埃特莫斯能源 (ATO) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone, and welcome to the Atmos Energy 2003 first quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Susan Kappes. Please go ahead, ma'am.

Good morning and thank you all for joining us. We are coming to you from Jackson, Mississippi, where later this morning Atmos Energy will hold its 2003 annual meeting of shareholders. We're holding our annual meeting in Jackson to recognize Mississippi Valley Gas Company which we acquired last December.

Our call is being web cast live over the internet. If you would like to access the web cast please visit our web site at www.atmosenergy.com and click on the conference call link under Investor Relations. We have placed on our web site slides 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 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, and J.D. Woodward, Senior Vice President, Non-Utility Operations.

As we discuss these financial results in our future expectations, please keep in mind that some of our discussions 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 Best will review the highlights of our fiscal 2003 first quarter.

Thank you, Susan and thank everyone for joining us this morning. Yesterday evening we issued our first quarter earnings release and we declared also declared a quarterly dividend of 30 cents a share, which was our 77th consecutive dividend declaration. Atmos Energy has indicated a dividend rate for fiscal 2003 is $1.20 a share which is up 2 cents from the $1.18 we paid in 2002.

I've also pleased to report that Atmos Energy achieved strong results in the fiscal 2003 first quarter, exceeding the Street’s estimates by 5 cents and bettering our own guidance for the quarter by 3 cents. Earnings per diluted share for the quarter with 60 cents, a 20% increase over the 50 cents per diluted share we earned in the first quarter of fiscal 2002.

Net income for the quarter was 25.8m, a 25% increase over the $20.6m we earned in fiscal 2002. Utility operations provided 82% of the net income for the quarter and the non-utility operations provided the remaining 18%.

Our first quarter did benefit from colder than normal weather during the three-month period. Heating degree days were 116% of last year and 105% of normal. Our gas through put also increased quarter over quarter owing to some very cold days during the period as well as the addition of the Mississippi Valley Gas operations which are headquartered here in Jackson. Non-utility net income increased primarily due to income from a sales type lease of distributed electric generated plant that Atmos Power Systems completed for a customer in Tennessee last fall.

Our O&M expense did go up 8m quarter over quarter. About half of that was due to the addition of Mississippi Valley and the other half was due to increase in employee benefits expense.

We're pleased that the weather the first quarter was more typical of what we think of as being the winter season. The increase in our heating degree days, though, meant that we did not realize any income from the weather insurance policy we have in place. As you may remember, this policy covers our Texas, Louisiana operations and is in place for the entire season if the weather during the heating season is 7% warmer than normal then the policy begins to pay us a benefit. We put this in place because of the unseasonably warm winters we had experienced the past five or six years and put it in place in order to protect the down side of our for our earnings.

Ultimately, though, and we’ve discussed this before, our goal is to obtain regulatory changes in Texas and other states that do not have weather normalization rules. Weather normalization, if we can obtain it through the regulatory process, would let us cancel our weather insurance. That would save over $4m going forward. Our current weather insurance policy runs through fiscal 2004 and we have the option to cancel the last year of the policy if we choose. This year we've [inaudible] rate cases in Texas and Kansas and possibly other states and we will be asking those state commissions to grant us weather normalization. We hope to be successful in obtaining WNA in those states and other gas utilities in those states do have weather normalization. So our track record in working with state commissions has been good and that's why we continue to forecast that our rate strategy during the next five years will produce upwards of 66m in additional revenue.

Now Pat Reddy, our Chief Financial Officer, is going to review our financial results in more detail and then I'll come back with some closing comments and a look forward for the remainder of 2003. Pat.

Thank you, Bob. Good morning. Before getting into the numbers I want to point out an important change that we're making in our accounting for energy trading contract beginning primarily in the second quarter of this fiscal year. Those of you who follow the industry closely know the Financial Accounting Standards Board has recently rescinded what's been called mark to market accounting for energy trading contracts that are not derivative. The status of these emerging issue task force put out its guidance last October and it pertains to energy contracts signed after October 25, 2002 and to all existing contracts for fiscal periods beginning after December 15, 2002. As a result, Atmos Energy has discontinued using mark to market accounting for natural gas inventory, storage and transportation contracts beginning in the second quarter of fiscal 2003.

