埃特莫斯能源 (ATO) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Atmos Energy Corp. second quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Friday, May 5, 2006. I would now like to turn the conference over to Ms. Susan Kappes, Vice President, Investor Relations. 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 is being webcast live over the Internet. We have placed slides on our website that summarize our financial results. We will not review those slides in detail, but 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 on Tuesday, May 9. With me 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 of our fiscal second quarter and six-month results. Bob?

Thank you, Susan. And good morning, everyone. We thank you for joining us this morning and we appreciate your interest in Atmos Energy. Pat Reddy, as Susan said, our Chief Financial Officer is going to review the financial results in just a moment, but before he does, I want to mention a few points about our results for the quarter and for the year. Yesterday, after the market closed, we did report net income for the second quarter of fiscal 2006 of 88.8 million, and 159.8 million for the first six months of the fiscal year. Earnings per diluted share were $1.10 for the quarter and $1.98 for the first six months. Year-to-date, net income was split about 64% from the utility and 36% from our non-utility operations. And as those numbers evidence, we continued to see very strong results from our non-utility businesses this quarter. Our non-utility operations added over 34 million of net income or 0.42 per diluted share in the second fiscal quarter and for the six-months period, they have contributed over 56 million of net income, or $0.70 per diluted share. Largely driven by our natural gas marketing operations.

Our natural gas marketing operations experienced a 479% increase quarter over quarter and a 96% increase year-over-year. Volatility in the natural gas market continues to provide arbitrage opportunities and our marketing group continues to successfully execute on their strategy to capture favorable spreads. As we mentioned in our press release utility gross profit for the quarter and for the year-to-date was negatively affected by unseasonably warm weather, particularly in Louisiana and Texas. In the second quarter, warmer than normal weather impacted gross profit by about 24 million, and about 32 million for the six months due to weather that was 16% warmer than normal in the quarter and 12% warmer than normal year-to-date, as we adjusted for jurisdictions with weather normalized rates. Weather has impacted our financial results in the two largest jurisdictions where we do not yet have weather normalization provisions, Mid-Tex and Louisiana.

These two jurisdictions combined have about 1.8 million customers or 58% of our total customer base. However, we are making progress and we remain focused on pursuing rate design changes in these jurisdictions. I'll go into more detail regarding our rate activity a little bit later in our presentation. Now, I'm going to turn the presentation over to Pat Reddy, our Chief Financial Officer who will review the complete financial results and afterwards, I'll be back for summary and closing comments. Pat?

Thank you, Bob. Good morning. I'll speak to the more significant items in the quarter and our six-month period and then we'll discuss the outlook for the remainder of our fiscal year. As Bob mentioned, for the second quarter, we earned 88.8 million of net income or $1.10 per diluted share compared to 88.5 million of net income, or $1.11 in the same period a year ago. For the six months ended March 31, our net income rose about 8% to almost 116 million or $1.98 per diluted share compared to $148.1 million or $1.90 a year ago.

Our consolidated gross profit for both the second quarter and six months rose about 8%, however, utility gross profit for the quarter declined about 2% to $316 million compared to the second quarter last year. Quarter over quarter, utility throughput declined by 11%, largely due to weather that was 6% warmer than last year, which resulted in a decreasing utility gross profit of almost $15 million. The adverse impact of Hurricane Katrina in our Louisiana division further reduced gross profit by about $3 million for the quarter. However, we did experience about $3 million in increased margins from rate adjustments associated with our 2004 and 2005 GRIP filings here in Texas.

In the current six month period, utility gross profit increased 3% year-over-year despite weather that was 1% warmer than the prior year and caused a reduction in utility gross profit of almost $6 million. The 3% increase in gross profit primarily reflects an increase in sales taxes year-over-year. This is a function, of course, of higher gas prices and these taxes are ultimately paid by utility customers and have no permanent effect on net income. Also adding to the increase in utility gross profit for the six month period was a positive effect of implementing about $4.5 million of GRIP rate increases. Offsetting these positive factors was the negative impact of about 3.5 million from, Hurricane Katrina year-over-year. You'll probably remember that we anticipated a full-year reduction in utility gross profit of between 10 and $12 million from the negative impact of Hurricane Katrina at the beginning of our fiscal year, but now that we're halfway through our year, we believe that the hurricane's impact on utility gross profit is a lower 8 to $10 million for the full fiscal year, or about a $2 million reduction in the range.

