埃特莫斯能源 (ATO) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Atmos Energy Corporation first-quarter earnings conference call. At this time all participants are in a listen only mode. Fallowing today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded today, Wednesday, February 11th of 2004. I would now like to turn the conference over to Ms. Susan Kappes, Vice President of Investor Relations and Corporate Communications.

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 that summarize our financial results. We will not review those slides in detail but will be happy to take any questions about them at the end of our remarks. If you would like to access the webcast and slides, please visit out website at www.AtmosEnergy.com and click on the conference call link.

To discuss our financial results and highlights for the 2004 fiscal first-quarter are Bob Best, Chairman, President and CEO, and Mr. Pat Reddy, Senior Vice President and CFO. 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 the Securities Act and the Securities Exchange Act. Any forward-looking statements are intended to fall within the Safe Harbor rules of the Private Securities Litigation Reform Act of 1995. To begin Bob Best will review the highlights of the 2004 first-quarter.

Thank you, Susan; we appreciate everybody joining us this morning. Later today we're going to be holding our annual meeting here in new Orleans, so it's especially good to be able to report to our shareholders our solid results in the first quarter of fiscal 2004. Yesterday after the market closed we did report our net income in the first-quarter increased a strong 14 percent year over year despite weather that was 12 percent warmer than normal. We also announced our 81st (ph) configured cash dividend. Our indicated dividend rate for fiscal 2004 is $1.22 a share.

Net income for the quarter was 29.5 million compared with 25.8 million last year. Utility operations provided 71 percent of this net income and our non-utility operations did very well providing 29 percent. Earnings per diluted share were 57 cents compared with 67 cents last year. The change is primarily the result of an increase of 8.9 million average number of shares outstanding, and that represents a 21 percent increase in our total number of shares from December 31 of 2002 to December 31 of 2003.

As we said, Atmos produced solid results despite unseasonably warm weather in all of our service areas. Weather during the quarter was 5 percent warmer than normal and 12 percent warmer than the same period last year. Our consolidated utility gas throughput was down from 70.9 Bcf in 2002 first-quarter to 68.2 Bcf this quarter, a 4 percent decrease. High gas prices and gas price volatility continued to remain a major challenge, and our provisions for doubtful accounts went up slightly. But, in fact, the warmer weather probably helped mitigate an otherwise rise in our collectibles.

Offsetting the decline in the results of our utility operations during the first-quarter were our non-utility operations which did perform extremely well. Non-utility operations achieved better margins and proved optimization of both of our oil and gas storage fields and those of third parties and improved the management of our contracts with full requirements non-utility customers. Non-utility gas marketing volumes were down slightly from 59.3 Bcf a year ago to 58.9 Bcf this past quarter, again because of the warmer weather.

If you exclude the provision for doubtful accounts and a $6.1 million increase attributable to the acquired Mississippi Valley Gas assets, O&M expense for the quarter was slightly lower. I'm now going to turn the program over to Pat Reddy, our Chief Financial Officer, who is going to review our complete financial results for the quarter, and afterwards I will come back with some concluding remarks and then we will open it up for questions. Pat.

Thanks Bob and good morning. As Bob said, we had a very successful first-quarter. Before I review the numbers, though, let me remind you about a significant change in how we present our financial results. Like others in the gas industry, Atmos Energy formerly used mark to market accounting in its non-utility gas trading business. But starting in January of 2003, with the change in gas, Atmos Energy discontinued marking to marketing its inventory, storage, transportation and index price to physical forward contracts.

As a result, we now present our non-utility gas marketing segments contracts that result in physical delivery on a gross basis. You'll now (indiscernible) on these amounts stated as components of revenues and purchased gas cost. In the past we netted the amounts and presented it as our gas trading margin. Although revenues offer little insight into our business operations, we have reclassified all prior year period to conform to this presentation. The change, however, had no effect on our previously reported net income or earnings per share.