Under this former market to market method, the contracts reflected their quoted or estimated value and any unrealized gains or losses on the contracts were recorded on the balance sheet as assets or liabilities from risk management activities. And then subsequently changes in those assets and liabilities in later periods were recognized as net gains or losses on the income statement.

The effect on Atmos Energy financials will be reported as a cumulative effect of a change in accounting principles which is in accordance with accepted accounting practices. At this point we estimate the cumulative non-cash charge that we will take in the second quarter of 2003 will be between 7m and 9m as performance under those inventory, storage and transportation contracts is completed in subsequent periods, the applicable income will be recognized. Thus really the effect of this is to unwind the present valuing of these contracts and we're pleased with this change in accounting method and feel it will make our results more transparent and on the marketing side of the business less volatile.

Turning now to our fiscal 2003 first quarter I would like to recap some of the financial drivers for the quarter. A key financial driver was weather which was 5% colder than normal adjusted for your weather normalized operations. We also realized a nice pick up for our first month of operating Mississippi Valley Gas Company and in our non-utility operations, we had a good gain on sales type lease of a distributed electric generating plant for an industrial customer in Tennessee. Offsetting these gains in part was increased operation maintenance expense due to maintenance of Mississippi Value Gas and higher employee benefits expense as we outlined for you in the end of last fiscal year. Also, while net income from non-utility operations increased over last year, the contribution from our natural gas marketing activities declined somewhat. The decline in gas marketing was caused by unfavorable gas price movements relative to the company’s storage activity.

Turning now to the financial results for this 2003 first quarter ended December 31, 2002, the company reported net income of $25.8m compared with net income of $20.6m for the same quarter a year ago. Earnings per diluted share for the first quarter were 60 cents compared with 50 cents per diluted share in 2002, as Bob said, an increase of 20%.

Gross profit for the 2003 first quarter was 132.6m compared with 109.4m last year. Volumes were 71.2b cubic feet for the 2003 first quarter compared with 57BCF a year ago. The increase in through put was due to weather in the quarter that was 16% colder than the same period last year plus we added approximately 4.9BCF of additional volumes in December from our acquisition of Mississippi Valley Gas.

Operation and maintenance expense for the 2003 first quarter was 50.5m compared with 42.5m for the same period last year. Excluding our provision for doubtful accounts and 3.9m increase for Mississippi Valley Gas's operation, O&M expense increase 2 2.5m to employee benefits expense. I want to stress that these increases were in line with our budgeted and projected amount.

Gas commodity prices went up year over year. Our average cost of gas for the first quarter of 2003 was $5.03 per million cubic feet compared with $3.95 per MCF in first quarter of 2002. Taxes other than income went up 2.7m because of additional franchise, payroll and property tax associated with Mississippi Gas.

Miscellaneous income decreased 1.3m quarter to quarter. This quarter we did not have 5.9m of accrued income from our weather insurance that we recognized in the first quarter of 2002. Of course we're happy because that means that the weather was cold. The decrease in miscellaneous income was partially off set by 3.9m pre-tax gain on sales type lease for the distributed electric generating plant and by 800,000 of additional income from our equity interest in Heritage Propane Partners.

Non-utility operations contributed 4.7 million or 18.4% of consolidated net income in the 2003 first quarter compared with 3.8m for same period last year. Contributing to non-utility net income was a 2.4m after tax gain from the lease of distributed electric generating part offset in part by 1.8m in decrease in gas marketing results due to unfavorable natural gas price movements relative to the company's storage activities.

Now I want to talk for a minute on our capital expenditures. In the quarter capital expenditures were 35m compared with 28m in 2002 and the 7m increase included approximately 1.2m of capital expenditures for Mississippi Valley Gas Company. About a third or 32% of our cap ex during the 2003 first quarter was for growth expenditures and the other 2/3 for non-growth spending but well win our depreciation allowances and rate. For fiscal 2003 we are projecting total capital expenditures of approximately $160m.

