埃特莫斯能源 (ATO) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Atmos Energy fiscal 2008 first quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS)

I'd now like to turn the conference over to Susan Giles, Vice President of Investors Relations. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us today. This call is open to the general public and media, but designed for financial analysts and is being webcast live over the internet. We've placed slides on our 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'd 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 10Q later today. With me this morning are Bob Best, Chairman, President and CEO, and Pat Reddy, Senior Vice President and CFO. There are other members of our leadership team with us 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 this morning and thank you for your interest in Atmos Energy. Today we're coming to you from Fort Worth, Texas, where in a few hours we will hold our annual shareholders meeting. I'm very pleased to report to our investors listening on those calls and to those who will join us at our annual meeting our financial results for the first quarter of fiscal 2008. As Susan mentioned, Pat Reddy, our Chief Financial Office, will review the financial results in greater detail in just a moment. But before he does, I want to make a few observations about the quarter and also about recent developments regarding our Company. Yesterday we reported first quarter consolidated net income of $73.8 million, with our regulated businesses contributing 68% of that total net income. We are particularly pleased with the 26% increase in net income from the regulated gas distribution business from a year ago.

The work done in our regulatory arena is yielding desired results, more stable and predictable earnings. Results from the nonregulated businesses were lower this quarter compared to a year ago due to declining volatility in the natural gas market. This has created fewer profit opportunities in our natural gas marketing segment, which is consistent, frankly, with our view that gas margins would decline because of a gas market conditions. Also yesterday, our board declared our 97th consecutive cash dividend. Our indicated annual dividend rate for fiscal 2008 is $1.30 per share. And finally, yesterday we announced that we had submitted a pre-filing request with the Federal Energy Regulatory Commission to construct and operate a salt cavern gas storage project in Franklin Parish, located in northeastern Louisiana. Because the facility will store and facilitate transportation of natural gas between states, the FERC will have regulatory oversight for the project.

The project is within close proximity to four major pipelines -- Tennessee Gas; Columbia Golf; Regency; and A&R. This is a multi-turn, high deliverability salt storage project and is one of the 15 potential projects we mentioned at our December analyst conference. We would intend to initially create three five BCF caverns, for a total of 15 BCF of working gas storage with six turn injection and withdrawal capabilities. We could potentially develop an additional four caverns, depending upon the market demand. We have acquired and/or leased all necessary land at the 500 acre site. In December we filed for an exemption from FERC to allow for the drilling of a convertible test well or re-entry of a plugged and abandoned well in order to test the salt quality at Fort Necessity. We anticipate FERC approval for this exemption at any time, which will clear the way for the testing of the salt dome. The first cavern is projected to be operational by early 2011 and the other two caverns by 2012 and 2014.

Our fiscal 2008 capital budget includes $15 million for this project. While this storage project is in its infancy, but as we get closer to the start-up date, more financial metrics will be provided. I'd like now to turn to the progress that we are making in Texas. In early January we announced a tentative settlement with cities representing about half of our customer-base in the Mid-Tex division. The settlement provides for the implementation of a Rate Review Mechanism on a three year trial basis. The rate-making process established by this mechanism is essentially the same as that described with the current GRIP program. The mechanism requires a comprehensive review of the entirety of the Company's costs, revenues and investment and enables rates to be established reflecting the Company's demonstrated cost of service on a prospective basis.

It allows for an annual resetting of both consumption and meters. The RRM is preferable to the current truncated mechanism for revising rates because all costs and revenues are considered, not just increases in capital investment, and it should provide us with more stable and predictable revenues. The traditional truncated rate filings, which are time consuming and expensive and also litigious, are all avoided. Rate adjustments occur in a comprehensive proceeding and we are annually -- and are annually adjusted providing bite size adjustments rather than sticker shock amounts. The review process should also facilitate frequent collaborative meetings with customers, with our customers to discuss and describe the cost and revenue structure and capital investment to continue safe and reliable service and to encourage and support economic growth in the many communities that we serve.

