埃特莫斯能源 (ATO) 2008 Q2 法說會逐字稿

Good morning. Welcome to the Atmos Energy fiscal 2008 second quarter 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 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 as you know 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 in detail, but we will be happy to take any questions at the end of our prepared 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 later today. With me today are Bob Best, Chairman, President and CEO; and Pat Reddy, Senior Vice President and CFO. There are also other members of our leadership team with us here to assist with questions as needed. As we review the 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 now over to Bob Best.

Thank you, Susan, and good morning, everyone, and as always, we appreciate you joining us, and thank you for your for your interest in Atmos Energy.

Susan mentioned Pat Reddy will review the financial results in greater detail in just a moment, but before he does, I want to talk about several business and recent developments regarding the company. Yesterday we reported second quarter consolidated net income of $112 million and earnings per diluted share of $1.24 per share. In the regulated businesses, made up of our gas distribution operations, and our intrastate pipeline in Texas, we experienced a 13% increase in our quarterly net income year-over-year. Distribution business continues to benefit from regulatory enhancements that further stabilize margins and our pipeline in Texas benefited from the recovery of prior-year capital expenses through the GRIP mechanism, as well as higher transportation volumes generated from increased natural gas drilling in our state. And as expected, year-over-year results in our non-regulated businesses declined this quarter as lower gas price volatility continued to limit our arbitrage opportunities in the market place. But, our strategy of combining complementary regulated and non-regulated operations continues to yield positive results. Our earnings contribution is projected to return to a more historical mix at about 70% coming from the regulated business, and the other 30% coming from the non-regulated businesses in 2008. Also our Board declared our 98th consecutive cash dividend. Our indicated annual dividend rate for fiscal 2008 is $1.30 per share.

I want to talk now about the mid-Tex rate case and the status of that case that we filed last September. That case now has been settled with all cities except Dallas, which accounts for about 15% of our customers. It is very significant that not only have we settled with about 70% of our customers, the staff of the commission is also supporting the settlement for what we call our environs customers, which represents another 15%. As part of the continuing efforts to set settle with the City of Dallas, the Railroad Commission of Texas ordered mediation, which the first day of mediation occurred yesterday, and we continue to talk to Dallas, and we're going to have follow-up meetings in an attempt to reach a settlement that's fair to both parties. The next milestone in the rate case occurs May 16th when the proportional for decision is due, and then we would expect absent a settlement, a final decision at the end of June. But I want to say this, that the settlement represents a dramatic paradigm shift in how we do business in the mid-Tex division. It encourages and facilities a collaborative and cooperative partnership with our customers. Traditional rate filings are going to be replaced by a mechanism which streamlines the rate review process and annually updates capital expenditures and expenses.

In addition to establishing a foundation to improve and strengthen customer relationships, the review mechanism incorporates agreement on traditional divisive rate issues including ROE, capital structure, depreciation rates and allocation of shared service costs. Which should significantly improve the stability, reliability, and predictability in revenues and margins during the term of the agreement. The opportunity to review, challenge and better understand the content of these annual filings is presented during quarterly meetings that will be held to review and discussion expense budgets, operational plans and capital projects. And these meetings should provide the oversight that the cities desire, while giving them an opportunity to better understand our rates, our service and the value that Atmos brings to all of its customers in the state of Texas.

Now I want to turn to several important projects that we have been working on and have mentioned in previous calls. Our Park City gathering project in Kentucky is nearing completion. This is a 23-mile low-pressure gas gathering system and treating facility. Construction is complete and testing is currently being conducted, and we expect to be fully operational later this month. Total project costs for the Park City project was $10 million with $7 million of the capital spent in fiscal 2008. In the first quarter full year of operation, pre-tax returns are expected to be about 20%, but the longer term value of this project that it should give us a foothold in a much larger regional strategy.

Now turning to our Salt Dome storage project in Louisiana. In early February, we announced we had submitted a prefiling request with the FERC 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 over this project. The potential exists for an initial build-out of three 5 Bcf caverns for a total 15 Bcf of working gas storage with six-turn injection and withdrawal capabilities. Structure could accommodate an additional four caverns defending on market demand. The first cavern is projected to be operational in 2011, and the other two caverns in 2012 and 2014. We have now secured a contractor to drill the test well, and drilling is expected to begin sometime next week. This well will be configured to serve as a cavern well on FERC 7C certification.

