埃特莫斯能源 (ATO) 2003 Q3 法說會逐字稿

Good day everyone, and welcome to the Atmos Energy 2003 third quarter earnings release 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 webcast live over the Internet. We have placed slides on our website to summarize our 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 the slides, please visit our website at www.atmosenergy.com and click on the conference call link. With me today to review our results and highlights for the 2003 third quarter and nine months are Bob Best, Chairman, President, and CEO; Pat Reddy, Senior Vice President and CFO; Earl Fischer, Senior Vice President, Utility Operations; J.D. Woodward Senior Vice President non-utility Operations; Fred Meisenheime, Vice-President and Controller; and Lowery Sherwood Vice President, Corporate Development and Treasurer. 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 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 the third quarter and nine months ended June 30, 2003.

Thank you Susan, and thank all of you for joining us today. Yesterday afternoon, we did announce our results. We're break-even for the 2003 third quarter. These results were consistent with Wall Street's consensus expectation for the quarter end. We are $0.05 better than our own internal budget. As you know, the utility operation traditionally is a little below break-even for the summer months, so we felt very good about our quarter particularly as it compare to our own -- looking our budget. This fiscal quarter benefited greatly from the contribution of our non-utility operations, and those results from gas marketing helped overcome this traditional loss of the utility operations that I just mentioned during the third quarter. Our gross profit for 2003 third quarter increased $13.4m, primarily due to an 8% increase in throughput associated with our acquisition in Mississippi Valley Gas. The provision for doubtful accounts decreased by $1.5m, mainly from our efforts to improve cash collections and we've really had a strong focus on our collections and we are back within the range -- our historic range of 0.5 to 0.75 of our residential commercial revenues. Operation and maintenance expense in the aggregate went up $7.3m by excluding the provision for doubtful accounts and an increase of nearly $12m, only to the acquired Mississippi Valley assets.

Our O&M expense for the quarter decreased by $2.9m from that in the third quarter of 2002. Pat will have a lot more details about these and other issues in his presentation. The nonutility operation benefited from reduced operation and maintenance expense during the quarter, and as I said earlier, really the -- it's really been our strategy for the nonutility to compliment our utility operation during times when the utility's earning powers met at a tie. And we've also mentioned before that we want our nonutility operations to be above 25% of our total net income, which historically has been. It will not be at that level this year, but it's finishing strong for the year, and we still expect Woodward will earn between $5m and $8m of net income this year. That's a little below -- it's some below what we had originally budgeted, but Woodward is taking some very strong steps to help its performance last or next years.

As we reported the last quarter, Woodward's yearly performance was impacted by volatility in the gas market, and by having some contracts that did not allow Woodward to fully collect its gas costs for intra-month purchases. We've been working diligently to close those loopholes. For one, Woodward has leased up to 1 Bcf of salt-dome storage, which will help it meet its physical requirements during the coming winter. It's amending its contracts to eliminate risks associated with volatile gas prices, so that it will have the right to pass through any intra-month purchases that it needs to make. It's also growing about enhancing its margins, and as you know, the market the way it is today, I think we've had some very good success with existing customers. I think, overall too, Woodward because of the fact that it's so -- it's had such a good reputation with its customers and is always ranked at the very top in the mass field survey and marketing companies. Throughout taking our history, it has had good relationships with its customers. And I think, these relationships are really helping Woodward taking steps to amend contracts in sort of customers better, so we -- we continue to be very bullish on Woodward, and really are looking for Woodward to continue to be an important part of Atmos, and Woodward is a marketing company, it sells essentially wholesale to industrials and municipalities and other private companies. So, it's really -- I mean essentially what Woodward will have would be, like the utility only it will have a PGA through its contractual arrangements. So, that's the kind of company we want Woodward to be and relatively risk-free company, who can contribute and compliment, and help Atmos Energy continue to grow our net income.

