埃特莫斯能源 (ATO) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the 2009 first quarter earnings conference call on the fourth of February 2009. Throughout today's recorded presentation all parties will be in a listen-only mode. Following the presentation there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Ms. Susan Giles, 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 slides on a website that summarize our financial results and although we will not review those in detail, 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. Additionally, we plan to file the Company's Form 10-Q later today.

With me today are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior VP, CFO, and Controller. There are also other members of our leadership team 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 will now turn the call over to Bob.

Thank you, Susan. Before I begin my remarks I would like to just say that yesterday our Board of Directors appointed Fred Meisenheimer as our Chief Financial Officer, Senior Vice President, Chief Financial Officer, and Controller. As most of you know, Pat Reddy left our company on December 31 to become CFO of Spectra Energy, so we are very glad and excited to have Fred as our CFO.

Fred has tremendous experience in the energy business and all of us here in the Company have terrific confidence in him as we move into the future. So he will be giving the financial report this morning as soon as I finish my remarks and then I will conclude with a few remarks at the end.

But yesterday we were pleased to report our first quarter consolidated net income of $76 million with our regulated businesses contributing 76% of that total net income. We are very pleased with the 25% rise in net income from the regulated gas distribution business from a year ago. The work that we are doing in our regulatory arena is certainly yielding the results that we have desired and those results have become more stable and predictable.

The regulated pipeline continues to perform very well. The pipeline experienced a 21% rise in gross profit from higher spreads on the through system deliveries. Our non-regulated operations contributed 24% of our net income. Their results include non-cash, unrealized, mark-to-market net losses of $0.16 per diluted share this quarter, which Fred will explain in detail in just a moment. But as you know, unrealized margins are temporary and should reverse in future periods.

Our strategy of operating efficient and effective regulated assets and offering non-regulated services remains very, very sound. Our earnings contributions had settled into its more historical mix with about 70% to 75% coming from our regulated business and about 25% or 30% from our non-regulated business. Our operations also generated significantly stronger cash flow than a year ago across all lines of business.

Also our Board yesterday declared our 101st consecutive quarterly cash dividend. Our indicated annual dividend rate for fiscal 2009 is $1.32 per share.

I would like now to comment on our credit and liquidity before turning the call over to Fred. I will remind you that the amount of unused borrowing capacity is affected by the seasonal nature of the natural gas business. Our working capital requirements increase as we begin the winter heating season. Traditionally, we access the short-term commercial paper market to finance purchases of natural gas to fill our storage fields.

As we stated last quarter, because of the unavailability of commercial paper we have borrowed funds from our five-year revolver to meet these working capital needs. However, we have seen improvement in the commercial paper markets recently. At December 31 the total amount directly borrowed against our line of credit dropped to $203 million, compared with $351 million at September 30. Our commercial paper borrowings increased to $158 million compared with just $20 million at September 30.

Additionally, during the first quarter of fiscal 2009 we strengthened the sources of our liquidity with the execution of two new committed credit facilities.

Our liquidity position is strong. As of last Friday our total available credit capacity included $247 million of available capacity on the $567 million five-year revolver, all of the $212.5 million of capacity on the new 364-day facility, and $287 million on Atmos Energy Marketing's $375 million committed facility. In addition, the Company has $319 million of outstanding commercial paper with some maturities extended into mid-February and finally $43 million of cash on hand.

Finally, our focus on strengthening our balance sheet and preserving our debt capitalization range of 50% to 55% has been rewarded. Recently Moody's revised its outlook on Atmos Energy to positive and Standard & Poor's raised its corporate credit rating to BBB+. It is very gratifying to us to receive these positive changes to our ratings, particularly during this time of tremendous disruption in the credit market.

It's now my pleasure to turn the program over to Fred Meisenheimer to review our financial results and then I will return for some closing comments and we will take questions at that time. Fred?

Thanks, Bob, and good morning, everyone. For the first quarter of fiscal 2009 consolidated net income was about $76 million or $0.83 per diluted share. This compares to about $74 million or $0.82 a share a year ago. As Bob stated, our regulated natural gas distribution segment reported over $57 million of net income, a 25% increase from a year ago.

This business benefited from the cumulative effect of rate design improvements and rate increases. An additional $25 million of gross profit was generated as a result of rate adjustments primarily in Texas and Louisiana. The Mid-Tex division experience an $11 million increase in gross profit as a result of the three-year rate settlement reached in 2008 with all of the cities other than the city of Dallas. Additionally, natural gas distribution gross profit benefited by about $8 million from a nonrecurring update to our estimate for unbilled revenues as a result of base rate changes in several of our jurisdictions.