Other provisions of the settlement include moving uncollectible gas costs to the gas cost recovery mechanism in the tariff and reducing the monthly residential customer charge from $10.69 to $7 beginning October 1, 2008. The settlement also establishes a new program designed to encourage gas conservation. Each year the Company and customers will each fund $1 million to the program. Funds collected from customers will be through a new customer tariff. The Company is currently in discussions with the other parties in the case to try to reach a settlement. The docket pending before the Railroad Commission of Texas is scheduled to go to hearing February 25th for the cities that have not reached a settlement by that date. I'll now turn the program over to Pat Reddy to review our financial results and then I'll return for some closing comments and then we'll be glad to take any of your questions that you may have. Pat?

Thank you, Bob, good morning, everyone. For the first quarter of fiscal 2008 our consolidated net income was about $74 million or $0.82 per diluted share, compared to about $81 million or $0.97 a year ago. Our regulated natural gas distribution segment reported over $40 million of net income for a 26% increase from a year ago. This business benefited from the cumulative affect of rate design improvements and much needed rate increases, as Bob mentioned. An additional $9 million of gross profit was generated as a result of rate adjustments in Texas, Kentucky, Louisiana and Tennessee. Our weather sensitive margin has been reduced to about 3%, resulting in more predictable earnings during our heating season. Gross profit per meter continues to grow, from $82 per meter in the first quarter a year ago to $85 per meter in the current quarter. Our regulated transmission and storage segment contributed almost $10 million of net income, up about 2% from the same period a year ago.

This segment continues to benefit from increased transportation in the Barnett Shale and Carthage gas producing regions of Texas. The nonregulated pipeline, storage and other segment posted $3 million of net income, down about 34% from this time a year ago. Earnings were lower mainly due to an expected decrease in unrealized margins on asset optimization activities resulting from reduced gas price volatility that Bob mentioned. The nonregulated natural gas marketing segment reported net income of about $21 million, declining about 41% from the same period a year ago. This decline is consistent with our view at the beginning of our fiscal year that gas margins would decline, along with our expectation of reduced price volatility. Since there are many components to the marketing business, let's look at gross profit for this segment. Natural gas marketing gross profit was down about $17 million from the same period a year ago, mainly due to lower volatility experienced in the gas market.

Unrealized margins decreased by about $20 million, mainly as a result of the smaller change in the spreads between the forward prices that are used to value our financial hedges and the market or spot price used to value our physical storage. Of course as you know, these unrealized margins are temporary and should reverse in future periods as the physical gasses cycle from storage and the related financial hedges are settled. Operationally we experienced a decrease in our delivered gas margins of almost $2 million in the current quarter compared to a year ago. This is largely due to realizing lower unit margins in a less volatile market compared to the prior year. Offsetting this somewhat, though, were higher sales volumes of about 19 BCF reflecting the ongoing execution of our marketing strategy. We also experienced a $5 million improvement in our asset optimization margins in the current quarter.

During the quarter, natural gas fundamentals were less than favorable with warm weather and national gas inventory levels were nearly full. Therefore the Marketing Company elected to inject gas into storage and roll its financial positions forward, primarily in the second quarter of fiscal 2008, in order to take advantage of more favorable spreads. The losses incurred to settle the financial positions were smaller than in the prior year period. This positive impact was partially offset by increased storage demand fees and cycling gas in a less volatile gas market. In the process of rolling forward its storaging book, the Marketing Company was able to increase the economic value associated with its storage book by almost $4 million. Information concerning Atmos Energy Marketing storage book is shown in the appendix to our slide presentation on slides 41 through 42, where it shows the difference between the economic value, which is what we use to manage the business, and our GAAP reported value at the end of a reporting period.

As you can see there, at the end of December, the excess value of our gas and storage was about $11 million, which we expect to realize primarily in our fiscal 2008 second quarter. Spreads fell to about $0.54 per Mcf at December 31, 2007 compared to $1.32 per Mcf at the end of December, 2006. As you all know, Atmos Energy Marketing maintains a flat trading book and we do not engage in speculative trading. Now focusing on the expense side of our income statement. For the quarter, our consolidated operation and maintenance expense rose almost $6 million. The primary drivers of the increase include -- about $3 million due to higher labor and benefits costs associated with annual wage increases and higher contract labor; other administrative costs as well as pipeline odorization and vehicle fuel costs increased O&M by $4 million. As a partial offset to these increases, our bad debt expense decreased about $2 million compared to the same period a year ago, mainly due to reduced receivables resulting from lower natural gas prices in the current quarter.

