埃特莫斯能源 (ATO) 2005 Q1 法說會逐字稿

Welcome to the Atmos Energy Corporation first-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 call is being recorded today Wednesday, February 9, 2005, and 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. This call is open to the general public and media but designed for our financial analysts. It is being webcast live over the Internet. We have placed slides on our website to summarize our financial results. We will not review those slides in detail, but we 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 our website at AtmosEnergy.com and click on the conference call link.

Also we plan to file the Company's form 10-Q later today. With me this morning are Bob Best, Chairman, President and CEO and Pat Reddy, Senior Vice President and CFO. There are other members of our leadership team to assist with questions as needed. 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.

With that I will turn the call over to Bob Best, who will review the highlights of our fiscal 2005 first quarter.

Thank you, Susan and I do want to thank you all for joining us this morning. Later today we are going to be holding our annual meeting here in Dallas and it is a tradition for us to hold our annual meeting in the community of our most recent addition to the Atmos family, and of course as many of you know, that is our Mid-Tex Division, which was created after we completed our TXU Gas acquisition on October 1, 2004. So it is gratifying to be able to report to our shareholders listening on this call and at our annual meeting later this morning our exceptional results in the first quarter of fiscal 2005.

Yesterday after the market closed we reported that our net income in the first quarter of fiscal 2005 more than doubled up 102 percent year-over-year despite weather that was 12 percent warmer than normal. Net income for the quarter was 59.6 million compared with 29.5 million last year. That was split 62 percent from the utility and 38 percent from our non-utility segments. Earnings per diluted share jumped 39 percent to 79 cents, from 57 cents a year ago, despite the increase of almost 24 million average diluted shares outstanding. A result of common stock issuances to help fund the TXU Gas acquisition.

We also announced our 85th consecutive cash dividend. Our indicated annual dividend rate for fiscal 2005 is $1.24 a share. I'm also pleased we are off to a great start in 2005, both financially and operationally. On October 1, 2004 our acquisition of TXU Gas was complete. We doubled the size of our Company increasing our customer count by about 1.5 million customers to 3.1 million, and added one of the state's largest intrastate gas pipeline systems. We financed the acquisition with two successful equity offerings that raised about $618 million in net proceeds, and we sold 1.4 billion of Senior Notes while maintaining our investment-grade credit ratings.

For the quarter ended December 31, our debt to capitalization rate reached 60 percent as a result of this debt issuance. It is not uncommon for us to reach a higher debt level after an acquisition. However, we have a solid track record of taking this back down to a more normal range, say 50 to 55 percent debt to capitalization within a few years after an acquisition is made. And we fully expect this trend to continue.

Investor demand for our stock as well as our bonds was especially strong, indicating the market's confidence in our transaction. Moreover our stock's trading price did not suffer. The decline that often results from an acquisition. Our stock has performed well, reaching a 52-week high of 28.56 just last week. Pat Reddy, our Chief Financial Officer will review the financial results in just a moment. But before he does I want to mention a couple of points about the quarter. We are extremely pleased with the Company's first quarter performance as we integrate the Mid-Tex and Atmos Pipeline Texas Divisions. The financial results are gratifying and also provide a glimpse of the potential these acquired operations have.

We have renamed the regulated utility operations at TXU Gas to the Mid-Tex Division. The regulated intrastate pipeline and storage operations acquired from TXU have been renamed Atmos Pipeline Texas and functionally report through our non-utility segment under the leadership of J.D. Woodward. The benefits of the acquisition are readily apparent in our financial results. Net income increased quarter-over-quarter by 30 million and over 24 million of the increase is a result of the combined operations of Mid-Tex and Atmos Pipeline Texas Divisions. The 24 million in net income equates to 32 cents per share.

Additionally, we continue to see improved performance from our non-utility operations, specifically in our natural gas marketing segment. They delivered net income of 13.3 million or 18 cents per share. Furthermore, Atmos Energy produced these solid results despite unseasonably warm weather in our service areas all across the country. Weather during the quarter was 12 percent warmer than normal as adjusted for those jurisdictions with weather normalized operations. Excluding the new Mid-Tex Division, weather was 6 percent warmer than normal and 1 percent warmer than the same period last year.

