埃特莫斯能源 (ATO) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Atmos Energy Corporation year-end 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. If anyone needs assistance at any time during the presentation, please press the star followed by the zero and a conference coordinator will assist you. As a reminder this conference is being recorded, Wednesday, November 9th of 2005.

I would now like to turn the presentation over to Susan Kappes. Please go ahead, ma'am.

Good morning, everyone. And thank you for joining us. I am Susan Kappes, Vice President of Investor Relations.

This call is open to the general public and media but designed for financial analysts. It is being Web cast live over the Internet.

We have placed our slides on our Web site 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 Web site at AtmosEnergy.com and click on the "Conference Call" link.

A recording of this call is available for replay on our Web site through February the 9th of 2006. Also we plan to file the Company's Form 10-K by next Friday, November the 18th.

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'll turn the call over to Bob Best who will review the highlights for the fiscal year. Bob?

Thank you, Susan. And we appreciate everyone joining us this morning for our call.

Pat Reddy, our Chief Financial Officer, is going to review our financial results in detail in just a few minutes. But before he does, I'd like to make a few comments about our year.

Yesterday, after the market closed, we announced results for 2005 and our fourth quarter and I'm pleased to report that our earnings per diluted share for the year were $1.72, well within our guidance of $1.65 to $1.75, and above First Call's mean estimate for the year.

Atmos Energy delivered unprecedented results in fiscal 2005. Our TXU Gas acquisition transformed our Company into the largest pure natural gas company in the country and allowed us to achieve record-breaking performances on many fronts, record residential customers, record gross profit and record earnings for our shareholders.

Net income for the year jumped 57% to $136 million. The TXU Gas acquisition clearly exceeded our expectations and delivered $0.18 per share, well above our earlier estimate of 5 to $0.10 per share.

And our non-utility business continues to run on all cylinders. The non-utility business contributed $0.30 per share this year, driven primarily by our natural gas marketing business.

Yesterday, our Board of Directors declared our 88th consecutive cash dividend. The annual dividend was raised $0.02 bringing our indicated annual dividend rate for fiscal 2006 up to $1.26 a share.

As we mentioned in the press release, net income for the year was negatively affected by almost $23 million, or $0.29 per share because of weather that was 11% warmer than normal as adjusted for jurisdictions with weather normalized rates.

Despite the financial impact warmer than normal weather caused, it's important to note that we were able to offset most of the negative effect of mild weather. This was achieved by enterprise-wide cost containment, but more notably in 2005, we accelerated about $20 million of operational synergies from the TXU Gas acquisition that we originally expected to achieve in fiscal 2006.

After taxes, this equates to about $0.16 per diluted share that we realized ahead of such schedule.

On a more somber note, we were deeply concerned for our employees and our customers and our facilities after Hurricane Katrina ravished our Louisiana division. It is too early to know with certainty how quickly all of our customers will be able to return to their homes, or if so, then will be able to return at all.

We continue to assess the impact this storm has had on our Louisiana operations. But from a financial perspective, the hurricane's impact was about $4 million of net income, or $0.05 per diluted share for 2005. Pat will discuss the anticipated impact on 2006 later in this call.

But by all measures, both financial and operational, 2005 was an exceptional year for Atmos Energy.

On the first day of our fiscal year, we doubled the size of our Company by completing the acquisition of TXU Gas on October 1, 2004. We added 1.5 million customers in Texas as well as one of the state's largest intrastate gas pipeline systems.

With a year of operational experience under our belt, we are even more pleased with this acquisition. We financed the transaction with two successful equity offerings that raised 618 million in net proceeds, and we sold 1.4 billion of senior notes.

I've stated before, it is not uncommon for us to reach a higher debt level after an acquisition is made, but we have a solid track record throughout our history of taking this back down to a more normal range of 50 to 55% within a few years after completing the transaction.

We maintain investment grade ratings with each of the rating agencies, and continue to dialogue with them on our progress. Our innovative projects on the acquired intrastate pipeline, which we renamed Atmos Pipeline-Texas, continue to progress on schedule.

We have announced four deals to date and continue to explore additional opportunities in the Fort Worth basin. The pipeline has certainly been a diamond in the rough for us, and it truly compliments our existing utility distribution and non-utility businesses.

We'll come back to talk more about this later in the call, but now, I'm going to turn the call over to our Chief Financial Officer, Pat Reddy, who will review in detail our financial results, and then we'll come back for a conclusion. Pat?

Thank you, Bob. And good morning.

I'm delighted to report on the results of our exceptional fiscal year. Since our fiscal fourth quarter is typically a loss quarter for us, I'll primarily focus on the full year and then speak to the more significant items in the quarter and then discuss the guidance we've announced for fiscal 2006.

