埃特莫斯能源 (ATO) 2005 Q2 法說會逐字稿

Welcome to the Atmos Energy second-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, Tuesday, May 10, 2005. I would now like to turn this call 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 financial analysts. It's being web cast 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 Web cast 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 today 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 all to Bob Best who will review the highlights of our fiscal 2005 second-quarter and the first six months of fiscal '05.

Thank you, Susan, and good morning everyone. Thank you for joining us this morning. It was good to see many of you last week at the AGA Financial Forum and we appreciate your interest in Atmos Energy. As Susan mentioned, Pat Reddy, our Chief Financial Officer, will review the financial results in just a moment. Before he does I want to talk about some of the highlights of this quarter. Yesterday after the market closed we reported that net income in the second quarter of fiscal 2005 increased 52% and net income for the first six months of fiscal 2005 increased 69%, despite warm weather in some of our service areas. Net income for the quarter was 85 -- 88.5 million compared with 58.3 million last year. Current quarter income was split 83% from the utility and 17% from our nonutility segments. Net income for the six months ended reached 148.1 million with 75% from the utility and 25% from our nonutility segments.

Earnings per diluted share were $1.11 for the quarter as compared with $1.12 a year-ago. For the first six months diluted earnings were a $1.90 per share as compared to $1.69 for the prior six-month period. Both the second-quarter and the first six months of fiscal 2004 include the impact of a onetime after-tax gain on the sale of our indirect interest in Heritage Propane of 2.9 million or $0.05 per diluted share. Yesterday our Board of Directors declared our 86th consecutive cash dividend. Our indicated annual dividend rate for fiscal 2005 is $1.24 a share.

Atmos Energy produced these solid results despite unseasonably warm weather in our service areas across the country. As we mentioned in the press release net income in the current quarter was adversely affected by $0.15 per diluted share because of weather that was 10% warmer than normal, as adjusted for jurisdictions with weather normalized rates. For the six-months net income was negatively affected by $0.22 per share due to weather that was 11% warmer than normal, as adjusted.

Noticeably weather has impacted our financial results in our two largest jurisdictions which do not have weather normalization provisions in their rate structure, Mid-Tex, the old TXU Gas, and Louisiana. These two jurisdictions combined have about 1.8 million customers or 58% of our total customer base. When we acquired TXU Gas we knew that weather normalization had been replaced with a declining block rate structure as agreed to in their last rate case, and we wanted to see how that rate design would perform during this heating season before we drew any conclusions.

Going forward it is certainly our goal to seek rate design that decouples the recovery of our approved margins from customer usage patterns due to weather, declining use and energy conservation. We will also seek to recover the gas cost portion of bad debt expense. Other LDCs across the country have been successful with similar rate designs, and we will be visiting our commissions as we move forward with these rate design strategies. Despite the financial impact warmer than normal weather caused, there are many highlights that I want to briefly share with you before Pat discusses the financial results in detail.

As you know what we acquired TXU Gas we financed the transaction with two successful equity offerings that raised about 618 million in net proceeds, and we sold 1.4 billion of the senior notes. As an acquitative (ph) company we routinely incur higher debt levels, but we also have a solid track record of bringing debt to total capitalization back down within our comfort zone of 50 to 55%. For the six-months ended March 31, our debt to capitalization ratio was 58.1% as compared to 59.8% at December 31. We continue to be pleased with the acquisition and integration of the Mid-Tex and Atmos Pipeline-Texas Divisions. Combined, these new divisions delivered about 29 million of net income or $0.37 per share in the quarter, and almost 54 million of net income or $0.69 per share in the first six months of fiscal 2005.

Additionally we continue to see improved performance from our natural gas marketing segment. This segment delivered net income of almost 4 million or $0.05 per share in the quarter, and 17 million or $0.22 per share in the first six months of fiscal 2005. During the year we have commented on the opportunities we see on the Atmos Pipeline-Texas. Let me update you on the projects that are currently being pursued.

We announced our Energy Transfer Partners deal last quarter. We signed a letter of intent 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. This solves deliverability issues for the utility and creates commercial opportunities for the pipeline. We are very close to executing the definitive construction and operating agreement. We are currently acquiring rights to (indiscernible) finalizing a design of the pipeline system and have placed the order with the supplier for the actual pipe. From the commercial perspective, the parties continue to negotiate with interested third party shippers. Atmos will contribute its share of capital, capped at 42.5 million within two years of signing a definitive agreement.