The new Mid-Tex Division does not have weather normalization, but instead they utilize a rate structure which combines a monthly customer charge and customer billing that follows a declining block rate schedule. It provides recovery of most of our fixed costs and helps to mitigate the impact on revenue from warmer than normal weather. Additionally, last month we announced our first pipeline project on the acquired intrastate pipeline system, which is now Atmos Pipeline Texas. This pipeline is a regulated asset but as I said earlier, it is managed by our non-utility group in order to expand its commercial uses. We have signed a letter of intent to joint venture with Energy Transfer Partners to jointly construct, own and operate a 45-mile, 30-inch natural gas pipeline in the high growth area just north of the Dallas-Fort Worth Metroplex. The new line will help our utility customers by improving the operating characteristics of the entire gas delivery system and by boosting pressures to meet demand in cities like Frisco, just north of Dallas and by delivering more volumes of gas into the total system for higher reliability. This pipeline also provides commercial opportunities as it will allow for badly needed new transportation capacity for Texas natural gas producers and will help to bring Texas gas to market.

The initial capacity is approximately 200 million a day. Atmos will contribute its share of capital capped at 42.5 million within two years of signing the definitive agreement. And the pipeline is expected to be operational by December 31, 2005. This expenditure is clearly eligible for GRIP recovery where it would earn the pipelines allowed rate of return. This is one of the many projects that we alluded to on our December 9th analyst call in New York, but we were unable to discuss any details at that time. The negotiations to final agreement are progressing nicely and we expect to sign a definitive agreement within four to six weeks and will share additional details with you at that time.

We also have negotiations with other parties to add compression to our pipeline system to increase throughput by approximately 250 million MMbtu per day. Now Pat Reddy our Chief Financial Officer will review the complete financial results for the quarter, and afterwards I will come back for some closing comments.

Thanks, Bob, and good morning. As Bob said, the quarter was exceptional and I am also pleased with the results. I will also echo Bob at how gratified we are to see the contributions from Mid-Tex and our Atmos Texas Pipeline division. It is a tribute to the diligence of our employees in ensuring business continuity as they transferred to Atmos on the first day of our new fiscal year. Our average number of diluted shares outstanding increased by 24 million quarter-over-quarter as a result of issuing equity to partially funded TXU Gas acquisition. For the first quarter of fiscal 2005 Atmos Energy delivered 59.6 million of net income compared to net income of 29.5 million in the same period a year ago, an increase of 102 percent.

Our earnings per diluted share were 79 cents compared with 57 cents per diluted share in the same period a year ago, an increase of 39 percent. Our consolidated gross profit for the first quarter reached 324 million compared to 159 million in the same period a year ago, an increase of 104 percent. Our utility gross profit was up 119 million or 86 percent for the prior year period, driven by the positive results of our new Mid-Tex Division which contributes gross profit of 114 million.

Rate increases in our Mississippi and West Texas jurisdictions also contributed to the increase in utility gross profit by about 5 million. Gas throughput at the Mid-Tex Division was about 52 Bcf. In our historical fixed utility division gas throughput was about 67 Bcf down slightly from the 68 Bcf in the prior year period.

Natural gas marketing's gross profit was up 9 million or 53 percent from the prior year period, primarily due to an unrealized mark to market gain on the company storage book, coupled with an increase in natural gas storage volumes quarter-over-quarter. The new pipeline storage reporting segment combines the pipeline and storage operations of our new Atmos Pipeline Texas Division and our former Atmos Pipeline and Storage LLC for reporting purposes. Gross profit was about 40 million in fiscal 2005 first quarter, an increase of 37 million from the prior year period.

Approximately 35 million of this increase is attributable to the nearly 73 Bcf of incremental pipeline transportation volumes from Atmos Pipeline Texas. Throughout the course of the acquisition process we discussed commercial opportunities to create value for the enterprise. We have begun to unlock the value of this Atmos Pipeline Texas asset as demonstrated by the high-volume transported on the pipeline during the period. I will remind you that about 60 percent of the revenue from natural gas transported on our pipeline is tariff based, meaning the Mid-Tex utility and our industrial customers rates are approved by the Texas Railroad Commission. The remaining 40 percent of the revenue stream on this pipeline derives from competitive, market-based rates.