I'll begin by first mentioning that our average number of shares outstanding increased significantly as a result of issuing equity to help fund the TXU Gas acquisition. Shares increased by approximately 25 million year-over-year and 19.6 million quarter-over-quarter.

The greater number of shares obviously influences the EPS calculations, so consider the share effect when looking at period over period results. Major changes in the income statement items over the prior periods discussed are primarily a result of the addition of TXU Gas in our fiscal 2005.

Consolidated net income for the fiscal year was a record 136 million compared to 86 million at fiscal 2004, an increase of 57%. Earnings per diluted share in fiscal 2005 reached $1.72 compared to $1.58 per share in fiscal 2004, an increase of about 9%.

Last year's net income was positively impacted by $4 million, or $0.08 per share due to gains recorded on the sale of an office building, and our remaining interest in Heritage Propane Partners. If you disregard the effect of the non-recurring gains in fiscal 2004, our net income rose 66% and earnings per share rose almost 15% in fiscal 2005.

Our consolidated net loss for the quarter was almost $17 million compared to a net loss of about of 6 million a year ago, primarily as a result of our TXU Gas acquisition. Net loss per diluted share for the quarter was $0.21 compared to $0.11 for the same period a year ago.

Consolidated gross profit for the 2005 fiscal year essentially doubled. This was driven primarily by the positive effects of the TXU Gas acquisition, and stellar results from the non-utility natural gas marketing segment.

This was a significant event in the course of our Company's financial performance, as gross profit exceeded the billion dollar mark for the first time.

Consolidated gross profit for the quarter was almost 202 million compared with 89 million in the fourth quarter of fiscal 2004. Utility gross profit for the year rose $404 million to 907 million, an increase of 80%.

The strong increase is due to 398 million of gross profit contribution, and 174 Bcf of incremental throughput from our Mid-Tex division. For the historical Atmos Six utility division, gas throughput was down about 9 Bcf from the prior year period as a result of the effects of warmer weather during our heating season.

For the fiscal year, weather was 11% warmer than normal which had a negative effect on net income, of almost 23 million, or $0.29 per diluted share.

Utility gross profit for the year and the fourth quarter was negatively affected by approximately 4 million in our Louisiana operations, which Bob mentioned earlier. Utility gross profit for the quarter was up 85% to 152 million compared with 82 million in the same period last year.

The rise was primarily due to the contribution from the new Mid-Tex division which delivered gross profit of almost 74 million, and 24 Bcf in incremental through put.

Natural gas marketing gross profit for the fiscal year rose $15 million to 62 million, an increase of 33%. The drivers include a 30 million increase in realized storage contribution, primarily from greater physical storage capacity and more favorable arbitrage spreads from increased market volatility, partially offset by an increase in demand fees on our incremental 9 Bcf of storage capacity period over period.

There was a $14 million decrease in unrealized storage contribution do an unfavorable move in the NYMEX which is used to value the storage financial instruments combined with a 1.4 Bcf increase in natural gas storage quantities period over period.

The natural gas marketing margin was basically flat due to an increase in realized margins on 15.5 Bcf of incremental volumes sold year-over-year from efforts focused on higher margin customers and entering new market areas, offset by 12 million of unrealized mark-to-market losses associated with basis swaps which we use to secure margins.

As we mentioned on prior calls, we've acquired 9 Bcf of additional storage in our fiscal 2005 and as a result, we can expect the potential for increased volatility in our margins going forward. However, this is just market value at a particular point in time and when this gas is cycled from storage and the financial hedges are settled as planned, these marks are eliminated.

In an effort to provide more transparency in this business, we now quantify the embedded value of our storage book in our SEC filings and also in the appendix to this slide presentation. This measure shows the difference between the economic value, which is the measure we use to manage the business, and the GAAP reported value at the end of a reporting period.

We define economic value as the difference between our weighted average sales price minus our weighted average cost of gas per volumes in storage.

At September 30, 2005 the economic value of our gas held in storage was $13 million. Whereas the GAAP value recorded in unrealized trading margin was an unrealized loss of 15 million, yielding an embedded storage trading margin of positive 28 million.

This difference is a result of marking the physical volumes and the corresponding financial instruments to market. The recognition of this 28 million in our earnings is currently expected to straddle both our fiscal 2006 and fiscal 2007 years and is dependent on our executing the planned withdrawal and injection schedule from which these values are derived.

Our natural gas marketing gross profit for the quarter increased $8 million to 14 million, up primarily because of storage activities, and an increase of almost 10 Bcf of additional volume sold. The quarter included a $7 million increase in unrealized mark-to-market losses on storage financial instruments due to an unfavorable move during the quarter in the forward indices used to value the storage financial instruments as compared to our prior year quarter.