Turning now to our results, Atmos Energy reported a 14 percent increase in net income, as Bob mentioned, to 29.5 million for the first quarter ended December 31, 2003 compared with net income of 25.8 million for the same period in 2002. Our earnings per diluted share for the current quarter were 57 cents compared with 60 cents per diluted share last year or a decrease of 5 percent.

Earnings per diluted share were affected by an additional 8.9 million average shares outstanding in the current quarter compared the same period a year ago. As you know, we had an equity offering in the middle of last year, we also issued equity in conjunction with the acquisition of Mississippi Valley Gas Company.

Weather during the first quarter of fiscal 2004 was 12 percent warmer than last year and 5 percent warmer than normal as adjusted for operations with weather normalized rates. Our consolidated gross profit was 159.1 million for the first three months of fiscal 2004, compared with 137.2 million for the same period last year as adjusted for our revised accounting presentation. The increase in gross profit was primarily attributable to having a full three months of results from Mississippi Valley Gas Company compared with only one month of results in the 2003 first-quarter.

Consolidated utility gas throughput declined by 2.7 Bcf from 70.9 Bcf in the 2003 first-quarter to 68.2 Bcf in the 2004 first-quarter because of the warm weather. But our non-utility operations contributed 8.4 million to consolidated net income in the first-quarter compared with 4.7 million for the previous year quarter. Net income from non-utility operations, as Bob said, represented 29 percent of consolidated net income.

A number of factors lowered non-utility results early in 2003. First, we experienced high gas prices and volatility, contract price risk, and an in ability 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 a number of steps to address these situations. And we believe the strong first-quarter results of our non-utility operations reflect each of these improvements.

For the fiscal 2004 first-quarter, operation and maintenance expense was 56.9 million compared with 50.5 million in the fiscal 2003 first-quarter. However, as we said earlier, excluding the provision for doubtful accounts and a $6.1 million increase attributable to Mississippi Valley Gas Company, our core (indiscernible) and expense for the quarter of 2004 was actually slightly lower compared with the first-quarter of 2003.

Our provision for doubtful accounts increased by $300,000 in the fiscal 2004 first-quarter. The average cost of natural gas in the utility segment was $6.35 per Mcf in our first-quarter of '04 compared with $5.03 per Mcf last year. Taxes other than income taxes for the three months ended December 31, 2003, were 15.1 million compared with 12.8 million for the prior period. And this increase was primarily attributable to additional franchise; payroll and property taxes associated with Mississippi Valley Gas Company and higher franchise taxes due to higher revenues. As you know, in most jurisdictions franchise taxes go up and down with revenues.

Increases in franchise taxes have no effect on our net income because these amounts are revenue based and are recovered through customer billings. Miscellaneous income to the 2004 first-quarter was 1.2 million compared with 4.1 million for the first-quarter of fiscal 2003. The $2.9 million change primarily reflects the absence of a $3.9 million gain that we recognized in the first quarter of 2003 which was associated with a sales type least of a distributed electric generation plant. It also reflects a $500,000 decrease in year-over-year earnings from our indirect equity interest in Heritage Propane Partners.

The decrease was partially offset by the absence of a 1.9 million and whether insurance amortization expense in this fiscal first-quarter due to our cancellation of a whether insurance policy in the third quarter of 2003. Our interest charges went up 1.9 million in the first three months of fiscal 2004 compared with the same period last year. The increase was primarily due to interest expense associated with $250 million worth of debt that we offered in January, 2003 partially to finance our Mississippi Valley Gas Company acquisition.

Operating activities during the first quarter provided cash of $11.5 million compared with the use of cash of 13.4 million in the first-quarter of 2003. The year-over-year increase in free cash flow was primarily due to favorable changes in working capital.

Turning now to our capital expenditures, capital expenditures during the fiscal 2004 first-quarter were 45.5 million, up from 35.3 million during fiscal 2003 first-quarter. The $10.2 million increase again was primarily due to our ownership of Mississippi Valley Gas Company as well as continuing system expansion throughout the rest of our franchises.

For fiscal 2004, we project our total capital expenditures to be approximately $175 million. Spending during 2004 is expected to be 48 million for growth capital and 127 million for nongrowth or maintenance capital.

