gas Company. Our guidance for the first quarter of fiscal 2002 are that we expect to earn in the range of 53 cents to 57 cents per diluted share, and with that, once again here's Bob to conclude our remarks.

Thank you, Pat. Before closing, I want to review some of the recent news about our acquisition of Mississippi Valley Gas. I mentioned earlier on October 31, we did receive final regulatory approval that we needed in order to complete the acquisition. We expect to close in early December and we expect Mississippi valley to be slightly accretive to our fiscal 2003 earnings in the range of probably about 2 cents. I've often referred to ATMOS Energy as a patient acquirers. The transaction took us about 14 months to complete, which was longer than we hoped going in, but we were glad to be able to sign the agreement and to be able to enter what is a new market for us.

In other states, we had had operations such as Louisiana where we already had a relationship with the commission, so this took us just a little bit longer, but we felt like in the end, that we reached a fair agreement, and we're very excited about doing business in Mississippi, and we've assured the regulators that we will maintain the high standards of customer service that Mississippi valley has contributed and hopefully will make some improvements of our own.

As you all know, acquisitions have been in an engine of growth for our company since 1986. We have made, if you count Woodward, eight acquisitions over those 16 years, and so we're proud of all those acquisitions and all those companies have been significant contributors to ATMOS Energy, and we've been able to integrate them and to find success with each one of them. With Mississippi valley, we will gain over 260,000 customers, and this is going to allow us to spread our overhead and lower our costs for our existing customers, and also it's going to allow us to achieve greater synergies, especially with our new technologies.

Longer range, we're going to benefit from entering a new market with diversity of economic activity, weather patterns and classes of customers and rate-making provisions. In particular, Mississippi valley's rates are weather-normalized and do include provisions for monthly purchased gas cost adjustments and semiannual rate adjustments. And it has a rate structure which is designed to mitigate the effects of weather and provide predictable and stable earnings and cash flow and reward the utility for its excellent customer service. As I said, we believe it will fit in well to our system in our area of the country that we serve, and it's going to make some very good long-term contributions to our earnings.

Going forward, our five-year growth projections show an average annual growth rate in ATMOS Energy, net income of 5 to 7%. And we plan to achieve consistent earnings growth over this period which is going to help our stock price, and we will do this primarily for two means -- through two means. One is, we have projected over the next five years $66 million in rate increases. These are going to -- they're not going to occur at an even pace, but they have already begun occurring with our Louisiana result. Already this year, we are in a test year in Texas and Kansas and we'll be making rate filings this year.

Part of our rate strategy as we have talked about before is to obtain and mitigate the impacts of weather on our earnings. We continue to file for and work toward obtaining weather normalization, particularly in our southern tier states, and we want to cancel our weather insurance Texas in Texas and Louisiana because it does cost us between 4 and 5 million dollars a year as premiums for this insurance.

The second is the major growth of our nonutility business at a rate of over 10% annually. And this growth is going to come from expansion of nonutility markets as well as new acquisitions, and we have many, if you can imagine, we have many opportunities and we continue to look at these, but the one great thing about Woodward, Woodward has been in business for a number of years, and it has a strong base of over 120 municipalities and over 1,000 industrials, so Woodward has a very, very, very strong base foundation of business on which to grow its earnings, and Woodward has shown consistently since we have been involved with them, which was from 1997 on since United cities was involved with them, which is 1995 on, and even before that, Woodward has continued to grow its company and be among the very top in terms of providing customer service, so we think the future is very bright in our nonutility business.

