埃特莫斯能源 (ATO) 2004 Q2 法說會逐字稿

Welcome to the Atmos Energy Corporation second quarter earnings conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, May 12, 2004. At this time I'd like to turn the conference over to Susan Kappes.

Good morning, everyone. Thank you for joining us. I'm Susan Kappes, Vice President of Investor Relations. Our 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 the slides, please visit our Website at www.atmosenergy.com and click on the conference call link.

To discuss our financial results and highlights for the 2004 fiscal second quarter and six months year-to-date are Bob Best, Chairman, President and CEO, and 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 quarter.

Thank you, Susan. I'm going to start by today by just giving you an overview of where we see ourselves as a company, and then I will turn it over to our Chief Financial Officer, Pat Reddy, who will review the numbers with you for the quarter and for the six months, and then I will conclude with a few -- a summary of where we see ourselves going forward.

Starting with where we are today, our net income in the quarter was up 20 percent. We have no short-term debt. We had 115 million of cash on the balance sheet, and we generated 100 million of free cash flow in this fiscal year. Our equity component stands at 51.7 percent, which is something we feel very good about, something we have worked very hard to get to over the last four years. Our credit rating remains strong. As Pat will tell you, we have overcome warmer than normal weather this year. Our utility operations, as he will also tell you, have bounced back with a vengeance and have been very strong for the year, and are forecast to be strong for the rest of the year. We remain a low-cost provider of services compared to our peers. Our utility continues to move forward with reasonable rate increases and an emphasis on rate design and taking weather uncollectibles and declining use out of the equation as much as we can.

This is our fifth consecutive year of good, solid earnings, and we feel like our model of 12 states and the diversity that we have is starting to work for us and our shareholders. We feel very good about where we are as a company today. Our performance continues to be very stable and very solid.

So with that, I will turn it over to Pat, who will review the financial results.

Thank you, Bob, and good morning. As Bob said, we had a successful quarter and a first six months. We reported net income of 58.3 million for the 2004 second quarter, compared with net income of 48.5 million for the same quarter a year ago; as Bob said, an increase of 20 percent. Earnings per diluted share for our second quarter were $1.12 compared with $1.07 per diluted share in last year's quarter. Income before the cumulative effect of the accounting change, which eliminated our marked to market accounting for gas inventory and non-derivative contracts, was 56.3 million in fiscal 2003's second quarter, or $1.24 per diluted share.

Our consolidated gross profit increased quarter-over-quarter by about 1/2 percent, even though our consolidated utility gas throughput decreased by about 2 percent, mainly from lower consumption and warmer weather. Weather, as Bob said, was a major factor. Heating degree days as adjusted for our jurisdictions that have weather normalization were 3 percent warmer than normal and 2 percent warmer than the quarter last year.

Our non-utility operations earned 7.7 million in the second quarter of 2004, compared with loss of 5.5 million a year ago. The biggest gains were achieved in the natural gas marketing segment and were favorably affected by enhanced margins on our commercial contracts, realized storage contributions as a result of improved optimization of our own and our third-party storage assets, and improved management of our full requirement customers. Non-utility operations also benefited from a 2.9 million after-tax gain on the sale of our indirect interest in Heritage Propane Partners.

Our operation maintenance expense increased 6 percent quarter-over-quarter. Excluding the provision for doubtful accounts, our O&M expense increased 4.1 million over the same quarter last year, primarily due to increased compensation and insurance costs. Our provision for doubtful accounts declined from 5.2 million in the 2003 second quarter to 4.5 million in this quarter. Our average cost of gas this year was 6.72 cents per Mcf compared with $6.13 per Mcf for the same period last year.

Our miscellaneous income in the second quarter was 4.5 million compared with miscellaneous expense in the quarter a year ago of 1.5 million. The 6 million change primarily was attributable to a 4.9 million pre-tax gain on the sale of our interest in Heritage Propane. Miscellaneous income and expense also were affected by the absence of 2.5 million of weather insurance amortization that resulted from our cancellation of a weather insurance policy in the third quarter last year. These increases were slightly offset by $800,000 left of equity earnings from the fact that we divested our Heritage Propane interest in January this year.