Also for those of you who follow us you know on January 16 Atmos Energy closed on an offering of 250m of 5-1/8% senior notes due in 2013. The notes offered at 99.915% of par with yield at maturity of 5.136% but the effective interest rate was reduced to 5.07% by using an rate hedge on 50% of the amount of offering. The proceeds of offers were used to repay debt under an acquisition credit facility we used to finance our Mississippi Valley Gas acquisition and some proceeds also used to repay short term debt under our commercial paper programs. The remaining proceeds were being used to unsecured senior notes health by institutional lenders. The notes A3 by Moodys. A minus by both Standard & Poors and Fitch.

I want to spend a minute talking about our pension and retirement and medical benefit expense. As you’ve read in the paper, these are benefits that the cost of which have up considerably in our forecast to continue to increase. Like nearly all companies, our costs for employee benefits have continued to go up. The increase in the first quarter compared with that in 2002 with 2.2m rising from 3.8m in 2002 to 6m this period. Combining pension pension, post retirement benefits and employee medical, dental and other benefits we expect the year over year increase in total benefits expense of approximately 12m. I think we provided you a slide last quarter that broke that out. Actual benefits expense in 2002 was 15m and total benefits expense this year is projected to be about 27m.

I want to talk also about gas hedging activities. As you know, we typically hedge about 20% of our flowing gas requirements using our own underground storage facilities and contract pipeline storage and this is often referred to as a “natural hedge.” We also use financial derivatives to cover another 30% or so of our gas requirements. For the 2002, 2003 heating season we are hedging about 51% of our expected flowing gas requirements through storage and financial contracts with the weighted average cost of below $4 per MCF. Hedging protects our customers and shareholders and has met with the approval of our state utility regulators.

I would like to talk about our earnings guidance for 2003. Our guidance for the second quarter of fiscal 2003 earnings in the range of $1 to $1.10 per diluted share. This guidance takes into account the effect of the cumulative non-cash charge for the change in accounting method regarding the use of mark to market accounting which we expect to be in the range of 7m to 9m after tax. For the 2003 fiscal year we reaffirm our expectation of earnings in the range of $1.52 to $1.58 per diluted share assuming normal weather in jurisdictions not covered by weather normalization adjustments for the balance of the heating season. And now once again here's Bob Best to conclude our remarks.

Thank you, Pat. I want to talk about 2003 and then the future. As Pat just reiterated, we expect to earn between $1.52 and $1.58 in 2003, even with the mark to market accounting change we must make.

If you look at Atmos in the last three years we've made four acquisitions, Woodward A and G, Associated Natural Gas, LGS and now Mississippi Valley and we're in the process in 2003 of integrating those acquisitions into our company, particularly Mississippi Valley which will be the one that we'll be primarily focused on this year.

Last year we earned $1.45 a share. Our goal this year, our budget has been to earn $1.55 a share and that really involves blocking and tackling for our company. In these times that's exactly what we're going to do. We are concentrating on operating our company well and that means being good at collections which we have really spent an enormous amount of time and energy and the talent of our people getting our collections back to .5 of 1% uncollectible. That's meant a great deal to us in terms of our income. Making sure that we take volatility out of gas prices to the extent that we can, making sure that we manage our gas supply and pricing so that it helps us, as I said, with customers, it also helps us with collections. We have a customer service initiative that we've undertaken that's important to us. Longer terms of those are the things that we are going to concentrate on in 2003 and, as I said, we are just -- we are determined that we are going to make $1.55.

We said previously that our main financial goal is to earn year over year, year in and year out on a consistent basis 5% to 7% increase each year and that's -- that is our goal. In looking into the future, there's several things we have to do in order to achieve this goal. We are attempting as we talk earlier to get weather normalization wherever we can. We are trying to take the weather volatility out of our rates and that's very important for us. We will also be filing rate increases in Kansas and in Texas and looking at other opportunities in states that we serve.

We are going to look at our capital spending. We want to continue to make progress on our balance sheet. We're mindful that keeping our credit strong and keeping our balance sheet strong is very important in these times and that's something that we are going to continue to concentrate on as we move forward.

