埃特莫斯能源 (ATO) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Atmos Energy Corporation fiscal year and fourth quarter earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) I would now like to turn the conference over to Susan Giles, Vice President of 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 our slides on the website that summarize our financial results. We will not review those 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.

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.

Thank you, Susan, and good morning, everyone. And as always, we appreciate you joining us and thank you for your interest in Atmos Energy. Susan mentioned Pat Reddy will review the financial results in just a moment, but before he does, I'd like to summarize the fiscal year that just ended.

We earned $1.92 per diluted share, which was our sixth consecutive year of delivering on our stated earnings guidance, and we are extremely pleased with our performance in fiscal 2007, as it was a pivotal year in many respects.

You may have noticed in our reporting we've changed the composition of our reporting segments to further distinguish between regulated and non-regulated businesses. We've completed some internal changes to further align our operations, and the new reporting segments should allow you to more easily identify the makeup of our earnings base. Going forward, it will be easier to see that about two-thirds of our earnings come from our regulated operations. These are stable and predictable earnings, which the investment public I know very much appreciates.

Combined, the regulated gas distribution and regulated transmission and storage segment contributed 64% of total net income for fiscal 2007. The gas distribution segment net income rose almost $20 million from a year ago, mainly due to colder weather, which increased throughput by 9%, and rate design changes, which stabilized and improved our margins in our two largest divisions: Mid-Tex and Louisiana.

With our margins now largely protected from weather, we can now focus our efforts on full decoupling of our margins from the effects of declining use, conservation and the gas cost portion of bad debt expense. We continue to be determined to achieve further stability in our gas distribution business through improved rate design.

The regulated transmission and storage segment saw net income rise $8 million from a year ago, mainly from higher throughput from colder weather and incremental revenues from our North Side Loop and other compression projects completed last year on our Texas pipeline. Revenues grew over 15% in fiscal 2007. This pipeline continues to perform very well and has capacity growth opportunities as we look into the future.

Atmos Pipeline Texas is unique to other pipelines in Texas, as it has gas supply and a consumer market interspersed along the pipeline. All other pipeline operators have either supply or a consumer market, but not both.

The non-regulated businesses contributed 36% of total net income in fiscal 2007. These businesses delivered solid performance despite reduced natural gas volatility. The natural gas marketing segment net income dipped almost $13 million from a year ago due to less natural gas volatility in the market, which provided huge opportunities to generate economic value. But please remember, fiscal 2006 had residential hurricane volatility in the gas market, so this segment delivered extraordinarily high numbers last year, which we're now comparing to.

Our pipeline storage and other segment net income rose over $5 million, mainly from asset optimization activities and increased transportation margins at Atmos Pipeline and Storage.

Our debt-to-capitalization ratio at September 30th, 2007 was 53.7%, compared with 60.9% a year ago. The improvement comes from our strong fiscal year earnings, the positive effect of using operating cash flow to reduce short-term and long-term debt, and our equity offering last December. We have reached our goal of reducing our debt capitalization to the 50% to 55% range and stand committed to preserving this range as we move into fiscal 2008.

Yesterday, our board of directors declared our 96th consecutive cash dividend. It is also our 20th annual dividend increase. The annual dividend was raised $0.02, bringing our indicated annual dividend rate for fiscal 2008 up to $1.30 per share.

I'll now ask Pat Reddy to review our financial results in a bit more detail, and then I'll return for closing comments, and then we'll certainly be glad to take your questions. Pat?

Well, thank you, Bob, and good morning, everyone. My remarks will primarily focus on the fiscal year, and at the end of that I'll discuss our earnings guidance for our new fiscal 2008. Looking first at our non-regulated natural gas marketing segment, gross profit for the year was down about $26 million from a year ago, mainly due to lower volatility experienced in the gas markets, as Bob explained. You can see the effects of that on our slide number 12.

As you know, we have continued to see market spreads compress. However, the gas marketing segment did experience a 31% increase in gas sales volumes and also slightly higher asset optimization margins this year versus last year. Operationally, we experienced a decrease in our delivered gas margins of about $30 million in the current year compared to last year, and that was largely due to realizing lower unit margins in a less volatile market compared to the prior year, but this was partially offset by higher sales volumes of about 87 bcf due to a combination of colder weather and the successful execution of our marketing strategy.