The pipeline is expected to be operational in fiscal 2006. The expenditure is eligible for group recovery where it could earn the pipeline's allowed rate of return on rate base. We continue to see robust demand for system capacity associated with new production being developed near our system, primarily the Barnett Shale area around Ft. Worth and the Bossier Sands area in East Texas. As a result we're also witnessing a healthy expansion in margin. Creating increased capacity allows us to secure new supplies that are available to serve our utility customer needs and create new margins by moving the gas to third party customers. This allows us to increase available capacity to this premium market we have -- in order to increase available capacity to this premium market we have to secure additional compression facilities which will require the use of capital.

Creating increased capacity allows us to secure new supplies that are available to serve our utility customer needs and create new margins by moving the gas to third party customers. We have signed a letter of intent with a third party to move 100,000 a day and expect a definitive agreement any day now. Also we are determining the need for additional Katy deliverability and we have sent out requests to producers and shippers and have received interest in a 50 million a day increase in capacity available to our Katy hub. Now Pat Reddy will review our financial results and then I will come back to summarize and then we will open the floor up for any questions that you all may have. Pat.

Thank you Bob. Good morning. As Bob said we had a successful quarter and a first six months, and we continue to be very pleased with the contributions from our Mid-Tex and Atmos Pipeline Texas division. Turning now to the results of the second-quarter, our average number of diluted shares outstanding increased by 27.5 million quarter-over-quarter as a result of issuing equity to help fund the TXU Gas acquisition. For the second quarter of fiscal 2005 Atmos Energy earned 88.5 million of net income compared with 58.3 million in the same period a year-ago, or an increase of 52%. Earnings per diluted share were $1.11 compared with $1.12 per diluted share in the same period a year-ago, however as Bob mentioned last year's earnings per share were positively impacted to the extent of $0.05 from the gain on the sale of our indirect interest in Heritage Propane Partners.

Consolidated gross profit for the second-quarter reached 379 million, compared with 206 million in the same period a year-ago, or an increase of 84%. Utility gross profit was 323 million, up 134 million or 71% from the prior year period, driven by the positive results of our new Mid-Tex division which delivered gross profit of 131 million and 70 Bcf in incremental throughput. Rate increases in our West Texas and Mississippi jurisdictions, which were not in effect during last year's second-quarter, also contributed to the increase in utility gross profit by about 4.4 million. Excluding the Mid-Tex Division, utility throughput was about 96 Bcf, down from 98 Bcf in the prior year period or a 2% decrease.

Natural gas marketing gross profit was 11.2 million, basically flat compared to the prior year period primarily due to a 13.6 million unfavorable mark to market effect produced by an unfavorable move during the quarter in the forward indices that we use to value the storage financial instrument, as compared to the prior year period. Since Atmos Energy marketing has 5.2 Bcf more gas in storage over last year's second-quarter, the effect of the move was amplified. Additionally we have acquired 8.4 Bcf of incremental storage as of April, and to the extent we fill this storage we can expect increased volatility in our margins going forward. Of course this reflects a snapshot of market value at a particular point in time, and when this gas is cycled and withdrawn from storage and the financial hedges are settled as planned, these marks are eliminated. However, at the end of the fiscal year our storage book could add some unrealized gains or losses to our storage margins.

In an effort to provide more transparency in this business, we now quantify the embedded value of our storage book in our 10-Q and also in the appendix to our slide presentation today. We endeavor to illustrate the difference between economic value which is the measure that we use to manage the business, and the GAAP reported value at the end of the reporting period. For example, at March 31, 2005, the economic value of volumes held in storage was 8 million. That is essentially the difference between our weighted average storage price minus the weighted average cost of gas. The GAAP value recorded in unrealized trading margin was an unrealized loss of 9 million, yielding an embedded storage trading margin of a positive 17 million. The recognition of this 17 million in earnings is expected to straddle two fiscal years and is very dependent on executing our planned withdrawal and injection schedules from which these values are derived.

The new pipeline and storage reporting segment combines the pipeline storage operations of the Atmos Pipeline-Texas Division and Atmos Pipeline Storage LLC for reporting purposes. Gross profit was roughly 44 million in the second-quarter or an increase of about 40 million from the prior year period. About 41 million of this increase is attributable to the almost 84 Bcf of incremental pipeline transportation volumes from the acquisition of Atmos Pipeline-Texas. Throughout the course of the acquisition we have discussed commercial opportunities to create value for the enterprise. We have begun to realize the value of our Atmos Pipeline-Texas asset as demonstrated by the high-volumes transported on the pipeline during the period.