Now turning to the first six months of 2004. Atmos Energy had net income of 87.8 million compared with a net income of 74.3 million for the first half of fiscal 2003, or an increase of 18 percent. Our earnings per diluted share for the six months were $1.69 compared with $1.68 in 2003. For comparison purposes, our diluted net income before the cumulative noncash charge of 7.8 million for the effect of the accounting change last year, was 82.1 million, or $1.86 per diluted share.

Consolidated gross profit increased 7.4 percent (indiscernible) period. The increase in utility gross profit primarily reflects the effects of six months contribution in fiscal 2004 versus only four months contribution in 2003 from our Mississippi Valley Gas assets, which we acquired in December a year ago. Utility gas throughput for the first six months of fiscal 2004 decreased 3 percent compared with a year ago. As in the second quarter, the lower throughput was caused by lower consumption resulting from warmer weather this winter. Weather was 4 percent warmer than normal and 6 percent warmer than the same period a year ago, as adjusted for our WNA states.

Our utility operations contributed 82 percent of net income for the six month period, and non-utility operations contributed 18 percent, a significant improvement for the loss incurred in our non-reg operations for the first six months of fiscal 2003. Net income from non-utility operations was 16. 2 million for the six months, compared with net income of 7 million for the same period last year, excluding the cumulative effect of the accounting change. The same factors that affected non-utility results for the 2004 second quarter affected its results for the six months.

Operation and maintenance expense for the six months in 2004 increased 9 percent year-over-year. Excluding a 6.1 million increase in operating costs associated with the acquired Mississippi Valley Gas asset and our provision for doubtful accounts, what we refer to as our core operating and maintenance expense increased by 4.2 million. The increase primarily was due to higher compensation and insurance costs. Our provision for doubtful accounts declined year-over-year. Our average cost of gas increased for the 2004 six months to $6.58 per Mcf from $5.70 per Mcf last year.

Miscellaneous income for the first half of fiscal 2004 was $5.7 million compared with 2.6 million for the same period last year, an increase of 3.1 million. As in the second quarter, the increase is primarily attributable to our 4.9 million pre-tax gain on the Heritage sale. 4.4 million related to the absence of weather insurance amortization resulting from the cancellation of our policy last year. But these increases were partially offset by a 3.9 million pre-tax gain recognized in the first quarter last year associated with the sales-type lease on a distributed electric generation plant that we completed, and by a reduction of 1.3 million in equity earnings as a result of the disposition of our Heritage interest.

Turning to our capital expenditures, they were (technical difficulty) 83.7 million for the six months ended March 31, 2004, compared with 72.9 million for the same period last year. The 10.8 million increase was primarily the result of capital expenditures for our recent acquisitions. For fiscal 2004, we are projecting total capital expenditures of approximately 175 million.

And now with respect to our earnings guidance for 2003 -- excuse me -- for 2004, Atmos Energy expects to earn between $1.55 and $1.60 per diluted share. This is consistent with our earlier issued guidance and is in line with recent Wall Street estimates.

Now once again, here's Bob to conclude our remarks.

Thanks, Pat. In closing, I want to emphasize there recurring factors that give us confidence in Atmos as we move forward.

The first is the strength in our non-utility operations. Our non-utility results helped overcome the lower results of our regulated utility operations which were affected because of warmer weather. And we feel that this really reinforces the fact that our strategy of complementary utility and non-utility operations is working well and will continue to work well for us as we move into the future. We have renegotiated many of our non-utility contracts to reduce our risk from volatile gas prices. We've added more than one billion cubic feet of gas storage to give us more capability to satisfy non-utility customers' requirements. We've continued to attract new customers as other gas marketers have exited the marketplace, and our non-utility results for the second quarter and the first six months reflect these improvements and the positive results that these improvements have brought about.

