埃特莫斯能源 (ATO) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. (Operator Instructions). Welcome to the 2009 second-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 would now like to turn the conference over to Susan Giles, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning, everyone. And thank you for joining us. This call is open to the general public and media but designed for financial analysts. It is being webcast live over the Internet. We have placed slides on our web site to summarize our financial results. We will not review all of them, but we will reference the following slides and you might want to write this down. Slides number 8, number 16, 34, 40, 41, 45, and 46. And, of course, we will take questions about any of them at the end of our remarks.

If you would like to access the webcast and slides, please visit our web site at AtmosEnergy.com and click on the conference call link. Also, we plan to file the Company's form 10-Q later today. Our speakers this morning are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President, CFO and Controller. There are other members of our leadership team to assist with questions as needed.

Let me remind that you as we review these financial results, and discuss future expectations, keep in mind that 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 Reform Act of 1995. Now I would like to turn the call over to Bob Best.

Thank you, Susan. And good morning, everyone. And as always, we appreciate your interest, and appreciate you joining us this morning. As Susan said, Fred Meisenheimer, our Chief Financial Officer is going to review the financial results in a little bit greater detail in just a moment, but before he does that, I want to make a few observations about the quarter and also about recent developments regarding our company. Yesterday we reported second-quarter consolidated net income growth of 16%. Net income was $129 million and earnings per diluted share were $1.41. Our regulated businesses contributed 94% of total net income and experienced a 20% increase in quarterly net income compared to a year ago. The second quarter's historically our strongest quarter and we expect 2009 to be the same.

The distribution business benefited from the results of ongoing rate work and regulatory enhancements to further stabilize margins. In the regulated pipeline in Texas continues to perform well, experiencing increased income despite lower transported volumes. The nonregulated business contributed the remaining 6% of net income in the current quarter. Similar to many of our peers, our consolidated operations experienced declines in volume from last year, primarily as a result of these challenging economic times. Overall volumes declined about 6% for the six months, and 12% quarter over quarter. The largest decline was felt in the industrial customer class, where we experienced volume declines of 12% for the six months and over 18% for the quarter. But the good news is, that industrial volumes only represent about 13% of our consolidated throughput, the bulk of the volume reductions as a result of idle production or plant closings.

In the regulated business, this includes customers like General Motors and Chaparral Steel, but these declines are somewhat offset by incremental load generated from new large customers, such as a sand plant south of Fort Worth, a heavy equipment plant in Longview, Texas, and and a brick plant in Denton, Texas. In the nonregulated business, the hardest-hit industries remain the chemical, steel and automotive sections, but again, we have been able to partially mitigate the effects of these lost volumes by adding new customers in this segment as well. Generally speaking, we were able to overcome the effects of demand decline because of margin protection in our rates in our regulated businesses, higher demand base charges at Atmos Pipeline Texas, and higher per unit margins in the nonregulated marketing business.

I want to spend a moment talking this morning about our newly issued senior notes. As many of you know, on March 26, we issued $450 million of 8.5% senior notes due in 2019. And yesterday, we used the majority of those proceeds to redeem $400 million of our senior notes, which were originally scheduled to expire on October 15th of this year.

Within the last six months, we have demonstrated on several occasions our ability to access the capital markets. Furthermore, we believe the successful $450 million debt offering should eliminate any uncertainty around our ability to issue under these tight credit market and conditions. Once we completed the public offering, Moody's put us on review for a possible upgrade, which would not only assist in any future debt offerings, but also would allow us to receive better rates on our commercial paper, which would also reduce short-term interest expense. Within the past six months, Moody's revised its outlook on Atmos, while Standard & Poor's raised its corporate credit rating to triple B-plus.

Our focus on strengthening our balance sheet, keeping ample liquidity sources, and preserving our debt capitalization range of 50% to 55%, has attributed to our solid investment grade credit ratings. I will now ask Fred Meisenheimer to review our financial results. Then we will return for closing comments and at that time, we will be glad to take your questions. Fred?