Our natural gas marketing gross profit for the quarter reached $44 million, up substantially from about 11 million a year ago. And for the current six-month period, gas marketing gross profit exceeded $70 million, compared to 38 million a year ago. Of course, the driver in the $33 million increase quarter over quarter lies with the mark to market impact on our margins, and I'll spend just a minute describing that. For the current quarter, the storage and marketing margin included a positive mark to market impact of about $12 million, which resulted from the change in value since December 31, of 2005. In the same period last year, the storage and marketing margin included about 21 million of non-cash mark to market losses. This resulted in a combined positive swing of roughly $33 million quarter over quarter in unrealized noncash mark to market impact. Operationally, we realized an increase of almost 4 million in our marking margins quarter over quarter due both to higher margins and about about 3 Bcf increase in volumes sold. This was more than offset by a reduction in our realized storage contribution of about 4 million quarter over quarter due to warmer weather, which resulted in fewer withdrawal opportunities.

For the current six months, the storage and marketing margins of about $70 million included a $17 million negative mark to market impact, which resulted from the change in value from September 30, 2005. In the same period last year, the storage and marketing margin included about 10 million of negative mark to market impact, resulting in an increased year-over-year in unrealized noncash mark to market losses of about 7 million. However, we experienced an increase in realize storage in marketing margins of almost 40 million over the same 6 months last year. Largely due to our ability to capture favorable arbitrage spreads in our storage operation as a result of unprecedented market volatility during the period, primarily due to the effects of Hurricane Katrina and we saw an increase in our marketing sales volume of 14 Bcf, as well as an increase in margins period over period, again due to unprecedented market volatility in the aftermath of the hurricane season.

As we've said before, with our incremental storage that we acquired in the third quarter of fiscal 2005, we are exposed to increased volatility in our margin. We had about 11 Bcf more and at physical storage at the end of March 2006 versus March 2005 which exacerbated the mark to market losses this year over last year. As you know, this is just market value at a particular point in time, a snapshot. And when this gas is cycled from storage and the financial hedges are settled as planned, these marks are eliminated. However, at the end of any period, our storage book can add significant unrealized gains or losses to our storage margin, but the economic gross profit we have captured in the original transaction will remain essentially unchanged. The embedded value of our storage book is quantified in our 10-Q and also in the appendix to the slide presentation on our website. Those charts show the difference between economic value, which is what we use to manage the business, and the GAAP reported value at the end of a reporting period. At the end of March, the economic value of volumes held in storage was almost $31 million. The GAAP value recorded in unrealized trading margin was an unrealized loss of almost 36 million, yielding an embedded margin of almost $67 million.

Based on the current setup and assumptions at the end of the current period, the recognition of the 31 million of economic value in realized trading margin would be split almost evenly between our fiscal year 2006 and fiscal 2007. The timing in actuality of the unwinding of the negative 36 million of unrealized loss currently reported on the books is dependent on the embedded spreads and market spreads, so we cannot predict when that amount will be reversed.

Turning now to our pipeline and storage gross profit, for the current quarter it was about $45 million, a 10% increase from the same period a year ago. Year-over-year, gross profit rose 8% to about $85 million. Improvement in both the quarter and six-month periods was largely due to favorable arbitrage spreads in the Atmos pipelines and storage asset management contracts and higher transportation and related service margins on the Atmos pipeline Texas system.

At this point, let me pause to provide you with a brief update on our pipeline projects that are underway. First, our north side loop project which we're pursuing in combination partnership with energy transfer partners is almost complete. This is the agreement to jointly construct, own, and operate a 45-mile, 30 inch natural gas pipeline in the high growth area just north of the DFW Metroplex. This project will help solve our deliverability issues for the utility and creates commercial opportunities for our pipeline. About half of the pipeline was placed in service last December and we anticipate the remainder of the project and associated compressors to be placed in service by the end of this month. As of March 31, we have spent about $26 million on this project and we expect to spend an additional 24 million in the remainder of fiscal 2006. Recovery through GRIP will be at the pipeline's allowed rate of return on total rate base of 8.258%.