Our operation and maintenance expense for the first quarter was 113 million compared with 57 million in the same period a year ago, an increase of 98 percent. As you would expect, the bulk of this increase was due to 40 million of O&M expense from our Mid-Tex Division and almost 9 million from Atmos Pipeline Texas. Our provision for doubtful accounts increased about 4 million due to the Mid-Tex Division. I will also remind you that we are operating under the agreement with Cap Gemini to collect our accounts receivable. We anticipate that the collections process will dramatically improve once these operations are brought in-house and operate on the Atmos platform beginning later this year.

Depreciation and amortization expense in the quarter was 44 million compared to 23 million in the same period a year ago, an increase of 91 percent, about 20 million of the D&A increase is due to our Mid-Tex and Atmos Pipeline Texas Divisions. Taxes other than income taxes in the quarter when 39 million compared to 15 million in the same period a year ago, an increase of 160 percent. The increase is due to incremental franchise, payroll and property taxes associated with our new Texas divisions. Interest charges for the quarter were 32 million compared to 17 million the same period a year ago, an increase of 88 percent. Interest expense is up due to increased debt levels after financing our TXU Gas acquisition.

Finally miscellaneous income was about $400,000 compared to 1.2 million in the same period a year ago. This decrease is primarily due to the assets of equity earnings from the Heritage Propane Partnership interest; this investment was sold in January 2004. Looking at our cash flow for the quarter we generated operating cash flow of 68 million compared to about 11 million in the same period a year ago. The increase was primarily a result of increased net income from Mid-Tex and Atmos Pipeline Texas operations, more effective management of our working capital, partially offset by lower-than-expected utility sales volumes due to warmer weather and cash flow was negatively affected by a 14 percent increase in the average cost of gas, and the timing of collecting this gas costs from our customers through our rates.

Our capital expenditures for the quarter were 67 million compared to 45 million in the same period a year ago. The increase primarily reflects spending at Mid-Tex of 23 million, and at Atmos Pipeline Texas of a little more than a million dollars. We continue to pay very close attention to our capital investing, not just in the aggregate, but distinguishing between gross capital and maintenance capital. Our objective is to limit our nongrowth capital spending to the level of depreciation expense that we recover in rates.

For fiscal 2005 we are continuing to project total capital expenditures of 340 to 350 million with 245 to 250 million in nongrowth capital, gross CapEx should be between 95 and 100 million.

Now I will turn to our earnings guidance for 2005. Although feeling a little bit exuberant based on the first quarter's results, we are maintaining our 2005 fiscal year earnings per share estimate of $1.65 to $1.75 and let me explain why. Even though the results of the utility were strong, they were still about 15 percent below our budget which assumes normal weather. Going into our second quarter we have already experienced weather that is 7 percent warmer than normal in the month of January across our system. But our actual January weather was only 74 percent of normal in our Mid-Tex Division and 65 percent of normal in Louisiana. We don't have weather normalized rates in either of these jurisdictions.

Additionally, in the first quarter in our natural gas marketing segment we have essentially realized our annual budgeted income in our storage book of business due to favorable mark to market treatment. As of December 31, 2004 based on Atmos Energy Marketing's derivatives position and inventory withdrawal schedule the forecasted gross profit margin was approximately $15 million, about 13 million of net, unrealized gains were recorded in the first quarter, leaving about 2 million of projected future gross profit margin to be realized.

We continue to be optimistic that the first quarter results are indicative of the opportunities we envision during our acquisition due diligence. But as you know, the first two quarters of our fiscal year include the primary heating season months thereby producing the majority of our earnings for the year. In fact, our January net income budget represents 36 percent of our projected annual net income. So I look forward to reporting on our continued progress when we review next quarter's earnings, and we can revisit our earnings guidance at that time. Now once again here is Bob.

Thanks, Pat, and I will just make a few closing comments and then we will be happy to take any questions that anyone on the call has. As we move forward following the TXU Gas acquisition, we are focused on strategically spending our growth capital to improve cash flow and maximize our returns. We are going to continue to focus on performance in our historic six divisions, and going to -- we are working hard on a model which would advocate more aggressive rate design to address weather declining use and other factors, which impact our earnings.