Consolidated operation and maintenance expense for the second-quarter was 106 million, up 47 million from the same period a year-ago. As you would conclude, the bulk of this increase was due to 51 million of incremental O&M expense from the new Mid-Tex and Atmos Pipeline divisions, offset by a decrease of 2.4 million in our historical Atmos Utility division, as they continue to focus on cost control measures. Our provision for doubtful accounts decreased by 1.7 million to 2.8 million, compared with 4.5 million a year-ago. Our aggressive collection efforts and lower overall consumption due to milder than normal winter weather, drove that decrease.

Depreciation and amortization expense in taxes other than income taxes, have increased quarter-over-quarter due to the addition of the operations of Mid-Tex and the Atmos Pipeline divisions. Interest charges for the quarter increased 17 million from a year-ago due to increased levels after financing the TXU Gas acquisition. Miscellaneous income was $1 million compared with 4.5 million in the same period a year-ago. We have already discussed that there was a 4.9 million non-recurring pre-tax gain from the sale of our Heritage Propane interest in January of last year.

Now let me briefly discuss the results for the first six months of our fiscal year. Our average number of diluted shares outstanding increased by 25.7 million over the prior year period, due again to the issuing of equity to help fund our TXU Gas acquisition. For the six months ended March 31, 2005, we delivered strong net income of 148 million compared with net income of 88 million for the first half of fiscal 2004, an increase of 69%. Earnings per diluted share for the six months were $1.90 compared with $1.69 and the prior year, or an increase of 12%.

Our consolidated gross profit climbed to 703 million compared with 365 million, or an increase of 93% in the prior year. Utility gross profit rose to 580 million, up 252 million for the prior six-month period. This substantial increase is due to 245 million of gross profit contribution from the Mid-Tex Division. Gas throughput at Mid-Tex was about 122 Bcf. In our historical fixed utility division, gas throughput was about 157 Bcf, down from 166 Bcf in the prior year period. As in the second-quarter, the lower throughput was caused by lower consumption resulting from warmer weather during our heating season. Weather was 11% warmer than normal and 7% warmer than the same period a year-ago across our system as adjusted for WNA. As Bob mentioned this negatively affected net income by about 17 million or $0.22 per diluted share for the six-month period.

Utility operations contributed 75% of net income and our nonutility operations contributed the other 25%. Our natural gas marketing gross profit was 38 million, up 9 million for the same period last year primarily due to higher physical storage volumes and more favorable arbitrage spreads from increased market volatility, offset in part by a negative move in the indices used to value our financial derivatives on the storage book, coupled with pipeline Bcf of additional storage year-over-year.

Our pipeline and storage gross profit was almost 84 million, up 77 million from a year-ago as a result of the incremental pipeline transport volumes from our new Atmos Pipeline-Texas Division. Consolidated operation and maintenance expense for the first six-months was 219 million, up 103 million from a year-ago, primarily due to adding the Mid-Tex and Atmos Pipeline Divisions. Excluding these new divisions, O&M expense was essentially flat.

Bad debt expenses increased overall with the addition of our Mid-Tex operations, but our budgeted expense as a percentage of revenues of 8/10 of 1% has turned out to be too pessimistic. Through March 31st, we have recorded bad debt expense that equates to 0.45 of 1% of residential and commercial revenues. Depreciation and amortization expense, taxes other than income, and interest charges have all increased period over period as a result of the acquisition.

Our miscellaneous income decreased by about 4 million from a year-ago again mainly due to the pre-tax propane gain last year. Looking at cash flow for the first six months, we generated strong operating cash of 400 million, up 109 million from the prior year period. As a result, the Company had 247 million of cash on the balance sheet with no short-term debt at March 31st. Results were helped by increased net income from our new divisions of almost 54 million, the favorable timing of payables, more effective management of working capital, partially offset by higher volumes of natural gas held in inventory and a 9% higher utility average cost of gas, the timing of cash collections and gas purchases placed into rates, and overall lower-than-expected utility sales volumes due to warmer weather.

Capital expenditures for the first six months were 138 million, compared to 84 million in the same period a year-ago. The increase primarily reflects spending at Mid-Tex of 46 million and at Atmos Pipeline Texas of about 8 million. We continue to pay close attention to our capital spending, not just in the aggregate, but distinguishing between gross capital and maintenance capital. As you know our objective is to limit our nongross capital spending to the level of depreciation expense that we recover in rates. For fiscal 2005 we're projecting total capital expenditures of between 340 and $350 million.

