埃特莫斯能源 (ATO) 2004 Q3 法說會逐字稿

Welcome to the Atmos Energy Corporation third-quarter earnings 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Wednesday, August 11, 2004. I would now like to turn the conference over to Ms. Susan Kappes, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us. Our call this morning is being webcast live over the Internet; we've placed slides on our website that summarize our financial results. We will not review those slides in detail, but please -- we'll be happy to take any questions at the end of our opening remarks. If you would like to access the webcast and 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 fiscal 2004 third-quarter and 9 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 under the Private Securities Litigation Reform Act of 1995. To begin Bob Best will review the highlights of the quarter.

Thank you, Susan, and thank you, everyone, for joining us this morning. Yesterday after the market closed we reported earnings of 9 cents per diluted share for the third quarter of fiscal 2004 and that compares with breakeven results for the same quarter last year. Net income was approximately 4.8 million compared with a net loss of $200,000 last year. As most of you know, this quarter traditionally is a loss quarter for us, but this year we benefited from a $4 million and improved contribution from our utility operation which lost only $548,000. We also continued to benefit throughout the 9 month period from the strong performance of our non-utility operation which has had a very strong year and our utility continues to perform very solidly.

I'm not going to talk any further about the numbers because our Chief Financial Officer, Pat Reddy, is going to go over those numbers in some detail, but I do want to mention, of course, that the biggest event during the quarter was our announcement of our acquisition of TXU Gas. And that acquisition is an all cash transaction valued at $1.925 billion and of this total consideration we announced at the time of the acquisition that we were going to raise $500 to $600 million through equity offerings. And on July 19th we did successfully sell 9.9 million new common shares to raise approximately $236 million in net proceeds and we were very pleased with the outcome of that offering. We had tremendous interest in our stock and, of course, we will look to do another offering later in the calendar year.

On July 23, we also renewed our revolving credit facility for the next 6 months and this facility is a backup facility for our commercial paper and it terms are essentially the same as our former facility. Because of the size of the TXU acquisition, of course it will virtually double the size of our company, we were put on credit watch by the 3 rating agencies, major rating agencies. But we've been pleased as they've reviewed the acquisition and the numbers surrounding the acquisition that they've all expressed the expectation that our credit ratings will remain investment-grade which we had expected when we entered into the transaction.

And so we move forward with the TXU transaction with a lot of confidence. I'm going to close the presentation today by talking in a little bit greater depth and detail about TXU. But before I do that I'm going to turn it over to Pat Reddy who will go through the numbers with you. Pat?

Thank you, Bob, and good morning. As Bob said, we certainly had an exceptional quarter both in terms of our financial results and in terms of our transforming acquisition. Let me talk first about the 2004 third quarter. We increased our earnings by approximately 5 million quarter over quarter. Our earnings per diluted share were 9 cents for this quarter compared with breakeven results last year. Consolidated gross profit increased 13 percent quarter over quarter primarily due to an increase in utility gross profit. Our utility gas throughput increased 7 percent due to weather that was 9 percent colder than the quarter last year. And as Bob said, utility gross profit also benefited from higher rates that went into effect in Mississippi, Texas and Kansas during the past year.

Our non-utility gross profit increased 4 million quarter over quarter primarily from recognizing 4 million less in mark to market losses on open marketing and storage contracts in the current year quarter. Our operation and maintenance expense increased to approximately 50 million, a 12 percent increase quarter over quarter. Excluding the provision for doubtful accounts, our core operating and maintenance expense for the third quarter increased almost $8 million primarily due to increased labor, benefits and insurance cost. Our provision for doubtful accounts decreased by approximately $2 million due to continued strong improvement in our collection efforts year-over-year. Our average cost of gas in the utility segment in the third quarter remained high at $6.49 cents per Mcf compared with $6.23 during the prior year quarter.

Our miscellaneous income for the quarter increased about $2 million quarter over quarter. The increase was due to a 1 million pre-tax gain on the sale of our remaining interest in Heritage Propane Partners. As you recall, last January we and 3 other utilities sold the majority of our indirect interest in Heritage and this sale completed that divestiture for us. Miscellaneous income also increased due to an 800,000 gain on the sale of an office building and the absence of a $600,000 weather insurance amortization that resulted from our termination last year of a former weather insurance policy. Those increases in miscellaneous income were partially offset by an $800,000 reduction in equity earnings from our investment in Heritage Propane Partners due to the sale that I just mentioned.