The regulated transmission and storage segment contributed about $8 million of net income, down about $2 million from the same period a year ago. Gross profit increased by almost $10 million due to increased through system deliveries as well as improved margins. During the quarter we were able to take advantage of spreads between our interconnects at the Waha and Katy hubs that spiked to over $3 compared to about $0.50 the same period one year ago. However, this increase was more than offset by planned maintenance expense.

The non-regulated pipeline storage and other segment posted almost $6 million of net income, up about $4 million from this time a year ago. Earnings were higher, mainly due to increased transportation margins and utilization of excess transportation capacity available under asset management agreements.

The non-regulated natural gas marketing segment experienced a decline in reported net income of about $11 million or about 49% from the same period a year ago. This was primarily due to the negative mark in our storage book at the end of the current period.

Since there are many moving parts to the marketing business, let's look at gross profit for this segment. If you will turn to slide number eight in the slide deck, you can see that the gross profit margins declined quarter-over-quarter by almost $16 million. That is comprised of a $54 million decrease in unrealized margins offset by a $37 million increase in realized storage and trading margins.

$37 million improvement in our realized asset optimization margins in the current quarter is a result of realizing net gains from settling financial contracts and withdrawing storage during the quarter. These gains were captured as unrealized in prior periods.

As we discussed on our year-end conference call in November, AEM had been deferring storage withdrawals and resetting their financial instruments in the last half of fiscal 2008 to enhance the potential realized gross profit in future periods. As a result of unfavorable natural gas fundamentals this period, it was economically advantageous to settle financial contracts of cycled gas from storage to realize economic value in the current quarter. This contrast to the prior year quarter where it was advantageous to leave the gas in storage and roll the financial hedges forward, which were ultimately cycled in the second quarter fiscal of 2008.

This $37 million improvement in the realized asset optimization margins was offset by a $54 million decrease in unrealized margins. First, the decrease reflects a movement from unrealized margin in the prior year into realized margins of about $37 million in the current quarter. Secondly, market spreads, that is cash versus forward prices on AMs positions, decreased by almost $0.54 per MCF in this year's first fiscal quarter compared to a decrease of about $1.81 per MCF in the same period last year.

Let me remind you that the mark-to-market impact in these GAAP financial values are temporary and should reverse in future periods as the physical gas is again cycled from storage and related financial hedges are settled. Information concerning AEM's storage book is shown in the appendix to the slide presentation on slides 32 through 34. These slides show the difference between the economic value that is the cash, which is what we used to manage the business, and the GAAP reported value at the end of our reporting period.

Primarily as a result of realizing the economic value in the first quarter, AEM's economic value associated with its storage book decreased from $48.5 million at the beginning of the current quarter to $20.7 million at the end of December. Based on the current set up at these December 31 we expect to realize about $10 million of this economic value in fiscal 2009, primarily in the second quarter, and the remainder in fiscal 2010.

Spreads were about $0.97 per MCF at December 31, 2008, compared with about $0.64 per MCF at December 31, 2007. As a reminder, Atmos Energy Marketing maintains a flat trading book and does not engage in speculative trading.

Looking at our expense side of our income statement, for the quarter consolidated O&M expense rose $13 million. The primary drivers of the increase included about $9 million due to higher contract labor largely related to planned maintenance and Atmos pipeline Texas. It was up about $6 million in increased employee and administrative costs and as a partial offset to these increases bad debt expense decreased about $1.3 million compared to the same period a year ago.

Because of rate work in fiscal 2008 we entered the 2009 winter heating season with the ability to recover the fuel-related portion of bad debt expense through gas cost trackers. This accounts for about 64% of the total budgeted gas cost at the regulated distribution business. This means we can collect the gas cost portion of bad debts through gas cost recovery trackers avoiding incurring it as an expense.

As a result, our projected bad debt expense for fiscal 2009 has been reduced to $12 million, which is considerably lower than the $16 million experienced in 2008.

Interest charges in the current quarter rose about $2 million compared to one year ago. We had higher average short-term debt balances, but moreover we experienced a higher average commercial freight rates of about 7.25% compared to a little over 5.5% in the same quarter one year ago. Also commitment fees for our lines of credit increased. Current commitment fees range from 7 to 50 basis points compared with 8 to 9 basis points last year on our short-term committed credit facilities.

Capital expenditures for the quarter were $107 million, up $13 million from the same period a year ago. This increase reflects spending for non-regulated growth projects and increased regulatory compliance spending in the Mid-Tex division.

We have affirmed our fiscal 2009 earnings per share guidance of $2.05 to $2.15 per diluted share and have updated the expected contribution by business segment. So let me draw your attention to slides 23 and 24 where we have outlined our budget assumptions and net income by segment for fiscal 2009. Our projections now include an $8 million increase to net income in the regulated gas distribution segment with an equal and offsetting decrease in the non-regulated marketing business.

