埃特莫斯能源 (ATO) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Atmos Energy corporation fiscal 2003 fourth quarter earning conference call. At this time all participants are in a listen only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs any assistance please press the star followed by a zero. As a reminder, this call is being recorded today, Wednesday November 12, 2003. I would now like to turn the call over to miss Susan Kappes. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us. Our conference call this morning is being web cast live over the internet. We have placed slides on our website that summarize our financial results. We will not review those in detail, but please be happy to give any answers to any questions you might have at the end of the remark. If you 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 the 2003 fiscal year and fourth quarter are Bob Best, chairman, President and CEO, Pat Reddy. Earl Fischer, SVP, Utility Operations, JD Woodward, Senior Vice President non-utility Operation, Fred Meisenheimer, VP and Controller and Laurie Sherwood, VP, Corporate Development and Treasurer.

As we review the financial results and discuss future expectations please keep in mind some of our discussion might contain forward looking statements within the meaning of the security act and security exchange act. Any forward looking statements are intended to fall within the safe harbor rules of the private security litigation reform act of 1995. To begin, Bob Best will review the highlights of fiscal 2003.

Thank you, and good morning to everyone. Yesterday after the market closed we were pleased to announce Atmos results for fiscal 2003 in the fourth quarter. And I am pleased to report that our net income increased a strong 20% year over year and diluted earning per share went up 6%. We also announced our 16th consecutive annual increase in Atmos Energy's cash dividend, our indicated dividend rate for fiscal 2004 will be $1.22 a share, which is up two cents with the $1.20 we paid in 2003. Earning per diluted share for fiscal 2003 were $1.54 and that was right on target with our guidance which was in the range of 1.52 to $1.58. Net income for the year was $71.7 million, compared with $59.7 million in fiscal 2002. Utility operations provided 87% of our 2003 net income and non-utility operations provided 13%. We feel really good about these results and they were achieved in a year where we had several challenges, including high natural gas prices, our average cost of gas for the year was up 51% to 576 per million cubic feet from 381 per MCF in 2002. Of course, higher gas prices led to increased customer receivables because more customers had difficulty paying their bills. High gas prices and volatility along with contract price risk and an inability to draw sufficient volumes from storage also reduced our non-utility earnings. And like every other company, we faced our share of rising employee medical costs for medical, insurance and pension. Even in the face of these challenges we persevered and sustained our trend of earning growth. A major factor in this growth was the 10 months of contributions from Mississippi Valley Gas and its 260,000 customers we acquired in December of 2002. Total utility gas through put for the year increased 20%, 248 billion cubic feet owing largely to additional Mississippi Valley Gas volumes. We also benefited from weather that was 3% colder than 2002. Pat Reddy, our Chief Financial Officer will review the compete financial results in just a moment. Before he does I want to touch on a couple points about the fourth quarter.

In the fourth quarter our utility operations had a smaller loss and our non-utility operations had a strong increase in earnings. This combination made for a successful quarter. For the fourth quarter we reported a net loss of 2.4 million or 5 cents per diluted share and this compares with a net loss in the previous year's fourth quarter of 5.6 million or 14 cents per diluted share. Utility gas through put in the fourth quarter rose 4 BCF quarter over quarter and this was, again, primarily a result of Mississippi Valley Gas. Weather is adjusted for jurisdiction with the weather normalized operations was 13% colder than normal during the fourth quarter compared with weather that was 47% warmer than normal in the same period last year. Operation and maintenance expense during the quarter went up 18 million compared with the fourth quarter of 2002. But excluding the provision for doubtful accounts and the O&M increase attributable to Mississippi Valley we were essentially flat in the fourth quarter. We have continued to work hard and will continue to work hard to control our operating costs.

I'm now going to ask Pat Reddy to recap our financial results and after Pat finishes I'll be back with a few words and summary of 2003 and then an outlook for 2004. Pat.