We continue to see robust demand for system capacity associated with new gas production being developed near our system, primarily in the Barnett shale area around Forth Worth and the Bossier Sands area in east Texas. As a result, we are witnessing healthy expansions in transportation margins and have entered into agreements to transport natural gas through our Texas intrastate pipeline this year with InBridge, Devan, and other producers. To handle the increased volumes for these projects, we'll spend about 32 million in fiscal 2006 as mentioned before for compression equipment and other pipeline infrastructure. Like the Energy Transfer Partners transaction, these expenditures are GRIP eligible. They become eligible for GRIP recovery in the calendar year in which the capital is placed in service. Now there's the project update slide in the appendix that explains this in greater detail.

Turning back to our financial results, consolidated operation and maintenance expense for the second quarter increased 9% and 3% year-over-year. The increases in O&M are primarily due to increases in the provision for doubtful account of almost $5 million quarter over quarter and $6 million year-over-year. High gas prices and gas price volatility remained a major challenge, and although our provision for doubtful accounts increased as a result of these higher gas prices billed to customers during the heating system, warmer weather in our largest division Mid-Tex, clearly shielded us from a more significant rise in uncollectibles. Our current run rate on bad debt expense equates to about 0.5 of 1% of residential and commercial revenues. However, as you probably know, typically the months of April and May when the heating season is over is when we begin to see uncollectibles spike upward and we begin to take bad debt write-off, so we'll be able to better assess the bad debt impact next quarter.

Taxes other than income taxes were about 65 million for the quarter and about 110 million for the current six-month period. This was up 18% from the comparable period a year ago. Again, as I had mentioned when discussing gross profit, the increase in these sales taxes will result in no permanent effect on our net income. Interest charges for the quarter were about 36 million and 72 million for the current six-month period. The slight increases from prior periods is mainly due to higher short-term debt used to buy natural gas at much higher prices this season and an increase in the three-month LIBOR rate, which produced a 200 basis point increase in the interest on our 300 million floating rate notes issued last year. Partially offsetting this was interest savings in the quarter and the six months of about 1 million and 2 million as a result of the early payoff of 72 million of mortgage bonds last June. Miscellaneous expense rose in both periods compared to last year by about $3 million as a result of an unfavorable regulatory ruling in our Tennessee jurisdiction related to the calculation of a performance-based rate mechanism associated with our gas purchases.

Now I'd like to spend a few minutes talking about our cash flow. For the first six months, we generated operating cash of about 148 million, compared to 400 million in the same period a year ago. Period over period, this reflects the adverse impact of high natural gas costs on our working capital management efforts. Despite favorable movements in market indices which reduced our marketing segment cash margin deposit requirements by about $84 million, we experienced significant outflows including 85 million from accounts receivable changes, 58 million from a 24% increase in our weighted average cost of gas, coupled with almost 15 Bcf of incremental gas storage, roughly 84 million in deferred gas costs due to timing of collecting this expense from customers through rates and about 103 million caused by unfavorable of timing payables.

Let's talk for a minute about capital expenditures. For the first six months, they were 213 million compared to about 138 million in the same period a year ago. For fiscal 2006, we're projecting capital expenditures of 400 million to 415 million in total and we expect between 220 and 228 million to be maintenance capital and about 180 to 187 million to be spent on growth projects. Of the expected gross capital spending, roughly 80 million is earmarked for the pipeline projects I previously discussed.

Moving now to our earnings guidance and outlook for the remainder of fiscal 2006. With the heating season behind us and knowing the actual weather impact on our operations, we've determined that Atmos Energy can still achieve a level of earnings this fiscal year at the lower end of our previously announced range of $1.80 to $1.90 per diluted share. Although the impact of warmer than normal weather at our utility was a significant challenge again this year, we believe it can be substantially offset by the continued strong performance in our nonutility businesses for the remainder of the year. The volatility that we continue to see in natural gas prices can provide positive opportunities for our marketing operations. However, that also means that the impact from mark to market accounting on that business can cause unforeseen swings in the trading margins of that business. So our updated guidance assumes no material mark to market impact at the end of our fiscal year, and with that, it's back to you, Bob.