We expect to announce a non-binding open season in our fiscal third quarter. Our fiscal 2008 capital budgets includes about $15 million for this project. With any project of this scale and scope, there exists a long gestation period. At this time, with the project being in its infancy, it will take some time before we can develop or disclose any meaningful related financial metrics. I'm now going to turn the program over to Pat Reddy to review our financial results, and then I'll return for closing remarks, and then Pat and I as well as the rest of the team will be glad to take any questions from you. Pat?

Thank you, Bob. Good morning, everyone, we're looking forward to seeing many of you at the AGA Financial Forum. I'll speak to more significant items in our quarter and our six month period, and then discuss our outlook for the remainder of our fiscal year.

As we stated in the earnings release, our consolidated net income for the quarter climbed 5% to about $112 million or $1.24 per diluted share and for the six months ended,net income dipped slightly to $185 million or $2.06 per diluted share. The main drivers of our earnings results were the following, our regulated natural gas distribution grew net income 12% in the quarter to about $86 million. Net income grew 16%, to 126 million for the current six-month period. For both current periods the natural gas distribution business continued to benefit from the cumulative affect of rate-design improvement. We experienced a net increase in gross profit of over $13 million in the quarter and about $23 million for the six-month period, generated primarily from rate adjustments from both of our service areas. The regulated transmission and storage segment experienced remarkable growth.

Net income grew 15% to $15 million in the quarter, an increased 9% to $25 million in the current six months. This segment continues to benefit from increased transportation, in the Barnett stale and Carthage gas producing regions of Texas as well as from GRIP recovery of annual capital investments in Texas. Our non-regulated operations contributed net income of almost $11 million in the quarter, which was down about $7 million from the prior-year quarter. Year to date, the non-regulated operations posted over 3$4 million of net income, down about $22 million from the same period one year ago. Earnings were lower mainly due to a decrease in realized margins on asset optimization activities, resulting from reduced gas price volatility. This decrease is consistent with our view at the beginning of our fiscal year that we expressed to you, regarding marketing margins that they would decline as a result of reduced price volatility. Although both non-regulated segments of our business were affected by the lack of natural gas price volatility, my remarks today will focus on gross profit and the natural gas marketing segment, and you can follow along if you would like by turning to Slide 6 and 13 in your deck. Natural gas marketing gross profit was down about $7 million for the quarter, and $24 million for the last six months as compared to the same periods one year ago. Unrealized margin losses decreased about $31 million in the quarter, and $11 million for the six months, mainly as a result of smaller changes in the spreads between the forward prices that are used to value the financial hedges and the market price used to value physical storage.

Operationally we experienced an increase in our delivered gas margins of almost $12 million in the current quarter, and $10 million for the current six months as compared to a year ago. This was largely due to the ongoing successful execution of our marketing strategy, which generated incremental sales volumes of about 19 Bcf in the current quarter and 37 Bcf for the six months, along with capturing favorable basis gains in both periods. Our asset optimization margins declined $50 million in the quarter and $45 million in the six months as compared to last year. This decrease was due to smaller gains realized from the settlement of financial positions, lower margins earned from cycling gas, and a less volatile gas market and increased fees paid to third parties for storage. You may recall that during last quarter, natural gas fundamentals were less than favorable, with warm weather and natural gas inventory levels nearly full. At that time, the marketing company elected to inject gas into storage, and roll its financial positions forward, primarily to this fiscal second quarter in order to take advantage taken of the favorable spreads that existed at that time.

During our fiscal second quarter, Atmos Energy Marketing essentially executed on its December 31, 2007, planned injection and withdrawal schedule by cycling gas from storage and settling the associated financial contracts. During the process, the marketing company increased its net physical position by 3 Bcf, however the captured spreads were lower than in prior periods. Information concerning the marketing company's storage book is shown in the appendix to our slide presentation, and it begins on Slide 38. It shows the difference between what we call economic value, and the GAAP reported value at then of the reporting period. At the end of March, the excess value of our gas and storage was about $11 million, which we expect to realize primarily in the second quarter of next fiscal year, that would be fiscal 2009. Spreads fell to about $0.52 per Mcf at March 31, 2008, compared to $2.49 per Mcf at the end of December 2007.

Now let's turn to the expense side of our income statement. Our consolidated operation and maintenance expense increased about $8 million for the second quarter, and about $14 million during the first six months of our fiscal year. The primary drivers of the increase were: Higher labor and benefits costs associated with annual wage increases, and higher contract labor, which increased to almost $2 million in the quarter, and nearly $5 million in the current six-month period. In the current quarter there was also a reduction in the accrual for incentive compensation at the non-regulated business segments as a result of lower earnings this year. Other administrative costs as well as pipeline notarization and vehicle fuel costs increased O&M by about $5 million for the quarter and $6 million for the current six months. We also had an absence of about $4 million in both the current quarter and six months from the deferral of 2005 and 2006 Hurricane Katrina-related expenses allowed by our Louisiana regulators in the prior-year quarter. We also experienced a rise in outside legal fees of about $3 million for the current six months. As a partial offset to these increases, our bad debt expense declined about $2 million in the quarter and by over $4 million in the six months as compared to the same periods a year ago, mainly due to relentless and continued focus on collections of customer accounts. Year to date our bad debt expense is running about 0.3% of residential and commercial revenues, and we anticipate no more than $15 million of bad debt expense this fiscal year, down from prior estimates of 20 million.