And interest charges in this quarter dropped about $3 million in connection with lower average short-term debt balances versus last year. Looking at our cash flows for the quarter, we generated operating cash of about $61 million compared with $165 million the same time a year ago. And this difference reflects changes in various working capital items, primarily in our natural gas marketing business, along with the timing of various tax payments and receivables. Capital expenditures for the quarter were about $94 million, up $7 million from the same period a year ago, reflecting costs associated with our investment in pilot programs for our automated metering initiative in the gas distribution segment. Turning now to our earnings guidance for fiscal 2008, we are maintaining our previously announced earnings estimate for the fiscal year 2008 in the range of $1.95 to $2.05 per diluted share of common stock.

Earlier Bob discussed the tentative settlement with about half of our residential and commercial customers in the Mid-Tex division. While we are very pleased with that achievement, we continue negotiations with the remaining cities. And since we are uncertain of the final outcome and timing of these negotiations and the timing of when we might implement the new rates, we are not assuming any material impact on our earnings in fiscal 2008. As we discussed with you at our December conference, some of our significant assumptions surrounding the guidance include -- normal weather prescribed by the regulators in our states where we operate without W&A or margin decoupling; continued successful execution of our rate strategy and bad debt collection efforts; no material impact from mark to market of our physical storage and offsetting financial hedges; and those are really the principle assumptions.

We are projecting between $450 million and $465 million in capital expenditures in fiscal 2008. Of that $305 million to $315 million will be maintenance capital and about $145 million to $150 million will be growth capital. The $15 million earmarked for the gas storage project in Louisiana is already included in this estimate and there is more detail and more breakdown in our slides around our CapEx. So with that, I'll turn it back to Bob.

Thanks, Pat. We'll make a few closing comments and then we'll be glad to take your questions. As Pat's just reported, we're off to a very good start this year and we are encouraged by our earnings report for the first quarter of fiscal 2008. Our debt to capitalization ratio at December 31, 2007 was 53.4%, compared with 54.9% a year ago. We remain in our targeted range of 50% to 55% and we stand committed to maintaining this range. One thing we feel really good about, we have realized enormous progress in our regulated operations. The gas distribution business grew as a result of effective rate making and we'll continue to work on rate design to stabilize our margins, decouple recovery of margin from throughput; and recover the gas cost portion of bad debt expense. This continues to be critical to the financial performance of our gas distribution segment. In the gas distribution business, we currently have rate actions filed and pending in our Kansas, Mid-Tex and Louisiana service areas. And we intend to file additional cases in Virginia and Georgia in the coming months.

We've talked about the proposed settlement in the Mid-Tex rate division and it should, in the long-term, smooth rate increases and avoid wild fluctuations in customer bills while removing risk and uncertainty for the Company. We think this settlement strikes a good balance between fair and equitable treatment for our customers, the Company and our investors. In the regulated transmission and storage segment, the thorough system business continues to be strong with robust production continuing in the Barnett Shale and Carthage regions. In the coming months, we'll be filing for 2007 capital expenditures on the Atmos pipeline Texas system through the annual GRIP filing. Our nonregulated operations will continue and have continued to compliment our gas distribution business. The nonregulated natural gas marketing segment will provide and has provided solid earnings through more than predictable delivered gas services revenue, with some upside from the storage optimization process and business.

Again, as we've said in this call, with lower natural gas price volatility expected for the foreseeable future, the marketing group's ability to lock in large arbitrage spreads is going to be limited. And as we also mentioned we have predicted that and really have planned for that. At a consolidated level, our earnings goal remains as it has been the past several years and that is to grow our earnings per share at a rate of 4% to 6% a year on average. Through this earnings growth, coupled with our dividend yield of around 4.5%, we think we offer excellent value to our shareholders. Again, we are very pleased with the start of fiscal 2008 and I appreciate you taking time to be with us this morning. And this concludes our prepared remarks and now we will be glad to field any questions that you may have.

(OPERATOR INSTRUCTIONS) We have no audio questions at this time. Actually, we just had one pop in, it's from [Ted Durbin] with Goldman Technologies, please go ahead.

Hi, it's Ted Durwin with Goldman Sachs. A question for you on the storage project, maybe just talk about when you think you might know if it is actually a feasible project with your drilling and what not, what the timing would be like. And then, in terms of the overall supply and demand balances for gas storage in the gulf region and maybe even specifically to the geography where you are on sort of off of the coast up in northeastern Louisiana versus on the coast?