Thanks, Pat. We've now come to a closing, and I'm going to make a few summary comments and then we'll be happy to take any questions from you. As Pat has just summarized, we have achieved solid year-to-date results despite the warm weather, which certainly has been much warmer than normal in Texas and Louisiana, particularly. We're going to continue to focus on pursuing rate design changes in these two jurisdictions and we've had conversations with the commission and those conversations are ongoing. We will continue to press for critical rate design changes and these changes, we want to better insulate us from weather, consumer conservation, and other factors which negatively impact our earnings.

The city of Dallas' show cause order that we received last fall will ultimately provide us with the opportunity to file a full rate case in the Mid-Tex division. We expect to show a deficiency there and push for margin decoupling as well and we expect to file a systemwide rate case in Mid-Tex in our fiscal third quarter.

In Texas, as most of you know, we are utilizing the GRIP mechanism to implement rate increases for our capital expenditures. In the last six weeks, we made two GRIP filings for rate increases of almost 16 million, related to 2005 capital expenses of 86 million in our Mid-Tex and Atmos pipeline Texas divisions. These revenue increases are recovered through a surcharge to the monthly fixed customer charge and are not weather-sensitive.

In Louisiana, last May we filed with the PFC to request approval of a decoupling mechanism to stabilize margins. But this was understandably pushed to the side after the hurricanes hit Louisiana in August and in September. We've continued to be in discussions with the commission staff and we are negotiating a stipulation that will address a modified weather normalization adjustment and partial decoupling. We expect that the commission will consider this stipulation in the very near future. On April 7, we filed our first rate case in nine years in Missouri where we asked for a 3.4 million revenue increase. Initial data requests have been received and we're responding to those and we expect a final result in the March 2007 time frame.

As I mentioned earlier, our main focus will continue to be on rate design, which fundamentally drives the performance of our utility divisions. At a consolidated level, we continue to be confident about growing our earnings at a stated goal of 4 to 6% a year on average as we've been able to do the last five years. With this earnings growth coupled with our dividend yield of almost 5%, we continued to enhance value for our shareholders. This concludes our prepared remarks and now we'll be happy to take any questions from you.

[OPERATOR INSTRUCTIONS] Our first question comes from Paul Patterson with Glenrock Associates. Please go ahead.

Good morning, guys, how are you?

Good morning, Paul.

Doing great.

That's great. Just a couple of questions. As you guys predicted, marketing trading is doing a lot better. I'm wondering, I guess, how much of this is sustainable going into 2007? You mention the arbitrage opportunities and what have you, what are your thoughts about a more -- are you -- what are you seeing in the market in terms of what you think in terms of the sustainability of that kind of result?

Well, I'll take a crack at that first. As Pat mentioned, with the storage arbitrage as it is somewhat uncertain about when income comes in, what our hope has been is that we'll continue in our marketing business to generate fee income that's not subject to volatility. And I think, our goal continues to remain to grow our earnings 4 to 6% a year. And if we do it through some volatility or if we do it through better rate design, that's going to be our steadfast goal. So I don't think we can promise these results year in and year out because it's really just to -- it's just something that's not predictable with any degree of precision.

The interesting thing, Paul, is that high gas prices certainly hurt our utility through conservation and bad debt expense, but it was almost exactly offset by a pickup in the marketing business. And that was volatility-driven, but also the fact that we had significantly higher storage volumes and better margins, marketing margins. As you know, gas prices fluctuated last heating season -- or this past heating season between about 7 and $15, spiked higher than that. We're not expecting that kind of range in volatility this heating season. First of all, we have significantly higher volumes in storage because of the mild winter. And looking forward at the winter strip, December prices, last time I looked, were more like $10. Certainly not 15. So we're coming into the hurricane season. Don't know what that's going to -- hopefully it won't be as tumultuous as last year, but hose are all things that are hard to predict. But to your question, as we go into our budget for 2007, we're going to pull out that extraordinary volatility and look at a more typical 8 to 10% increase year-over-year in earnings from our nonutility business. That's really what we budget and we were happy to take advantage of this volatility, but we're certainly not going to predict it forward.