We also experienced a slight increase in our storage optimization margins of $2.6 million in the current year as compared to last year, due to an increase in cycled storage volumes. These were partially offset by increased storage demand fees and park and loan fees.

The excess value of our storage growth is shown in the appendix to our slide presentation on slide numbers 65 and 67. They show the difference between the 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 September, the excess value of our gas and storage was about $30 million, which we expect to realize primarily in the fiscal 2008 second quarter.

It's important for all of you to remember that Atmos Energy Marketing maintains a flat trading book, and we avoid any material mismatches between the volume of gas in storage and the associated financial hedges. The marketing company does not engage in speculative trading, and it uses financial hedges to lock in an economic gross profit margin at the time it enters into a storage transaction and then works to optimize those margins.

Taking a look now at the expense side of our consolidated income statement. For the year, our operation and maintenance expense rose about $30 million, mainly due to the following factors. First, higher employee and benefit costs, which increased O&M by about $22 million. These increases are due to salary increases across all operations and some headcount increases. Insurance costs, IT maintenance and utility service vehicle lease expenses increased by about $14 million in the current year. Our bad debt expense decreased about $10 million compared to a year ago, mainly due to declining collection risks caused by lower gas prices as compared to a year ago.

For the year, operating expense included an impairment of about $6 million. I believe you've seen in our press release that we recorded a non-cash charge of about $3 million associated with costs incurred related to our gathering project in Eastern Kentucky.

On our last call we reported that we could not reach economically feasible terms with our original partner to jointly construct the Straight Creek system, so the project was scaled down, and since that time negotiations with anchor producers have not advanced with respect to proven reserves and committed volumes needed for this project, so as a result we've concluded that the project will not be further developed and have taken the charge for capital costs incurred for things like rights of way, legal fees, et cetera. There remains a need for gathering projects in Western Kentucky, and we are moving forward with the much smaller Park Cities system that gathers shale or low pressured gas with an investment of about $10 million.

Also in fiscal 2007, we recorded a non-cash charge of about $3.3 million in connection with the write-off of obsolete customer-related software in the Mid-Tex division.

Looking at our cash flow for the year, we generated operating cash of over $547 million, up 76% from $311 million a year ago. This improvement reflects the favorable impact of higher net income, timely gas cost recoveries, and favorable changes in our working capital.

At a more granular level, operating cash flow was affected by these factors. First, the favorable timing of payments for accounts payable, equating to about $108 million, improved management of our deferred gas cost balances of about $125 million. But partially offsetting these favorable improvements was a decrease in customer collections of $85 million, due to lower natural gas prices in the current year.

Turning to our capital expenditures, for fiscal 2007 they were about $392 million, down $33 million from the same period a year ago, basically reflecting the absence of capital expenses related to the North Side Loop project on our Atmos Pipeline Texas and pipeline compression projects that were completed in fiscal 2006.

I encourage you to refer to our conference call slides for more detail on our capital expenditures. We have a number of slides that break it down between growth and maintenance, et cetera.

Moving now to our earnings guidance for fiscal 2008, we feel good about our financial condition as we move into the new fiscal year. We are initiating our earnings guidance range for fiscal 2008 at $1.95 to $2.05 per fully diluted share of common stock.

We have reduced the impact of weather on our regulated gas distribution margins, with over 90% of our residential and commercial meters now protected against the effects of warm weather. This equates to about 97% of our margin. This should substantially reduce the volatility in this segment's operating results. We are anticipating net income from the gas distribution segment in the range of $86 million to $90 million.

Our regulated transmission and storage segment, which we refer to as Atmos Pipeline Texas, continues to perform very well. This sizable and strategic pipeline in Texas was a diamond in the rough when we acquired the assets of TXU Gas. We expect net income to be in the range of $37 million to $40 million. Since the pipeline's rates are not weather normalized, weather-related fluctuations in throughput do affect income.

Our non-regulated natural gas marketing segment should provide additional earnings generated by the more predictable service revenues provided by the marketing segment and the relatively more volatile earnings from our storage optimization business. Again, we continue to see declining natural gas price volatility, which clearly limits the marketing group's ability to maximize storage arbitrage spreads. We anticipate net income from this segment to fall within the range of $42 million to $43 million.