Pipeline and storage gross profit for the year was almost 158 million, up from 10 million in the prior year. Primarily from incremental volumes on the year of almost 376 Bcf from our new Atmos Pipeline-Texas division.

We continue to unlock the value of our Atmos Pipeline-Texas assets as demonstrated by the high volumes transported on the pipeline during the year.

We have provided details in the analyst slides on the four announced pipeline projects that we have been updating you on during the year. Therefore, I won't cover these here, but I will echo Bob and say that we are very optimistic about the capabilities of our intrastate pipeline to add significant value in the future.

Pipeline and storage gross profit for the quarter was $36 million, up from a million in the same quarter a year ago, due to 121 Bcf of incremental pipeline transportation volumes at Atmos Pipeline-Texas.

Our consolidated operation and maintenance expense for the year reached almost 428 million, and 114 million for the fourth quarter. The increases again are a result of our TXU Gas acquisition.

Throughout the course of the year, we have kept a close eye on our O&M expense levels. We were able to reduce our budgeted expense level to help offset the 23 million in net income impact of mild weather during our winter heating system by what we refer to as our warm winter plan.

Also, we achieved accelerated operational savings in fiscal 2005 of about $12 million after-tax that we didn't expect to realize until fiscal 2006 from the TXU Gas acquisition.

Although the provision for doubtful accounts increased by almost $15 million to 20 million for the fiscal year, including the incremental provision for the Mid-Tex division, we have experienced actual bad debt expense that equates to just under six-tenths of 1% of residential and commercial revenues. This level continues to trend lower than our industry peers.

Depreciation and amortization expense and taxes other than income taxes and interest charges for both the fiscal year and the fourth quarter have increased since adding the new Mid-Tex and Atmos Pipeline-Texas divisions. Interest expense increased due to higher debt levels associated with the acquisition.

Miscellaneous income for the year decreased by 8 million, primarily due to the absence in fiscal 2005 of one-time gains on the sales of our propane business and an office building in 2004. Offsetting this the 2005 fiscal year benefited from increased interest income earned on a higher cash balances as compared with fiscal 2004.

Finally, miscellaneous expense for the quarter was primarily affected by the Company's million dollar contribution towards the Hurricane Katrina relief effort.

Looking at cash flow for the year, we generated strong operating cash flow of 387 million, up 116 million, or 43% from fiscal 2004. The considerable changes in our cash flow primarily represent the effects of the TXU Gas acquisition.

These new Mid-Tex and Atmos Pipeline-Texas divisions contributed incremental net income of about $53 million. The timing of payments for accounts payable and other accrued liabilities favorably affected our operating cash flow by 364 million.

Operating cash flow was negatively impacted by an $81 million margin account deposit required for derivative contracts related to our marketing business, higher volumes of natural gas held in inventory and a 13% higher utility average cost of gas, which resulted in an $82 million reduction in cash flow.

The timing of cash collections from our customers unfavorably affected cash flow by 169 million, and overall lower than expected utility sales volumes due to the warmer weather we experienced this past year.

Our capital expenditures for the year were 333 million compared to 109 million in fiscal 2004. The increase primarily reflects spending at Mid-Tex and Atmos Pipeline-Texas of about 94 million.

As you may recall, we had estimated about 335 to 345 million in Cap Ex for 2005 so we came in a little bit under budget.

I'd like now to review the highlights of recent rate activity, and remind you that a lot of the details surrounding this activity are contained in the analyst slides on our Web site which accompany this call.

In Georgia, we have a rate case pending and a final order is expected on November 24th. We recently received a favorable result in Mississippi.

The final order from the Commission establishes an earnings sharing mechanism. It shifts 10 million in annual margin recovery from the volumetric charge to the customer base charge.

It extends the WNA period and results in about 4% of additional heating degree days being realized. It reduces regulatory lag, adjusts for forward-looking known and measurable expenses, and utilizes an average expected rate base.

In Texas, we have resolution now of the 2003 GRIP filings made on behalf of our Mid-Tex and Atmos Pipeline-Texas division. The increases are now included in our rate base.

In September, we made 2004 GRIP filings for these divisions and we also filed for our West Texas and Lubbock jurisdictions.

Turning now to our credit facility renewal, on October 18th, we entered into a 600 million, three-year committed revolving credit facility which will expire on October 18, 2008. This is a backup facility for the Company's commercial paper program and replaces the Company's previous $600 million, 364-day working capital facility on essentially the same terms.

