埃特莫斯能源 (ATO) 2003 Q2 法說會逐字稿

Good day, everyone. Welcome to the Atmos Energy 2003 second 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 Miss Susan Kappas. Please go ahead mam.

Good morning everyone and thank you for joining us, our conference call this morning is being web cast live over the internet. We place on our website slides to summarize the financial results. We will not review the slides in detail but we'll be happy to take any questions about them at the end of our remarks. For those of you who would like to access the web cast and slides please visit our website at www.Atmosenergy.com and click on the conference call link. With me today to review our financial results and highlights for this 2003 second quarter and first six months are Bob Best, Chairman, President, and CEO, Pat Reddy Senior Vice President and CFO, J.D. Woodward Senior Vice President non-utility Operation, Fred Meisenheime, Vice-President and Controller, and Lowery Sherwood Vice-President Corporate Development and Treasurer. As we review this financial results and discuss future expectation please keep in mind some of our discussions might contain forward looking statements within the meaning of security fact 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 2003 second quarter and the six months ended March 31.

Thank you, Susan. We appreciate all of you being on the call today and we enjoyed seeing many of you at the American Gas Association Financial forum last week. Unfortunately we could only give you broad outline at that time of our second quarter performance because we had not had our board of directors meeting at that time. But we are announcing our results today or announced them yesterday and issued an earning release last night as well as a release of a quarterly dividend of 30 cents a share. In our earning release we did reaffirm we are on track to achieve our projected results for fiscal 2003.

We continue to forecast diluted earnings per share for the year of $1.52 to $1.58. Of course, because our second quarter is so important to our overall earnings our success in this quarter has strengthened our confidence in that projection. Yesterday evening we did report earnings for the second quarter of $1.07 per diluted share compared to $1.01 for the same quarter 2002. Operating revenues were up 85% quarter-over-quarter to $704.4 million compared to $379.5 million in the 2002 quarter. The increase was largely due to higher gas prices and volumes, additional revenues from our acquisition of Mississippi Valley Gas and an increase in the base charge of our Louisiana operations. We also benefited from a 22% increase in through put delivering 108.8 billion cubic feet in the quarter. Weather was 3% warmer than last year but we benefited mainly from the additional volumes related to Mississippi Valley Gas which contributed 16.6 BCF of the 18.2 BCF.

Our quarterly earnings were reduced by 17 cents per share due to a new accounting standard. Affective this past January 1st our non-utility gas marketing subsidiary reported a cumulative non-cash charge of 7.8 million net of income taxes to eliminate mark to market accounting for inventory energy track trading contracts that are not derivatives. This change is in keeping with the recession of ETIF issue 9810 in October of 2002. Our income before the cumulative effect of the accounting charge was 56.3 million or $1.24 per diluted share for the quarter. Other offsetting factors during the second quarter were increases in operating and maintenance expense and in taxes other than income taxes. That was mainly because of our acquisition of Mississippi Valley Gas. For the year, our non-utility operations is pretty much at a break even point.

The utility, of course, is 75-80% of our business and probably this year will account for object 90% of our net income. Our non-utility was affected by having to buy [in-train month] gas for full requirements customers. And not being able to pass those costs on. Also by not being able to get as much gas out of storage as it had originally hoped. Both of these issues, of course, we can deal with as we head into next winter. As we said at the financial forum we still expect our non-utility operation to be profitable for the year and to have a net income of $6-7 million for the year so we remain confident in that part of our business. But we have done extremely well in the utility and that has been really the driving engine for our earnings achievement for the year.

Pat will go into a little more detail about several of these issues when he makes his part of the presentation. Looking now to six months ended March 31, earnings per diluted share were $1.68 in 2003 compared with $1.51 in 2002. Net income for the first half of fiscal 2003 was $74.3 million up 20% from $62 million in 2002. Like the second quarter, the 6 months benefited from additional volumes as a result of our acquisition of Mississippi Valley. In operations and maintenance expense for the six months was $106 million compared with $84 million for the six months in 2002.