Turning now to our earnings guidance for the remainder of fiscal 2005, we are expecting earnings per diluted share to be at the lower end of our previously announced range of $1.65 to $1.75, primarily due to the warmer weather across our service territory during our winter heating season. Among other things our original guidance was based on 30 year normal weather which we certainly did not experience this year. As mentioned earlier, this negatively impacted earnings per share our $0.22 for the current six-month period. We do believe however that by continuing to control our O&M expense, we can shave approximately 15 million from our original budget and also reduce our working capital requirements.

O&M at Mid-Tex and Atmos Pipeline-Texas are continuing to run lower than expected and we had experienced lower outsourcing costs with Cap Gemini than we originally had expected. Since we accelerated our plans to bring the Waco Call Center in-house on April 1st, we expect to reduce our call center expenses by $2 million for the remainder of this fiscal year and by 6 million for fiscal 2006. We have a every strong complementary nonutility business which continues to perform very well. We project operating income to be in the 340 million to $350 million range with the regulated utilities contributing 71% of that income, the regulated pipeline contributing 16%, and the nonregulated business segment contributing 13%. Overall 87% of our operating income is expected to come from regulated operations this year.

The mix has changed slightly since we first announced the acquisition, but that is due to the better than projected results from our nonutility marketing segment offset in part by the less than expected results due to weather from the utility segment. We continue to be very optimistic about the opportunities we envision during our TXU Gas acquisition due diligence. I look forward to discussing further progress during our next earnings conference call. For now though, once again here is Bob.

Thanks, Pat. I'm just going to summarize, and then we'll open the floor for questions. Our overall goals remain much the same as we previously articulated. We want to achieve earnings growth year-in and year-out of 3% to 6% a year. We want to keep our dividend yield at between 4.5 and 5%. We want to continue to pay down debt. As I said earlier, eventually we want to get back into the 50, 55% debt range where we have historically been. Our integration with TXU Gas has gone extremely well, maybe even better than we had envisioned. A lot of this is due to the tremendous attitude of the people who have come over to us from TXU Gas and the leadership that they have shown. When we did the acquisition, we modeled the costs and those costs have come in better this year than we had modeled. At our utility we need to continue to work on rate design. Previously before the acquisition we pretty mitigated weather in all of our jurisdictions except Louisiana. But now we've got to work that not only in Louisiana but Mid-Tex as well, and we will do that.

We need to continue to manage our spending and our costs and do so in a very strategic way. Our interstate pipeline has a number of commercial growth projects on the board. We've announced one. We are poised to announce several more in the coming months. What's going on in the Ft. Worth basin obviously with gas prices remaining high and drilling there probably exceeding even the normal original expectations, has only increased the opportunities for us and for our pipeline. In our nonutility business we need to continue to grow our marketing business as we have done in the past. And we also are selectively acquiring additional storage to help us serve customers and take advantage of price volatility as it occurs.

We have a strong operation. When you combine our nonutility with our utility and our interstate pipeline, we see tremendous growth potential that we saw, probably better than we saw when we did the TXU Gas acquisition. We remain very, very optimistic about the long-term growth potential and the assets that we have, and the mix of assets that we have in Atmos Energy. With that, I will close and we will open it -- turn it back to the operator and we'll open it up for questions.

(OPERATOR INSTRUCTIONS) Paul Patterson with Glenrock Associates.

Good morning. On slide seven, I'm sorry if I missed this, I might have just missed this. But the $12.3 million increase in realized storage contributions due to improved profitability from restructuring certain asset management transactions, could you elaborate a little bit on that? In looking at the six-month number, which I think is in slide 16 with respect to the gas marketing business, I didn't see -- I wasn't clear what that number would have been for the six-months?

We've got Rick Alford (ph) who is the Vice President and Controller of our nonutility business. And I think, Rick, we will let you handle that.

Paul, you're looking at second quarter slide versus the year-to-date slide?

Yes, I'm looking at the second quarter slide. My first question is, that $12.3 million increase from restructuring certain asset management transactions, I wasn't clear exactly what those were, what that was all about. If you could just elaborate a little bit on that. And then what is the number for the six-months, I guess?

