埃特莫斯能源 (ATO) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Atmos Energy's 2008 fiscal year and fourth 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'd now like to turn the conference over to Susan Giles, Vice President of Investor Relations.

Good morning everyone and thank you for joining us. This call is open to the general public and media but designed for financial analysts and it is being webcast live over the internet. We have placed slides on our website to summarize our financial results. We won't review those in detail but we will be happy to take any questions 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 this morning are Bob Best, Chairman and CEO, and Pat Reddy, Senior Vice President and CFO. There are also other members of our leadership team here to assist with questions as needed. As you review these financial results and discuss future expectations please keep in mind some of our discussion might contain forward-looking statements within the meaning of the Securities Act and Securities Exchange Act. Any forward-looking statements are intended to fall within the Safe Harbor rules of the Private Securities Litigation Act of 1995.

With that, I'll turn the call over to Bob.

Thank you, Susan and good morning. As always we appreciate you joining us this morning for our call. Our Chief Financial Officer, Pat Reddy is going to review our financial results in greater detail in just a few minutes but before he does that, I'd just like to start out by saying we are extremely pleased with our performance in fiscal year 2008. We were able to earn $2 per diluted share, an increase of 4.2% from last year. Again, meeting our committment to deliver average annual earnings growth in the 4 to 6% range on a per share basis. In fiscal 2008 our regulated operations contributed 74% of the total net income while the non-regulated operations contributed the remaining 26%, which really reflects a return to our more historic earnings composition. Also we are extremely proud of achieving a significant milestone for our Company, despite the uncertainty in our financial markets in our economy.

Yesterday, our Board of Directors declared our 100th consecutive cash dividend, which was also our 21st annual dividend increase. Annual dividend was raised $0.02, bringing our indicated annual dividend rate for fiscal 2009 to $1.32 per share. Our debt capitalization was 54.6% at the end of fiscal 2008. We keep this ratio on our list of top priorities and stand committed to preserving a debt capitalization range of 50 to 55% and maintaining solid investment grade credit ratings. These fundamental business principles have served us well during this time of disruption in the credit markets. On October 29, we secured a $212 million 364 day committed revolving Credit Facility. This facility replaced a $300 million facility that expired October 29, 2008, and includes two new participating banks.

I would also like to make some observations about our credit and liquidity before turning the call over to Pat. Our credit capacity in the amount of unused borrowing capacity are affected by the seasonal nature of the natural gas business and our working capital requirements ratchet up as we head into the winter heating season. We typically access the short-term commercial paper market to finance purchases of natural gas to fill our winter storage. Because of the freeze in the CP market beginning in mid September, we drew down 331 million under our five year revolver to fund these working capital needs.

Our short-term debt outstanding is about $200 million greater at September 30, 2008 compared to the same period in 2007 primarily driven by a reduction in operating cash flows in fiscal 2008, largely due to the rise in gas prices experienced during the Summer injection period. At a consolidated level our weighted average cost of gas in storage was $8.40 at September 2008 compared to $6.78 the same time a year ago. Our debt level is expected to peak by the end of January and start to decline as our customers begin paying their winter heating bills. Our liquidity position remains very strong. We have credit facilities in place to meet our working capital needs and as of last Friday, November 7, our total credit capacity included $168 million of available capacity on the $600 million, five year revolver, all of the $212 million of capacity on the new 364 day facility, and $213 million on Atmos Energy's $580 million uncommitted facility. In addition, the Company has $171 million of outstanding commercial paper with some maturities that extend into late January, and we also have $97 million of short-term investments and cash on hand.

We could potentially experience some near term earnings pressure as a result of these challenging conditions. As a result, we are reviewing our capital and expense budget to determine what steps may need to be taken to conserve cash and avoid reliance on credit facilities. We will not, however, jeopardize safety or reliability on our distribution and pipeline systems.

I will now ask Pat Reddy to review our financial results and then I'll return for a few closing comments and we will 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 touch on our earnings guidance for fiscal 2009. I'll begin with the regulated Operations. Our natural gas distribution and Texas Intrastate Pipeline businesses, combined the regulated operations experienced 24% growth in net income, as compared to a year ago. Continued execution of our rate strategy, coupled with higher throughput and per unit margins at Atmos Pipeline Texas were the primary drivers of the growth in income. Our non-regulated operations experienced a drop in net income of about 25% from one year ago.

If you turn to slide 7 in the slide deck, you can see that earnings declined because of reduced realized margins on asset optimization activities, mainly due to lower natural gas price spread volatility which we have witnessed for some time now. The natural gas marketing segment experienced a decline in gross profit for the year of about $11 million as compared to last year, mainly due to continued compression of market spreads as i just mentioned. The largest driver of this segment's decrease was a result of AEM's decision to defer storage withdrawals and reset the corresponding financial instruments, which should enhance the potential gross profit in future periods. This caused financial hedge settlement losses without the corresponding storage withdrawal gains, resulting in lower gross profit from realized asset optimization activities of about $35 million. Additionally, AEM experienced year-over-year increases in storage demand fees charged by third parties.