I now want to turn to some very important strategic initiatives, probably the most important, actually which situation did occur during the quarter was our successful equity offering. Our goal has been long term to try -- to achieve a fifty-fifty balance in terms of debt equity and we had been below that by anywhere from six to ten points and we felt that with the market and the way it was that this would be a good time to sell equity and so, in June we did sell 4m shares of common stock through a public offering. We received net proceeds of $99m for that offering. And, as of June 30, our debt-to-total cap ratio was about 51%. By the end of the fiscal year, September 30, we expect it to be 50%. We think this really provides us a great deal of flexibility on these uncertain times and also helps us maintain our credit ratings which we want to remain -- those to remain strong during this period. So, we're very pleased with the equity offering, and then pleased with the response that we received in the marketplace about Atmos.

The other important thing that has happened during the quarter, we mentioned previously that because of the bear market that is affecting all business and the drop in interest rates, our pension fund have become under funded and we were required to make a minimum of -- minimum contribution of $5m to meet the risk requirement by June 30. But, as we reviewed the situation, we decided to make additional contributions to help us reduce our future funding requirements by the plan. So, we did contribute $77.4m in the form of both cash and common stock and this restored our plan to fully funded status in 2003. Taking this action, not only did we strengthened our pension plan and hopefully avoid future funding that at least helps move out our future funding, but we also strengthened out balance sheet and Pat go into more detail about that in his part of the presentation.

Now, I would like to turn to our rate situation, because that does have such important impact on our future revenue and earnings growth. Our utilities continue to do a good job of keeping our operating costs down. That's one of the reasons that we continue to be a leader in most benchmark that people do concerning O&M expenses. But, we've also understand and believe that we got to continue to be proactive and -- where we can't manage -- where our costs are not enough to earn the returns that we need, to file rate cases when needed and ask the regulatory bodies to adjust our rates and I think that really is the strength of the Atmos model that we are in 12 states, and so that we are going to have two to four rate cases going on at any one point in time. In June, we did file for two rate increases, one in Kansas and one in Amarillo, Texas. We are seeking a $7.4m annual increase in Kansas and a $5.18m increase in Amarillo. We are going to file for a rate increase in our West Texas jurisdiction later in fiscal 2003. We are also looking at several rate cases for next year, and every year we also file rate cases in Virginia, Louisiana, and Mississippi. So, these cases are really on top of the annual increases that we are required to make under certain state provisions.

The other thing that we have really -- that has been as important to us is rate increases has been rate design. And we've set as a goal to try to achieve weather normalization and/or base rate increases in every jurisdiction in which we do business. And, today we do have weather normalization in Georgia, Tennessee, Kentucky, Mississippi, and Kansas. We will be pushing to get weather normalization in Texas. We've been able to increase our base rate significantly in Louisiana and in Colorado, our earnings have been very good historically, so we really don't need weather normalization there, but. So, that would give us weather normalization or base rate increases in seven of our eight largest states. And it helps stabilize and increase our earnings and provides a great deal of consistency to our earnings over time. So, the other thing that we continue to work on and believe is appropriate in the rate arena, while we have mentioned collections earlier in our tax rate (ph) standpoint of our people working on bettering our collections efforts. But, we don't think that we will continue to work on it and drive again uncollectibles pass through the gas cost portion of our PGA, which we think is fair particularly in states that has set policies which make it very difficult to do customer turn off during the winter time.

The other thing I'll mention in connection with rate design, since we have been so successful in achieving weather normalization and increased base rates, we've cancelled our weather insurance policy that had been in effect for two years. We're now receiving payouts on to that policy. But, we need to make sure that we put a safety net under our earnings until we could achieve regulatory fixes and so we have now cancelled that insurance policy that we a cost of $600,000 to do that in this third quarter. But, we will see savings next year in the annual premium of approximately $4m. So, we felt that was now the appropriate time to take that step and we have now taken that step.

I will be back in a few minutes to talk about some other issues including GAAP prices for the coming winter, and before I do that, I am going to turn the program over to Pat, who is going to give us more detail on a number of financial matters, Pat.