Also, we are in discussions with our banks to increase our $250 million non-utility credit facility to provide more working capital for the business. As far as the time line for finalizing this, we're looking at late November or early December, but I would say there is a lot of enthusiasm and interest on behalf of our banks in increasing that line.

With respect to our outlook for our current fiscal year, we are initiating our fiscal 2006 earnings guidance range of $1.80 to $1.90 for fully diluted share of common stock. The budget high points assume normal weather conditions in jurisdictions without weather normalization and their rate designs, bad debt expense of no more than $20 million.

This is the amount of bad debt we actually experienced in fiscal 2005. However we are going into this heating season with about 10 million in our reserve account versus just 8 million last year at this time.

Additionally, we've had one winter heating season to retrain delinquent Mid-Tex customers and convince them that Atmos Energy takes collections very seriously.

Hurricane Katrina's impact is estimated at 10 to 12 million in lost margin for the fiscal year. We've had had ongoing discussions with our Louisiana Commission, and staff members.

As compared with electric providers we face smaller hurdles but still have concerns about uninsured damage claims, the level of insurance coverage, treatment of additional O&M expenses and lost margin. We cannot be sure of the timing of these recoveries but we fully expect the majority of these losses to eventually be recovered.

The estimated financial impact incurred to date is approximately $13 million and consists of the following elements. A little under 11 million of damage to distribution systems in the St. Bernard, Plaquemines and St. Tammany Parishes; roughly a half million damage to three of our buildings and related equipment; approximately 1.8 million of lost gas, roughly 144,000 Mcf; and approximately 800,000 of incremental O&M related costs.

In our Louisiana division, we're estimating a semi-permanent loss of customers in St. Bernard Parish of about 20,000. This Parish took the most damaging hit.

Other semi-permanent loss of customers include Jefferson Parish at about 5,000 customers, Plaquemines Parish, about 2,000 customers and St. Tammany Parish, about 1200 customers. As you can imagine the future growth we were expecting in our St. Tammany Parish is also questionable at this point.

The estimated financial impact of lost margin on our 2006 results is roughly 11 million, or about 8 to $0.10 a share.

Capital expenditures for fiscal 2006 are estimated in the range of 400 to 415 million and that breaks down as follows: 150 to (115) ph million at our Atmos Six utility divisions; 135 to 140 million at our Mid-Tex division; and 115 and 120 million at Atmos Pipeline-Texas.

Now once again here's Bob for some closing remarks.

Thank you, Pat.

As you heard Pat's report, it's been an incredible year for Atmos Energy. We obviously are very pleased with the acquisition and integration of TXU Gas.

From day one, our integration teams were ready to go and we were able to assure a very successful transition. The utility group worked non-stop on the distribution operations, and the non-utility group honed in on the gas pipeline and storage asset opportunities, so we remain very bullish about this acquisition, obviously with our intrastate pipeline and with the strong growth that we see in the Mid-Tex division, particularly in the Dallas/Forth Worth area.

And it was a wonderful fit with our strategy of Atmos Energy and we continue to be highly optimistic about the continued financial performance of this asset, and I don't think our Company has ever been in a stronger position as we are today.

We always talk about the fact we've got our distribution operations, we've got our pipeline and storage operations, and then we've got our, some of which are regulated, some of which are non-regulated, and then we've got our strong natural gas marketing operations. And we have the ability to have strong performances in all of these areas, and as was shown this year, when the utility was impacted some by warmer weather, the non-utility was really able to pick up the pace and I think this diversity going forward is going to be a tremendous asset are for Atmos.

The other thing during the year that was a huge accomplishment for us was the completion of all back office and information technology systems to existing Atmos processes and IT systems. We are no longer, as of October 1, utilizing any of the Cap Gemini services that we contracted for during the transition period.

As Pat mentioned we continue to be successful in maintaining our rates. We think we'll have an, we'll, we've had averages and we expect to continue having averages of between 15 to 25 million in annual adjustments in our revenue stream, and the bulk of that in fiscal 2006 is going to come through our GRIP filings in Texas.

Rate design continues to be our main focus. It will continue to be our goal to seek rate design that decouples the recovery of our margins from customer usages, due to weather and declining use in conservation.

And we're also in all of our jurisdictions continuing to work to try to recover at least the gas cost portion of our bad debt expense.

I mentioned earlier, we're going to, our goal is going to be to pay down our debt into the 50 to 55% range over the next two to four years. We've done that throughout our history where we'll take on a little more debt, make an acquisition, and then pay that down, and that's our intent here, and we want to continue on that path.

In the long-term, we have not abandoned our strategy of growth through acquisitions. But for the short-term, our emphasis is going to be on making discrete investments either on our intrastate pipeline where Pat mentioned we have four projects already signed and ready to go.