Okay. In terms of the elasticity, what are you guys experiencing -- I know it's difficult to necessarily give a 10-point estimate on that, but what do you estimate has been the elasticity impact of higher gas prices?

I don't have the percentage, but we certainly did see it this season in contrast to prior seasons. Paul, I think part of that was attributable to the fact that as an industry, we went out starting last summer and cautioned our customers to be ready for high gas prices and typically, we haven't done that in the past. And I think you're probably into January before customers start to turn down their thermostats. I think, if anything, we maybe spooked our customers a little bit and I don't know if that's primitive behavior, but we did see some conservation this year as opposed to prior periods. Like I said, I don't have a percentage, but it was noticeable.

What about the ROE associated with the Mid-Tex division? You mentioned that you might have a rate case there. What was last 12 months?

The currently authorized ROE from Mid-Tex or for the pipeline is 10%, and I'm confident that we'll be filing for something in excess of that. But we're still working on our testimony and our cost of capital studies.

Okay. What was the earned ROE, I guess is what I'm wondering?

I'm sorry, the earned ROE on a GAAP basis, we don't break that out, we just report our utility division.

You don't break out the regulated ROE for the Mid-Tex division?

We do not.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question comes from Lance Eddis with Calyon Securities. Please go ahead.

Hi. Congratulations on another good quarter. I just wanted to go over -- you guys are saying that the recovery is going a little bit better in Katrina and the Katrina-stricken areas. Just wondering what your outlook is going forward, maybe even into '07. What you're seeing there as far as how quickly people are coming back. We're definitely seeing some conflicting stories in the news in that.

Well, we serve the two parishes that were the heaviest impact that we serve are St. Bernards and Plaquemine's parish. In St. Bernard parish, we almost have all of our system back in operating order. We've still got some to go and we're seeing customers coming back, but I noticed last week they had put like 850 new customers back on. It's going very slow. There were 25,000 homes in Plaquemine and St. Bernard parish and so our intent is to try to get those systems back up and in operating order And we've been doing that and as we go, we talk with the commission and let them know about what our plans are. So we will be ready as customers come back on, but it's very slow going.

And as you can imagine, there's still a lot of uncertainty down there about people coming back and what right does the government have to bulldoze their homes and also the hurricane season is approaching and whether people want to move back. I think there's going to be uncertainty going forward. I mean, longer term, what we're going to want to do and try to do is to recover our costs that have been associated with, either through insurance or through the regulatory process. So that will be what we're working on. As I say, we've been talking with the commission and keeping them informed as we go forward.

Okay. And just one other question. Just to highlight more on the storage, from the last question. Just maybe, what you're seeing year-over-year or what you're seeing going forward. Is it even better than what you did guide to last year, or in Q1, or is it -- it seems to be pretty much pretty steady as far as the wide spreads I would say. Is that correct?

I think that's generally true. There's been a narrowing or a coming together more of the physical and financial prices. And the fact, too, that we had a mild winter means we didn't withdraw as much gas from storage, which is a little bit of a buffer on the physical side for our weighted average cost of gas. So I think generally, that's true.

Okay. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Angela Ho with Wachovia. Please go ahead.

Good morning. I just want to ask a little bit more about the marketing business again. Given that we think that the net gas volatility is going to slow later on, assuming that there's no huge hurricanes coming on board, how do you think about your marketing or gas buying strategy? Are you trying to get as much as possible into storage right now? I can see that on your slide 38 that you do have quite a bit of gas already in storage.

Well, Angel, from the utility standpoint, we fill storage every year starting in April and going through October and then we typically leave about a 5% hole for November if it's warm. And we do that every year, because we have to be ready for -- we cannot not fill storage because we have to be ready for the coldest days of the year, and that's the only way we can serve them. So as far as our hedging in our utility, we are now talking with our commissions and implementing our hedging plans for the summer. And again, we implement those plans across our company on a ratable basis. So we're not -- we typically do not try to outguess the market. And our hedging activity is designed to dampen volatility. That's what we try to do. I don't know, Pat, if you want to add anything to that as far as the marketing company is concerned.