We’re also looking at the opportunities that we have to work together where we're permitted with our non-utility operation. We've said before we'd like that operation to be about 20%, 25% of our net income and that's still our goal but the non-utility benefits typically when we make good acquisitions and there's business opportunities for the non-utility which essentially works in our service area and compliments our strong utility business.

Finally, you know, we will continue to look at growth opportunities, acquisition opportunities, but with, again, with a very mindful eye to keeping our balance sheet strong during these times. So that's a look at 2003 and a look at the future and we have maintained a devotion to the gas business. We believe in the gas business. We're committed to the gas business. We've said what our strategy is and vision is. We've remained true to that vision and we think it has produced good results for us as we've seen other difficulties arise in our industry and which -- not only good results for us but good results for our investors. With that, I'll turn it back to Sue.

That concludes our prepared remarks and we will be happy at this time to answer any questions.

Thank you. The question and answer session will be conducted electronically. Please press star key followed by 1 on your touchtone telephone. If you are using a speaker phone allow your mute function is turned off. We will proceed in the order that you signal us and take as many questions as time permits. Once again press star one on our tcht telephone to ask a question. We will pause for just a moment to give everyone an opportunity to signal for questions. We will take our first question from Dan Fidell with AG Edwards.

Good morning.

Good morning, Dan.

Appreciate the call. And good solid results. Two quick questions. First, the timing, if you could give us any kind of idea of the timing for the rate filings in Texas and Louisiana, sort of when we might expect to see the beginning of this and hearings and when you hope for resolution.

Okay. Well, in -- got Earl Fischer here. In Texas, Dan, we're going to be filing, actually, we have to file an Amarillo and then we file -- what we call -- in west Texas and in Amarillo our filings in May and west Texas it will be next November. In Kansas, we've already filed for weather normalization and when is our rate filing in Kansas.

It's spring of this year. We're going to be filing soon. It is kind of in conjunction with the WNA request.

We've already filed a WNA request there, Dan. We're moving, you know, we're moving forward, you know, as pro actively as we can.

Again, I might add with respect to Texas in particular and Louisiana, to a lesser extent, while we do want to true up our margins and cure any rate deficiencies we have in those two jurisdictions, we’re probably more focused on getting better rate design particularly weather normalization and Kansas in particular we feel good about that because staff has been supportive and Kansas Gas Service has WNA already and we feel pretty good to be able to get that and have it in place in the next heating season.

Any indication where the staff sits in Texas?

Because we have to make local filings. The railroad commission sort of has secondary jurisdiction. The cities actually we make the filings in the cities themselves and, so, but I will say this, other companies in Texas and Austin and El Paso and Port Arthur, et cetera, do have weather normalization. So we're hopefully -- what we really want to do is negotiate with the cities and reach an agreement with them. Again, we think it's good for the customers because everything that we do, whether it's gas supply or our own rates, we want to take the volatility out of pricing for the customers.

Dan, this is Earl. In addition, we've been visiting with every mayor in west Texas that makes up our system out there and doing an education program with them, bringing them up to speed on WNA, why it is good for both sides. We feel pretty good about this approach.

That's great. And the I guess the end game here being to put both rate cases to bed in time for the fiscal '04 season this September; is that right.

That would be right, Dan. Our goal would be to have those in place as well as Kansas in place and we're continuing to look at other opportunities. We do have to file our rate stabilization filings in Mississippi and in Louisiana, particularly in Louisiana we continue to work toward and have actually achieved some good success in -- they haven't adopted weather normalization but they have allowed us to continue to increase our fixed charges in Louisiana, which is, you know, is good a protection as weather normalization if you can get it to the extent we want to.

Dan, one other thing and benefit of this will be that we're in the second season now under our weather insurance policy and I think we need to make a decision around May about whether we feel like we've made enough headway in getting less weather sensitivity in our rates in Texas and Louisiana and if we feel that we have it's possible we might drop the policy in the third year and the net benefit of that would be a little bit under $4m annually in terms of avoided insurance premiums. That's something we are studying right now.