We have other opportunities that we're exploring. And the drilling, in the Fort Worth basin is continuing at almost a record pace.

So there are just a lot of opportunities on our pipeline system and we'll continue to explore those. And also take advantage of the growth, the tremendous residential commercial growth that we have here in the Dallas/Forth Worth area.

And then as we move forward, and as we pay our debt down, we'll continue to have a watchful eye on what other acquisition opportunities might be available to us.

Our stated goal has been to grow our earnings at a rate of 4 to 6% a year. And that will continue to be our goal. I mean what we want and what our investors want is sustained, consistent, predictable earnings.

And we've not only had a great year in 2005, but we've had five consecutive good years. And that momentum, and next year, of course, will be our sixth consecutive good year.

So I think that's the one thing that's so important to us in this Company is consistency and making sure that we build on the momentum that we create as we go forward. We also of course have raised our dividend and our yield will be around 5%.

And so we believe with all of this, that we are delivering on the promises that we've made to those who invest in us and who follow us. And so we want to thank you for your interest and your support, interest in and support for Atmos Energy.

So with that, I'm going to turn the call back to the Operator and we'll open it up for questions and answers.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Steven Rountos with Talon Capital. Please go ahead.

Good morning.

Good morning.

I guess I had a couple of questions around the '06 guidance and some of the assumptions that are in that guidance. The first is, you guys are spending $75 million between the Katie expansion, the Enbridge project, I wanted to know, are contributions from those projects in the earnings guidance and what level would they be?

J.D., we might have you talk about that, if you would.

Hi, Steven. Yes, the impact of the projects is feathered in starting in April on the projects, and we will see that ramp up through the year to basically 100%. So what you're seeing in the '06 estimate is a partial year estimate of revenue.

Is there a way to get some detail on what that number is?

Not at the moment, Steven.

Okay. And then secondly, around the storage business, I guess through September 3rd, you had a mark-to-market loss of 28 million that you expect to reverse over the next two years. What piece of that is going to be in '06 and is that in the 180 to 190 number?

I might ask Rick Alford to address that.

Just to comment on your questions, $27.9 million is not all mark-to-market impact. That includes a $13.1 million economic effect which is the difference between our weighted average cost of gas and our expected sales price in the future.

There's $14.8 million of negative mark-to-market, and that's the combination of those two is the $28 million we have in future results. That's primarily in the '06 time frame. There is some of it that straddles over into '07, but it's primarily in the '06 fiscal year.

And are you including that 14.8 in the 180 to 190?

Very difficult to predict when all of that's going to come back. It will come back as was mentioned earlier in the call, when either the gas is cycled out of storage or when the spreads come back. But it's very, very difficult to predict exactly when that's going to come back.

The way we do our projections for any fiscal year is we take a quote-unquote a normal spread value on our storage, so as I said, it's not possible or very unusual.

J.D. Woodward was the first person that was answering your question and we'll be able to give you more detail at our December analyst call on the four projects that we've been talking about. So I didn't want to leave that.

We do have not less than $11.7 million of storage margin contribution in our '06 plans.

Is that new margin or is that just, you know, just a realization of the mark-to-market, you know, a realization of contracts you've already entered into that are being reflected as mark-to-market losses in '05?

That's a realization of the value we have on the books today.

Okay. So when you take all that into account, how do you get to $1.80 to $1.90 number? I mean if you're at a $1.70 and weather hurt you by $0.30 in the quarter, you had 14 or $15 million in mark-to-market losses which is, rough, rough, maybe $0.10 more, $0.12 a share, and you're expecting bad debt to stay flat, you're north of $2, kind of adjusting normal weather normalized for '05, how do you get to a lower level in '06?

Well, I think have you to take into consideration two or three things. First of all, while we're working to mitigate the impact of weather in our Mid-Tex division and our Louisiana division, we still have not, we still don't have rate designs at this point that will be in place this winter to do that.

So I mean I think particularly on the Gulf Coast area, nine of the last 10 winters have been warmer than normal. So that certainly can have an impact on us. And of course, we can't guess for sure what that might be.

The other issue that Pat talked about is Katrina. And we don't know for sure how quickly, well, we're estimating today how quickly we think our customers will come back on, and so what we're, you know, what we've done is to just I mean we'll have better knowledge as we move forward, obviously. But we think that's going to impact us $0.10 a share, and so we're just concerned that it could even have a bigger impact on us.

That when we're not clear that it will, but there's so much uncertainty with when will we recover that from the regulators, et cetera. So those are the two biggest influences on our earnings guidance, and we obviously have some things that could break our way as well. But that's why we think $1.80 to $1.90 based on the facts that we know today is a pretty fair guidance range.