Turning now to the 9 months ended June 30, our net income increased by 25 percent to almost $93 million compared with net income of approximately 74 million for the 9 months for fiscal 2003. Our earnings per diluted share for the 9 months of 2004 were $1.78, up 8 percent from the $1.65 per diluted share in 2003. You may recall that accounting rule changes required us, and many others in the industry, to revise the way we account for gas storage and transportation contracts. The prior year 9 month period was affected by a cumulative non-cash charge of almost $8 million. So excluding that cumulative affect of the accounting change, net income for the 9 months of 2003 would have been approximately 82 million and diluted earnings per share would have been $1.82.

Our consolidated gross profit for the 2004 9 months was approximately 473 million compared with 435 million last year, an increase of 9 percent. The 3 percent increase in utility gross profit was primarily the result of having a full 9 months of operating income from Mississippi Valley Gas which was only 7 months of results we had last year at this time. Utility gas throughput for the year was down slightly from that of a year ago, 209 Bcf compared with 211 Bcf because of lower consumption resulting from weather that was 5 percent warmer than the previous year and 4 percent warmer than normal as adjusted for our states with weather normalization.

Strong results in our natural gas marketing segment, primarily from the margin enhancement initiatives that we've talked to you about and were undertaken in the later half of 2003, improved contract terms and better positions management on commercial contracts also contributed to an increase in gross profit of approximately $24 million. Operation and maintenance expense for the 9 months increased 15 million year-over-year or 10 percent.

Excluding the provision for doubtful accounts and a 6 million increase related to the MVG acquisition, our core own in (ph) expense increased 12 million this year over last year due to increases in labor, benefits and insurance costs. Our provision for doubtful accounts decreased approximately $3 million in 2004 due to better collections of accounts receivable as we saw in the third-quarter results. Our average utility cost of gas for the 9 months was $6.56 per Mcf compared with $5.78 in the same period of 2003.

Our miscellaneous income for the 9 months of 2004 increased roughly 5 million year-over-year primarily due to the following factors. First, a 6 million pre tax gain on Atmos Energy's sale of our indirect interest in Heritage Propane Partners and the absence of weather insurance amortization totaled $5 million. The increases were partially offset by the absence in 2004 9 months of a 4 million pre-tax gain associated with a sales type lease of a distributed electric generation plant recognized in the first quarter of 2003 and a 2 million reduction in our 2004 period earnings from our indirect interest in Heritage Propane, again due to the sale.

Looking briefly at cash flow for the first 9 months of 2004, our operations provided cash of 359 million compared with 117 million for the same period in 2003, an increase of 242 million primarily due to improved collections of accounts receivable and other favorable changes in working capital.

Turning now to our capital expenditures, they were about 130 million for the 9 months ended June 30, 2004 compared with approximately 114 million for the same period in 2003. The $16 million increase was primarily the result of incremental capital expenditures for our recent acquisitions. Our fiscal 2004 capital expenditures are expected to range between 170 million and 175 million. For fiscal 2005 we are expecting total capital expenditures of approximately 171 million not including TXU Gas. As you can imagine, we're still evaluating the capital requirements associated with TXU Gas' operations and our final budgeted expenditures will, of course, exceed the 171 million related to our core operations.

As Bob mentioned, we were very pleased with the outcome of our equity offering in July. We sold 9.9 million common share at $24.75 a share yielding net proceeds of about 236 million before offering costs. The underwriters purchased all of the over allotment because of strong investor interest which was very gratifying to us. We will use the offerings proceeds to take out a portion of a consideration for our TXU Gas acquisition. We expect to sell equity again next quarter to raise between $300 and $350 million to apply towards the purchase price of the TXU Gas acquisition.

Bob also mentioned that we renewed our $350 million committed revolving credit facility. That facility term is a backup liquidity facility for our commercial paper program. The renewed facility has essentially the same terms as our previous facility; it has a term of only 6 months. That's because next January we'll seek a longer term facility in an increased amount reflecting the scale of our operations after the TXU Gas acquisition. Bank One is serving again as the lead agent on the unsecured facility with a number of other quality banks participating.