Thank you, Bob, good morning. As Bob said we had a very successful 2003. Before I review the numbers, though, let me point out a significant development that has changed how we present our financial results. Those of you who follow the industry know the accounting authorities have made a major change in the way gas contracts are accounted for. In layman terms the issue is how best to reflect economic value in financial statements, that, of course, is hard to achieve when the value of the commodity goes up and down. Like others in the industry, Atmos Energy uses market to market accounting in its non-utility trading business. Starting last January 1 with a change in generally accepted accounting principals, Atmos did continue market to market, its inventory, storage, transportation and index priced physical forward contract. As a result, we are now required to present our non-utility gas marketing segments contracts that result in physical delivery on a Gross basis. Starting with our latest earning release and the forthcoming filing of our form 10-K you will now find these amounts stated as components of revenues and purchase gas costs. In the past we netted the amount and presented it as our gas trading margin. You will find a large increase in our consolidated operating revenues even though revenues do not provide any particular insight into our business operations we have reclassified all prior year periods to conform to this new presentation. This changed in presentation, however, had no effect on our previously reported earning per share or net income.

Turning now to our results, Atmos reported a 20% increase in net income to 71.7 million for the fiscal year ended September 30, 2003, compared with net income of 59.7 million for the same period in 2002. Earning per diluted share for fiscal 2003 were $1.54 compared to $1.45 per diluted share in 2002 and an increase of 6%. Earning per diluted share were affected by an additional 5.2 million average shares outstanding in 2003 compared with 2002. Weather during 2003 was 3% colder than last year and 1% colder than normal as adjusted for our operations that have weather normalization. Gross profit was 535 million for the 2003 period compared with 431.1 million last year and was adjusted for our revised accounting presentation. The increase in Gross profit was primarily attributable to the additional gas volumes resulting from our acquisition of Mississippi Valley Gas company and from weather that was 3% colder than last year. Total gas throughput on our system in 2003, increased by 39.5 BCF to 248 BCF from 208.5 BCF in the prior year. Our non-utility operations contributed 9.6 million to consolidated net income in fiscal 2003 compared with 16.7 million for 2002. Net income from non-utility operations represented 13% of consolidated net income. A number of factors lowered Non-utility results early in 2003. First, was high gas prices and volatility, contract price risk, and an inability to withdraw sufficient volumes from storage to match up with the unwinding of associated financial hedges. During the third and fourth quarters of fiscal 2003 Atmos Energy took steps to address these problems so they won't recur. For example, we entered into a leasing arrangement for 1 BCF of additional salt dump storage as of November of 2003. We also renegotiated contracts where possible to transfer the risk of volatile gas prices to the customer and to provide higher gas marketing margins to the non-utility.

Operation and maintenance expense for fiscal 2003 was 205.1 million compared with 158.1 million for fiscal 2002. Excluding a $36 million increase attributable to the acquired Mississippi Valley assets and the provision for doubtful accounts, our O&M expense for fiscal 2003 actually decreased 2.2 million compared to fiscal 2002. Provision for doubtful accounts increased 13.2 million in fiscal 2003 generally due to hire revenues, a byproduct both of higher gas prices and increased volumes. The average cost of natural gas in 2003 was $5.76 per MCF compared with $3.81 last year. Taxes other than income taxes were 55 million compared with $36.2 million in the prior year. The $18.8 million increase primarily was attributable to additional franchise, payroll and property taxes associated with the acquired Mississippi Valley asset and higher franchise taxes due to higher revenues. Of course, increases in franchise taxes have no effect on our net income because these amounts are revenue based and are recovered through customer billings as part of our gas costs.

Miscellaneous income was 2.2 million compared with miscellaneous expense of 1.3 million of fiscal 2002. The 3.5 million positive change primarily was attributable to a $3.9 million gain recognized in 2003 associated with a sales type lease of distributed electric generation plant and to an increase in year over year earnings in the amount of a million dollars from our indirect equity interest and Heritage Propane Partners. These gains were partially offset by a $600,000 charge associated with a cancellation of a third year with our weather insurance policy and a $500,000 charge associated with the write-down of some obsolete compressor inventory.

Operating activities provided cash of 49.5 million compared with providing cash of 297.4 million in 2002. The year over year decrease was primarily due to increased accounts receivable balance in the current year as a result of higher gas prices which, of course, is just a timing impact, and additional sales generated by the Mississippi Valley Gas acquisition higher cost associated with gas and storage and the effect of our cash contribution in June 2003 to our pension fund.