Steven, I think maybe, this is Pat. A couple of other factors, too, that are always uncertainties for us. With the additional storage that we have, we're going to have more volatility in our sales margins, and that can, at any point in time that can help or hurt, but we're also expecting some tightening of our marketing margins as we begin to see additional competitors kind of emerge.

And we don't budget unrealized gains and losses. So that's something that as we go throughout the year we'll just explain from our baseline.

But you know, as Bob said, but for things like Hurricane Katrina, we'd probably be at the $1.90 or maybe a little above level. It's just starting the fiscal year with all these moving pieces, we want to be a little bit cautious.

Okay. I'll probably just follow-up offline on a couple of the pieces. Thanks, Pat.

Thank you.

Thank you. Our next question comes from Angela Ho with Wachovia Securities. Please go ahead.

Hi, everyone. Congratulations on the year.

I just have one actually quick question on the rate activity. Could you guys go over just a little bit about how much you have embedded, you know, that into your budget for '06?

Well, Angela, this is Pat.

We typically, as Bob mentioned, we're looking to get net revenue increases across our system of 15 to $25 million, and so the budget reflects for '06 rate activity right around the $20 million level in that range, and it's primarily in our Texas division through our GRIP filings that we make. Somewhat in Mississippi, where we now have annual filings, instead of semi-annual filings. And then in Louisiana, where we have some pending rate increases that because of Hurricane Katrina haven't been addressed yet.

Right. And then you said that the permanently lost EPS level as a result of the hurricanes would be around 8 to $0.10. Is that correct?

Yes. I don't think that's permanent. I think that's really our '06 impact.

Okay.

I mentioned that there were three Parishes.

Right.

Where, you know, that may go beyond a year. But they're fairly, it's a fairly small level of customers.

Okay. Great. Thank you.

You're welcome.

Our next question comes from Jay Janello with Pelly Capital. Please go ahead.

Good morning. I had to jump off for a minute so I may have missed this, but in your jurisdictions where it's relevant for '06 guidance what level of conservation did you assume? Thank you.

Jay, we typically have experienced, looking back over the last five years, margin loss of about 5 to $6 million in our core utilities due to conservation, whether it's, you know, demographic or improved housing stock and appliances, that's been kind of an average level that we've needed to offset each year, and that's why we've had such a drive to get, you know, conservation tariff riders and jurisdictions that would permit them. We have filed for that back in May in Louisiana. And again, Katrina set back our timetable a little bit.

We would expect at the first opportunity to pursue that here in our Mid-Tex jurisdiction, and precisely to your point. And I would just say that I think as we look across the industry at our peer companies, the concept's getting a lot of traction to help, you know, stabilize and moderate fluctuations in customer builds from season to season, especially in light of the high gas prices that we're seeing.

Well, I guess I'd like, with the higher gas prices, are you assuming a higher level of elasticity this year in '06?

We're not really in our residential and commercial markets. There are a variety of reasons for that.

I mean here in Texas alone, it would tend to build larger homes, a little higher-end homes in our service territory and the gas consumption's a little better there and the declining usage hasn't been as significant as in our core utilities, so we think that's a mitigating factor.

Okay. If you had to give an all-in rate price increase year-over-year for all of your, I know this is a hard question to answer, but what percentages do you think your all-in rate is up, would be up fiscal '06 over fiscal '05? Is it 10%, 20%? 30%?

If you take $20 million a year rate increases divided by our 3.2 million customers that's about $6.25, I guess, on an annual basis. It's not that significant.

Certainly not compared with, I noticed on my own gas bill here in Dallas, we're billing out the commodity rate at $15.71. So everything, our distribution margin is fairly small overall.

Okay. Thank you.

Our next question comes from Reza Hatefi with Zimmer Lucas Partners. Please go ahead.

Good morning. I have a question. In that guidance it was 1.80 to 1.90 which includes 8 to $0.10 from Hurricane Katrina, but on Slide 37, it says adverse impact of Katrina on net income, between 10 and 12 million. Is this a typo?

It is, Reza, that should be gross, that should be our margin. It's not net income.

And we saw that last night, but after we posted the slides. So you found our one typo. Kudos to you.

And the 8 to $0.10, I just want to clarify again, that includes some of these customer losses and just lower total usage in '06 versus what would be in a normal year I guess?

That's exactly right.

One thing that confused me was, Bob earlier was talking about the '06 guidance and he mentioned nine of the last 10 years or so that weather hasn't been really up to normal levels. I'm kind of confused because in the guidance, you actually say assuming normal weather, so that kind of confused me. Could you elaborate on that?