Thanks Bob and good morning. As Bob said, we did have a successful quarter. Atmos reported a net loss of only $200,000 for the 2003 third quarter ended June 30, 2003, compared with net income of $3.3m for the same quarter a year ago. This is inline with the Street's expectations and better than our own internal budget. Earnings per diluted share for the third quarter were break even compared with net income of $0.08 per diluted share in the 2002 quarter. Gross profit was $87.2m for the third quarter, compared with $73.8m last year, an increase of 18%. Total throughput was 39.8 Bcf for the 2003 third quarter compared with 36.7 Bcf a year ago. The increase in throughput resulted mainly from sales volumes associated with our purchase at Mississippi Valley Gas Company in December 2002.

Weather in the 2003 third quarter was 16% warmer than last year and 14% warmer than normal. nonutility operations contributed $4.4m to consolidated net income for the quarter, compared the income of $5.2m for the same period last year. As Bob mentioned, results for our nonutility operations nearly offset the loss in our utility operations. nonutility income was however lower in the current quarter, at last year primarily due to unfavorable differences between our physical inventory and financial contract valuations, and smaller gains from gas inventory sales, as compared with the 2002 third quarter. Operation maintenance expense for the 2003 quarter was $45.1m compared with $37.8m for the same period last year. Excluding additional operating cost of $11.7m for the MVG operations and the provision for doubtful accounts. Our core operating and maintenance expense actually decreased $2.9m. The provision for doubtful accounts decreased by a $1.5m from $1.8m in the 2002 third quarter to $300,000 a twist in the third quarter 2003.

Our average cost to gas for the third quarter was $6.23 per Mcf compared with $3.99 per Mcf a year ago. Taxes other than income taxes for the third quarter were $12.7m compared to $8.7m in 2002. The increase was primarily due to additional taxes associated with MVG and higher franchise taxes due to higher revenue. Miscellaneous income for the quarter was $700,000 compared with miscellaneous expense of $200,000 last year. The $900,000 improvement was due to increased earnings from Heritage Propane, in which Atmos owns an indirect equity interest. So, we're offset by $600,000 charge to cancel our weather insurance as Bob mentioned.

Turning now to the first nine months of the year ended June 30. Our net income increased by 14% to $74.1m, compared with net income of $65.3m for the nine months of fiscal 2002. Earnings per diluted share for the nine months this year were $65, up 4% from $59 per diluted share in 2002. Our gross profit was $420.4m compared with $333.1m last year, an increase of 26%. The increase in gross profit was primarily the result of our acquisition of Mississippi Valley Gas Company in December 2002. Our total throughput during the first nine months of the year was 211.8 Bcf compared with the 176 Bcf a year ago. The increase in throughput was primarily due to additional sales volumes from MVG and the weather in the 2003 period, it was 3% colder then same period of 2002. Our nonutility operations contributed $3.6m to consolidated net income for the nine months ended June 30, compared with $13.7m for the same period last year. The lower income was due to high price volatility, contract price risk and an inability to withdraw sufficient gas volumes from storage, that adds up with the unwinding of associated financial hedges. This occurred primarily in the second quarter of 2003. This past January 1, as we've discussed previously, Atmos Energy also began accounting for inventory in nonutility energy trading contracts that are not derivative, to comply with the provisions of SFAS 133. This new accounting standard procures the use of mark-to-market accounting for these trading contracts. The cumulative non-cash after tax charge in the second quarter of fiscal 2003 associated with this change in accounting method was $7.8m or $0.17 a share. As performance under these inventory storage and transportation contracts are completed, the applicable income is being recognized. Before the cumulative effect of the accounting change, income from nonutility operations was $11.4m for the nine months of 2003 compared with $13.7m last year.