Okay, great. Just for clarification, I guess, maybe for you, Pat. The $1 to $1.10 range you had for the second quarter, that is $7m to $9m charged after tax and is included in your guidance.

That's correct.

Great. Thank you. Thank you very much.

Thanks, Dan.

Moving on our next question comes from [Donato Esse with Royalist] Research.

Good morning. Congratulations on a nice quarter.

Thank you.

And I've got three quick questions and, Pat, the first one on this EITF and it may just deal with the timing but I was curious what discussion went on and whether there was any thought to go ahead and take it in the first quarter or why we wait until the second but it may be just the way the timing is required. I can't really tell from this. The other is can you breakdown that 160m of cap ex or is that just the utility? Because we had a little bit more than that counting, you know, the non-regulates up. On J.D. Woodward in your trading business is the growth profile changing at all given the collapse of the major merchants? More opportunity? More risk? Less risk? Close to the [inaudible] cutting of [marking] there.

Do you want to start with the financial question? With respect to timing on the change in accounting method, when the pronouncements first came out, there really wasn't a lot of guidance around it and then the notes of the staff came out and it wasn't clear initially whether you could early adopt it in the first quarter or not. And we just decided that, as you can imagine we have over 1,200 contracts, and to go back and unwind the market to market effect that we've taken you really need to go almost contract by contract to do that and then in terms of forecasting, you know, windows results are going to come back. You also need to look kind of quarter by quarter and that took a fair amount of analysis for us. Also internally we are implementing an upgrade to our accounting and trading systems so we had a lot going on and we felt like we needed to study this a little bit and make sure that we got it right. So I don't think there was -- we did talk about, you know, adopting it first quarter versus second quarter but I think with you are going to see that, you know, most companies are going to be adopting it in the same time frame and there also was some benefit to that, you know, to going out with the other marketing companies. So that's really what was behind that.

I might -- you asked a question about the 160m of capital expenditures and whether that was really for the utility or not. I guess I'd say about that that our total capital budgets really for the utility is about it looks like about I might ask Fred to comment on that the breakdown between utility and non-utility. We haven't really budgeted much, frankly, for the non-utility and the reason is up until recently the non-utility has been essentially just a marketing company and while we have been able to choir some books of business along the way, we really haven't been until these two distributed generation plants we built recently we haven't been investing in physical assets. Even there those are items we want to account for leases and a third party financial institution to provide the capital and get us out of middle of that. We have about $156m budgeted for utility, about a million seven budgeted for the marketing company, [2.2m] budgeted for what we call our Atmos pipeline and storage company for 160.2m. Only about 3.9m or let's say 4m is a non-utility.

Let me take the third question. As you remember when we -- Woodward became part of Atmos in April 2001 our stated goal was for wood ward to grow about 10% a year. Other than that, really, that was not based on any, you know, speculative kind of activity. Woodward has over 800 municipal and industrial customers, Woodward owns gas storage, it does asset management deals, some of those deals for our utilities. So it has a good, strong base of business. It's been making some small acquisitions which have continued to grow its business. I think one thing that our -- that we made clear as our board and our management is that we don't want to be taking any unnecessary risks that we want this business to be built on the same foundation that JD built it on as he grew this business since 1985. And that continues to be our philosophy, and we continue to believe that Woodward will grow its business and that, you know, 10% range is still one -- that's our goal, you know, whether we can achieve it, the marketplace will be part of that and -- but that Woodward achieving that 10% would be part of our 5% to 7% growth profile for our company.

Great, Bob. Pat Thank you for clarification and continued success.

As a final reminder if you would like to ask a question press star 1 at this time. Mike Warner with Kennedy Capital.

Congratulations also on a good quarter and good year. I just had a follow-up. Did you mention what your DNA was going to be for 2000 -- for this year I guess.

Our budgeted depreciation and amortization for the year? Let me get that for you, Mike.

Thanks.

I might just say about that one of the things we are also working on in our various rate cases is making sure we have the appropriate depreciation allowances in our rates and that's something in our Texas division in particular that we've been working on the last few cases. We've got a good methodology established and we're just basically refreshing our rates there. Our -- let's see. It looks like our depreciation and amortization for the year consolidated it's roughly $100m for the year on a budgeted basis, Mike.