A second strength for us is our successful rate filings and regulatory relations. I think most of you know that Atmos is a low-cost provider of service, and so it's very difficult for us to generate additional earnings by cost reductions. We have got and we have been more proactive in our rate case filings and execution, and we've had some very significant successes in that arena.

In April, we settled with 66 of our West Texas cities for $3.2 million of rate increases. In February, we settled with the city of Lubbock for 1.525 million, and these increases followed a $2.8 million rate settlement we reached with the city of Amarillo last August, a $5.9 million semiannual adjustment to our tariff in Mississippi and a $2.5 million settlement in Kansas. And so -- in Texas now, we have settled all of our rate matters for $7.5 million, and we'll talk later about some other things that we were able to achieve. But this attention to our rate and regulatory area is allowing us to keep our returns close to our allowed (ph) return as possible and continued to generate earnings for our company.

A third strength is the modernization of our rate structure, which we are working to include weather normalization, bad debt recovery, declining use adjustments and other changes. Since the start of the fiscal year we've added weather normalization in Amarillo, Lubbock, West Texas and Kansas. We now have weather normalization or higher base rates in seven of our eight warmer weather jurisdictions, while retaining upside potential in our colder states -- namely, Colorado, Iowa, Missouri and Illinois.

In the first half of 2004 we had a benefit from WNA of 5.2 million. This compares to a deduction from profit in the same period in 2003 of 6.1 million. We are also working on tariff changes and adjustments which will shift more of the commodity charge to base rates, recover the gas portion of bad debt, mitigate pressure on our earnings from declining use, and eliminate as much regulatory lag as possible from capital expenditures on needed utility infrastructure. We also are working our collections, of course, from the angle of the field people doing turnoffs and collecting dollars. And we are working to limit our revenue deficiencies by both the push of rate increases and the pull of customer collections. And we feel very good about where both our non-utility and our utility stand, and as I said earlier, we believe that our complementary strategy is really starting to work for us. Our non-utility gas margins continued to improve and we are adding new business. Our utility operations are adding revenue through successful rate filings, while working to develop rate designs which will mitigate weather and other factors that we cannot control.

As Pat alluded to, the first six months of 2004 were warmer in our service areas than normal, yet we've achieved very good quarters and we fully expect and are confident that we will meet our earnings goal this year of $1.55 to $1.60 per diluted share. As I said at the outset, that would be our fifth year in a row of solid earnings growth, and we continue to believe as we move forward with full confidence that our model and our diversity is beginning, and has, served us very well.

So with that, I will turn it over to Susan for any questions.

That does conclude our prepared remarks. We will be happy now to answer any of your questions.

(OPERATOR INSTRUCTIONS). Gordon Howald, Calyon Securities.

I apologize -- we got on a couple of minutes late here -- if you already talked about this. Could you talk a little about your natural gas and storage situation, where you guys ended at the end of the fiscal second quarter? Essentially, assets were up pretty significantly versus where they were a year ago at this time.

Gordon, we didn't wind up withdrawing as much gas from storage as we would in a really cold winter because as we said, the first six months the weather was warmer than normal. And on our non-utility side of the business, the storage model that we run, the optimization model indicated that it would be better for us to buy flowing gas and keep some of the gas in storage. And I can let JD elaborate on that, but I think those were the two factors. It just means that we'll have that much less gas to buy in the summer months during our storage injection season. JD, any other thoughts?

Gordon, just a thought on the non-utility side, is that, again, the volatility that we saw in the winter with the fiscal disconnects between daily prices in the cash market versus the forward curve, gave us the opportunity to basically not cycle gas and capture some forward monetization values on the forward curve.

Great. Just a follow-up -- it seems like this could be a year that looks similar to a couple of years ago when gas prices were pretty high in the shoulder months as they are now, and possibly increasing as we go through the year as utilities and other operators of storage are scared to -- or a little cautious about injecting. How do you see the storage situation shaping up as we go into the end of 2004?

I think probably in the aggregate, I would think, Gordon, that absent an extremely hot summer, I think we get back to a very healthy storage number for the industry.