The decrease in asset optimization was partially offset by a year-over-year increase in delivered gas margins of over $16 million which was driven by an increase in consolidated gas sales volumes of about 18 Bcf or 5% compared to last year and an increase in per unit margins due to favorable basis gains and improved marketing efforts, and finally, unrealized gains increased $7 million mainly as a result of the narrowing of the spreads between current cash prices and forward natural gas prices. Additional information concerning AEM's storage book is shown in the appendix to the slide presentation beginning on slide 51. This shows the difference between our economic value which is what we use to manage the business and our 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 $12 million, which we expect to realize primarily in the first half of fiscal 2009 based on our current injection withdrawal set up. There is a more detailed discussion of economic gross profit and potential gross profit in the MD&A section of our 10-K which should be filed by the end of next week. As a reminder, Atmos Energy Marketing endeavors to keep a flat trading book and does not engage in speculative trading.

Now I'll turn to the expense side of our income statement. For the year our operation and maintenance expense rose about $37 million mainly due to the following factors: First, higher employee and and benefit costs increased O & M expenses by about $7 million largely due to salary and headcount increases across all operations. Our contract labor rose about $8 million primarily due to project spending at Atmos Pipeline Texas. Other administrative costs rose over $6 million for the year and vehicle fuel costs increased O & M by almost $6 million in fiscal 2008. We also experienced a rise in outside legal fees of about $9 million year-over-year, due primarily to an increase in both litigation and rate and regulatory activity. Our bad debt expense in the regulated gas distribution business decreased about $4 million compared to last year mainly due to continued focus on collections. In fiscal 2007, operating expense included charges of about $6 million which did not recur this year.

Our capital expenditures for fiscal 2008 rose about $80 million to $472 million. This mainly reflects costs associated with the automated metering initiative in the gas distribution segment, main replacement activity in our Mid-Tex division and capital for the non-regulated Park City gathering project. Please refer to our conference call slides for more detail in our capital expenditure. Moving to our earnings guidance for fiscal 2009 we have affirmed our fiscal 2009 earnings per share guidance of $2.05 to $2.15 per diluted share. Our guidance range assumes no material mark-to-market impact at September 30, 2009, but as you can understand, we have no way of determining what the mark will be until the end of our fiscal year.

So let me draw your attention to slides 37 and 38 where we have outlined our budget assumptions and net income by segment for fiscal 2009. This has not changed since we provided it originally during our Analyst meeting on October 1. Some of the assumptions that under lie our budget include continued successful execution of our rate strategy and collection effort, no material impact for mark-to-market of our physical storage and offsetting financial hedges, short-term interest rates as a level of 3.75%, no material acquisitions, normal weather conditions which is less impactful to our distribution operations now but can affect our regulated pipeline and limiting our bad debt expense to no more than $12 million.

It's important to note that as a result of the rate work we accomplished in fiscal 2008 we're heading into the 2009 winter heating season with the ability to recover the fuel related portion of bad debt cost to purchase gas adjustment mechanisms in Amarillo, West Texas cities, Lubbock, Tennessee, Virginia, Kansas and our Mid-Tex jurisdictions which all when combined account for approximately 67% of the total budgeted cost of gas at a regulate the distribution businesses. This means we can now defer the gas portion of bad debt cost above the amount included in base rates in the above mentioned jurisdictions.

I'd like to spend just a minute on our defined benefit pension plan given what's occurring in the markets. Despite the recent decline in the fair value of the plan assets we were not required to make a minimum funding contribution to our pension plan during fiscal 2008, however, we will monitor this situation in light of market conditions to determine if any contributions are required in 2009, our next measurement date is January 1 of 2009. We're projecting between 510, and $525 million in capital expenditures in fiscal 20009. Of that, 330 million to $338 million will be maintenance capital and about 180 to $187 million will be gross capital. The gross capital includes 50 to $55 million for regulated project close to Austin Texas on the Atmos Pipeline Texas system. As an update on this project, it is proceeding with preconstruction work that includes acquisition of rights of way, permitting et cetera, and pipe has been ordered with delivery expected in early February and we have another $50 million targeted for non-regulated projects including $30 million for identified but as yet unnamed projects.

As Bob said earlier, we are reviewing our capital and expense budgets to determine what steps can be taken to conserve cash and avoid reliance on credit facilities. Therefore, some of these projects may be delayed until after the first of the year, but we are committed to insuring Atmos will continue to deliver the value that investors expect even in these difficult markets and that concludes my remarks and now once again here is Bob.