Thanks, Bob. And good morning, everyone. I will speak to the more significant items in the quarter and six months, and then discuss the outlook for the remainder of our fiscal year. As we stated in the earnings release, consolidated net income for the quarter climbed 16% to about $129 million, or $1.41 per diluted share. On the six months, net income increased 11% to almost $205 million, or $2.24 per diluted share. Quarter and year-to-date results were favorably impacted by one-time tax benefit of about $11 million, or $0.12 per diluted share. The benefit arose during the quarter from updating the tax rates used to record our deferred taxes.

Tax benefit increased net income at the distribution segment by about $10.5 million, and at the regulated transmission and storage segment by about $1.7 million. However, net income for the nonregulated segments combined was negatively impacted by less than $1 million. Our regulated natural gas distribution segment, net income increased 19% in the quarter to about $102 million. Net income grew 21% to about $152 million for the six months. For both current periods, the natural gas distribution business continued to benefit from the cumulative effect of great design improvements. We experienced a net increase in gross profit of over $9 million in the quarter. About $35 million from the six-month period. Generated primarily from rate adjustments in our Mid-Tex Division, smaller increases of West Texas, Louisiana and Georgia. Additionally, both periods benefited from the reversal of a $7 million accrual, estimated unrecoverable gas cost recorded in the prior year.

Also as Bob mentioned, both periods experienced volume declines across all business segments with the hardest hit being the industrial sector. Fortunately, our sensitivity to the downturn in the industrial sector is minimal, given that only about 4% of our distribution throughput is generated from industrial customers. We have included some detail on slides 40 and 41 to show the demand decline by segment. Regulated transmission and storage segments continues to experience good growth. Net income grew 28% to over $19 million in the quarter and grew 8% to $27 million in the current six months. This segment continues to benefit from the ability to earn higher unit margins of through system deliveries, higher demand-based charges and GRIP related rate increases, all of which offset the throughput decline from Barnett Shale activity and reduced industrial and electric generation demand. Volumes have declined on Atmos Pipeline Texas.

We have been successful in raising our per unit margins, thereby achieving increases in gross profits for three months and six month periods when compared to last year. Nonregulated natural gas marketing segment reported net income of about $3 million, which is down $2 million quarter over quarter. Year to date, this segment reported net income of about $14 million . Which is $12 million lower than the prior year period. Since there are many moving parts to the marketing business, let's look at gross profit for this segment. You may want to follow along in your slide deck. Turning first to the quarter on slide 8. Here you see the gross profit margins increased quarter over quarter about $7 million, comprised of a $40 million increase in unrealized margins, offset by $30 million decrease in realized asset optimization margins, and a $3 million decrease in delivered gas margins.

Looking first at our asset optimization margin, operationally in the second quarter of fiscal 2008, we withdrew gas from storage and settled the associated financial hedges all in the same period. Creating total asset optimization margins of $27.7 million. Contrast this to the current year's quarter where as as a result of falling [prompt] month prices relative to future prices, it was financially advantageous to leave gas in storage, throw the financial hedges forward to increase the economic value of those positions in future periods, and inject additional gas into storage, create new storage positions, and further increase economic value. However, this decision created a negative $2.1 million of asset optimization margin for the current period. The corresponding quarter-over-quarter increase in unrealized margins of $40 million is primarily from marking-to-market the physical gas in storage, and the related financial hedges at the end of each period.

On slide 45, you can see that during the quarter, we experienced more volatility between current cash prices and forward natural gas prices. The change in the mark between December and March in the prior year quarter decreased by $1.89 per Mcf, compared with just an $0.18 per Mcf decrease between December and March of this year. Turning again to slide 45, you can see the difference between the economic value, cash, which is what we use to manage the business and the GAAP reported value at the end of a reporting period. As you will note, we increased our economic value by almost $13 million during the quarter, as a result of rolling positions forward and increasing storage volumes with related spread positions. Additionally, the spread captured in our storage book was about three times greater than it was a year ago. $1.52 for Mcf, or $33 million in total as of March 31, 2009, compared with $0.52 per Mcf or $11 million as of March 31, 2008. Based on the current set-up on March 31, we expect to realize about $3 million of this economic value in the last six months of fiscal 2009, with the remainder in the first half of fiscal 2010. As a reminder, Atmos Energy Marketing maintains a flat trading book, and does not engage in speculative trading.