I would agree with that, Gordon. Because coming out of the winter, our storage was about 29 percent full. And as I mentioned a minute ago, that's unusually high for us; it means that we'll have to buy less gas this summer. And if we are typical of other LDCs, I think that would be healthy for price moderation.

(OPERATOR INSTRUCTIONS). Philip Salles, Credit Suisse First Boston.

Thank you. Bob, as you move forward with rate design and are more and more successful with weather and uncollectibles, and collecting on or offsetting the declining use, how do you balance that with the allowed earnings? Your comments on the call said that you're earning very close to the allowed rate. So I'm just thinking as you go in and have these discussions with regulators, how do you balance those rate increases and potential rate designs with the allowed earnings?

I think, first, the starting point for us is we want to grow our earnings, our net income 3 to 5 percent a year. And to do that, we need the non-utility to grow at about 8 to 10 percent a year, and then the utility has to provide the rest of that growth. We're in 12 states, and some states will give you a little bit of leeway on your return; other states are a little more precise. Really a starting point for us is we want to earn our rate of return or better in every state, every year, regardless of whether. And one of the things that -- when we started this process we had two of our 12 states that were weather-normalized. The other thing to realize is some people might say, well, you're giving away some upside; but we've done extensive studying in this matter, and our upside is only about one half of our downside. So we have a huge downside compared to what our upside might be. And we will take that -- I mean, we'll take that. We think people who invest in our company are concerned about a stable dividend that can increase year in and year out, and they are interested in stability and consistent core earnings growth. So I think the rate strategy that we have employed, we're just looking for year-on-year, 2 or 3 percent growth in the utility. And if we can get that out of the utility and then have our nonregulated operation perform the way it did this year, we are going to be at the high end of that 3 to 5 percent. And our yield is 4.5 to 5 percent, and so that will give our investors, we think, a very reasonable and adequate return.

Philip, I would just add -- this as Pat -- that one thing that doesn't really come through in all of this maybe is some of the information, the slides on page 40 that shows the pickup in pension, post-retirement and other benefit expense. Going from 2002 to 2003, those expenses increased 9 million. Going from '03 to this year, we're expecting another maybe $4 million increase. So the rate of increase is slowing down, but because of the lag we haven't really had the opportunity to go in and file for those type of expense increases; we've had to try and offset them through organic growth, cost control and other things. But I think in most jurisdictions you have a historical test period where you look back over a 12 month period, so it takes a little bit of time for these expense increases to roll into our cost structure. But I think that will fuel some rate filings for the next year or two.

I was too busy taking notes to get to page 40 of the 60-page slides. But now that you pointed me to page 40 I'll flip it to page 41. Could you just comment on the capital expenditures, specifically non-growth capital of 126 million?

Yes. And I'll ask Earl Fischer, our Senior Vice President of Utility Operations, to help me elaborate. But I would just say from a capital investing discipline, our overall objective is to limit our non-growth capital investing to the levels of depreciation in rates, which are closer to 100 million than the 126 you see here. One thing that gives us a little comfort is of that $26 million, it all is investing in jurisdictions where we get very quick recognition and rates of that investing. For example, in Texas, some legislation that was enacted last year that the acronym for it is GRIF (ph), allows us during the year to put construction work in progress in our rate base, (technical difficulty) on it and begin to depreciate it. So in that sense, even maintenance capital contributes incremental margin. We also have -- in two other states we're investing a little bit more in maintenance than depreciation; that would be Louisiana and Mississippi. In Mississippi, we get to true-up our rates every six months, and in Louisiana annually. So there isn't much lag there. But from a discipline standpoint, we work hard to try and limit our non-growth to depreciation. Earl, is there anything you would want to add?

I don't think there's anything to add except we are extremely focused on this program that we've developed over the last three to four years, making sure that we're investing where we get our quickest return. And on top of the maintenance that we do, then we want growth to pay for growth as we go into new subdivisions and install our new piping systems on that basis.