In December, we also made our first GRIP filing in Texas, the Gas Reliability Infrastructure Program allows for prompt recovery of capital investments made to maintain our system or serve new customers. And this filing was for capital expense which TXU Gas incurred in calendar 2003. We just paid the filing with supported increase in rates of about 8.5 million, and anticipate implementation of these new rates during the first half of fiscal 2005.

On February 1 we started to rebrand the Atmos Energy logo on employees' facilities and 1.5 million customer bills. In April we will begin operating our own call center to serve these customers. We continue to be encouraged about growing our earnings at our stated goal of 3 to 6 percent a year in a very predictable and consistent fashion. With this earnings growth coupled with our dividend yield of 4.5 to 5 percent, we continue to believe that we will be able to enhance value to our shareholders and create a very nice return for those who invest and have confidence in us. So with that, I will turn it back to Susan.

Thank you, Bob, and with that I will turn it over to John our operator who will queue up the questions for us.

(OPERATOR INSTRUCTIONS) Gordon Howald with Natexis.

Pat, you may have touched on this already, but could you discuss more specifically the cost-saving goals that you have associated TXU Gas for 2005, maybe how the call center in Waco has that contributed yet, and maybe when we can expect to see some demonstrated results from the cost-saving side?

That is a great question. Thank you. As you may recall from our December analyst conference, we indicated that in this fiscal year we were anticipating reductions primarily in G&A allocations of about $25 million by bringing TXU Gas on to our platform. And we feel very comfortable with that this year. We did see that O&M expense at the distribution company was slightly below budget in the first quarter, as well as at the pipeline. So we feel like we are on track to realize those projected savings. And then we talked about the fact that because much of our services have been outsourced to Cap Gemini the call center, billing, accounting and so forth, that until that arrangement was concluded as of October first that there were further savings that we wouldn't be able to realize until our next fiscal year.

Fortunately we were able to negotiate our ability to step into their lease at the call center in Waco, and we are estimating that that should reduce our fiscal 2005 O&M expense by about $2 million. We believe on a full-year basis that by in sourcing those services our O&M expense could be about $6 million less than has been our rate this year. But again as we discussed in December, those savings can't be realized until we bring those services back in-house. So for this year I think we feel comfortable that we are going to realize those $25 million of reduced expenses this fiscal year.

Then work more into 2006?

Correct.

If I could one more quick question. You mentioned that you had set aside 95 to $100 million for expansion CapEx in '05. Which I guess is about what you were looking for what you had said previously. You weren't required to pay your half of the first expansion then if you transfer up front. Does that imply that there are incremental expansion opportunities at TXU Gas or at the pipeline side in 2005 that we can anticipate maybe beyond what was discussed previously?

I might ask J.D. Woodward to comment on that because J.D. has kind of been our point person in negotiating with various parties.

Good morning, Gordon. Yes, we got a couple of things that we are negotiating now, Gordon, in terms of -- Bob's made a comment about projects we are involved in about 250,000 a day. Both those projects, there's two of them, will require capital. But those negotiations right now are very fluid. But basically our capital will be compression.

And those would be qualified for GRIP in Texas?

That's correct.

Excellent. I think that answered the question. Thank you very much. Appreciate it, guys.

Stacey Sau (ph) with W. H. Reeds & Co.

Two questions. One, what is the actual shares outstanding at the end of the quarter, not the average?

It is a little over 79 million. Let me to get that for you, Stacey.

It is the 79,348,039 shares.

Okay. And can you just go over some more of the comment about you had some additional mark to market gains on storage in the quarter. How much was that, and does that get, if they were unrealized, but your unrealized mark to market gains do they unwind later in the year?

We will ask Rick Allbert (ph) to comment on that. Rick.

Thank you Pat. As noted in the release we had $13.3 million of net income from the natural gas marketing segment this year compared to $7.5 million last year, or $5.8 million change. Unrealized income from our storage mark increase by approximately $5.1 to $5.2 million. So you can see that is the majority of the change. As I believe Pat mentioned earlier, we did accelerate the income from our storage operations into the first quarter this year, so based on the market, the end of the quarters in the remainder of the year in our storage volumes, we could see some of that mark turnaround depending on prices. Or barring that and cycling our storage we will see all of that or a majority of that turn into cash sometime this year.