Turning now to our earnings guidance for 2004 and 2005. As we've said before, for 2004 we remain confident that we should earn within our stated guidance of $1.55 to $1.60 per diluted share which, as you know, is in line with the Wall Street estimates. For fiscal 2005 we project earnings in the range of $1.65 to $1.75 per diluted share assuming the completion of our acquisition of TXU Gas this fall, normal weather conditions and gas commodity prices that are not quite as volatile as those last winter. We expect that our TXU Gas acquisition should add between 5 cents and 10 cents per diluted share to our total EPS in fiscal 2005 and that's included in our guidance. And now, once again, here's Bob to wrap up.

As I said at the outset, in closing I just want to comment on the TXU Gas acquisition and at this point we are extremely pleased with how smoothly and quickly the acquisition is moving. Obviously the equity sale in July and the market's continued support for our stock price give us extreme confidence that investors see this as a great acquisition for Atmos.

Also, on the regulatory front we're moving ahead quite well. We passed a deadline for Hart-Scott-Rodino review with no inquiries from the Justice Department or the Federal Trade Commission. The 3 states in which we operate have rights to review the transaction. We've received approval from Virginia and are awaiting the final order from Iowa which we expect to receive soon and we are also continuing to work with the Missouri commission and expect that we could reach a settlement there soon. So given these positive indicators that we are receiving, we now anticipate that we could close as soon as October 1, and that certainly remains our goal.

Our integration efforts are moving forward with TXU and their employees and they've been very helpful and cooperative with us and we appreciate that. And those integration efforts are going well. We have 11 teams that are working very diligently to be prepared so that when the time of closing comes we'll be ready to move forward expeditiously.

I want to mention in closing there are really 5 things that cause us to be very excited about the TXU transaction. One is just the growth potential that we see in the future, 2 percent in the residential market and that's even after declining use. We also, of course, see a great number of commercial opportunities on the Intrastate pipeline which we think will be a very excellent asset for us. As we said when we made the transaction -- when we did the transaction, the environment here in Texas is a good environment; we have a fair regulatory commission. We certainly know the landscape -- the operating landscape, the regulatory landscape and the legislative landscape. So this was a perfect situation for us right in the state in which we're headquartered.

There are potential for cost reduction including reductions in corporate overhead so these reductions are going to help us meet our earnings targets. Pat mentioned we're going to have immediate accretion and that accretion will build as we move forward. And then the equality of the people that we're going to be -- that are going -- and the equality of the assets that are coming over. So those are really the 5 primary reasons we are so positive and excited about the TXU transaction.

In my mind it really does remake our company. It gives us a core market, a foundation market, if you will, and a market -- I can't think of very many markets that we would have wanted to -- or assets that we would have wanted to acquire. So it's a good time in our company. We're going to have a good strong earnings year this year and then we'll move into next year and look forward to our fifth consecutive good, strong year of consistent growth in our earnings. So with that I will stop and we'll turn it back and open it up for questions.

(OPERATOR INSTRUCTIONS) Paul Patterson, Glenrock Assoc.

I wanted to ask you about these recent statements that came out last week on your ratings going from about A3 to BAA3 under the current plan and ways you might be able to remedy that if you chose to. And I was wondering, "A", would you feel comfortable going to that much of a lower credit rating? And "B", have you given any thought to perhaps doing some more equity or what have you, some of the other suggestions that they had to get you to BAA2?

We have had a number of conversations with Moody's since their initial notice came out back when we announced our transaction on the 17th of June and we continue to work with them and supply projections. We are absolutely convinced that the projections that we provided support a BAA2 P2 rating. They are not built on significant synergies, opportunities or other optimistic assumptions. There are some things that are going to happen right at closing. For example, about $80 million of allocated G&A from TXU Corp. is going to go away and be replaced with much lower G&A from Atmos Energy. We think that results in about 25 million of reductions.

Also as a result of the rate case decision that came out in May of this year TXU Gas gets a pickup up about $12 million per year in their rates. And then finally, as a result of some projects that are already underway on the pipeline storage side of the business, there's about 5 million of incremental operating income that will result. So we continue to have that dialogue with Moody's. The other rating agencies I think have followed the numbers and would support a solid BBB rating, I think in that range. So we have some further discussion to do with Moody's.

It's always a possibility to consider additional equity although, as you know, it's a balance between making sure that our bondholders are comfortable with our coverages and that our equity owners are comfortable with our accretion and our earnings growth. So we continue to have those discussions between now and closing and we are optimistic that when the final ratings are issued that we will be in that BAA2 range.