Maybe just along the same lines of capital expenditures, and maybe a good question for Bob -- to the growth capital and the comments earlier of growing the non-utility assets, or just some thoughts to the current suite of assets on the unregulated side to achieve that level of growth, and what you're looking at down the road; you added some storage assets recently. What's the thinking going forward to achieve those 8 to 10 percent growth rates on the unregulated side?

And JD can certainly complement what I had to say, but you know, we have certainly looked at storage assets, (indiscernible) helped JD serve his market, and we've looked at salt cavern storage in the market area. The other thing we have certainly looked at is we pay our pipelines a lot of money each year to move gas for us, and to see if there's some things we can do to kind of optimize our contracts and optimize our assets, and maybe keep a little of that ourselves. And you know, you may have to build some facilities to do that. Those are the kind of things that we're working on. And JD, you might want --

I think that captures it, Bob. The other thing I would say is we're going to stay focused on trying to retain our high margin business as opposed to low margin business. And really that's going to have to be a discipline around the type of customer acquisition that we want to continue to add to the portfolio.

Dan Fidell, AG Edwards.

I just wanted to ask a question about the -- with Texas all wound up, and those look like they're pretty successful outcomes out of those cases -- where do you turn to next for future rate filings? Just a quick look at my model if I'm correct says that it's been several years since you've been in Kentucky, Colorado and the like. Can you give us any kind of a plan for where you might be headed next?

We do have a rate case filed now in Virginia which is about $1 million, a little less than 1 million, and we filed for some rate design changes there as well. Another possibility is Missouri. We continue to evaluate that property, but we -- you know, you mentioned, Dan, Kentucky and Colorado, but we continued to do well in both of those states. Mississippi, we just filed a $5.9 million rate increase. As Pat mentioned, we filed every six months there. And we're looking at Georgia and Tennessee as well, after our merger and integration costs; the situation ends in December 2004. And then of course, we also file in Louisiana every year. So Mississippi and Louisiana are just six months and yearly, and Virginia we typically file every year. In Texas we are in good shape, Kentucky we are, Colorado we are, Kansas we are. So we have had some very good successes the last few years, which have really fueled our earnings. And I said not only successes in rate increases but successes in rate design changes, which have been just as important to us as the increases. So we have a laser-like focus on this, I can tell you, because this is really -- cost management is always important. But as Pat said, as these costs continue to evolve, we have got to get timely recovery. And we have a group of people in our company who have been focused on literally nothing but this -- making sure that our rate filings are timely and that we're seeking the changes as necessary.

Okay. Just to clarify, then, you have these annual filings where they're seemingly quite modest, and on the horizon we don't see any major rate cases, nothing on a large-scale at least over the near-term?

No. We just filed in Mississippi for example, the first week in May, and we are capped in -- with respect to the amount that we can request each six month period, it's limited to a 2 percent increase, and that translates to about $6 million. And that's about the size of the filing that we made, for example, in early May in Mississippi. So I wouldn't characterize that as small relative to their operation. And likewise, in Louisiana every year -- going back a couple of years ago we got $15 million of net rate relief, and so our filings have been a little bit smaller there in the last year, but still significant. And as Bob said, we're evaluating Missouri. We filed in Virginia. And then going into next year we will be looking at Georgia and Tennessee. We haven't had any rate filings there since we (indiscernible) United Cities companies in 1997, because they had just refreshed rates; they had good rate design, and it's a pretty good customer growth. And then, as a result of the acquisitions we've done since then, we have pulled off some corporate overhead off of them. So they really haven't needed to go in, but we'll look hard at that as we go into fiscal 2005 in those two jurisdictions.

(OPERATOR INSTRUCTIONS). Management, at this time we appear to have no further audio questions. Please continue.

Let me remind you that a recording of this call is available for replay on our Website at AtmosEnergy.com until August the 10th. We appreciate your interest in Atmos Energy Corporation, and thank you very much for joining us today.

Ladies and gentlemen, at this time we will conclude the conference. At this time you may now disconnect.