Thanks, Pat. I'll make a few final comments and then we'll be glad to take your questions. As we've outlined today, we feel very good about our achievements that were accomplished this past year. We increased our earnings, preserved our debt capitalization target, received positive outcomes in the regulatory arena, and completed the non-regulated Park City gas gathering project in Kentucky. Additionally, our proposed non-regulated Fort Necessity salt cavern gas storage project in Louisiana is progressing.

In July, we completed a non-binding open season which reflected significant interest in the project. Drilling of the test well is now complete. The core sample has been extracted and is currently being analyzed and as we indicated at our October 1 Analyst meeting, we have engaged the services of an Investment Bank to help us determine the most optimal ownership development mix for this project. We want to mitigate the market risk associated with a project of this scale and scope as well as gain assurance on the availability of capital as we move forward. we will continue to update you as milestones are met for this long term project. Our regulated pipeline, Atmos Pipeline Texas continues to perform well. There are a few projects under review that would increase capacity to meet potential demand associated with the continued development of production in Texas, as well as capacity enhancements in the growing areas of our service territory.

As you know, the foundation of our business lies at the regulated distribution business. Execution of our rate strategy is paramount to achieving our financial objectives. This past year we made considerable progress in the Mid-Tex division. We reached settlements with 438 of 439 cities served by Mid-Tex on terms that everyone felt good about. That settlement is for three years and includes a mechanism which provides us the ability to refresh rates annually to reflect changes in cost, revenues and capital.

In April we made the initial RRM filing with the settling cities for $33.5 million on a system-wide basis. We negotiated with these cities and reached agreement on $20 million which went into effect on November 1. Last week, we filed a rate case with the City of Dallas, the only city in the Mid-Tex division not to agree to the settlement earlier this year. The rate case for Dallas is approximately $9 million. We have proposed that these rates become effective on December 11. If Dallas chooses to suspend the case, the statutory deadline will be March 11 of next year. We requested a return on equity of 11.7%. This filing effects over 220,000 customers. We have several other cases currently pending with plans to file others in Fiscal 2009. Over the five year budgeting horizon, we project normalized revenue increases of about 50 to $60 million annually from our rate outcomes.

We recognize that consistency, predictability and growth are important and all of these attributes will be our focus as we move forward. We appreciate you taking time with us this morning and now we will open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Shneur Gershuni with UBS. Go ahead, please.

Good morning. Guys can you hear me now?

Now we can.

Oh, perfect. Sorry about that. We had some phone difficulties. Just wanted to ask a couple of quick questions, just with respect to the utility, I know that you've made significant amount of progress with respect to immunizing yourself from weather exposure and so forth and what not. I was wondering if you can talk to the effects of conservation. I know that you've got something in Mid-Tex and so fourth, but if you can sort of give us some color with respect to your exposure to conservation and this type of environment.

I'm going to get Kim Cocklin who is here with us and then our President of our Company answer that question.

Good morning, Shneur. Well as you know, conservation tariffs are a very popular discussion topic with regulators today and it's pretty similar to the demand side management that goes on on the electric side, and we do have conservation programs. We have one in the Mid-Tex division and we're adopting one in West Texas and essentially it encourages our customers to conserve and it rewards us with joining with them in these efforts to have them conserve and then our margins are not tied essentially to throughput.

And Shneur, another thing we benefit from is about 75% of our margins today are reviewed in annual rate filing mechanisms like we have in Texas. The other jurisdictions are Louisiana and Mississippi so that to the extent that conservation were to accelerate, we wouldn't have to, there wouldn't be a significant lag between the time that that developed and the time that we could reflect the declining volumes and rates.

Okay, makes sense. Can you also give us some color with respect to your historical experience with bad debt expense? I mean going back, let's say to '91 or some more severe recession scenarios than we've seen recently?

We hit kind of I high watermark for bad debt expense in the Winter of 2000, 2001 where we were approaching about 2% and since then we've worked hard to reduce our bad debt expense by taking maximum deposits by charging reconnection fees to customers and cutting off customers for non-payment before they have burned through their deposit, and as a result, we're running at less than 0.5% today. Now, of course, we're all concerned with the current economic conditions that our customers may have more difficulty paying all of their bills, credit cards and utility bills and we're certainly in the middle of all of that but we have a very effective collections team in place and good trackers in our tariffs. We also talked in our release about the fact that we have made significant progress in being able to recover the fuel cost portion of bad debt expense in our tariffs which for us is probably 85% of our bill.

Okay. Two last questions here. One is you'd brought up the pension plan and so forth and that you can review in 09 and what not. Is there some sense or some thought process out there to potentially make even a token contribution at this point right now just given the fact that the assets are down and obviously the market is down and it may potentially recover before you make the contribution and so forth and you can take advantage of that?