Well as far as the economic or when we'll be able to determine if we have a project or not, the next eight months will be critical to that. We'll have all kinds of activity, power market studies and we'll have test wells, further geophysical staff activities. That should -- we should have a decision whether we're going to move forward because we'll also have a non-binding open season. All those will give us indications as to the viability of the project. As for the need for storage in that area, our studies have indicated that there's still, although there have been some other projects announced, there's a very large need for storage because of the -- a lot of the gas production coming out of Barnett Shale, Boser Sands is going to be moving in that direction.

We'll be able to support some of the operations of a lot of those pipelines. It's very near the Perryville Hub, a lot of pipeline networks, as Bob mentioned earlier. The proliferation of LNG is expected to be coming into that region will also be advantaged by additional stores. Our studies seem to indicate that there's quite a bit of need at this time for that type of project.

Okay, great and then just a couple other questions on that. What are the steps in terms of getting permitting done at the federal level and at the local level? How long do you think that'll take and then what kind of just high level returns might you be looking for on a return on capital or what not?

I can speak to the timing of the permitting. There's quite a few milestones that will take place, I guess, but we just received word that we did get the -- FERC did give us an exemption to proceed with a test well. That'll be number one. We'll be performing that and aligning the drilling of that well so that we can have a core sample to submit to the Department of Natural Resources in Louisiana. But I guess longer term we'll have a lot of interim milestones, but we expect that we'd be able to receive a FERC approval to develop this project probably, January, February, timeframe of '09. As far as the economics, I don't believe we're at that stage where we can even begin to start putting those out.

Okay, good. And then just last question, actually on the Mid-Tex settlement. Is there any concern that you are increasing your volumetric risk at all since you're reducing -- I think you said the customer charge is going from $10.69 to $7.00. Is there any sort of offset in terms of decoupling? Are you actually increasing your volumetric risk there?

I think Kim Cocklin is here, who runs our regulated business. We'll let him address that.

There is no risk economically to the recovery because we'll reset the charges based on the consumption and the meter count in each year that we establish new rates with the RRM mechanism.

Okay, that's all my questions.

Well, frankly, it's a bonus to the customer because they're paying a lower base charge, but we'll continue to collect the same revenue.

Okay, great, thank you.

Thanks, Ted.

(OPERATOR INSTRUCTIONS) We do have a question from the line of Faisel Khan with Citigroup. Please go ahead.

This is actually Barry Klein.

Hi Barry.

How's it going?

Great.

Two questions, one with regard to the regulated transmission and storage. The increase was about $5 million from the last quarter, I guess, relating primarily to the GRIP filing, it says here. Can you remind us how much that'll be for the year?

On an annualized basis?

Yes. Is that just -- is it $5 million a quarter for the four quarters?

I think last year's filing was $13.2 million of GRIP.

And of course it's kind of front loaded in the heating season, but -- .

So we shouldn't see much of this over the rest of the year?

In the second quarter you'll see probably the bulk of the balance.

Okay. So about, about $5 million to $10 million, about $8 million, you are saying, in the second quarter?

$8 million in the balance of the year and a good portion of that in the second quarter. And again, of course that depends on the pipeline's throughput in the summer, whether it is a hot summer or cooler summer. They have probably five or six other ways to collect revenues for things like park and loan. It's not as simple as just the heating season. But I would say at least half of it would be in the second quarter.

Okay, thanks. And can you give us a little bit more color surrounding the FERC investigation and I guess what are the potential outcomes?

Well, the FERC of course, as we've mentioned in our filings as we submitted this, dated to the FERC and we're still waiting. We haven't really, at this point, no idea exactly when they will get back to us. Also they're all looking at a notice of proposed rulemaking which would, we think, would help clarify some of the rules around issues relating to the matters that they had submitted data to us for. So we're, we're somewhat uncertain at this point about when any action would be taken. And we'll just keep you posted as we know something.

Okay. Thanks a lot.

Thank you.

Thank you. At this time there are no additional questions, I'll turn it back to management for any closing remarks.

Thank you all. This is Susan. Just as a reminder, a recording of this call is available for replay on our website through May 2nd. If you have any additional questions, of course you can always call me. We appreciate your interest in Atmos. Thank you for joining us. Bye-bye

You may now disconnect.