Distribution business continues to perform very well. We believe outcomes from our rate design work should provide stronger earnings power in this segment. Additionally, the distribution business has benefited from a one-time $8 million increase in margin, which is about $5 million after-tax, that is from refining our estimates for our unbilled revenue.

We continue to expect lower margins in the non-regulated marketing business based on our viewpoint of relatively low volatility in the natural gas market in fiscal 2009. Marketing margins will likely fall in the lower end of the estimated range. As a reminder, the guidance range assumes no material mark-to-market impact September 30, 2009. As you can understand we have no way of determining what that mark will be until the end of our fiscal year.

I would like to take a minute to review our defined benefit pension plan, given what has transpired in the financial markets. Despite the recent decline in fair value of plan assets, we were not required to make a minimum funding contribution to our pension plan during fiscal 2008. However, based on the January 1 measurement date we expect to fund at the 94% level as permitted by the new ERISA funding requirements. This would require a contribution of less than $25 million to our plans by September 15, 2009.

We are projecting between $500 million and $515 million in capital expenditures in fiscal 2009. Of that $345 million to $355 million will be maintenance capital and about $155 million to $160 million will be growth capital.

As we said last quarter, in an effort to conserve cash and avoid reliance on credit facilities some of these projects could be delayed. In response to this action we have modified our CapEx for fiscal 2009. Growth capital has been revised downward from our original projections. You can refer to slide 28 for a current breakdown.

Major growth CapEx requirements now include about $73 million to $75 million in regulated distribution growth projects throughout our service territory. $50 million to $55 million for the project close to Austin, Texas, on the regulated Atlas pipeline Texas system and $20 million to $22 million in non-regulated projects, which include $6 million for the Shrewsbury acquisitions we announced back in October and $15 million to $16 million for Fort Necessity.

With respect to Fort Necessity, in January we executed an option to purchase 240 acres and lease 328 acres putting our total investment at about $12 million at the end of December. Drilling of the test well is complete and the valuation on soft core is in progress. The well will be configured to serve as a cavern well upon FERC 7c certification. In November we filed FERC 7c application and anticipate the certificate by May of 2009.

As we previously indicated, we have engaged the services of an investment bank to help us determine the 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 provide updates on this long-term project in the future.

That conclude my remarks. I will turn this over to you, Bob.

Thanks, Fred. I will take -- make a few closing comments and then we will take questions. As Fred and I have just reported, we are off to a good start this year and are encouraged by our earnings report for the first quarter of fiscal 2009. We realized considerable progress in our distribution operations and have rate cases pending.

In October, we filed a rate case in Tennessee seeking an increase of $6 million; in November we filed a $9 million rate case with the city of Dallas, which is the only city in the Mid-Tex division not to agree to the settlement we have reached in 2008 with a 438 other cities served by the Mid-Tex division; and in December we filed the Trans La annual rate stabilization clause for $1 million in Louisiana. This ongoing rate work is critical to the future financial performance of our gas distribution segment.

In the regulated transmission and storage segment the through system business continues to be very strong. There are a few small projects under review to add capacity enhancements in the growing areas of our service territory. This month we expect also to make the filing under Texas GRIP legislation to recover 2008 capital expenditures on the Atmos pipeline Texas system.

Our non-regulated operations will continue to complement the regulated businesses through the marketing segments more predictable delivered gas services revenues. Pipeline, storage, and other business should provide additional income from its storage and transportation activities.

We continue to review our capital and expense budgets to determine what steps may be taken to conserve cash. We certainly believe that we can balance the needs of providing our shareholders with stated earnings growth without jeopardizing the safety or reliability on the distribution and pipeline systems. We are off to a great start with solid first-quarter earnings, ample credit to operate our business, and improved credit ratings. We are certainly pleased with the start to 2009 and I appreciate you taking time to be with us this morning.

That concludes our prepared remarks and we will be glad now to take your questions.

(Operator Instructions) Ted Durbin, Goldman Sachs.

Question on the O&M side; up $13 million or $14 million. I'm trying to get a sense of how much of that is expected to be recurring? It sounds like a lot was in the pipeline. And how much might be more one-time?

More of that is one-time in that we did a lot of maintenance-type work on the pipeline in the first quarter. We had opportunities to do that and so a lot of that spending we accelerated into the first quarter on the pipeline operations. And so we believe that will level out back out more in line with our budget for the year.

So it's related to the expansion or is it just kind of ongoing maintenance that you needed to catch up on?

Ongoing maintenance that we needed to catch up on.

Okay, that is fine. On the non-regulated growth CapEx coming down, just from your -- it looks like $25 million or $30 million. Is that mostly coming out of Fort Necessity or is there other projects that you took out of the budget?