Well, Rez, I think you put your finger on something that is problematic for us as a distribution company, because our rates, when we go in for rate filings, our commissions require us typically to use 30-year normalized weather in setting the volumetric piece of our bill.

So even though nine of the last 10 winters have been warm, you know, typically our rates today reflect 30-year normals, and so as I mentioned a minute ago, we are aggressively seeking margin decoupling which would take care of, it would basically disconnect recovery of our profit margin from volumetric usage whether the decline is due to a warm winter or conservation. At that point it really wouldn't matter what the impact was.

And as I mentioned we filed for that already in Louisiana, and we're looking at how we can pursue that here in our Mid-Tex division.

Does that mean, though, that if were you to assume 30-year normal weather in your guidance, your guidance would actually be a little higher, that you kind of haircut your guidance because of this? Over the last 10 years?

No, it just uses the 30-year, you know, normals. And we'll see fluctuations up or down especially in our Gulf Coast states, with weather that departs from 30-year normals.

So basically, your guidance adds back the entire $0.29? From, you know, the '05 getting hit by $0.29 due to weather. It basically adds it all back and there's some other deductions and so forth?

Reza, this is Susan. I mean you can assume that but remember you can't just totally take weather and add it back because you've got things like bad debt expense would have been higher this past year. I mean there's offsets to that.

Plus we know right now that we have higher O&M expenses in some areas, pension and benefits continues to go up. I mean we have other offsets to that.

And we're not giving you all the detail, you know, on that here, but, and we'll do that in December at the analyst conference.

Okay. And do have you an earnings guidance from marketing in '06 or a margin guidance? I'm sorry if I missed it.

No, again, we haven't given that out yet. We'll do that in December.

And just finally, one more question, actually two more, the CapEx guidance being in the $400 million range, should we assume that's sort of an ongoing level after '06 even? I know earlier, it seemed like it would be more in the 300 to 350 range.

That's right, Reza, because Bob mentioned the four projects that we have at Atmos Pipeline-Texas and those are capital intensive and you know, when you adjust out for those projects, we would be back to that more normal run rate that you described.

And finally, is there a way you can go about maybe shrinking or shortening the time gap between when you spend in Texas and when you get the GRIP recovery? It seems like it's a year and a half or so, as we stand.

We have, actually, taken steps to do that. There was a, if you will, a loophole in the legislation that allowed our cities which have original jurisdiction here in Texas to in essence exercise a pocket veto and just not act on our filing. By that I mean not approve it or not reject. It's that action that then triggers our ability to go to the Railroad Commission and get a final result.

We have gone back and that legislation has been amended to limit the amount of time that our cities have to either accept or reject the filing, so I think on a go forward basis, with our '05 filings, you'll see a lot shorter lag between the time we file and the time we get a final order.

Great. Thank you very much.

Our next question comes from Anatol Feygin with Banc of America Securities. Please go ahead.

Good morning, everyone. Thanks so much for your time.

Pat, I was wondering if you could just give us a little bit more detail on the mark-to-market movements? I was following it well through last quarter, and now got confused I have to admit.

The change from the combination of pent-up margin and mark-to-market wasn't that great. It went from I think 26.5 million last quarter to 27.9. And I think you mentioned in your comments that there was a $7 million mark-to-market hit in the quarter.

Can you just go through kind of how that plays out and how that articulates between those three numbers?

Sure, Anatol. I would be happy to do that. I might ask Rick who's got the detail with him to take that question.

Thank you, Pat.

I don't have last quarter's book in front of me, but based on what I have here, we had a total embedded value at the end of last quarter of $18.1 million, down to $7.9 million at the end of September. The reason that's down, or primarily the reason that's down is because we cycled quite a bit of gas. We had 15.5 Bcf on the books at the end of June, down to 7.4 Bcf at the end of September.

On the other side of the ledger, the mark-to-market loss was, according to my notes here, $8.4 million as of June 30, up to $21.1 million at 9/30, and that's, as you know, the result of spread expansion from June 30 through September 30. Does that answer your question?

I think by the time I'm done with the calculations it will. Thanks very much.

You're welcome.

Our next question comes from Josh Godden with JPMorgan Asset Management. Please go ahead.

Good morning, gentlemen.

Good morning, Josh.

The question, I'm looking for some more detail in the level of debt and the debt reduction in light of next year's planned Cap Ex expenditures and the targeted range that you set forth for the rating agencies? Can you talk to me about the plan to pay down the debt from the TXU acquisition?

Yes. You know, Josh, we've talked about the balancing act between our intention to delever and our desire though, to fund these growth projects that currently are very attractive here in Texas, in particular. And so that's what we talked about ranges from 50 to 55%, and from 3 to 5 years to accomplish that.