Your first question, Paul, the $12.3 million, although we did restructure one of our asset management transactions with one of our utility segments, which originally had an index minus deal. This $12.3 million really occurred because we cycled some of our gas in the second quarter. We had some embedded value. And remember, the embedded value that we talked about earlier, that was actually turning that embedded value into cash during the second quarter. So again although this restructuring transaction did happen, the $12.3 million was more applicable to cycling some gas in the quarter.

How much was the restructuring charge -- obviously the restructuring gain or whatever it was?

It actually wasn't a restructuring charge. But when we say restructuring, what we did, as I mentioned we had an index minus deal with one of our utility customers, one of our affiliates, and that ended last year. There was an index minus deal which I think when you look it at the end of the day it actually affected us by about $1 million. It wasn't really that significant.

That is non-recurring or should we expect that to recur?

No, that will not recur, we are on even keel now. So as we go forward we are selling that gas in an index plus, and we paid for that asset management transaction upfront.

Anything for the six-months? Would that be about the same or would it still be at $1 million?

It would be about that $1 million, maybe about 1.5 million because as I recall we restructured that in April 1st of last year.

Thanks, guys.

Tom Hamlin with Wachovia Securities.

Good morning. I'm looking at your earnings for the rest of the year. At six-months, you're at a $1.90 per share and your guidance is the lower end of the $1.65 to $1.75 range. Last year you had, and this was obviously before the Mid-Tex, you had positive earnings in your third quarter and negative in the fourth, although the amount you had to cycle down was a lot less than you have here. Can you give me some sense as to how you see this slide of $0.35 or more going from breaking down between the two quarters?

Looking across the whole six-month period, we are at $1.90 but if you project out the weighted average number of shares continued to increase during the next six-months, so that $1.90 actually comes down to about $1.87. We have a budgeted loss in the last six-months of $0.24 which would take us to $1.63. We are looking to capture at least $0.02 per share in O&M savings which gets you to $1.65. So that is kind of at the low end, I guess, of the range, what we could expect to do just with some additional modest O&M savings. And obviously, given the warm weather that we had, we intend to try to do better than that in the next six-months. It is basically looking at a budget, a $0.24 loss.

Last year you had positive results and then negative results in the fourth quarter. Do you see the same kind of thing happening or do you see negative in both quarters weighted?

We see negative results in both quarters now that we have the Mid-Tex operation, a lot larger utility segment than we did last year. And their pattern tends to be, as we have looked at it, a negative result, flat to negative in the third quarter and negative in the fourth quarter.

Flat to slightly negative in the third quarter and the rest in the fourth?

Yes.

Thank you.

(OPERATOR INSTRUCTIONS) Jeff Gildersleeve with Millennium Partners.

Good morning. You had a comment that costs were coming in this year a little better then modeled. I was wondering if you could comment on that, and also comment as it relates to your general outlook for '06?

If you think about our operation and maintenance expense year-to-date, we are about 10 million better than budget. I can tell you that of that, about 2.8 million is lower contract labor from Cap Gemini or third parties, so nearly 3 million. And we talked about another 2 million between now and the end of the year and 6 million next year. We are just now starting to work on our 2006 operating budget. One of the things we are going to be looking at are additional operating synergies from Mid-Tex, and that would relate primarily to putting them on our billing system as of October 1st. That is the last major system conversion that we have.

We will be trying to project out into our budget the additional savings that we will get from that. We talked about 10 to 15 million as an annual run rate, just based on our experience with past acquisitions that there ought to be that much additional synergy. We've got about 6 million from the call center and that would leave the about 4 to 9 million of other operating synergies from billing, from putting them on our procurement system which we have outsourced inventory management, putting them on -- they are on our accounts payable system now, and those kinds of things.

Is the cost though, is it just moving up, the timing of the cost improvements or is it generally coming in higher than expectations?

It's both, actually. In the first quarter we saw O&M at Mid-Tex including Cap Gemini charges, being slightly below budget. And then as of April 1st by stepping into the their shoes at the Waco call center, that's where we expect to get another 2 million. It's really about 50-50, accelerating and just better lower costs from the core operation.

Thank you very much, Pat.

Anatol Feygin with Banc of America Securities.

Good morning, everyone, and thanks for the time. You guys have a very good slide I think on the energy marketing business in the appendix, and Pat speaking to the 17 million of embedded margin on the gas business. If I understand this correctly, this stems from storage transaction where you hedge forward the gas. And then the market continues to move up and you realize the mark to market loss on the hedge, which will reverse when you deliver the physical position and at that point you will capture the spread that you had initially locked in.