Operation and maintenance expense for the 2003 nine-months was $151.3m compared with a $122.6m for the same period last year, excluding an additional $26.2m in operating cost associated with MVG, and a provision for doubtful accounts. Our core O&M expense decreased by $2.6m from the prior year period. The provision for doubtful accounts was $8.5m in the first nine-months of our fiscal year compared with $3.4m last year, reflecting higher volumes in prices. Our average cost of gas for 2003 nine-months period was $5.78 per Mcf compared with $3.79 in the same period of 2002. Taxes other than income taxes for the nine-months were now $14.4m, primarily due to higher taxes associated with the Mississippi Valley Gas Company operations and higher franchise taxes. Miscellaneous income for the nine-months of 2003 was $3.3m compared to miscellaneous expense of $900,000 in 2002. The $4.2m improvements was mainly due to $3.9m gain associated with the sales-type lease of a distributed electric generation plant that we recognized in the first part of 2003 and due to a higher earnings from our indirect equity interest in Heritage Propane.

Turning now to our cash flow. For the first nine-months of 2003, our operations provide a cash of $117.3m compared with $301.7m for the nine-months period of 2002. The decrease this year was due to higher accounts receivable owing to additional sales associated with Mississippi Valley Gas and less cash held on deposit in margin accounts in the current year. With respect to our capital expenditures, capital spending was $113.5m for the nine-months ended June 30th, 2003 compared with $89.8m for the same period last year. The $23.7m change is primarily the result of capital expenditures associated with the Mississippi Valley Gas assets. Our fiscal 2003 capital expenditures are expected to be in the range of $155m and we are currently working on our capital budget for 2004.

I'd like to add a few comments with respect to our equity offering to those that Bob covered earlier, of course, we are very pleased with the outcome of our overnight offering in June. We sold 4m common shares at $25.31 a share, which was the closing price the day prior to issuance and yielding gross proceeds of approximately $101m. In July, our underwriters purchased an additional 100,000 shares at the same price to cover over allotment. After fees and expenses, we netted an approximately $99m in proceeds. We used a portion of the proceeds to fund cash contributions to our pension plan and we used the remainder to repay outstanding short-term debts and to fund other corporate needs such as capital spending and purchasing natural gas for the coming winter.

I'd like to talk a little bit about the effects of this funding for pension plan, as you know, our fund became underfunded last year and we were required to record a minimum pension liability on our balance sheet as of September 30, 2002. This has the effect of reducing our shareholders equity by about $39.4m after-tax. We are required to fund the plan this year by a minimum amount of about $5m to meet the rest of requirement, and that was due to be funded by June 30. However, we decided to make additional incremental funding to eliminate this liability, that funding further strengthens the company's balance sheet and helps to reduce future funding requirements to the plan. The contributions we made to our pension plan should bring it up to fully funded status by the end of fiscal 2003. We contributed $48.6m in cash and almost 1.2m shares of Atmos Energy restricted common stock, having a value of $28.8m. The cash contribution was financed through a combination of cash on hand and net proceeds from the common stock offering. Also, about the same time, actually it happened a little after the close of our quarter, in fact in July, we renewed our revolving credit facility and increased the amount by $50m to a total of $350m. This committed revolving credit facility requires an annual renewal and serves as a backup liquidity facility for our commercial paper program. The new facility contains essentially the same terms as of previous facility. The $50m increase will helps us to cover gas purchases at higher cost this winter. Bank One serves as our lead agent on the unsecured facility, with 13 other banks participating.

Now, I'd like to turn to some guidance -- earrings guidance for both the remainder of this year and for fiscal 2004. For fiscal 2003, we continue to expect to earn at the lower end of our stated guidance for the $1.52 to $1.58 per diluted share, which is inline with the last estimates. For fiscal 2004, we are projecting earnings in the range of $1.55 to $1.60 per diluted share, assuming a return to normal weather condition and gas commodity prices that are not quite as volatile as those of last winter. Now once again here is Bob, to conclude our remarks.

Thanks Pat. I'll conclude by just saying overall we feel good about the progress we've made in 2003 with our equity offering with the full funding of our pension plan, with the renewal of our bank credit facility, with the renewal earlier of Woodward's $210m credit facility and with the strong management of our total spending, O&M and capital. The Mississippi Valley integration is going extremely well. And, on top of all this, we are looking -- we think this year we will achieve earnings growth of about 6%. So, we feel real good about the company and then able to enhance our balance sheet, maintain our credit ratings and continue to run the company well.