Turning now to our 2003 fourth quarter Atmos Energy reported a much smaller net loss of 2.4 million compared with a net loss last year of 5.6 million. For the fourth quarter, that loss translated for 5 cents per diluted share compared with a loss of 14 cents in the year ago quarter. Gross profit for the quarter was 99.8 million compared with 69 million for the same period last year. Total utility through put for the fourth quarter was 36.2 BCF compared with 32.2 BCF the same trade a year ago. The increase resulted primarily from additional volumes associated with Mississippi Valley, that was partially offset by slightly lower transportation volume. Weather, as adjusted for our jurisdiction, was 13% colder than normal during the fourth quarter of 2003 compared with weather that was 47% warmer than normal in the same period last year.

Our non-utility operations contributed 5.9 million to fourth quarter net income compared with net income of 3 million for this segment last year. The increase was primarily due to increased marketing margins. Operation and maintenance expense for the fourth quarter was 53.8 million compared with 35.5 million in 2002. Excluding the provision for doubtful accounts and the 9.9 million increase attributable to Mississippi Valley, O&M expense for the fourth quarter as Bob said was essentially flat for the same period last year. Our provision for doubtful accounts increased 8.2 million compared with the prior year quarter generally due to higher revenues. In our utility segment, the average cost of natural gas in the fourth quarter was $5.60 per MCF compared with $4.23 last year.

Looking at our capital expenditures during fiscal 2003 excluding acquisitions, our CAPEX was 159.4 million up from 132.3 million last year. The 27.1 million increase was primarily due to the acquired Mississippi Valley operation along with continuing system expansion. For fiscal 2004 we project our total capital expenditures of 175 million. Spending during 2004 is expected to be 48 million on growth million and 127 million on non-growth capital. The increase is primarily due, again to a full year of Mississippi operations versus only ten months in fiscal 2003 along with material increases in capitalized employee medical and other benefits and strategic increases in capital spending in jurisdictions where recovery comes with minimal regulatory lag, that would be primarily Texas, Mississippi, and Louisiana.

As Bob mentioned, rising employee and retiree benefit costs were a major factor in our financial picture in 2003. Like all other companies, our costs in these areas has gone up. For Atmos the increase in 2003 was approximately 9.4 million. And in June, we contributed cash and company stock to adequately fund our pension plan. We contributed 48.6 million in cash and almost 1.2 million shares of Atmos restricted common stock with a value of 28.8 million. The cash contribution was financed through a combination of cash on hand and net proceeds from our June common stock offering. That plus market appreciation and our pension account plan has resulted in our plan being fully funded. Medical and dental benefits in 2003 increased and we expect another increase in 2004. In fact, we're projecting a 3.6 million increase in medical and dental expense for fiscal 2004. We changed our primary medical insurance provider and we provide some benefit programs to help control cost, particularly prescription drug coverage. When combining the pension, post retirement benefits and employee medical and benefit expense we are forecasting a year over year increase of total benefit expense of approximately $4.2 million. Actual benefits expense in 2003 was 24.4 million and total benefits expense in 2004 is expected to be about 28.6 million.

Turning now to earning guidance for 2004, for our 2004 fiscal year, which began October 1, we project earnings in the range of 1.55 to 1.60 per diluted share assuming normal weather conditions, gas commodity prices that are somewhat less volatile and no new significant acquisition. We no longer are giving guidance quarter by quarter but we will be keeping you up to date on our annual forecast as fiscal 2004 progressing. Now once again here's Bob Best to conclude our remarks.