This $21 million increase was caused by two factors, an increase in the provision for doubtful accounts as a result of increased gas prices and volumes and an increase associated with the assets of Mississippi Valley Gas. Excluding this two factors expanse for the six month 2003 was about flat compared with the year earlier period. I'm now going to turn the presentation over to Pat Reddy who's going to give you a little more detail about our quarter and then I will come back for some conclusions and closing thoughts and then we'll be glad to open it up for questions. Pat.

Well, thank you, Bob, and good morning. As Bob said, we had a very successful quarter exceeding the street's consensus estimate by two cents a share. Last night we reported net income of $48.5 million for the 2003 second quarter ended March 31 compared with net income of $41.4 million for the same quarter a year ago. Earnings per diluted share for the 2003 second quarter were $1.07 compared with $1.01 per diluted share in 2002. Income before the cumulative effect of the accounting change eliminating mark to market accounting for gas inventory and non-derivative contracts was 56.3 million as Bob indicated for our fiscal second quarter. Or $1.24 per diluted share, a 36% increase.

Gross profit was $200.6 million for the 2003 second quarter compared with $149.9 million last year, an increase of 34%. Volumes were 100.8 BCF for the 2003 second quarter compared with 82.6 BCF a year ago. The increase in through put resulted mainly from volumes associated with Atmos' acquisition of the Mississippi Valley Gas assets in December 2002. Our non-utility operations had a net loss of $5.5 million in our 2003 second quarter compared with net income of $4.7 million for the same period last year. As Bob mentioned, the results for our non-utility operations were affected by a confluence of negative factors that decreased our gas trading margins.

As Bob mentioned we had colder weather in the quality that certainly helped our utilities but prompted higher customer demands in non-utility side. We had a couple of things that affected us there. The inability to withdraw as much gas from storage to meet demand and the fact that spot prices increased dramatically during this heating season. Our O&M expense for the 2003 quarter was 55.7 million compared with 42.3 million for the same period last year. Excluding the provision for doubtful accounts, and a 10.7 million increase in O&M expenses associated with Mississippi Valley Gas our operating and maintenance expense actually declined 2.2 million from the same quarter last year. The provision for doubtful accounts increased 4.9 million in the 2003 second quarter generally as a result of higher revenues in 2003. That's our provision for doubtful accounts. I will say that our actual collections experience is very good this year.

Our write-offs are running at approximately 6/10% of 1% of our revenue. Our gas commodity prizes increased 68% quarter over quarter. Our average cost of gas for the second quarter of 2003 was $6.13 per NCF compared with $3.65 per NCF the same period last year. An increase in taxes, other than income taxes, resulted in a $7.6 million decrease in income. The hire taxes were due to additional franchise, payroll and property taxes mainly for Mississippi Valley Gas. The remaining increase was a result of higher franchise taxes due to hire revenues and has no effect on net income because these amounts are recoverable in rates. Let's turn now to the six months ended March 31, where in Atmos Energy had net income of $74.3 million compared with net income of $62 million for the same period last year.

Our earnings per diluted share for the six months were $1.68 compared with $1.51 per diluted share in 2002. Income before the $7.8 million cumulative effect of the accounting change was $82.1 million or $1.86 per diluted share. Gross profit was 333 million for the 2003 period compared with $259 million last year an increase of 29%. Total through put for the first six months was 172 BCF compared with about 140 BCF a year ago. The increase in through put again was primarily the result of higher sales volumes associated with our acquisition of Mississippi Valley Gas. I hope you're getting a sense here that we're we've gotten off to a very strong start with our new Mississippi Valley franchise. Our utility operations contributed all of the income for the six month period.

Utility operations were helped, of course, by the addition of Mississippi Valley Gas' operation and by weather that was 4% colder than last year. Non-utility operations had a net Loss of $786,000 for the six months compared with net income of a $8.5 million for the same period last year. Operation and maintenance expense for the 2003 six months was 106.2 million compared with 84.8 million for the same period last year. Excluding the operating costs associated with our newly acquired NBG assets and a higher prevision for doubtful account our core operating and maintenance expense was about equal to the prior year.