Okay. So basically if I gather you right, your discussions -- you've had discussions with them so far, they put out their press release last week, but you feel that you're still in a discussion process and you still hope to have them come around to your way of thinking?

That would be our expectation.

Okay. I also wanted to sort of touch base on slide 8 with the increase in miscellaneous income. It seems like the decrease in equity earnings from the Heritage sale is likely a continuing item. But I'm not sure that the other increases to miscellaneous income would be reoccurring. Could you give us a little bit of a feel as to how much of this will be reoccurring?

Sure, Paul. You make a good point; there are some onetime games like the $1 million increase from the sale of Heritage and an 800,000 increase in the sale of an office building. On the other hand, 600,000 a year related to the weather insurance that we terminated last year will be ongoing. And I think we feel like the continued increase from the marketing company with respect to the better margins that have been negotiated on our contracts is a continuing item. We have some other items in the non-utility side of the business that for 2005 will help fill in that gap. So you're right, there are a couple items that go away, but just with growth in the basic business we think we can fill that gap.

Okay. And then the $2.4 million decrease in provision for doubtful accounts due to your robust collection efforts which you guys have discussed before, it's a little surprising insofar as we found that most gas utilities have just the opposite because of higher gas prices and what have you. Could you just give a little bit more clarity as to now that provision is accounted for? In other words, are these -- was there a change in your estimation about what doubtful accounts would do or was it the actual results of your collection efforts that gave you that $2.4 million benefit?

That's a great question, Paul; I appreciate your asking that. One thing I would say about our situation is that I think we got a head start on aggressive collections going back to the winter of 2000. A couple of things that maybe were a little unique to Atmos occurred at that time. In addition to a cold winter and high gas prices we converted to a new billing system and we had some hiccups that -- associated with that in terms of taking customer deposits. And so I think we got a very early indication of the importance of tightening up our collection practices maybe a year or two winter's ahead of some of our peer companies.

As a result of that we have been very aggressive in taking customer deposits and shutting off customers for nonpayment as early as our (indiscernible) rules allow. And I think that's something that we continue to monitor. Our reserve is set up as a percentage of commercial and residential revenues and that percentage we've continued to refine over the last 2 years. One thing that we wanted to do, Paul, coming out of last winter was to make sure that as we came into the spring and summer months that our bad debt expense didn't creep up on us and we're just not seeing that this year. So that's what gave us confidence at this point that we could lighten up a little bit on the provision for bad debts.

So it's basically a reserve reversal?

That's correct.

And going forward, obviously you guys have a better expectation about what recovery will be and it sounds like it makes sense. But we should be seeing -- we shouldn’t expect next quarter, or what have you, this kind of an increase?

I would think not.

Thank you very much.

Jeff Gildersleeve (ph), Millennium Partners.

Just following up on a little on Paul Patterson's question, the miscellaneous income. In your '05 projections should we be thinking of any sales or items flowing through in that 1.65 to 1.75 number?

No, we don't have any onetime sales planned in our numbers.

Okay. And you mentioned Missouri and a possible settlement there. When you say settlement, is there something that you have to give up in Missouri in order to make the transaction flowthrough?

Josh, the standard in Missouri is no detriment to Missouri rate payers and they have the right to approve an out-of-state acquisition but that is the standard. And so, we have been providing information to the staff. The ALJ granted our request for expedited treatment. The staff is to file their report by September 15th. We do have a settlement conference scheduled for August 19th. And we believe that we can satisfy the no detriment to Missouri rate payers without making substantial concessions.

Okay.

I think we only have about 62,000 customers in Missouri, so relative to our 1.7 million customer base it's a fairly small state in which we operate.

I see. Thirdly, if you were BAA3, how would that impact your marketing business which has been pretty successful? Does that increase your collateral requirements or how would that affect you?

No, we've worked hard to insulate our --.

It's Jeff.

I'm sorry, Jeff. The way that works is they have their own credit line with some banks in the amount of about $250 million. We also have the ability to advance about $100 million intercompany to them to support their working capital requirements which have actually been down substantially this year. If you look at our cash-flow statement there's no margin cash required at this point for that business. So really we don't see that having an impact on the marketing company going forward.

Great, thank you.

Paul Clegg, Calyon Securities.