Looking at our pension and postretirement and other benefit expenses, we continue to closely watch our employee and retiree benefits costs which were a major factor in our financial picture in fiscal 2003. These costs went up $600,000 year-over-year from 6.1 million in the first quarter of 2003 to 6.7 million for our first-quarter of 2004. For all of fiscal year 2004 we project a total increase in benefits costs of $4.2 million with the largest increase being in medical and dental expense.

Now with respect to earnings guidance for 2004, we continue to project earnings in the range of $1.55 to $1.60 per diluted share assuming normal weather conditions in the rest of our heating season, gas commodity prices that are less volatile than those experienced during the past winter, and no new acquisitions of utility or other properties. And we remain optimistic about our ability to meet this forecast. And with that now I'd like to turn it back to Bob for some concluding remarks.

Thanks, Pat. To conclude our presentation I want to note three developments that give us confidence in Atmos Energy's future performance. First is the improvement in our non-utility operations. Our non-utility group under J.D. Woodward's direction has worked hard this past year to add to our capability in our wholesale gas marketing operations.

First this past December Atmos Energy marketing was successful in increasing its stand-alone credit facility to $220 million. We also renegotiated contracts wherever possible to transfer the risk of volatile gas prices to the customer and to provide higher gas marketing margins to the non-utility. We contracted for additional storage to give us more flexibility in meeting non-utility custom requirements and avoid having to buy commodity gas on the spot market. And we installed a new state-of-the-art billing system for non-utility customers.

Our non-utility results in the first-quarter showed the results of these and other improvements. Even though our non-utility volumes were slightly down in the first-quarter, gas, marketing -- earned more profit. Equally important our non-utility results helped overcome the lower results of our regulated utility operations. And we feel very strongly that our strategy, as we've articulated before, of having our non-utility complement our utility earnings continues to be a good one and I think this quarter again proved that to be very true.

Our second strength for us is in our rate filings which we've also discussed previously. And these filings continue to add to our revenues. We recently received approvals of $8.4 million of rate increases, and 5.9 of that came in Mississippi from our semi-annual adjustment to our tariff and 2.5 came from our rate case in Kansas.

These increases followed a $2.8 million rate settlement we reached with the city of Amarillo, Texas in August of 2003. And we currently have a rate request pending in Lubbock, Texas which we hope to settle soon and a rate request in front of our other West Texas cities besides Amarillo and Lubbock. We've been diligent in seeking rate increases to help us earn at a minimum our allowed rates of return.

The third strength which closely relates to our rate activities is the addition of weather normalization adjustments in our utility operations. Earnings consistency continues -- earnings consistency and quality continues to be one of our premier goals. We reached -- in our Amarillo settlement we were able to include weather normalization in that particular settlement, we reached a Kansas settlement that included weather normalization. Our filings in Lubbock and West Texas seek weather normalization and we do hope that we can reach settlements in those cases and that we can have weather normalization in all of West Texas at that point.

We now have -- or will if we achieve the West Texas weather normalization, we will have weather normalization in six of our largest eight rate jurisdictions covering 51 percent of our utility margins. As of December 31, 2003 our seventh jurisdiction in Louisiana, we've continued to increase our base rates. In our eighth largest jurisdiction, Colorado, because of our growth and use of gas we've always been able to do well there in terms of earning our rate of return. So we feel very good about where we stand in terms of weather normalization. And in fact, in the first-quarter we had a benefit from weather normalization of $2.8 million.

Pat mentioned previously, too, one of the things we've been trying to do is we canceled our whether insurance this year and we really decided that the best strategy for us from a cost and efficiency standpoint was to get weather normalization through the regulatory process. So we've saved $4 million in premiums by canceling that policy.

So in summary, even considering the weather that we had in the first-quarter, in our service area -- I wish -- I told my friends up East that I wish that they had shared some of their weather down here, but we struggled in terms of having warmer weather. But even with that we were able to achieve our earnings goal for the quarter. We feel very confident; we are poised to do well in 2004 and beyond. Our goal and our strategy continues to be to grow our earnings at a rate of 3 to 5 percent a year. We are focused on that and that will continue to be our goal as we move forward.