To conclude, our earnings for 2002 were on target at $1.45, as pat shared with you. We're projecting for 2003 $1.52 to $1.58, but we're not satisfied with that, that's not our goal. Until we are able to complete our weather normalization, it's the' achievement of that that we want. Weather still has an impact on us. So, you know, with a break or two, we'll do better, but that's what we see as probably the most problematic at this point in time. In 2002, our nonutility rate operations made significant contributions, just as we thought that they would. We're pleased to get Mississippi valley closed, and we'll be making our rate filings, two rate fight filings this year, as I said $66 million over five years. Continue to work on costs, always a priority for us, but ATMOS is one of the more efficient gas distributors, but that doesn't mean we can't continue to improve in both O and M and capital. Increased utility revenues and nonutility growth is going to drive our earnings. We've remained faithful to our strategy that we continue to talk about. We stayed that course, we've stayed focused through some tough weather years and some $10 gas costs and we believe in this strategy, we are going to stay the course, we're going to grow our earnings, and we're going to be a highly successful company. Certainly since my time here, I've never felt better about the prospects before us. So with that, I'll close the formal presentation, turn it back to Susan and for any questions.

That concludes our prepared remarks. We will be happy now to answer any of your questions.

Thank you the question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, that is star 1 to ask a question. We'll pause just a moment to assemble our roster. We'll go first to Dan Fidell with A.G. Edwards.

Good morning.

Good morning, Dan.

Just a quick question for you. And I apologize if this is in the slides somewhere but you talked about over $60 million in rate increases over the next five years. Do you have any kind of detail on which states would be coming first and, I guess, general size of those, or have you not put that out yet?

Well, I don't know that we put it out, but as we said, we started -- and when I referred to $66 million, I was really referring to the Louisiana part of it too, which we achieved $15.8 million this past year. We will be looking to file in West Texas and Amarillo this year and in Kansas, and then in 2005, we'll be filing in Georgia and Missouri, and then it goes on out. And of course Mississippi valley will be part of that as well.

So I will say this, a lot of times, you know, I hear people in the financial community talk about hockey sticks and they say, well, we've got this five-year plan and it's all out in the last year, but we're going to know very quickly, within the next two years, how successful this strategy is because probably two-thirds of the increases are going to occur within the first three years. I know a lot of companies back in the mid to later '90s decided that they were going to try to stay out of rate cases and to work on their costs, and I think, you know, everybody has their own unique situations, but what we've found is, is that with our technology improvements and process improvements, we can still make incremental progress on costs, but there's a limit to how far that can go, and I think we've seen -- pat referred to pension and medical costs, insurance costs, those have gone up since 9/11. Those are typically costs that regulators don't -- you know, they understand that those are costs that are in this environment, and so they're costs that typically you can get in your rates, and so our attitude has been in order to grow our earnings as we looked back at what we needed to do to grow our earnings 5 to 7% a year, keep our dividends stable with our 5% yield and continue to increase it as we've done for 15 years, which is very important to a huge segment of our investor community, that we were going to have to go out and seek revenue increases, so that's why we've embarked on this strategy, and Dan, we do have a chart that we'd be glad to share with you.

Dan, this is Pat. I'd just add that in addition to earnings growth, we're very focused on quality of earnings. What we've done in that regard on the utility side, we've got weather normalization in Kentucky, Tennessee, we'll have it in Georgia when we close, we're also pursuing it in Kansas, Missouri and Virginia. And in Virginia, as you know, AGL has recently gotten it, and we've had preliminary discussions with the staff in Kansas and they're very receptive to the concept and we expect to file there in December in anticipation of trying to get W and A in Kansas for our next heating season.

Also I guess I'd mention, Bob talked about the 15-point 8 million in rate increases we got just recently in our Louisiana jurisdiction. But at the same time, we also got an increase in the base monthly customer charge of $2, so all that to say, we're working hard to shift more and more of our margin to fixed charges or to W and A.

Great. Appreciate your comments today, and as always, really appreciate all the detail you guys put out. It's very helpful.

Thank you.

Thank you. Good luck as you goes forward.

Thank You

Once again, that is star 1 to ask a question. We'll go next to Phil Adams with Bank One Capital Markets.

Good morning. I second the motion, love the detail on the slides.

Thank you, Phil.