Could you just remind us of what is in the intersegment eliminations number and gross profit and talk about -- there's a fairly substantial difference there in that number this quarter versus the year ago quarter?

I might call on Rick Alford (ph) who is our Senior VP of Finance at our unregulated company to answer that question. If you have that detail handy, Rick.

What we have in the affiliate sales is -- from the marketing company we have been handling gas supply from two of our utility divisions, the Kentucky division and the mid states divisions. That intercompany or affiliate types sales are eliminated during the consolidation process.

Okay. And there were simply fewer of them in this quarter versus the year ago quarter?

That's right. What we did actually -- we restructured our midstates trade so that we're no longer handling the commodity side of the gas supply. We are still handling the commodity side of the Kentucky supply but not the midstates.

Paul, over time what we'd like to do is get out -- where we can get out of the middle of the commodity procurement piece and bid that out directly to suppliers let them use their balance sheet and their working capital since as you know we don't make any margin off the sale of gas itself.

So we could see this being a trend then?

Over time I think that is right.

Could you just talk a little bit more about the pressure on O&M expenses and whether or not you see this trend beating or at least slowing down any time soon or conversely if you see any major events on the Horizon in late 04, 05 that could increase the pressure on O&M?

That is a good question, Paul. If you look on slide nine you can see that our pension, post-retirement and other expense did kick up about $1 million year-over-year. The good news in that is that the trend has slowed down quite a bit. The inflation on medical premiums is running about 12 percent, that is down from about 15 percent in prior years. Our pension plan is fully funded; the perverse thing is that with interest rates ticking up a little bit the discounted present value of future pension obligations comes down somewhat. So to answer your question we do see a slowdown in the rate of increase of those kinds of expenses. As you know those are the kinds of expense that are fully recoverable typically in rate cases so at the utility what we have to deal with is a little bit of lag between the time we incur those expenses and the time we can go in and seek recovery of them. But we are gratified to see a slowdown in the rate of increase.

Okay, great. Thanks, guys.

Paul Patterson.

On slide 7 the increase in natural gas marketing segment gross profit, there was an increase in unrealized gain of 6.8 million and I was wondering if you could just elaborate a little bit more on that? Is that marked to market accounting? When is that realized, just sort of elaborate a little bit more on what is actually going on there?

Rick, why don't you give some color around that number?

To answer your question directly, yes, that is mark to market accounting. Effective January of last year, we came off of EITF 98-10 and now we account for our storage assets under FAS 133. And what we're doing is we're marking our financial trades to market and our physical storage is the hedged item in a fair value hedge. So what we've had this quarter is a reversal of some negative affect we had on mark to market in the second quarter so that most of our income now is -- or for the 9 months at least -- is really cash, there's no mark to market impact to speak of.

So in terms of realization -- I mean, in other words, when we're looking at the 6.8 million, this is really actually a swing from the previous quarter, if I understand you correctly, and there isn't a substantial amount of mark to market earnings that have yet to be realized, is that correct?

That's correct, that's correct. Most of it was a swing that we had on our books at the end of the second quarter, so you're absolutely correct. That's bringing that back to 0.

That's right, Paul. One of the things that having to work under mark to market accounting, which as a company it's GAAP and we have to follow it, it's really not the way we run the business; we follow the economics of the transactions. And one of the things that we take comfort from, if you look on slide 24 is that when you look at the maturity of our contracts, the vast majority is less than 1 year and it's really all within the 1 to 3 year time frame so that kind of within an annual cycle we tend to see those mark to market effects wash out.

Okay. I also wanted to -- I'll take a closer look at that. What I also wanted to ask you about was the benefits you guys might have received from postretirement OPEB with respect to the Medicare --. How much was that and how much do you expect that to be for the -- annually speaking going forward?

Well, year-to-date that's about 1.5 million from adopting the new Medicare prescription drug program and I think that's 9 months and it's proportionate for the whole year.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) At this time we have no further questions. Please continue with any further remarks that you would like to make.

I'd just like to say that we do have a recording of this call available for replay on our website at AtmosEnergy.com until November 9th. We appreciate your interest in Atmos Energy and thank you very much for joining us.

Ladies and gentlemen, this concludes the Atmos Energy Corporation third-quarter earnings conference call. We thank you for your participation. You may now disconnect and thank you for using AT&T Teleconferencing.