Thank you, Pat. To conclude our presentation today I want to briefly note seven of the major successes that we achieved in 2003. First we took advantage of a window of opportunity this past summer to sell 4.1 million shares of Atmos Energy's common stock. That stock sale strengthened our balance sheet and persevered our hi credit rating. Second we made a $77 million contribution to our employee pension plan. We adequately funded our pension plan not only to protect our employees but also to reduce our future pension costs. Third we closed our acquisition of Mississippi Valley Gas company adding about 260,000 valley gas customers to Atmos Energy. Mississippi valley was our ninth major acquisition in our 20-year history. Fourth, we renewed our credit facility for both our utility and non-utility operations allowing us to manage all of our operations in an orderly and disciplined fashion. Fifth, we were granted revenue increases in Louisiana and in Texas and one weather normalization adjustments in Kansas and Amarillo. We also filed rate cases that are now pending in Kansas and west Texas. Sixth we cancelled the third year of our weather insurance policy owing to the weather normalization provision that we received in Kansas and Texas and the Louisiana rate stabilization clause we received in November of 2002. Weather insurance is provided a measure of protection for our shareholders earning, however, canceling the policy will save us approximately $4 million annually in premiums beginning in 2004. Seventh, using our natural gas storage and hedging of our gas purchases, saved our utility customers more than $67 million last year. Going to be hard to match those savings this winter given the high cost of gas and storage, however our hedging program has clearly been a big success over the last two years.

As we leave 2003 behind, we also know that 2004 will be another challenging year. High gas prices in particular will be a major factor. We trust that congress will provide some relief for the nation through a natural energy policy. That opens more areas to gas exploration and brings more gas supply to market. We intend to continue our program of seeking rate increases when justified. To add revenues and to keep our purchase gas adjustments current. We also will continue to evaluate new prospects. Our prospects for new acquisitions as well as expansions in our existing non-utility markets. We have set an earning growth target of 3% to 5% on average for the next five years. The target has been adjusted but it also reflects our decision to reduce the risk profile of our gas marketing operations which, accordingly, also limits some of the upside potential in this business, as well. It also reflects the effects of dilution from our common stock sale this past summer, as Pat said we expect 2004 EPS to be in the range of 1.55 to $1.60.

In summary, as we close today, reported earning for 2003 were on target at 1.54 per diluted share. We expect earning next year to grow at an annual rate over the next five years to grow at an annual rate of 3 to 5%. Earning per diluted share in 2004 will likely range from $1.55 to $1.60 assuming normal weather, reasonable gas prices and no new acquisitions. Our utility earning base continues to expand with acquisitions like Mississippi Valley Gas, rate filings are adding to our projected revenue and our yielding other benefits such as weather normalization adjustments, which reduced the swings in our earning and customer budget. We are continuing to control costs even as we expand. We remain one of the country's most efficient pure gas distributors in terms of customer severed for employee and O&M expense per customer. Our non-utility operation is poised to take advantage of new market opportunities as they become available. During the past six years we have remained faithful to our strategy of running our utility well, growing our non-utility business and making sound acquisitions. Going forward, our strategy and our commitment to it remains unchanged. This consistency in purpose and in results is one of Atmos Energy's greatest strengths.

I just want to say as we end the year, you know, we really do feel good about our company. We have been able the last three years to grow our earnings on a consistent basis. We now gotten our balance sheet about 50/50 debt equity where we want it. We have solid credit ratings. We have a fully funded pension plan. We have ample access to credit. We have a strong utility with a complimentary non-utility operation that we still have great confidence into the future will do well. Our focus above all others is going to be to grow our earnings at a measure pace which will allow us to continue to increase our dividends for those who invest in us. And as we continue to grow, as we continue to grow our earnings, we also will look for future growth opportunities for our company. So with that, I'll close my remarks and open it up for questions. Susan, is there anything else you want to add at this point?

No, that really does conclude our prepared remarks Bob. We'll be happy now to answer any questions you might have.

Ladies and gentlemen at this time we will begin the question and answer session. If you have a question please press the star followed by the star on the touch-tone phone. You will hear a three-tone prompt acknowledging your selection. Your question will be pulled in the order they are received. If you are using speaker equipment you will need to lift the hand set before pressing the numbers. One moment, please, for the first question. The first question is from Donato Eassey from Royalist Independent Equity Research.

Good morning. Thanks for the update. First question deals with the range of earning guidance for next year, $1.55 to $1.60. Just to clarify would that exclude the $4.4 million gain on the sale of Heritage?