Okay. So you accelerate the recovery of the anticipated earnings from the year into this quarter, so.

It wasn't a decision that we have made to accelerate earnings to. The earnings were accelerated in the first quarter based on the mark to market impact of the changing prices.

Okay but I guess for modeling purpose I'm trying to figure out that --.

Based on that we were forecasting about 15 million of gross profit in total. We took 13 million in the quarter leaving about 2 million for the balance of the year and based on what Rick was saying, that if nothing changes in our assumptions and if we withdraw storage just as we have planned and then we would expect to realize that additional 2 million. But we are always looking at our storage book of business to optimize based on changes in prices. So that 2 million could also change as we go through the second and third quarter.

Okay, great. Thank you.

Paul Patterson with Glenrock Associates.

Just wanted to follow up on Stacey's question here on mark to market because it's a little confusing looking here at the slides. There was an $8.5 million increase in unrealized mark to market gains on storage financial. It looks like that was part of the number. There also apparently appears on slide 6 to be a 2.3 million I guess at the utility, with respect to mark -- but what was just in general I guess the question, what is the general total mark to market unrealized gain that you guys got in this quarter?

From our storage operation we had an unrealized gain of $12.5 million in the first quarter of '05 compared to 4.1 in the first quarter of last year. That is the $8.5 million pretax increase, and after I tax effected that that is approximately 5.1 or $5.2 million from the storage operation. There was a little more unrealized loss, I believe in the first quarter from our marketing operation, and that is primarily around our accounting treatment for what we refer to as our fixed-price book that we changed our accounting for that on April first of 2004 from a care value hedge to a cash flow hedge. So what we see in '05 is that 1.8 million or 1.9 million pretax coming out of the upfront marked on the fixed price (multiple speakers).

Okay, so 8.5 versus minus 1.8, right?

Minus 1.8 in the first quarter of '05 I believe on the marketing side. And we did have an unrealized gain last year of -- I don't have the number in front of me, but it was not a large number.

Okay, but I mean, and then there is a $2.3 million increase due to mark to market gains on hedged volumes, is that -- I am getting the idea that this is from -- is that at the pipeline, I guess? Is that --.

We do have a $2.3 million unrealized gain on our Louisiana pipeline operations. That is storage on our book.

Okay. So -- okay, so if you add all those up pretty much you get an idea its somewhere in the neighborhood of $9 million, is that right, on a pretax basis?

That's correct.

And then you also mentioned that $3.2 million increase in realized storage contribution due to higher spreads and restructuring of certain asset management transactions. What was the nature of the restructuring of certain asset management transactions, and how much was that?

One of the transactions that we had with our affiliate in Tennessee required us to in effect pay a negative index price to the utility for all their gas (indiscernible). We've been able to unwind that and actually now is not pay any negative index price. And so that has turned around pretty significantly. I guess our risk capital investment in that asset (multiple speakers).

So you do not have to provide gas at a discount to index anymore?

Right, right. So we've been able to turn that around, and I believe Rick, that's about $1.5 million.

I believe that's right.

On an annual basis, Paul.

$4.5 million?

On an annual basis. Yes.

On an annual basis pretax; and what do you have to do, do you have to pay these guys, is that how that was restructured? Or how did you -- when you say you unwound it, was it just simply terminated or --

It terminated by its terms on the contract, and then the Company elected to bid its gas supply. And its asset management structures is two independent transactions. And we elected not to bid on the gas supply but we elected to bid on the asset management structure, we were successful in getting that.

Okay, but you guys show a lot of data on weather and what have you and I will admit I haven't read all of it, but I just wonder is there a quick and short and I am sorry if I missed it and you mentioned in your prepared remarks, but what was the weather impact again for the quarter? In cents per share?

I think thinking about it in terms of net income versus what we were expecting from the utility sector, we were down about 7.7 million of net income versus what we had budgeted based on normal weather.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) We have no further questions at this time. Please continue.

Let me remind you that a recording of this call is available for replay on our website at AtmosEnergy.com through May 9 of '05. Also we will be at the AGA Financial Forum from May 1 through 3 in New Orleans, and we hope to see you all there. We appreciate your interest in Atmos Energy Corporation, and thank you very much for joining us.