Additional acquisition related O&M expense for the 2003 period was 14.5 million for our MBG assets. The provision for doubtful accounts increase bid 6.6 million to 8.1 million in the six months ended this March generally the result of higher revenue. Our average cost of gas for the six month period was 570 per MCF compared with 375 for MCF last year and taxes other than income taxes for the current six months were 31.4 million compared with 21 million in 2002 due mainly to taxes, again, for associated with Mississippi Valley Gas. Our miscellaneous income was 2.6 million for the first half of fiscal 2003 compared with an expense of 711,000 in 2002. This $3.3 million change was attribute about toll 3.9 million gain that we recorded associated with a sales type lease on a distributed electric generation plant which was recognized in our first quarter this year.

Our capital expenditures were about 73 million for the six months ended compared with 61 million last year. This $12 million increase again is attributable to Mississippi Valley Gas company's capital spending. For this full fiscal year we're projecting total capital expenditures in the range of $150-160 million. I might just mention that in January we did issue $250 million of senior notes. The notes were offered to investors to repay a bridge loan that we had incurred in connection with the Mississippi Valley Gas acquisition. The notes are rated A-3 by [Moodies] and A-minus by Standard & Poor's and Fitch. The effective interest rate after we did some hedging on half of the issue was 5.07%.

Again, I think our timing was very good on that. Turning now to earnings guidance for the year. As Bob said for the third quarter our guidance is break even to a loss of 2 cents per diluted share. For the full fiscal year we continue to believe we'll earn in the range of 1.52 to 1.58 per diluted share. And this range is consistence with the earlier guidance and it is in line with recent Wall Street estimates. With that I'd like to turn it back to Bob Best to conclude our remarks.

Thank you, Pat. I want to conclude by just emphasizing some of the good things that are going on at Atmos. First of all, at Pat mentioned, Mississippi Valley Gas is making extremely good contributions to our consolidated earnings. We did receive approval last November from the Louisiana public service commission of our Louisiana rate stabilization adjustment which added 15.8 million to our revenues for this year and next and then 12.2 million a year thereafter. We have filed rate cases in Louisiana and Mississippi already this year. And we are making rate adjustments in Amarillo, Texas, West Texas, Kansas, and possibly in Missouri this year. We will continue to seek weather normalization in all jurisdictions in which we do business in order to keep our earnings stabilized and take weather out of the equation and we are very encouraged about continuing to receive commission approval.

We have -- four states now that are weather normalized and we hope by the end of the year we're going to have several more. Our rate stabilization adjustment in Louisiana lowered our sensitivity to weather and has allowed us to cancel our weather insurance for next year. Next year we'll reduce our expenses by the amount of an annual premium of roughly $4 million. So that will help us for the fiscal year beginning next October 1. As Pat also mentioned, we've effectively managed our bad debt expense and we have restored those provisions to levels below our normal our historical norms. We continue to work on our O&M expense. If you take out all of the, you know, movement, our core O&M expense went down in the second quarter and was flat for the six months.

And as I mentioned earlier, our non-utility operations is still predicted to make about six or seven million dollars for the year by the end of September. So we're pleased with where we stand and where our earnings are. We've said that our goal is to grow our earnings 5-7% a year. That remains our goal. Atmos, I know, in talking with many of you at the financial forums, what people want that would invest in Atmos are quality consistent earnings and for us to hit our numbers and do what we say we're going to do and we need to continue to do that.

We want to keep our balance sheet in good shape. We continue to -- we want to continue to work back toward a 50/50 debt/equity ratio. But the declaration, the dividend means that this is the 78 consecutive dividend that we've declared and we've raised our dividend for 15 consecutive years. So I think that speaks volumes about Atmos and our history and our performance. So at this point we'll be glad to take any questions from anybody who has any.

The question and answer session will be conducted electronically. If you would like to ask a question you may do so by pressing the star key followed by the digit one on your touch-tone telephone. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you do have a question you may press star one now. We will pause for just a moment. And it appears we have -- actually there is a question. Philip Adams (ph) of Bank One Capital Markets.

Good morning, nice quarter.

Thank you.

One quick question. The consensus I think for the current quarter was like three cents and your guiding break even of minus two. I'm guessing that that's maybe some additional provisions for doubtful accounts? I don't expect you to know exactly what goes into analysts consensus, would it be fair to say the provision might be a factor in that downward revision?