First of all, I guess if you could just ‘yeh’ or ‘ney’ that high concept. Then second, you also said that this straddles two fiscal years. I would have expected most of this to come in Q1 and Q2 of the next fiscal year. If you could give me a sense for whether that is on the right track and maybe kind of just fine-tune that assumption?

This is Rick Alford, I will try to field that question. You're absolutely correct. What we have done is we've locked in that arbitrage from the time that we put the gas in the ground until we have intended to take it out, which is where we set our financial hedges. On the second part, you're absolutely correct. Most of that embedded value is -- and the embedded value again is the $8 million that will be realized primarily in January or February of '06. The other part of that $17 million, which is the $9 million negative mark to market we have on the books as of March 31st, we cannot predict the timing when that will turn around. As Pat discussed earlier, it will turnaround because that is all mark to market timing. However, again we cannot predict when that will happen.

I guess at the latest, it will be reversed from an accounting standpoint when you settle out the physical and financial transactions, right?

That is absolutely correct, and that will be primarily in the second quarter of '06.

Terrific, thank you very much.

Paul Craig (ph) with Natexis.

A quick question about the agreement with Energy Transfer Partners. What is the mechanism for dividing up cash flows there and allocating returns on your partnership at ETP? And with that in mind, what is the thought process that goes into decisions to delay, or at least the timing of your portions of the capital contributions of that partnership?

I might ask JD to talk about the latter. I should say, Paul, on the front end that first of all we were looking at a pretty significant expansion on the north end of the system that has been delayed. It has been acknowledged by (indiscernible) gas in years past that had been delayed. They had actually had some discussions with the Railroad Commission about trying to get preapproval for the project. Most regulatory commissions are reluctant to do that. We knew that a number of parties were interested in building pipeline capacity in the area of the north end of our system across Texas, another one, Kinder Morgan, might have been another one.

We kind of cast about to determine who would make the best partner. The agreement that we struck requires that always put up half of the capital but to have a call on 100% of the capacity which could be, in the future, as much as 500,000 a day of additional capacity. We like that flexibility. We also like the ability to do some additional things with ETC down the road, at least the possibility of doing that. And along the way, because as Bob indicated, there is so much additional production coming on stream, parties like ETC were anxious to get going and pretty accommodating in the terms that they are willing to agree to. So it is really our option. In order to operate the system, we have to put up our share of capital and we are certainly able and willing to do that. IT really just gave us kind of a cost free option to think about when to put up our share of investment. JD, I might ask you to elaborate.

A couple of, I think, further comments around your first question, Paul. The Energy Transfer deal is basically structured as a 50-50 transaction, and that will set the appropriate level of revenue sharing and cost sharing as we go forward. I think to the second point what we are currently seeing is that we think about one-third of this project will be in service by the end of this year. It is our current plan to go ahead and fund our capital portion of that investment at the end of the year. The balance of the system should be operational first quarter of '06. And absent some change to it right now we probably plan on making that capital contribution in '06 for that. Again, for GRIP purposes, we need to have the money paid to have it GRIP eligible.

Paul, (indiscernible) on the call, but (indiscernible) last December, we made our first GRIP filing in Texas, and to our knowledge we are the first Texas gas company to do that. It involved a little over 40 million of capital on behalf of the distribution of pipeline company, and about 8.5 million of incremental revenues. We've gotten the approvals from the Railroad Commission and we are working with our cities to have original jurisdiction to get their approvals. We did put the pipeline piece into our rates effective April 1st. As you might remember those were to recover dollars that were spent by TXU Gas in calendar year 2003. We will be making our filing for 2004 in the next month or so to begin to earn on and recover those dollars.

Thanks, that is very helpful. If you don't mind, just one quick follow-up about steel costs and how you see those affecting the economics of pipeline investments?

Paul, we have seen actually a significant cost increase due to steel, the same thing for compression. It needs to be factored into the analysis when you are doing your analytics for any project. At the end of the day the market is still robust enough for those costs to be passed along, so you are still holding your projected rate of returns.

Thanks very much, guys.

There are no further questions at this time. Please go ahead with any closing comments.

Thanks. From our standpoint we are finished. Susan, if there is anything else you would like to say?

I just like to remind you all that there is a recording of this call available for replay on our website at AtmosEnergy.com through June the 10th. And again we appreciate your interest in Atmos Energy Corporation. Thank you very much for joining us. Goodbye.