Looking at our capital expenditures, for the current six months they rose about $26 million to $199 million, primarily reflecting costs associated with pilot programs for our automated metering initiative in the gas distribution segment. Pipeline main replacement activity in our mid-Tex division, and the Park City gathering project that Bob talked about in Kentucky. Putting out our earnings guidance for fiscal 2008, despite the changes in the composition of our earnings this year, we are maintaining our previously announced earnings estimate in the range of $1.95 to $2.05 per diluted share of common stock. Earlier Bob discussed the rate case settlement in the mid-Text division, and as a reminder, we are not assuming any material impact on earnings fiscal 2008 from its final outcome. And that's primarily because the increase that we put in effect last April is recovered volumetrically, so we're out of the heating season, and we'll be in to our summer and fall months.

However, our assumptions for the 2008 fiscal year do include total expected gross margin contribution from the marketing segment in the range of $90 million to $100 million, excluding any material mark to market impact. Continued successful execution of the rate strategy and collection efforts at our distribution utilities. Bad debt expense of no more than $15 million, average interest rates on our short-term debt of about 6.5% and no material acquisitions in the balance of the year. On a consolidated basis, we remain within our original guidance range, but now that we are halfway through the year, we are better able to refine the split between our business segments. Now let me draw your attention to slide 29, where we have projected an increased contribution from the regulated transmission and storage segment and decreased contributions from non-regulated segments. We are projecting between 450 and $465 million of capital expenditures for fiscal 2008, we have a breakdown in our slide deck. Of that 325 to $335 million will be maintenance CapEx and about 125 to $130 million will be growth capital, and with that, I would like to turn it back to Bob.

Thanks, Pat. I'll make a few closing comments, and then we'll be very happy to take questions. While we don't talk a lot about our solid investment grade credit, I would like to remind you that maintaining our credit rating is extremely important to us, and certainly essential to financing growth and operating our businesses more efficiently. Our debt capitalization ratio at March 31 was 50%, compared to 52% one year ago. We have worked hard to return to our traditional 50 to 55% range after integrating the TXU gas assets and operations and feel good about where our balance sheet stands today. Additionally, we have no short-term outstanding at the end of March, which is where we want to be, as we head into the storage retention season. Operationally, we continued to realize progress and are very focused on our regulated operations, and particularly the rate activity that goes on in our states. In the gas distribution business we currently have rate actions filed and pending in Kansas, mid-Tex, Louisiana, Virginia and Georgia service areas, and we certainly as I said remain focused on effective rate making and effective rate design.

I talked earlier about the settlement in mid-Tex but let me give you a few more details as we close. Settlement includes initial rate increase to revenues on a system-wide basis of $10 million, which was implemented April 1st. This is being recovered as Pat said through the volumetric piece of the rate, so it will have no sizable impact on our 2008 earnings. The settlement also includes an annual Rate Review Mechanism or an RRM as we call it, effective for a three-year trial period that provides for annual adjustments to rates including both a true-up to revenues for the prior-rate period, and of the setting of perspective rates to include known and measurable costs for the next year. Beginning October 1, we will lower the base customer charge to $7 from $10.69 for the residential customers. We will adjust billing determinants and consumption to the previous year's actual throughput experience. The gas cost portion of uncollectibles will be recovered through the purchased gas cost adjustment. Conservation program has also been approved to be funded equally by customers and the company. First RRM filing was made April 14th, requesting an adjustment to rates of $19 million, and a true-up to rates of $13.8 million for a total requested increase to rates of $33.5 million. Cities are currently reviewing the filing and after negotiation and agreement, implementation is scheduled for October 1, 2008.