Well we took our snapshot at September 30 and we were 98% funded at that point. Obviously since then the market has trailed off in October, and as we looked at early numbers as of October 31, we were about 89% funded and under the pension protection act you don't want to be really below 94% funded on a measurement date. Our next measurement period is January 1 and we'll take a look at that point to see if we're below the 94% level and think about whether we want to make a contribution to the plan, the concern you have is if the market if and when the market does come back, it puts you in an over funded position but we'll certainly look at that. Based on the snapshot at October 31, the amount of the under funding to get to 94% would be about $16 million so it's not an overwhelming amount. It's just that the current liquidity situation we prefer not to be making voluntary contributions. We do have all the way until I think October 1 of 2009 to make additional funding, so we'll watch it during the year and watch the markets and make decisions as we go.

Cool. And final question, more housekeeping. If you can just give us for the fourth quarter the mark-to-markets that you've effectively earned the margin on and so fourth that would in theory can be reversed for the non-cash impact rather?

The impact on an earnings per share basis for the quarter was $0.11 compared to $0.12 last year and for the full year, the mark-to-market impact between the marketing segment and pipeline storage was $0.20 compared to $0.14 last year.

Is the $0.11 broken up between the pipeline and the trading business?

Yes, $.0 03 for pipeline and $0.08 for natural gas marketing.

Perfect. Thank you very much.

You're welcome.

Thank you. Our next question comes from Barry Klein with Citigroup. Go ahead please.

How is it going guys?

Good morning.

Shneur asked a few of my questions, but staying on the topic of the pension expense, does that annual review that you have with I think you said it was Louisiana, Texas, and Mississippi, does it include an annual review for any increases in the pension expense or funding necessary?

Yeah, that's an element of our overall cost of service and so pension expense is included in the review.

Okay. How much would a 1% change in the discount rate affect your expense, your pension expense?

That's a good question. I don't have that at my fingertips but let me think about that while we're on the call here.

Okay. And that's it.

Thank you.

Thanks a lot.

Thank you. Our next question comes from Ted Durbin from Goldman Sachs. Go ahead, please.

Hi, guys, just coming back to the non-regulated, the marketing margins and what not. I'm trying to figure out, if I back out the $0.20 of benefit that you got from non-realized margins this year and then the $0.14 it looks like the sort of core operations are down pretty significantly because you've said I think in the past that you don't really budget for unrealized margins. Can you just give us a sense of where you see that coming on in 2009, just given the experience you had in 2008 and then the other question on that is I just noticed that your net physical position is down to 8 Bcf which looks like it's pretty low versus where you've been over the last many quarters, maybe just talk about what's the commercial activity you're seeing. Is that being reflected in the physical position or is that something else going on.

Rick, would you like to address that?

Absolutely. We are at 8 Bcf as you pointed out at the end of fiscal 2008 but we are reinjecting in order to set our economic values for next year. We have recognized $36.4 million of our economic value of 48.5, leaving us $12.1 million as Pat pointed out in his remarks. We expect that $48.5 million based on our current set up to be realized in the primarily first quarter of 2009 and the remainder of that in the second quarter of 2009. And it's really not unusual for us to have these unrealized gains as we set our positions for the following periods and then we're reinjecting as I mentioned so that we can have additional economic value and it again it's not unusual to recognize those in income before we actually get the cash.

Okay. Thank you. And then just a question on CapEx and thinking about the pipeline business. You're seeing a lot of the E& P companies like Chesapeake and what not slashing their CapEx budgets and I'm just wondering how that might translate for you in terms of your growth projects on pipeline and storage and things like that.

Ted, this is Kim. Obviously, as Pat and Bob indicated in their opening remarks , both capital and expense budgets are being reviewed almost on a daily basis right now to keep in contact with the economic climate and we have had conversations with several folks in the Barnett Shale and the producers that we do business with and while we're still having a very very good, we have a good situation with our throughput, they are backing away from certain projects in the very near term related to expansion of capacity right now, and further development given where prices are, so some of those things have been deferred and delayed. They aren't totally shelved but they are deferred and delayed.

And interestingly, in our fiscal 2009 fewer of our capital projects are earmarked for additional throughput across our Atmos Pipeline Texas system. We've got some reinforcements that we're doing at the Southern end of our system down near our Austin lateral to beef up our ability to deliver gas down to that portion of our system and that's not really dependent on the producers' drilling programs. We have identified as Kim said, probably something on the order of 30 to $40 million of CapEx that could be slipped beyond January 1 without really hurting the effectiveness of those programs, so as Kim said, those are things that we're looking at pretty closely.

Okay, thanks a lot.

Okay, thank you. (OPERATOR INSTRUCTIONS). We have no further audio questions at this time. I would like to turn the conference back over to Susan Giles for any closing statements.

Well thank you all and just as a reminder a recording of this call is available for replay on the website through February 4. We appreciate your interest and thank you again for joining us. Good day.

Ladies and gentlemen, you may now disconnect.