And we feel good about the complementary nature of our relationship between the utility and the non-utility operations. Our utilities are adding revenue through rate increases and reducing the effects of weather on earnings through WNA and our non-utility operations are continuing to add improvements and refine their business model to grow the earnings in the wholesale gas market.

So, in closing, we feel good about where we are, we feel optimistic about the future, and we think the company is at this point doing very well. So, with that I will turn it back to Susan who will open it up for questions.

That does conclude our prepared remarks. So if you would like us to answer questions now is the time.

(OPERATOR INSTRUCTIONS) Dan Fidell with AG Edwards.

Good morning, thanks for the call. Just a couple of questions for you. I guess first, do you have weather data for the January year-to-date period do far for six weeks or so of the year? And if so, is that in the $1.55 to $1.60 guidance? Are you assuming any benefit from perhaps colder weather since the beginning of the year into that number?

Dan, I will say this, January for us was a warmer than normal month. I think February -- and I'm just -- I don't have the statistics in front of me, but I think February to date has been better. But we still feel, because of the improvement of our non-utility operations and what we know that our utility can do the rest of the year regardless of weather, that we can hit the $1.55 to $1.60.

One of our goals has been consistency of earnings and we've had three good years, this would be our fourth good year. And I think that's -- we've told those who invest in us that what we want to do is take weather out of the equation so we're not talking about it all the time about well we're down, we're up. And I think that's what our goal is this year. While we may have to overcome a warmer than normal January, maybe February, March will give us a little help. But regardless of that, we still feel that we can fall into the $1.55 to $1.60 range in terms of our earnings.

Great. Can you tell me just quickly about your expectations in (indiscernible) -- timing a little bit for the Lubbock and West Texas cases, when we're expecting to -- I guess what are the next dates that we should be looking for in terms of possibly having those cases done?

Our intent would be that they would be done within the next three or four months. Texas is a little bit different in that you file with the cities, and then if you're not able to reach a settlement you have the right to go to the railroad commission, our goal is always to settle with our customers, we were able to do that in Amarillo. And we think -- we feel very optimistic that we'll also be able to do that in Lubbock and in West Texas.

But I think frankly it should occur within the next three to six months. Our goal is to get those increases in by the next heating season for sure and have weather normalization because if you look at our -- if you look at the map where we've particularly been warm, the cold front just has not come down particularly to Lubbock and Midland Odessa. It kind of just curves away after it hits Amarillo. So that's been a challenge for us the last few years. And we think that weather normalization will really help us in Texas.

And Dan, one other factor I think that's taking a little bit more time to settle these cases is that, in addition to weather normalization, we're basically going after margin decoupling where we improve that -- the prospects for recovering our margin and make it independent of not only weather but customer usage and conservation, and to get at least the gas cost portion of bad debt expense recovered in customer rates. And we did have favorable results in Amarillo and we're hopeful to get the same kind of rate design changes in West Texas and in Lubbock.

So, educating our city councils and mayors and others on these issues is taking a little time. But as Bob said, we're optimistic and I think we're feeling like we've got good relationships with these cities and hopeful of good results.

Sounds great. One last question and then I'll turn it over to somebody else to ask a question if they like. But just your expectations for the non-utility business through the year, I guess specifically in the gas marketing had a great jump this last quarter, it looks like a good chunk of that from changes in mark to market accounting.

I guess my question is do you expect the gas marketing business to sustain I guess through the remainder of this fiscal '04, or is there built into the assumptions for '04 some possibility for reversals in the marketing business going forward? I guess just sort of how confident are you in the marketing numbers delivered here through the first-quarter that '04 will finish quite strongly on the high side?

As we said in our remarks, J.D. and the team has done a great job in really having a strong quarter. I think if you look at our marketing organization, two years ago we made in the $16, $17 million range. Last year, because of some of the issues that we talked about previously, we fell back to about 9.6 but we were still profitable. I think this year we would anticipate that we're back up in the range we were a couple years ago. We may do better than that, but I think right now that's really what we're factoring into our expectations in helping us meet the $1.55 to $1.60.