That is, I think, the consensus for the third quarter. As you know, our heating season really is over in the March-April time frame. We have industrial load and municipal customers and others that, you know, continue on. But the heating load, obviously, provides, I think, in the second quarter during the last three years our average net income has been 76% of the net income for the full year. So obviously the second quarter is our big quarter. The third quarter really tend to be typically break even. It's a little bit difficult to predict. It kind of depend on our irrigation season. We're off to a pretty good start. The farmers have done pre-watering and we can make about $3 million in a decent irrigation season. That's really the swing for us. It's not so much the provision for doubtful accounts at this point. We're managing that very well. We don't see that moving out on us. We're adequately provided for. So like you say, I'm not exactly sure what goes into the consensus but at that level I think break even plus or minus is a few cents is plausible.

As Pat said, irrigation is important. One thing that's difficult for us to predict, irrigation this year is because of the high gas prices and as Pat said, the irrigators, they have started to put in their crops. But longer term it's a little bit difficult for us to predict exactly how much they'll use. If they happen to use, you know, more than we think then it becomes a little bit better quarter.

Okay. One other question. The -- help me understand the business a little bit. The inability to withdraw gas from physical storage. How does that work? Is that just a matter of pipelines being too busy because of the high gas usage? What -- how does that work?

It's really more a function of our own storage. Woodward marketing affiliate is able to use storage that it manages for our utilities but it basically has a second call on that storage on very cold days with good peak send-out the utility is drawn hard on storage and non-utility isn't typically able to get out as much gas as it would need to. That was particularly something we saw this last winter where the cold kind of came early and set in and really didn’t ease up. In prior winters you tend to get a couple weeks of cold whether and get a break and you can kind of catch your breath. That really wasn't what we saw this past winter. Of course, that helped our utility to have such a strong showing which really is what we like about this complementary mix of utility, non-utility. As Bob said keeping that balance at about 80/20, 75/25 something in that range on average.

Obviously this was an unusual quarter weather wise. Does it tell you as the business grows you need to make additional investment in storage.

Clearly that's a priority for us in the balance of the year. That's probably something we'll talk about in next quarter's call. We have some plans underway to acquire additional storage. To function as a shock absorber for us. Probably not only storage. Probably storage that will contract with pipelines.

Thank you.

Thank you.

We'll good next to Sam Brothwell of Merrill Lynch.

Good morning.

Good morning Sam.

Pat, with respect to this 9810 charge I guess it was about 17 cents.

Yes.

Relative to your guidance for the full year, what kind of assumptions are you making about that reversing itself in successive quarters?

We're not making much in at all, Sam to the third and fourth quarter, just like the utility, non-utility marketing company season the first two quarters are where they make most of their net income. That 6-7 million that Bob talked about for the balance of the year is basically their base business of a million to million and a half a month of net income that really doesn't include much of the reversal of that, you know, of that charge this year. That really would have come, you know, in our first and second quarters.

So, I guess, if you're trying to look at comparing year-over-year, if you add that back, you're certainly -- you would be well ahead of your anticipated guidance range but maybe as those things -- I guess it's going to make the comparison of Q1 and Q2 next year versus this year a little bit trickier.

That's exactly right. Because there were two things going on. We took this book charge, sort of non-cash charge and we also had a tough, you know, first and second quarter on the non-utility side. For some factors that we're kind of unique to this year. The other thing that we're doing Sam, we're renegotiating the full requirement contracts so we can pass through the impact of fluctuating intra-month prices. That's something we have the ability to do between now and the next heating season. So it is going to make the comparison more complicated.

Okay. Thanks a lot.

Thanks, Sam.

As a reminder you may press star one to ask your question. We'll go next to David Crumbhouse (ph) of Covia Capital.

Good morning guys how are you?

Good.

Two quick questions for you. Can you talk a little bit more about the bad debt and the allowance for the doubtful account. Your number actually seems to be quite a bit higher obviously we're in a very different gas environment, but across the board on some of the other gas utilities we haven't seen them step up that much. So any comments there. And then a second question, a little more minor item but something I'm curious about. You mention in the release that earnings -- from the second quarter from Heritage Propane were down and was just trying to understand that better since Heritage obviously had a strong first quarter.

Yes. They did and really our earnings in the first quarter of our fiscal year were helped by Heritage. In the second quarter, our contribution from Heritage was down slightly from where it was last year. But overall it's been a good six months. They have had a strong -- just like we did, the cold weather helped the propane business.