Well, we factored some of that gain in there, dough gnat owe, as we were going through the budgeting process. I would say at this point we would say it would include it. You know, our challenge is going to rest around gas prices. I mean, if we knew gas prices we would feel, you know, much more confident that we could, you know, maybe do a little better than we're projecting. I think, you know, one of the things last year we were able to get our uncollectible amounts down to about 0.8% of our residential and commercial revenues. Our goal is 0.5. And the reason we really have done a good job on collections, the high gas prices tend of February and early March hurt us in that effort, and we had $11 million write-off last year compared to 7 the year before. So I think, you know, if we can get a break or two with gas prices and keep our uncollectible at 0.5, you know, we've got a shot at doing better than that. But right now I think our comfort zone is that 1.55 to $1.60 is what we'll hit.

Thanks. That's a nice segue to my second question. You mentioned that our assumption includes reasonable gas prices. When you look at the gas price situation, is it just the receivable issue? Or does it have to do with where you're currently hedged at with JD Woodward?

Well, we know, we typically going into the winter, of course we're d our storage is full, as we always talk about on these calls. We have to fill our storage. We really have no choice. That's our really our safety valve during the winter. And we have hedged with our storage and our hedging, about 55 to 60% of our winter requirements. Now, that gas, is in storage and is being hedged, we know, at about 520 to 530 in MCF. We know that our gas prices even if prices fall, are going, you know, we're not going to be able to -- I mean we'll blend the hedging and the storage with the market price, but we know that prices are not going to be low under any circumstances. So but as we said, you know, in the remarks, we saved our customers -- have saved our customers a lot of money in this hedging strategy and we still think it's the best for the market that we -- really, the hedging is to take volatility out of pricing. But you know we know that even if prices fell to $4 or $3.50 that a blended price is still going to be in the 4 to $5 range.

This is Pat on the non-utility side because Woodward is really a marketing company not a trading company. Unlike other trading companies they don't really need volatility to make money. It is really a margin based, service based business. We're not really high gas prices you know, to the extent it drives industrial customers to other fuels I suppose could affect the non-utility but most of the customers there, the Atmos Energy utilities and mix of industrial customers.

My last question, thanks Pat for that insight there. As far as the acquisitions that you made to date, the O&M per customer still one of the most attractive in the industry, seems to be creeping up a bit. You've got this wonderful call center opportunity, lower cost. Do you see simulation still adding value as we move into '04/05 and adjacent with that you mentioned that, you know, the earnings did not include an acquisition but I assume that you guys are still, you know, doing what you do best, that's look for opportunities to grow the base of the customers and that's my final question. Thank you.

Thanks Donato. Well, we are looking to grow. I mean that's -- as I said, we made nine major acquisitions in 20 years and so you know we have a board that wants to continue to grow this company in a disciplined fashion, always being mindful we must keep our balance sheet in line as well and our credit ratings in line. I think the biggest opportunity we have longer term is, you know the assimilation of Mississippi Valley into our company is continuing and will continue. And so over time their targets are a little bit higher than our you know, the targets that we have in our company. I just -- the President over there is doing a good job and we've taken, you know, a go slow approach in not getting ahead of ourselves in Mississippi Valley and building up our relationships there. I think over time with attrition and other things we can, you know, realize some savings from our Mississippi Valley acquisition.

I guess I just add too that with the acquisitions we've made we've groan to a customer base of about 1.7 million. We've grown into the technology investments we made going back four or five years ago. I think as a management team we're very focused in looking at acquisition opportunities on those that will provide, you know, really immediate or near term accretion in a significant way because, you know, we're at a point we don't want to move our earnings sideways. We are seeing some very good opportunities now. Some of the other energy companies out there are looking to prune some of their assets, either because of liquidity concerns or just strategic refocusing on their core business. Assuming we can match up seller's price expectation with ours. As Bob said we are seeing some potentially attractive opportunities out there.

Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star follow bid the one at this time. As a reminder if you are using speaker equipment you will need to lift the hand set before pressing the numbers. One moment, please, for the next question. Miss Kappes there are no further questions at this time. Please continue.

Okay. Well on that note I will say to remind you that this call is available for replay on our website at Atmosenergy.com until February 11, 2004. We appreciate your interest and thank you all very much for joining us.

Ladies and gentlemen, this concludes the Atmos Energy corporation fiscal 2003 fourth quarter earning conference call. If you would like to listen to your replay of today's conference call please dial 800-405-2236 with pass code 558069.You may now disconnect