As I look towards next year, we obviously do have some challenges with higher gas prices and hopefully the fact that we -- volatility is what hurts us in the gas market. So, we've done everything that we can to eliminate that volatility where possible. Our storage will be full. We're continuing to progress very satisfactorily on filling our storage for the year. We've also done hedging with the support and/or concurrence of our regulatory commissions and we feel that we will have 50% of our winter requirements priced obviously at a higher level than they were last year. But still, our main goal is to try to take volatility out of gas prices. We manage our differed gas cost very tightly and we have those in very good shape overall and we've also been obviously very aggressive in our collection efforts. So, as we go into the winter, we'll be prepared and say, we've been filling storage at between $4.50 and $6. So, compared to historical levels, those are high. But again, the marketplace and our customers are more concerned with these jumps in prices then they are -- I think, to level out themselves.

The other thing I would say, our earnings and stock prices done well this year. Our dividends remain very strong. We are going to continue to look for opportunities to grow our base, utility business, but our history has been one of in a patient acquire, and we think in these times that will continue to serve us well. There will be opportunities that occur for us, if we'll just be out there watching and waiting. As we do that, as we continue to be patient, we are going to continue to prove the overall operation of our company, our utility and nonutility business. We are going to continue to grow our earnings on a consistent basis and continue to increase our dividends on a consistent basis. So, with that I'll stop and I then turn it back to Susan and then we can open it up for any questions that anyone might have.

That concludes our prepared remarks. We would be happy to take any questions you might have at this point.

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 one on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you're signaled. As then, we'll take as many question as time permits. Once again, if you would like to ask a question, please press star one at this time. And we will pause for just a moment to give everyone an opportunity to signal. We will take our first question from Gordon Howald with Credit Lyonnais.

Thank you, good morning.

Good morning Gordon.

Quick question for you, and I apologize if you've answered this in your comments, I got on a couple of minutes late. Just related the gas cost pass throughs and I was wondering if delay in gas cost pass through was a contributing factor to the lower gross margins that you guys have experienced, I think it was 35% this quarter versus 45% gross margins in the previous quarter. Is there any issues there or what was the reason for that decline?

Gordon, no. We've got excellent PGA pass-through treatment in our jurisdictions. We are actually over collected on our gas costs, with the exception of one of our divisions that over collected overall. So, that's really not -- has not been an impact on gross margins year-over-year.

So, no delays in pass throughs.

No, no delays at all.

Excellent. And if I could -- one last question. You talked quite a bit about the less volatile gas prices being positive impact -- hopefully a positive impact in 2004 versus 2003. And I'm guessing, you really refer more to the utility than you would at Woodward that would assume that Woodward higher or more volatile gas prices would actually be a contributing factor?

Well, actually that -- for a classic trader that's the case. But for a marketing company like Woodward, the volatility hurt and it's really because of a couple of factors. First of all, Woodward has what are called full requirement contracts with some of its customers and under those contracts, customers give Woodward an estimate of how much gas they are going to burn in the coming months. That gas is purchased and hedged based on first at the month prices, and then as we get into a month, it turns out to be colder and that customer needs to burn more gas. Under these full requirement contracts, Woodward is obligated to furnish that gas, but has to charge first at month prices and in a period like February of last year where we saw prices go from, like $8 to $18. The inability to pass through that incremental difference is what occurred in Woodward; and Bob talked about how we are going back and amending those contracts to allow for the full pass through that difference. And, that was one of the two things that hurt. The other thing with the inability to get gas out of storage utilities. We are pulling hard on storage in the winter months and Woodward has the ability to use that storage when others are -- when the utilities are using it, and being second in line with something that hurts in there is by flowing gas. So again, we've addressed that by going out and contracting for an additional Bcf of high turns or down storage. So, thus we're two factors that hurt us in the second quarter primarily this year, and we've taken steps as Bob said to make sure that we are in a better shape going into 2004.

Great, thanks a lot. I appreciate it.