Looking at year-over-year results, you would turn to slide 16 in your slide deck. You will see that gross profit margin decreased almost $9 million, comprised of a $14 million decrease in unrealized margins, a $3 million decrease in realized delivered gas margins, partially offset by an $8 million increase in realized asset optimization margins. Operationally, as we discussed on our first-quarter conference call in February, the last asset optimization margins reflected a $37 million movement from unrealized margins to realized margins when we cycle gas from storage last quarter. And realize the favorable spreads that we have previously captured in fiscal 2008 from deferring storage withdrawals at that time. These gains were partially offset by the marginal loss incurred in the current quarter, as a result of deferring storage withdrawals and injecting gas into storage I just spoke about. Prior year's period primarily reflects a storage withdrawal gains recognized in the second quarter of 2008 that I just discussed. Unrealized margins decrease year-over-year almost $14 million.

Take a look at slide 46, you will see that lower volatility between cash and forward natural gas prices in the prior six months resulted in a decrease in the mark between September and March of $0.91 per Mcf, compared with a significantly larger decrease of $4.46 per Mcf in the current six months. Let me remind you, these GAAP reported values, the mark-to-market impact, are temporary and should reverse in future periods as the physical gas is cycled from storage, and related financial hedges are settled. Finally our delivered gas activities declined in both the current quarter and year-to-date, compared to the same periods a year ago. This primarily reflects the impact of lower sales volumes. Information concerning our quarterly and year-to-date sales volumes are shown in the appendix to the slide presentation on slides 40 and 41.

On the current six months, total sales volumes in the marketing segment declined about 8% from the prior year period, with all the decline attributable to weakened industrial demand. However, despite the unfavorable economic climate, operating margins have remained consistent year-over-year. Turning now to the expense side of our income statement. Consolidated operation and maintenance expense increased about $2 million for the second quarter, and about $15 million during the first six months of our fiscal year. Looking at the current six months compared to the same period last year, contract labor increased about $9 million, partially related to project spending in Atmos Pipeline Texas in the first quarter of this year. Year-over-year saw employee costs rise almost $5 million, primarily from annual wage increases of 3.5% and various employee welfare costs, and we experienced a $3 million increase in legal and miscellaneous administrative costs.

As a partial offset to these increases, bad debt expense decreased about $1 million in the six months as compared to the same period a year ago. Mainly due to the Mid-Tex division's ability to recover the gas cost portion of bad debt beginning last November. Year to date, our bad debt expense is running just over two-tenths of 1%. Capital expenditures for the current six months rose about $23 million, to about $221 million. Primarily reflecting costs associated with the nonregulated or necessity storage project, and the construction at the line extension project at Atmos Pipeline Texas.

Moving now to our earnings guidance for fiscal 2009. We are maintaining our previously announced earning estimate for fiscal 2009 in the range of $2.05 to $2.15 per diluted share of common stock. Our assumptions remain materially the same and include total expected gross margin contribution from the marketing segment in the range of $80 million to $90 million, excluding any material mark-to-market impact. Continued successful execution of our rate strategy and collection efforts add debt expense of no more than $12 million. And average annual short-term interest rate of 4.6%. And no material acquisitions. Additionally, we continue to watch the capital markets to determine the impact that they could have on certain of our available for-sale securities.

Like most companies, the value of these investments has declined in recent months due to the overall decline in the financial markets. Although the markets started to rebound late in the second quarter, we cannot be certain that this rebound will continue to sufficiently recover the value lost in these investments in a reasonable period of time, which could adversely impact our results in the latter half of this fiscal 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 the business segments. So let me draw your attention to slide 34. We have projected our increased contributions from the regulated natural gas distribution and regulated transmission and storage segments, and decreased contributions from the nonregulated segments. We are projecting between $500 million and $515 million in capital expenditures in fiscal 2009. Of that, $360 million to $370 million will be maintenance capital, and about $140 million to $145 million will be growth capital. Once again, here is

Thanks, Fred. I will make a few closing remarks, and then we will be glad to take your questions. Our strategy of operating efficient and effective regulated assets and offering nonregulated services remains very sound. We continue to full-court press in the regulatory arena, and as you can see from the results today with concentrating on rate design which fundamentally and primarily drives the performance of our regulated businesses. In the Mid-Tex division, we currently have a case spending for $8.8 million of operating income at the railroad commission for the City of Dallas and the Environs customer, both of which are not part of the settled cities. We expect to receive the procedural schedule in this case soon.