Again, as you know, it's always a little bit more complicated to estimate the revenues and net income from the marketing business because the accounting is a little bit more complicated. Although, since January of last year we have reduced the portion of the business that's subject to mark to market accounting, it's the fixed (ph) forward physical contracts that we have, and we're hopeful as we go through the year even to make earnings from those contracts more transparent and a little bit less volatile than they might otherwise be. As Bob said, how it falls in the quarter may vary a little bit, but we are very confident in coming in on budget at the balance of the year.

Great. Thanks for your comments today and good luck as we go through the rest of the year here.

Donato Eassey with Royalist Independent Equity Research.

Good morning, Bob, Pat.

Good morning, Donato.

I recently read where you had said one of the biggest concerns out there is supply, and Bob, you shared this view in a recent article I read that that's the one cloud in the sky. I was wondering what your view is as we move forward into what continues to be very demanding weather. From where you sit at Atmos and in the broader picture, what are your views currently on supply and are we going to be sustaining these higher gas prices for more than what most of us probably thought by now?

Thank you, Donato. That's a great question. One of the things that we had hoped would help us with the supply situation nationally was that we would pass an energy bill. And although there's no immediate quick fix, but that's a little bit uncertain at this point in time. I do worry that prices will not moderate as we had hoped, but I do think that -- I have confidence longer-term. If you look longer-term, with the resource base that we have here in North America that we will have more supply. I mean basically what we need here is more supply.

I think if you look at LNG, we're projecting that LNG I think the capacity at terminals now, once some of the rework and expansion is done, will be about 1.5 Bcf -- Tcf. There are at least four or five new terminals that are being projected to be coming on out of all those that are out there which would give us another 1.5 Tcf. So that would be some real help and offset some of the decline from Canada that we're seeing.

But usually we have a lag of 6 to 18 months when we have a situation where we have more demand than supply, and where there's a tightening of demand and supply. So I'm hoping that we continue to get more supply into the pipeline so to speak and that will moderate prices. Because I don't see -- I mean, demand continues to grow. And most -- 90 percent of the electric generation plants that are being built today are being built on natural gas. Some states even mandate that you have to use natural gas. So we need to work on the supply end of the equation, and we're going to continue to do that as Atmos and then, of course, through AGA in Washington as we continue to work Capitol Hill and hope we can get some legislative relief.

Thanks a lot. But with respect to Atmos, could you break down by chance how much of your gas supply is currently in a fixed rate basis and how much is on a spot basis percentage wise?

It's -- about 50 to 55 percent, Donato, is either in storage or hedged. I think of our gas supply -- we have done that -- so this is the third year we have been in that range, it's worked pretty well for us. Our goal has been to take the volatility out of pricing and we've had some good success with that. We go to each one of our 12 jurisdictions with our plan for next winter; in fact we're getting ready to do that as soon as this winter is over. Typically four or five of those jurisdictions will actually give us specific approval for those gas supply plans. Most of the other commissions will at least indicate their concurrence.

We have had no denial -- I guess we had $300,000 in Missouri one year, but other than that we've had no denial of pass through. Right now our storage is 39 to 40 percent full, and we feel good about where we stand on storage in the middle of February. So we don't see any problems. In fact, from an operations -- a winter operation standpoint, we've a very good winter. We've had no upsets or things go awry, it's been a very solid year for us from an operating standpoint.

Thanks, Bob.

(OPERATOR INSTRUCTIONS) There are no further questions at this time. Please continue.

I just would like to remind you that a recording of this call is available for replay on our website at AtmosEnergy.com until May the 11th of 2004. We appreciate your continued interest in Atmos Energy and thank you very much for joining us.

Thank you. Ladies and gentlemen, this concludes the Atmos Energy Corporation first-quarter earnings conference call. You may now disconnect and thank you for using ACT Teleconferencing.