You're welcome Gordon.

Our next question comes from David Grumhaus with Copia Capital.

Good morning guys. How are you?

Good morning David.

Two questions for you. First, on the bad debt front. It sounds like that you are managing that pretty well. Give me where the gas prices are? Sounds like it's 8.5, you've written off $8.5m year-to-date. Just wondering what's sort of your target is for year end there and you are still sort of trying to track it at 0.5%, or is that turning upward as gas prices have stayed up?

Well, let me -- I'll take the later part of it and let Pat address the first part of it. Our goal still continues to be 45%. That's our own internal goal. That's a goal that we're able to achieve in a time when there was much less volatility in gas prices and gas prices were much lower. We've been doing a very good job in our collection efforts. It probably would be a little higher than that this year because of the higher gas prices. But, several years ago, we were over 2%. So, I mean, we may -- this year, it may be 0.7, 0.8. We have it, it's not really -- we haven't determined that at this point, but we made tremendous progress but our goal continues to be 0.5. Pat why don't you address that.

Sure Bob. In the third quarter, our write-off as a percent of revenues. We are just under six-tens of one percent and so far this year, our total our provision for a bad debt is at about $8.45m. So, that goes up of course with revenues, so with higher gas costs and higher volumes, our provision goes up. But, our collection experience has been very good this year. In fact, we've actually disconnected about 45,000 additional customers this year over and above our disconnects last year. So, we've been very active in going out and disconnecting customers for non-payments. But, nevertheless with higher gas prices and cold weather just exacerbates the collections issue and of course that's extra customers' ability to pay.

That's helpful. Second question for you, with regards to the '04 guidance. Obviously, you are seeing some incremental growth over this year. But I guess, with the accounting change of $0.17 earlier this year and given that you won't have any charge like that last year. You know, I guess I was hoping for a little bit higher numbers for '04. Obviously, you got some equity dilution, but net with the accounting change, you still have a bump there and I guess just -- your views on what sort of holding that guidance down for '04?

Well, I think, first David you put your finger on this and the fact that the -- we knew when we did the equity offering and when we fully funded our pension plan that there would be some dilution to that. We felt as if having [Inaudible] between having a -- making sure your balance sheet is in good shape and your earnings growth, but we just felt where the market was, and the opportunity that we had, that it was the right time for us to move forward. We are going to suffer by I think $0.07 dilution from those offerings. We've had some benefits increases in the $0.07-0.09 range. And then other normal increases. So, those are the things that we've got to overcome in order to achieve earnings growth. Obviously its August, we will start our fiscal year October 1, we are still in the process of fine tuning these numbers. But I guess, if you want to look at it from the other side of the equation and say, well what is the potential for higher earnings next year, I think, the places that we have some optimism, but are not willing to actually put it down yet, and say we can count on it, we do have rate cases filed and we have obviously the success of those rate cases is something that we continue to believe will happen, but we've made estimates of what levels of increases we think we can achieve, and we've made those estimates in line with historical success levels in those states. The other thing that we have -- that obviously could help us would be Woodward and we are -- one thing about Woodward and we think is where the market is, and Pat mentioned that we want it to be almost mirror the utility in terms of risk. And so, those are the things that we are doing in the market place now to achieve that. And we have, to be honest, all of the work that Woodward is doing in the margin, enhanced but the work is not complete. And so, we again are having to make estimates of what we think will happen given that situation. So, we are not -- when we give that guidance, we are not giving up on possibly achieving better earnings results. We've said over time, that we do hope to be at about 5% over a longer period of time, and that's still -- that's still our goal. But, this is where we stand right now and we have just let you know that, at this point in time.

That's helpful. I appreciate it, and thanks for the time this morning.

Thank you.

We will now go to Donato Easey with Royal List Research.

Good morning Bob, and Pat.

Good morning Donato.

A couple of quick questions on, Pat. In your balance sheet you had a summary, and I was just wondering if we have the current assets and liabilities associated with trading yet?