Our non-regulated pipeline, storage and other segment is targeted to deliver net income in the $11 million to $12 million range, and some of the assumptions that underlie our budget include normal weather, which is less impactful for our distribution operations, but can affect our regulated pipeline, continued successful execution of our rate strategy and collection efforts, no material impact from mark to market of our physical storage and offsetting financial hedges, limiting our bad debt expense to no more than $20 million, and short-term interest rates at the level of about 6.5%, and no material acquisitions.

We project between $445 million and $465 million in capital expenditures this year. Roughly $310 million to $325 million will be maintenance capital, and about $135 million to $140 million will be growth capital. As I mentioned earlier, the details of that are in the slide deck.

So with that, I'll turn it back to Bob.

Thanks, Pat. I'll make a few closing comments, and then we'll be glad to take any questions. We want to close by highlighting our accomplishments in 2007. First, we took advantage of the strong market last December to sell 6.3 million shares of Atmos Energy's common stock. That stock sale strengthened our balance sheet, as we used the proceeds to reduce short-term debt.

Secondly, we completed a public offering of $250 million of 10-year senior notes in June, and with $53 million of available cash, we redeemed the Company's $300 million of unsecured floating rate senior notes in July, further strengthening our balance sheet.

Third, with a constant focus on rate making, we were granted revenue increases of almost $40 million in several of our jurisdictions where we operate. Another $57 million of rate work was initiated during fiscal 2007, with outcomes to be determined in the 2008 fiscal year.

I mentioned at the outset we continue to work on rate designed to stabilize margins, decouple recovery of margin from throughput, and recover the gas cost portion of bad debt expense. The financial performance of our gas distribution segment hinges on how effective we are at rate making going forward.

As we leave 2007 behind, we know 2008 will be another challenging year. We will continue to focus on our primary operational goal of earning the authorized rate of returns in each of our natural gas distribution jurisdictions, in particular at the Mid-Tex division, where we continued to significantly under-earn.

At June 30th, the test year for the rate change we filed in September, Mid-Tex was earning just over a 5% return. While recovery of capital investments through the GRIP mechanism in Texas works well, the lag that exists on recovering our O&M expenses greatly dilutes the positive impact of GRIP relief. Because of the length of time it takes to process a rate case in Texas, we expect our current $52 million rate case to have no financial impact in fiscal 2008. We will continue to update you on the progress of this rate filing as we move through the year.

Further, we are taking action on the matter of aging infrastructure in our distribution service territories. We are developing a program to implement proactive steps to accelerate the timing of system improvements. Our aim is to partner with our regulators to commit to the recovery of the cost of this work in advance to support a more reliable gas infrastructure.

Through this partnership, we will strive to balance and benefit the needs of our company, our shareholders and our customer. The integrity of our gas distribution pipeline is critical. Safety and reliability truly remain at the forefront of our gas distribution operations.

Our financial goals remain consistent with what we've communicated for the past several years, which are maintaining solid investment grade credit ratings with the agencies, keeping our debt-to-total-capitalization range of 50% to 55%, growing our dividend annually and achieving a dividend payout ratio of around 65%, in line with our gas utility peers, and growing our earnings per share at a rate of 4% to 6% a year on average.

Again, we are very pleased with our performance this past year and appreciate your taking time to be with us this morning. This concludes our remarks, and now we'll be glad to take any questions that you may have.

(Operator instructions) Our first question comes from the line of Adar Zango with Zimmer Lucas Partners. Please go ahead.

Hi, good morning, guys.

Good morning.

Just a question on your CapEx. The CapEx level for '08 is somewhat high relative to historical levels. I just wanted to know what's driving this, and is this the level we could expect to see going forward?

Adar, this is Pat. I mean, we'll focus on 2008 in just a minute, but from year to year we've had some fairly significant projects that were completed and then dropped out. For example, in '06 we had our North Side Loop project, and then we had three compression projects for producers on our system, and then we didn't have that recur in 2007, so we have on page 48 of our slide deck a breakdown of the capital expenditures for 2008. We've got about $310 million for maintenance, $310 million to $325 million. The lion's share of that, of course, is [just] the distribution company. For transmission and storage, it's $54 million to $60 million, and then we've got about $135 million to $140 million of growth capital, and then you can see the breakdown for fiscal 2007 on page 20. So it just reflects kind of the lumpy nature of capital work.