Okay. Just kind of curious, when you made the comment that you wanted to keep our balance sheet strong, could you maybe elaborate on that.

Sure. One of the things that we're focused on and we talked with the credit rating agencies regularly is looking at our cash flow coverage of interest charges and debt to equity ratios and the measures the three rating agencies use. And our strategy, I think we talked last quarterly about our five year plan targeting net rate increases of $66m. We are looking at the margin line to get rate increases but also looking at quality of earnings. I think our philosophy as a company that grows through acquisitions. We need to have a stable and growing stock price which is contingent of having year over year growth that is predictable. An in order to do that since we operate in 12 states currently, we need to have better predictability in our rate design so we know whether we can cover that margin whether we are having a mild warm or cold winter. We are willing to give up a little upside for that occasional cold winter that you get in order to have stable rates. When we talk about improving the balance sheet our preference would be to internally generated cash flow to keep our short term debt balances down, to avoid, you know, issuing additional equity for capital expenditures to the extent we can finance it through depreciation at least on the non-growth side and that kind of thing. We are not at this point contemplating an equity issue or anything like that if that was your question.

Yeah, it was, actually. I was curious. What was your -- so you think that at this point your coverage in terms of your operating cash flow will be sufficient to cover your cap ex, dividends this year.

Yes.

Would you also be able to tell me what your equity ratio was coming out of the quarter.

It's basically 61/39 almost 60/40 on a rounding base. It has been holding stable at that level both before and after the Mississippi Valley acquisition. You may recall we issued both stock and debt to finance that purchase.

Mike Warner Right. I think that will do me for now. Thanks again.

Our next question comes from Philip Salles from Credit Suisse First Boston.

Just noting the clarification that you gave relative to the second quarter EPS guide and ETIF charge, can you expand on the pluses that you are looking for in the forecast to make up the 18 cents difference for that charge that we can take away.

Sure. I think primarily we got off to a good start with respect to volumes in January. We don't actually -- we haven't actually closed our utility results yet but looking at through put we had a good month and, you know, all indications are we'll have strong results from the utility in the first quarter. Also, from our, you know, marketing company, even with the charge we're still looking for good results from our non-utility business in the second quarter. I think that would be the primary item.

Just a follow up on the marketing business, could you expand on what happened in the first quarter relative to gas storage and the gas price movement that you described.

Yes. We have J.D. Woodward who is the Senior Vice President of our Non-Utility Operations and Ron Barr he is our SVP of Finance at Woodward and I'll ask them both to address that.

Good morning, Philip. This is JD. We had a momentum call in the first quarter that was a negative and we just took a shore position in arising market and then we had some operational issues around storage that precluded our ability to get storage gas out in a timely fashion. Those were the two primary things.

Great.

As you know the non-utility operates storage for the utility and has some storage rights in those fields but, obviously, the utility has first call on capacity for withdrawal and on peek days as we've seen I know you've followed this but a number of companies reported record peak day send outs and December, January time frame and we encountered a little bits of that ourselves.

Thank you.

You're welcome.

We do have a follow-up question from Mike Warner with Kennedy capital.

Just one quick thing. What are your current maturities that are coming due say within the next nine or 12 months.

Of our debt?

Yeah.

I might ask Laurie to touch on that. That is something we have in our K. Let's see if we have it handy here.

Yeah, securities due in less than one year as of the end of December 31 it is about $9m. So really our matures for the next three years are pretty small, between $9m and $10m a year for the next five years.

Thanks very much.

You're welcome.

And it appears there are no questions at this time. I will turn the conference back over to you for any additional closing remarks.

Let me all remind you there is a recording of this call available for replay on our web site at www.atmosenergy.com until March the 12th. Tomorrow, Bob Best, Pat Reddy and I will be joining Jay Kopen of the American Gas Association at a meeting here in Jackson of the Mississippi Financial Analyst Society. We look forward to seeing you then. We appreciate your interest in Atmos Energy corporation and thank you very much for joining us today.

That concludes today's conference. Thank you for your participation.

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