We've got about double the volumes in storage at the end of March for the marketing company, as you mention Angela, on the slide, so we'll have less gas to buy. But Rick, do you have a comment on the gas-buying strategy for the remainder of the fiscal year?

I think somebody mentioned earlier, Pat, that the relatively warm heating season didn't give us much opportunity to cycle gas. Some of our earlier setups that we had during the year had us withdrawing more gas than we actually did. But fortunately, we were able to see those market volatility in the spreads available that we were able to leave the gas in there and still realize our book, at least, a significant embedded value. So this is the highest volume we've had in storage certainly in the last 18 months.

Yes, I noticed that. So I was just thinking going forward, what is your potential in the marketing area in terms of the profitability? That's all.

Well, we do -- as you can see, Angela, on slide 61, we do have significant embedded value and significant negative mark to market from a GAPP perspective. So just looking at that, the $66.6 million. As Pat pointed out earlier, and as you look back in history on this slide, it is a significant number, and just like all these other numbers, it's significantly higher than we've experienced certainly in the last year or so.

Okay, great. Thank you.

Thank you, Angela.

Thank you. Our next question comes from Craig Shere with Calyon Securities. Please go ahead.

Hi. Hopefully you're not getting tired of all these storage questions.

Hopefully our story is consistent. Go right ahead.

Well, in a lot of the general markets that you're in, companies like Duke Energy and AGL Resources are talking about expanding existing high turn salt on gas storage or going into greenfield development of new sites. Is this something that you are looking at for yourselves? How much do you think the market can bear? Does this present upside for your marketing business?

We have looked at substorage in Louisiana, and we continue to do that. I think that's something that we'll continue to be interested in. Obviously, your comment about how much can the market bear, that's something we always have to be cognizant of. But we added storage from the last couple years, we've added what, Pat, about 9 Bcfs. So we have -- we are looking at that. Of course, we just want to make sure that the storage that we acquire is economical and the cost associated with removing the brine or what other activity may be necessary is one that will make us competitive. But that certainly, we view as an opportunity for us over the longer haul.

One advantage I think we might have over some is that adding over 3 million customers and taking pipeline -- taking capacity on 36 interstate pipelines, mostly coming from the Gulf, we have a market for this gas. And so our storage is designed to fulfill that need. And we're looking down the road at the advent of these new LNG terminals and where they're being sided is right where we have pipeline takeaway capacity. So there's obviously some interest on the part of those sponsors in talking with us to make a market for that gas. And as you know, those cargoes are lumpy. The gas when it's regasified needs to be stored. So I think there's a role for us potentially to play -- you probably know too that we have five storage fields here in Texas and one of them is a salt cavern and we've looked at the feasibility of expanding that. We're going to -- we're not -- we're mindful that trends can get overdone, so we're going to be careful in looking at the economics and making sure that we've got contracts and an end use market for any incremental storage that we take on.

Great. A couple quick follow-ups. On the LA -- I'm sorry, Louisiana development opportunity, do you have an ETA for decision-making there on whether you're going to proceed with that gas storage development? I believe that was salt dome, if I remember. And then on the 9 Bcf that you all referred to over the last couple of years, can you remind me on the regulated and unregulated mix of that and the reservoir and salt dome mix of that?

On your first question, we're still in the reservoir study phase on the Louisiana opportunity. And it's not a large cavern. It would be about 1 Bcf of working gas. It's not like some that have been discussed. And we're looking at what the potential is to expand that. With respect to the 9 Bcf that we picked up, that really is on the non-utility marketing company side. And that's leased storage, for example, Duke, their Eagan field, it's not owned storage or developed storage.

And is all that salt dome? Eagan is, I know.

I think we've got about a B and a half is salt. 1.5 Bcf is salt and the rest...

Did I understand the answer on Louisiana to be that that's a reservoir, not salt dome potential development?

It actually is salt, a salt cavern.

Okay, great. Thank you.

Thank you.

Thank you. Next question comes from Gordon Howald with Natexis. Please go ahead.

Thank you. Hey, guys.

Morning, Gordon.