I think, too, Pat, as we move forward, we know that as our infrastructure continues to age, we're going to have to spend capital to make sure that our system is safe and reliable, and so that's something that we obviously are focused on. I know Kim Cocklin, who runs our utility division, is -- we're both in pipeline improvements and replacements and with our automatic meter reading program, automated meter reading program, so we're going to -- I would think projects will come in and out of that number from year to year, but we're going to either probably be -- for maintenance, we'll be at that 310 to 320 level or higher going forward, so I think you can expect to see probably an increase in our normal maintenance. And of course, as our projects come in and out, that will fluctuate. That part will fluctuate, but not our normal maintenance.

Got it. Thank you. And second question, you guys are seeing about $30 million of growth CapEx at your non-reg pipeline and storage business. Is there a specific project associated with this?

We have some projects in the planning stages, but we're not at a point of talking about any specific projects.

Okay. Okay, thank you.

Thank you.

Our next question comes from the line of Ted Durbin with Goldman Sachs. Please go ahead.

Hi, there. A question on -- I understood the Mid-Tex rate case is not included in sort of 2008 guidance. If you get, let's say, half of what you've asked, so if you get $25 million or so rate increase, should we think of that as sort of a 2009 ongoing uplift to earnings?

Yes. Whatever your assumption is about the net rate release, it would be ongoing in our base rates.

Yes, it would be 2009, Ted. That's right. We don't have anything in here, as you mentioned, for 2008.

No, our cities have --if they take the full time available to them, I believe they have until about January 23rd to either accept or reject our filing, and then we go to the Commission. An administrative law judge would be appointed and a procedural schedule established, and we'd fully expect, based on past history, that that would take us beyond the end of our fiscal year.

Is there anything that could offset that if we -- again, thinking ahead to 2009?

Not within Mid-Tex, although we'll have our GRIP filing that we'll make for our 2007 investments. That typically is kind of in the May timeframe, with implementation in September, so that also would be outside of fiscal 2008. If we're wrong in that there is more volatility, gas price volatility, that could certainly help our marketing business, but we can't budget based on that. But that's some potential upside.

Okay. And then, again, just on sort of how you resegmented. If you think about the non-regulated business, what's the --? Maybe just characterize the assets, what you expect them to earn on a long-term basis and how you have to grow them, things like that.

We have on slide 45 a breakout for pipeline storage and other, which would be our Louisiana operations and our Kentucky storage, and we're still focused on regional gathering strategies. We're also looking at some storage development opportunities that would be of scale and significant to our earnings. But with those kinds of capital projects, there's kind of a two- to three-year lead time from conception to revenue generation, so those aren't '08 items, but we're certainly working on things that will give us uplift in 2010 and beyond.

Okay. And then last question, on rate cases. Are there any other jurisdictions, if you look around, that you'd say maybe are potentially underearning or you might need to file again?

Well, we have a case going in Kansas, Ted, that we've got. We've mentioned that probably we'll be making a filing in the future in Georgia. We file every year under rate stabilization clauses in Mississippi and Louisiana and Virginia, so we do have some annual filings that we continue to make. We've just come out of cases in Kentucky, and we're working on a -- to finalize our case in Tennessee. So really, we've been very diligent in making sure that we continue to update our rates, and really not only updating our rates, but just as important to us is making appropriate rate design changes. As we mentioned in our remarks, that sometimes is just as important as our rate filings to increase our rates. We're very diligent about making sure -- as we said, our goal is to earn our allowed rate of return in all of our jurisdictions on a consistent basis, so that will continue to be our goal. And as I said, we've got some rate cases that are on file that will be coming up this year, and so we continue to -- that's probably -- in the utility, that's our number one priority, other than safety and reliability.

Great. Thank you.

I'm showing no further questions at this time. Please continue.

Thank you, all. Just a reminder that a recording of this call is available for replay on our website through February the 6th. And of course, if you have any additional questions, please call me. We appreciate your interest in Atmos Energy again, and thank you so much for joining us. Bye-bye.

Thank you. You may now disconnect.