If there earnings were up a lot in the January to March quarter, why were your contribution there is be down?

I don't have in front of me what Heritage earnings were. I know what our --

Okay.

That's something we can take a look at and get back with you on, David.

Then my first question about the doubtful accounts, just how you think about that and try and set those numbers.

Sure. Just to back up a little bit. Going back to the winter of 2000 we had some cold weather set in the first quarter. We had high gas prices and our doubtful accounts, actually our bad debt write-off kind of ballooned as an industry. We took a strong cue from that. We've had a very strong collections program since then. As I think I mentioned earlier in the call, our write-offs are running about .6 of 1%. We are adding to our provision for doubtful accounts in the range of one half of 1% to three quarters of 1%. It's kind of a formula approach so the provision scales up with increases in gas prices and increases in sales. We saw both happen this winter. So, again, by formula our provision has scaled up. And we hope to hold our bad debt Write-offs, though, to about one half of 1%. As I say we're running at about .6 now. I think that just shows that we're adequately provided for. But the amount really is going to vary from company to company because of the difference in sales volumes. You know, we're the third largest gas distributor with 1.7 million customer so obviously our provision would be higher than a smaller utility with smaller sales volumes.

Okay. Thanks. That's helpful.

We'll go next to Dan Fidell of A.G. Edwards.

Good morning, thanks. I appreciate the call today and as always really appreciate all the detail you put forth in your slides. More gas utilities need to do that. Just a quick question on specifics of the timing for rate filings and W&A requests in Kansas, Texas, and Missouri, possibly. Is there any specifics you can give us on those?

Well, Dan, thank you. Susan is here and your comments are really something that I know that she works very hard on to get the slides out with her staff. We appreciate that. In terms of our rate filings, in Amarillo our filing will be made either this month or early next month. In West Texas we're looking for a later in the fall probably the November time frame. In Kansas we have already filed for weather normalization there and we will be filing the rate case within the next 60 to 90 days. Missouri will probably be the end of this calendar year, early next year. But it will probably fall into our next fiscal year. In early May we filed in Mississippi -- in Mississippi we file every six months. And we made our filing there in early May and then in Louisiana we filed in April. We want -- one of the things that I feel that -- one of the reasons that our model ought to work being in 12 states is that with that many states we ought to be able to sequence our rate filings so we're in several rate cases every year, which can help our revenues in the succeeding years. So we're really focused on rate issues, particularly as we are dealing with increased pension and medical costs we want to make sure our filings are timely and as I said earlier, we want to -- if we can get weather normalization in Texas and Kansas and ultimately Missouri, that would leave us seven states with weather normalization and then Louisiana we've been able to get increased base rate charges, in Colorado our returns have always been pretty good so those are two states we probably won't get weather normalization but that would only leave us Illinois, Iowa, and Virginia, and we're very small in all three of those. So we essentially are hoping by the end of this year that we will have in all of our major -- where we have major numbers of customers, we would have ourselves insulated from the downward effects of weather and we could grow our net income by these rate increase, managing our O&M and the non-utility picking up next year. I know that's a long explanation.

No, I appreciate it.

That's our goal.

Can you tell me approximately -- I guess you sort of did -- approximately what percentage of your margins at this point are weather normalized? Are you about two thirds normalized? Is that what gives you comfort to drop off the private weather insurance?

Yes, that weather insurance was applicable to Texas and Louisiana only. And so we were able to get our base rates increased in Louisiana. We think we are, you know, we think we'll be able to get -- we're going to press very strongly for weather normalization in Texas and if we can get those -- if -- and as said, also, in Kansas and Missouri. So this year we -- weather normalized in 39% of our customer base. We had insurance for 41%. But if we can get the weather normalization in Kansas, Texas, and Missouri, we will be at about 70% weather normalized or better.

Great, thank you very much.

Thank you.

And we have no further questions. I'll turn the conference back over to you for any additional or closing remarks.

Let me just remind you all that there is a recording of this call available for replay on our website until August 12. Additionally, if you have any follow-up questions, please do give me a call at 972-855-3729. We appreciate your continued interest in Atmos Energy corporation. And thank you again for joining us this morning. Bye.

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