We have had recent meetings with the rating agencies and we will be going back again in November, so we're staying very close, and communicating our five-year plan with expectations for debt reduction. And our five-year plan does show us getting back to more like a 50, you know, a 50, 52% debt to cap within that period of time.

So you know, 2006 is a little bit of an anomaly because we do have these four growth projects in Texas that we've announced and that we're pursuing and we don't necessarily, we're not extrapolating that level of spending out to 2007 and beyond.

So with our strong cash flows that we're projecting, and assuming again normal weather conditions, and improved rate designs over time, we do see ourselves getting down in that 50 to 52% debt to cap within our five-year plan horizon.

Okay. Thank you.

Thank you. Our next question comes from Matthew Leme with UBS. Please go ahead.

Hi, guys. Matt Leme at UBS.

Good morning, Matt.

Hi. Couple of questions.

First is on the fiscal '06 guidance, you took 20 million, or you got 20 million of synergies in '05, I think a lot of which was originally destined for '06. Can you talk about any more incremental synergies on top of the 20 million that we'll see in '06?

Matt, this is Pat. I think, you know, as we prepared our budgets the level of '06 synergies is, you know, relatively smaller compared to the 20 million.

And a lot of what we achieved, frankly, was accelerating transitions from Cap Gemini, our third-party service provider. As you remember we stepped into their shoes at the Waco call center April 1st of last year. We transitioned billing and the customer revenue cycle activities as of October 3rd.

And one thing that, you know, we're particularly proud of is that we not only did those, or completed those conversions on time, or in some cases ahead of time, we did it at about $12 million less than we had budgeted for those activities. So that was a significant achievement. But that's been achieved if you will.

The other kinds of things that we'll look at, we're in the process of putting, you know, Mid-Tex on our outsourced warehousing and inventory program. And there will be some incremental benefits from that.

But those kinds of things will be much smaller in comparison to what we achieved this past year. So we have baked in some incremental savings into the '06 number but they're not nearly as significant.

So you're saying it's just a few cents?

Pardon?

It's just a few cents in the '06 number? Nothing material?

No.

Okay.

The second question I had was on the 400 to 415 million Cap Ex for the year. How much of that is growth and how much is maintenance? And then going forward, on a long-term basis, what kind of growth maintenance split can we expect?

Well, just as a general proposition, as we've discussed in the past, our objective is to limit our, you know, true non-growth Cap Ex to at or below the level of depreciation expense that we recover in rates so that basically that piece of our capital investing just kind of maintains the level of our rate base and doesn't increase it.

Then by definition, our growth Cap Ex needs to attract, you know, additional customers that bring additional margin to provide an adequate return on that investment. One wrinkle in all of that though, there's not such a bright line here, for example, in Texas because even our maintenance capital spending brings in additional margin in a sense that we're allowed through GRIP to put it in rate base with, you know, a modest lag and earn on it.

But we do go jurisdiction by jurisdiction in our capital budget and look at non-growth relative to depreciation. And then run growth projects through our profitability model to make sure they clear their hurdle rates.

So I don't think in our slides we've given any kind of breakdown between growth and non-growth within our divisions other than what's on Page 38. And I mentioned this in my remarks, that we've got the 150 to 155 million in our Atmos Energy historical divisions. And I've mentioned the amounts for other divisions but not really broken down between growth and non-growth.

We'll share that with you, Matt, at the December analyst conference call.

Okay. And I just have one more, just to clarify what you were saying about debt reduction. Just to clarify, it sounds like you're going to be a net borrower in 2006 then? Given the projects that you've got on the table?

We -- well, yes, but not maybe to the extent you might have thought because we did some pre-funding, you know, in connection with the acquisition, we actually raised more capital than we needed at closing.

Now, we've used most of that to redeem some first mortgage bonds, all but one series that was outstanding, around 75 million or so of first mortgage bonds. That helped a little bit with our deleveraging. We're a little bit under 50% at this point.

This year with those capital projects we do issue about $50 million of new equity each year through our various plans, retirement savings plans and so forth. So, you know, much of that growth can be covered by that.

And then we do have our short-term lines, you know, that we can borrow under, so it will be a little bit of a blip in '06, probably push us, instead of three years to get there, you know, it's probably more like four years. But these are good growth projects and the cash flow and earnings from them, with a little bit of lag in '06 will help us, you know, with that objective.

Okay. Thank you very much.

You're welcome.

Thank you, sir. Ladies and gentlemen, we thank you for your participation on today's teleconference. At this time, we'd like to conclude the conference. You may now disconnect. And please have a pleasant day