Obviously you're working real hard to -- you know, through weather normalization to take some -- as much volatility as possible out of the utility side of the business. I guess what has investors maybe more nervous about companies in general, not you particularly, is that the volatility we've seen on the unregulated businesses over the last year-plus. I wonder if you could just once more refresh the qualitative factors that make your unregulated businesses less susceptible to volatility in earnings.

what I would like to do, Phil, I'm going to turn it over to J.D. Woodward, but we do feel that we are less susceptible and we need to get that message out very loud and clear, and we are going to continue to do that, and I think it's important because as we said this morning, nonutility accounts for almost 30% of our earnings, and we'll continue to be a major contributor as we go forward, so J.D., if you would, would you address that?

Be happy to, Bob. Good morning, Phil.

Good morning.

Again, I think our premise on that is that with our pretty stable long-term customer base which has our 120 municipals and roughly thousand industrial customers, that book of business really gives us the ability to budget a fairly reasonable and expected gross margin, Phil, and looking at last year's numbers, we've got about a 14-cent gross margin on our book of business, which is fairly consistent with what we've done in the past. Actually it's a little bit up from prior years. We were in the 10 to 11-cent gross margin range. So we're actually seeing a little bit of improvement in our gross margins. And with our storage activity, with our storage trading, what the markets have been able to give us with the spreads that are in the front months versus the back months is some fairly attractive margins on our storage inventory. So -- and that's historically where some of the volatility has come from, is around the storage margins. We're opt mess particular with the new rules coming out, you know, that we will see continued deceleration of volatility in our earnings, and that's what our expectation is at the moment.

Phil this is Pat Reddy. If I might just direct you to slide 10, in our package it shows a breakdown of the fair value of our energy contracts and the maturity.

Most of it's one to three years, right?

It is. 97% is in that range. Most of it75% of it is less than one year, so that we don't have to rely on complicated models, there's a very liquid curve, and, you know, again, Woodward's trading and hedging is around physical volumes for customers. They typically may sell gas at index minus and do some trading to make up that gap, but it's not financial speculative trading. We're not taking a market view. It's really all tied to physical business with municipals, industrials and the at ATMOS utilities. J.D. mentioned that on October 25th, the EITF met and determined that they're going to discontinue EITF 9810, which means going forward in 2003 perhaps after the first quarter we won't be marking our storage or transportation book, and that by itself should reduce volatility from quarter to quarter, and make it easier to relate activity to cash flow to earnings to the balance sheet, and I know J.D. is very much in favor of that.

Do you have -- the 120 municipals and thousand industrials, is there a statistic that you use to talk about longevity of those client relationships?

J.D.?

No, there's not. We do have, you know, as a function of our mark to mark, the way we keep track of that is through our contract administration group, and so it would be a fairly easy slide to get to, but on a general basis, most of the municipals are on one to three-year contract terms. The industrial contracts can be anywhere from 30 days to three years. I think the more probably important statistic to note is that a majority of these customers, particularly in the municipality group, we have had consistently since about 1988. So we have a very high retention rate and (inaudible) factors on these munis that is extremely important.

Would you expect, going forward, the 10 to 11 cents or the 14 cents? I mean, which one do you think would be -- is it likely to stay within that range?

You know, I think it's fair to say it will stay in the range. We're going to try to continue to push margins a little bit, just given the reduction in competition that we're seeing in the marketplace, so -- but again, the market will dictate what that's going to be.

Excellent. Thank you very much.

Yes, sir

Thanks, Phillip.

At this time, we have no further questions in our queue. I'd like to turn the call back over to Ms. Kappes for and additional or closing remarks.

Let me just remind you that a recording of this call is available for replay on our website at ATMOS Energy.com until the 13th. Additionally, the senior leadership team will be hosting an analysts' conference in New York City on December 11th. If you have not received an invitation and would like to attend, please e-mail me through the investor relations page in our website or call me at (972) 855-3729. Our analyst conference also will be webcast live over the Internet. Again, we appreciate your continued interest in at moss ATMOS Energy, and thank you very much for joining us today.

This does conclude today's conference call. We thank you for your participation. You may disconnect your line at this time.