Do we need to wait for the -- if that's one. Pat, also the shares outstanding for next year, the restricted stock at a 1.169m shares for the pension funds that would be included in there, right?

That's correct Donato.

Yeah, I wanted to verify that. And then do you have the --

We will see, I might ask Fred -- Fred Meisenheimer, our Controller to talk with that. I do believe we have [Inaudible] and we're filing our 10-Q later today, so you would be able to get that on Edgar.

Okay, great.

Donato, our assets from our risk management activities are $18.6m at June 30. That's the current of portion of that, and the current portion of the liabilities is $13.3m.

Very good. Thank you and good luck with the balance of this year. And I appreciate y'alls time this morning.

Thanks Donato.

Daniel Fidell with A.G. Edwards has the next question.

Good morning.

Good morning Dan.

Just a couple of housekeeping questions, I guess. First where will the $4m benefit in savings from the cancellation of the weather normalization hit. Will that be on the O&M line, or will that be the other income line, or is that just where the charge hit this time -- the cancellation charge hit?

These benefits will just show up in the form of reduced O&M next year Dan.

Okay great. Secondly, do you have a cash balance at June 30?

Yes. One second. Our cash balance is $17.321m.

Great. And then, just for -- what you said about another filing this one in West Texas and you said you thought you might file for this one before the end of fiscal '03, which would mean some time before September 30. Is that right?

Yes. I think we are just weeks away Dan. We are still working on the revenue requirement, but we are very close.

Okay.

And in that case, Dan, it would probably not really, I mean, we don't know for sure. It could or could not impact next winter and that's another thing when people ask about earnings -- last time when we filed in West Texas, because we really have two rate jurisdictions, although technically we file in all the cities, the West Texas cities have come together as a group. So, that would mean Amarillo is West Texas is all of Texas for us, and last time we did have to, it took a while to get that case resolved. So, again we are not certain, although we think Amarillo will be resolved fairly shortly.

Great. And I appreciate that you are trying to give the most on-target guidance you can for fiscal '04, I guess piggybacking a little bit on what David's question was, but do you see any opportunities? You had mentioned that there are some opportunities with Woodward and possible additional success that you could get in the rate cases. But, are there opportunities for cost savings associated with your recent acquisitions? Any chance you see to, as a way to offset the gains you are seeing in higher operating cost coming next year from benefit plan?

Well, Dan, I guess as far as the benefit plans are concerned, we've taken a course to try to smooth our pension bond expenses and we are hopefully, as you all know, pension funds are driven by interest rates and market performance. So, we are really hopeful that those costs are fairly well under control. Our medical cost, those are all recoverable and rated, it's just the lag that has an impact on us. But, we are looking internally at things we can do to help keep those costs under good control as well. With specific reference to Mississippi Valley, that is a good purchase, will be and is, but one of the issues there is, because we file essentially rate cases every six months, the savings that we achieve go back to the rate payers. So, it's not exactly the same as some other jurisdictions where we made acquisitions. But, eventually, over the long haul, Mississippi Valley -- when you say long haul, what does that mean? I mean, our goal is still three to five years, try to get Mississippi Valley continuing work with the regulators into the same kind of operating modus in the rest of our utilities.

Great, thanks.

Probably aren't the short-term benefits that you are alluding to.

Thank you very much.

Thank you.

We will now go to Philip Adams with Banc One Capital Markets.

Most of my questions have been answered and it's going to take a while to get through this very complete disclosure. I just wanted to ask if there's anything -- what's your next thoughts are strategically, in terms of additional businesses or filling in acquisitions or what's on the horizon?

Well, Philip, that's an excellent question. We continue to look at opportunities. We have stated in the past and continue to believe that for very small companies, we would like for them to be contiguous to us. For medium sized companies, 200,000 to 300,000 customers, we would like for them to be in our market area, so to speak, than have to be exactly contiguous. And then for larger acquisitions, obviously we would consider other issues. But, I would say now, our thinking on the matter is, I mean longer term, we want to continue to grow our utility business. The way we look at it, the nonutility business basically operates in the same territory as our utility business. So, when we make utility acquisitions, many times it will also help our nonutility business at the same time. I think the other thing I will add is, we want to make sure we've taken steps to repair our balance sheet, strengthen our balance sheet is probably a better word. And we don't want to take any steps backward. So, we are going to be -- any acquisition we make, we really want it to be accretive immediately. And that's sort of the -- that's the approach that we're taking in this environment, but we do have several opportunities that we're presently evaluating.