As I said earlier, we hope this marks the beginning of a new collaborative and cooperative rate-making environment for Atmos and its customers in the state of Texas. In the regulated transmission and storage segment, the through system business continues to be strong. Atmos Pipeline Texas is uniquely positioned in the Barnett Shale production basin, Which obviously is one of the hottest onshore supply basins in the country. Pipeline traverses and feeds our mid-Tex utility, which in turn, serves the sprawling DFW metro-plex. Its capital invest suspect recoverable through the annual rate mechanism in Texas, and it benefits from market-based tariffs earned transportation gas from producers drilling in the Barnett Shale field. 2007 GRIP filing for a revenue increase of approximately $7 million was implemented on April 15th of this year. Pipeline also provides reliability for the mid-Tex division distribution customers, yet is strategically positioned to serve the growing producer needs in Texas. Our non-regulated operations continue to complement the gas distribution business. As we have said on this call, we anticipated some pull-back in our gas marketing and storage income from the lack of gas price volatility, but the marketing group is increasing sales volumes, and continues to evaluate expanding into new market areas.

The non-regulated natural gas marketing segment should provide solid earnings through its more predictable delivered gas service revenues with some upside from the storage optimization business. Non-regulated business development strategy is pretty simple, stick to areas in which we're confident in which we have a lot of expertise. The Park City gathering system in Kentucky gives us a foothold into a much larger regional strategy, and as I talked earlier, the Fort Necessity salt dome storage project in Louisiana is still in its infancy. There are a lot of unknowns at that time which makes it extremely difficult to model that project at this time with any amount of precision. We get closer to the startup date, we will give you a better idea of the financial metrics associated with this project. And finally, I would like to add that assuming we achieve the middle of our earnings guidance of $1.95 to $2.05 for fiscal 2008 on a fully diluted earnings per share on a consolidated basis, we will have grown 6% over the past five years, which is at the upper end of our stated annual earnings range of 4 to 6% on average. This earnings growth, coupled with our dividend yield of 4.5% gives us the opportunity to provide our shareholders with exceptional value. We will continue to do that as we continue to grow our earnings in that 4 to 6% range. We appreciate your taking time to be with us, and we'll now open it up for any questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). One moment, please, for our first question. And our first question comes from the line of Ted Durbin with Goldman Sachs. Please go ahead.

Question for you on the mid-Tex case. I'm trying to understand the adjustment of the $33.5 million that you are talking about for sort of the next phase. How much of that is -- I understand it's -- part of that will be CapEx recovery, similar to what you had with the GRIP filing, but now you are going to be getting O&M and all of that. How much of that 33.5 is -- would have been captured in GRIP and how much of it so more on the expense side and things like that.

Good morning, Ted, this is Kim Cocklin. The GRIP amounts to about $10.2 million for that part of the filing that would have been associated with GRIP is about $10.2 million, and the 13.8 represents the true-up of the revenues that were generated during the period compared to the 9.6 ROE in the capital structure that was agreed to, and the remainder is principally expense.

And he has dropped out of the queue. (OPERATOR INSTRUCTIONS). And we will put Ted Durbin back in the queue. Please go ahead, sir.

Sorry about that.

Welcome back, Ted.

Thanks, I don't know what happened there. Just wanted to know -- it sounds like it is forward looking for O&M, is that as of fiscal 2009 or I guess as you filed it sort of April 14th.

We utilized the period ending December of last year as the base period.

And Kim, when we take that filing, Kim -- known measurable --

Yes. Yes.

Okay. And so can you give an estimate of sort of what you think you'll earn on an ROE basis for 2008 and presumably you'll earn your 9.6% ROE in 2009 if you get the full filing requirement?

If we would get the full filing requirement, that would be the outcome. You know, we expect to have a process of negotiation and compromise.

And --

Just like any other case, so -- I mean this is the first step of a three-year trial period, and obviously, we want everybody to have a -- a good understanding of -- of where we're going, and there will probably be give and take associated with this initial filing for sure.

Okay.

I don't know what the return is going to be in -- next year. If you know that would be helpful to us.

Okay. And then if I could ask a question just on the Fort Necessity storage project. What kind of interest are you seeing, and what sort of commerciality are you seeing given where the project is? Have you gone up -- and not done an open season, obviously, but just spoken to producers and whatnot?

We're very encouraged by the interest in the project. The location in Louisiana is downstream of some bottlenecks, and a lot of other projects, so the location is good. It's -- it's -- it's very proximal to a couple of -- about a handful of interstate, which brings in more players that are interested in participating. The interest has been very encouraging. We -- it gives us a lot of options, because the interstates that we have an opportunity to tie to cover different regions, which also add to the attractiveness of a storage facility of this size and in this location. So-so far so good as far as all of the steps that have taken place to date, and the open season should be forthcoming here shortly. Non-binding open season.

Yep. Okay. And if I could just -- one more question, probably for Kim. How far along are you in terms of getting regulatory approval for the AMI spending in the various jurisdictions?