I'm glad you're not sick of storage questions, a deviation on some of the questions that were asked. The profitability there in the marketing business overall was up pretty big. Of course some of that was mark to market, but when you have profitability up that big, it raises a bit of a red flag in terms of how do you manage the risk around that? And now that you've had a change of leadership in marketing to mark from JD, is there any, or will there be any change in philosophy at that business from where it was previously?

Thank you, Gordon. No, there really won't be. I think some of you know that Mark has worked with JD. since 1992, so he certainly shares the same philosophy and we want to keep the same risk profile. We look at that business as a low-risk business for us. We don't speculate we close our physicals. So there's not going to be any change for sure and we continue to take advantage of the opportunities that the market gives us, but as I said earlier, we also are concentrating on getting more fee-based business in our portfolio. So -- and for us, the foundation of our company is still our distribution business and we need to make those rate design changes that we discussed in our presentation. Because you can see the amount of gross profit that we lost, or did not achieve because of the weather. So that's -- if we have an A number 1 priority, that's it. And we just think we can add a lot of value to our earnings without spending a lot of capital by doing those rate design changes. So our philosophy with our marketing company is going to remain the same as it has been over the last nine years that we've owned it.

And no change in VAR?

No, no.

If I could have one other follow-up question. I think you've talked about this in the past and I apologize if you talked about this earlier. But could you discuss the rationale for expensing hurricane-related costs instead of and what the regulators are saying about recovery of those costs through new rates in 2007.

Well, Gordon, it's perhaps a little bit of a conservative approach to the expensing them, but as a regulated utility, without preapproval, we really -- that's the accounting treatment that we need to follow. As part of our settlement discussions of our prior rate stabilization clause filings, Bob mentioned we filed for margin decoupling and so forth. We're pretty far along in those settlement discussions, and as we mentioned earlier, we hope to have some good news in the foreseeable future. But in connection with that, we're also discussing with our commission new rates that would be placed into effect in the next few months that would be subject to refund, but that would reflect some of the impacts of the hurricane, including a lower customer count and once we know what level of expense the commission will allow us to recover, then we also have our insurance coverage that, as you can imagine, will take a long time to finally settle out. But we continue to be optimistic that between rate design and rate increases and insurance recovery that we'll be substantially whole for the expenses and the losses that we've incurred.

Do you think insurance could come in 2007, or are you indicating longer than that?

We really don't know. We're still negotiating with our carriers and we're a fairly small part of the overall Katrina impact for the mutual insurance firm that insures the primary amount of our loss. So these things just -- they're very methodical and a lot of documentation, but there's a good history and a good track record there.

And the regulators have been overall willing to accept that cost, that you did expend costs and they should be recoverable. Have you gotten body language feel from any of the regulators?

I think really at this point, Gordon, it would be a little bit premature to talk about that, but within, certainly by the next quarter call, I think we'll be able to talk in more detail about what we've obtained.

Your initiatives all sound very positive. Thank you very much for your comments.

Thank you, Gordon.

Thank you, our next question is a follow-up question from Paul Patterson. Please go ahead.

Just the Mid-Tex rate case, what's the schedule on that?

Well, as I said, we will be filing that in the third quarter of our fiscal year. And the schedule is -- if it would take -- if it goes to a litigated proceeding, it would probably take 12 to 18 months. If you could settle the case, it would occur in a shorter time. Obviously, our goal would be to try to reach a settlement before next winter heating season, but we certainly can't predict that. And so -- we are committed to seeing this through to -- for the long haul to get the changes that we feel are necessary. So if we're not able to settle on acceptable terms, it probably would go to final resolution by the railroad commission. The reason it takes a little longer in Texas, as many of you know, is because we have original jurisdiction resting in the hands of the cities, and so, there's a procedure that you have to follow to get -- to finally get to the railroad commission. As I say, we'll try to settle it. And if we can settle it sooner than we would want to do that.

Okay, great. Thanks a lot.

Thank you.

Thank you. At this time, I show no further questions. I would like to turn the conference back over for any concluding comments.

Thank you all for joining us today. Let me remind you that a recording of this call is available for replay on our website through August the 9th. Thank you, bye-bye.