It's a combination of both, Ted. Looking for the highest and best use of our capital, so we have reduced what we are going to be putting in Fort Necessity plus put some other projects potentially on hold.

Okay. Can I ask then just about volume growth? It looks like the distribution companies had volumes were up 6%. How much of that was due to weather? And maybe can you give a little color and what you are seeing on different segments like industrial demand? A lot of folks are talking about industrial demand being off.

Good morning, Ted. This is Kim. Yes, a lot of that is related to weather, because we had obviously experienced some weather patterns in our service territory early in the heating season and obviously December and January. So that is principally what we are seeing. Obviously, you are seeing some contraction in the commercial industrial sector right now. And that may continue as this economy continues its course.

So when you talk to your customers do they give you a sense that you come out of this in the second half of the year or where are they kind of talking to you about that?

It depends if you are watching CNBC or Fox or anybody in New York. Really on the residential side, which is the lion's share of our service and associated volume, we have weather normalization that covers about 97% of that stuff.

The commercial side it really isn't that much of a big part of our business; most of it obviously in the Kentucky mid-states area. And those folks they are looking very optimistically at second half.

Okay. Then if I could just ask one more on sort of rate cases, can you remind us what the rate increase that you actually have in '09 rates are in mid-Tex? And then also in West Texas I thought you had filed for a $9 million or $10 million rate increase there?

Well, the best way to look at that probably is we kind of keep a running total of the revenue additions that are associated with actual rate outcomes. If you look at 2008, we added about $54 million of additional revenue from cases that we successfully concluded during that period. So far in '09 we have brought in about $23 million of additional revenue.

We have cases on file seeking amounts of $16 million and then we have another in the planned filings that we will make during calendar '09 amount right now to about $61 million. But we have got, obviously, a very aggressive approach to our rates and trying to keep our expenses in line with our filings and keeping everything current so that we can address and reduce as much lag as possible.

I am sorry, the $61 million that you planning to file that is system-wide not just in Texas?

All of those things are system-wide.

Okay, that is great. And then if I could just -- one last question in terms of the short-term debt balances. They have picked up $150 million versus where you were at this time last year. Is there a plan to be out there more in the debt markets with longer-term debt or how are you thinking about the mix of short and long-term debt and other financing needs?

We are looking at options. As you are well aware, we have the $400 million that comes due October 15, 2009, and we are looking at activity out in the market now. The rates are continuing to improve from what we are seeing and we are looking at our options as to what we have available to us and what we will do during the year. So we will come to conclusions on that as we go through the year, but as of now we don't have -- haven't finalized those plans.

And would you need any equity at all beyond the standard drip that you do every year?

This -- Ted, this is Bob. No, that is not in our plans at the moment. We have gotten all of our credit facilities in place and as Fred said, we are looking at the timing of this $400 million. But, no, we are not -- our balance sheet is pretty much where we want it to be and so we wouldn't be looking at any equity.

Okay. I appreciate the time. Thanks, guys.

(Operator Instructions) Barry Klein, Citi.

Just piggybacking off of one of the last speaker's questions, talking about planned filings, $61 million system wide. Over what territories would that be?

I guess you were talking about the rate case filings this year.

That is over everything, Barry. We got some actions we have got to pursue in Missouri, the pipeline GRIP. Mid-Tex obviously we wanted a settlement. We have further discussions to go there. Down in Louisiana, West Texas, Kentucky, Mississippi, Georgia, Illinois, Colorado, and Kansas.

Okay, basically --.

How about that?

Also, gas is probably put into the ground at pretty high prices compared to historical numbers. What type of working capital cash flow should we see for the rest of the year or at least going in through the rest of the heating season? Versus previous years?

Our cash flows have been very strong, as you will see in our numbers for the quarter. We have been pulling a good bit of gas out of storage and cycling that gas. Our debt balances are in good shape and we have done things within the Company in improving our cash flows just from daily operation in the way we build and collect our monies. And so our working capital funds are in good condition at this time and believe that we will continue with that throughout the year.

What I was getting at is they should improve because you are taking out some high cost gas that you are passing on to customers?

That is correct.

How much of an improvement in working capital could we see over the next three to six months compared to other years because of this sort of turn around? And should that impact -- and how much should that impact the short-term debt balances that people have been talking about that are pretty high now?

Our short-term debt balances are going down and will continue to go down. We anticipate they will be substantially reduced in the next very few months, largely due or in part due to cycling the gas out of storage and recouping that money from the customers.

Okay, thanks a lot.

(Operator Instructions) As there are no further questions, I would like to turn the call back to management for any additional remarks.

Thank you all for joining us this morning. As a reminder, a recording of the call is available for replay on our website through April 30. If you have any additional questions, please call me. Again, thank you. We appreciate your interest in Atmos Energy. Good day.