We have sought recovery of those amounts in both of the jurisdictions where we have begun the pilot program, Ted. So they are included in filings that are before commissions.

So you -- so you'll do a pilot of -- I'm sorry?

A pilot of 70,000 customers right now. We did it in the McKinney, Texas area, which is part of the mid-Tex facility division, and then we also did it in Louisiana, part of the Louisiana division.

And those will be reviewed and assessed, sort of the next year or so, or?

I think the timing on Louisiana is around June, my recollection, and then, the mid-Tex will be part of the process that we're undergoing right now.

Okay. Great. Thanks for your time.

Thank you, Ted.

Thank you, sir. Our next question comes from the line of Eric Beaumont with Copia Capital. Please go ahead.

Good morning. Couple of quick clarifications. One in particular is you had the expectation of increased LNG shipments. And you said that was going to be a positive, just seeing some structural things, do you still feel that may be the case for this summer?

This is Mark. At this point, it's pretty hard to predict the LNG shipments coming in this summer. We don't see a lot of -- a lot of LNG terminal operators locking up a lot of supplies, but it is a function of what the market drivers are, and what is happening out in Europe, and competition for LNG, so LNG -- more LNG arrivals on our shores would probably increase the volatility in the gas market.

Okay.

If gas prices jumping up around $11 and continuing to rise, it's a -- we're in a world market, so we think that there's an opportunity for LNG to come, but obviously it's a hard to predict its arrival.

Yes. Thanks. And I guess just on bad debt you guys have done an extraordinary job keeping it down. I know you have had increased collection activities. Just given where most of other utilities are seeing problems, do you expect to see a little increase, understanding you have given no more than $15 million for the year, but just given we are coming through the heating season, so not everything is past due or what have you in housing markets and other residential issues. Do you expect to see an increase there?

We have been working on our uncollectibles, really with a tremendous focus on that since 2000 when gas prices spiked. And I think, our goal has always been to be at 1.5 of 1% of commercial residential revenues or less think we are seeing our good work this year, but that good work has almost been a cumulative effect, because as I say we're very focus on making sure we stay on top of on our collectibles. Higher gas prices put pressure on uncollectibles. And we do other things nationally such as push for more dollars for live heat which is a low income housing allowance, and we work closely with agencies to help people who cannot pay their bills. So we'll just continue to be very focused on it, and as I say, we know that some of the things that are going on in the housing market, and the -- and the -- and also with the gas prices, we'll put -- it's going to put -- increased emphasis on it, but -- but it's something it's something we really work hard on to stay on top of. And our people are very passionate about it. It takes a lot of labor to be able to reach the marks that we have, and we're very appreciative of the great job our people do.

In Texas obviously we had warmer than normal weather. It was pretty normal last year. Is the weather norm mechanism in mid-Tex working how you expect?

It actually worked very well. As part of the ongoing of fine tuning and negotiation of this RRM, we are making some technical changes. And it doesn't change the total amount we collect, it just changes how we fall among our various classes of customers. But overall it really has helped us remarkably. And as we come out of the heating season, Bob mentioned the fact that we don't have any short-term debt. Part of that has to do with rate increases that we have put in to effect, but a big part of it relates to this better rate design that we have at mid-Tex and in Louisiana, and in Mississippi. That's about 75% of our customer margins that are now effectively normalized for weather, and we have got a second winter under our belt, and it's working very well.

Great. I appreciate it. And we'll see you guys in Miami.

Thank you.

Thank you, sir. Our next question comes from the line of Brooke Glenn Mullin with JPMorgan. Please go ahead.

Thank you. You mentioned that you were seeing higher storage cost. Can you give us a sense of whether your storage portfolio is close to market? Or should we see continued cost pressure on that side going forward?

This is [Rick Offert], Brooke. We are currently experiencing probably about $1.8 million a month in storage demand charges. As you can see from our table in the appendix, we have about $0.52 per Mcf in our economic value. And we're -- at this point, we feel like we're positioned well for the remainder of the year because we have in excess of 20 Bcf in the ground, and if there's some kind of weather event or curtailment of production in the Gulf, we are, again, in a good position to realize some benefit from that.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). One moment, please. And at this time, there are no further questions. I would like to turn the conference back to Susan Giles for any closing remarks.

Thank you. Just as a reminder, a recording of this call is available for replay on the website through August the 5th. If you have any additional questions, please call me or visit us at the upcoming AGA financial forum. We appreciate your interest in Atmos Energy and thank you again for joining us. Good-bye.

Thank you, ladies and gentlemen. You may now disconnect.