Would you think that there might be something in the next six months say?

Well, that is a very hard question. I mean, the one thing that we've -- the answer I think honestly would be we don't know. There's always possibilities, but I think we just -- we did carefully evaluate things and we do walk away from things, if we don't think that they're appropriate in terms of fit strategically or in terms of earnings power.

Okay, thanks very much for your time this morning.

Thank you.

And would you have a question from Peter Zu (ph) with Genco Capital.

Good morning.

Good morning.

Could you refresh my memory and give me an update as to where you are in the rate cases for Amarillo, Texas and Kansas.

Yes the Amarillo filling was for $5.18m. We're presently in Texas, you go through the city first and then the Railroad Commission has, what I would call secondary jurisdiction. We can't go to Railroad Commission if we're not able to work out a settlement with the city, and with Amarillo, we're presently in negotiations and we're cautiously optimistic that we will know something within the next few weeks. Kansas, we filled for $7.4m annual increase and we had received weather normalization approval from them earlier which we're. And in Kansas, the auditors have come out and have been here in July and looked at our operations and so, I think, again our preference would be try -- to try to settle the matter in we will now be in negotiation with the staff of the Kansas Commission to see if that is achievable, obviously settling helps you if you can under reasonable terms because it resolves the issues much more quickly than you would resolve them through hearing. In West Texas, the other Texas jurisdiction, we will be filling shortly within the next several months. So, those would be the three cases that would be ongoing. But as I said, our culture is always to work with regulators, try to negotiate and settle, put the rates into effect and move forward and that will continue to be our mode of operation and we only go to hearing in the unlikely aware or unable to settle.

Okay, great. For the Kansas and Texas rate cases, what would be the ROE that the company would be getting under the revenue increase?

In Amarillo, we filled for 12.5% and of course that -- again that is subject to the negotiating process. And in Kansas, I think we're using the cost and cost of capital pretty much.

So it would be probably in same range?

Same range, yeah of ROE.

12.5%?

Right.

Okay, the revenue increase that the company is asking for, is that reflected in your 2004 earnings guidance or has it been excluded so far?

Well, its reflected to the extend that we're able to accurately estimate it. And so, we've put numbers in there. I mean at this point we're really -- until we reach settlement, we don't want to -- I guess that wouldn't evolve there because obviously it can affect our settlement situations so, but there are some numbers in our earnings goal. And as I said, that's obviously if we do better than we anticipate that would help that earnings number or could help that earnings number.

Okay, great. One question related to Woodward marketing. Now, given the credit concerns in the industry right now, there's a lot more focus on companies with stronger balance sheets. Companies like yours putting supply into, or putting storage facilities into the hands of stronger hands, and I was wondering if Woodward marketing has been some of the benefit for that and I guess in terms of the volumes or the Bcf that manages, if we could see a change this year to next year.

JD Woodward is on the phone. JD, did you hear the question.

Yeah, and I'll be happy to. I would say right now, we are seeing some incremental pick up Peter, in terms of new customers, but our focus for the last 90 days has really been just to take care of our existing business and get our risk profile down from last year so that we don't have the same issues occur. I think, as soon as we feel good about that, we fell very good about it right now. Our folks in the field are telling us that, with the lack of competition that is in the marketplace, we do expect a system increase opportunities.

Okay, great. Thank you very much.

Thank you.

And there are no further questions at this time. I would like to give one last reminder. If you would like to ask a question, please press star one at this time. And, it appears there are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

I just want to thank you all for joining us again today. And, if you have any additional questions, please call me at 972-855-3729. Have a great day.

And that concludes today's conference. Thank you for your participation.