Also within the Mid-Tex division, in March we filed the second RRM with the settled cities to increase operating income by approximately $9.7 million. Statutory deadline for a decision is July 15, 2009. I remind that you the RRM is the filing process required in the settlement agreement last year reached with 438 of 439 cities served in Mid-Tex division. It reflects annual changes in the cost of service and rate base and replaces GRIP filings.

Our West Texas cities, and the city of Lubbock also adopted the RRM mechanism, and earlier this month, we filed for a combined operating income increase of $14.6 million. At Atmos Pipeline Texas we continued to utilize the GRIP mechanism to implement rate increases for our capital expenditures. Earlier this week, we received approval to increase rates by $6.3 million from the Texas Railroad Commission effective today. In Louisiana, we filed an annual rate stabilization request for an increase of operating income of $3.9 million, and anticipate a decision by July 1. In Tennessee, we reached a settlement which increased operating income by $2.5 million effective April 1.

As a result of these filings and smaller ones I haven't mentioned, we have received or currently have on file, cases which we project will add incremental operating income in the $50 million to $60 million range. At the consolidated level, our debt capitalization ratio at March 31, was 54%, compared to about 50% one year ago. This increase was due to completing the public offering in March of $450 million senior notes, and not redeeming the $400 million of senior notes until yesterday. Had we issued and redeemed both pieces of debt in the second quarter, our debt capitalization ratio at March 31 would have been just under 50%, but just where our ratio came in one year ago.

Additionally we had no short-term debt outstanding at the end of March, a favorable position as we head into the storage injection season. In closing, the first six months of fiscal 2009 have been very, very strong. We are off to a good start with solid earnings, ample credit to operate our business, and improved credit ratings. We believe we are on track to meet our earnings guidance and to achieve another year at Atmos of making our goal of four to six percent earnings net income growth. We appreciate you taking time with us this morning and now we'll take your questions.

Thank you, sir. We'll now begin the question-and-answer session. ( Operator Instructions ) Our first question comes from the line of Gabe Moreen with Bank of America Merrill Lynch. Please go ahead.

Good morning, everyone.

Good morning.

Question on the regulated transmission and storage side of things, the decline in Barnett Shale activity, I was wondering if that was something you were expecting going into the year, and how should we think about your ability to continue to kind of expand margins and get GRIP filings, offsetting a potential further decline should gas prices stay very low?

I am going to turn it over to Kim Cocklin who is our President over all of our regulated, nonregulated operations.

Good morning, Gabe.

Good morning, Kim.

We talked about in the past the potential drop-off of volumes in the Barnett Shale, and really the drop-off has not been as precipitous as we might have thought, but what we did last year was take contracts with producers on third-party transportation, and we essentially entered into three-year agreements and phased the revenue from the one-year contracts over the three years in anticipation of this drop-off in revenue. So, as you can see with the regulated storage and transmission results, we are not experiencing any negative effects of that downfall right now.

And, we don't anticipate. Now as far as the GRIP filings, it does not affect the GRIP filings at all. Those are going to continue to be made. The investment that we make in the pipeline will continue to be pursued through the GRIP filings themselves.

And we have got a case that we are going to file in September of '10 for the pipeline itself. So overall, we feel very good about our position in the Barnett Shale field, the throughput side of the business. At least the third party throughput transportation margins are continuing to be very strong and very healthy.

Great, thanks, Kim.

Did I answer your question?

Yes, thanks, Kim. One quick follow-up for Fred. I am not sure if you talked, you might have mentioned this, but in terms of raising your cash flow guidance from operations. Is that pretty much working capital, lower working capital needs going into injection season?

Yes, it is, because the lower gas prices and we are seeing very good results in all of our collection efforts and the price of the gas that we are putting into storage is at a lower overall cost. So it is basically the working capital.

And I guess are you assuming just the current forward curve for that, for that projection right now?

Yes.

Okay. Great, thank you.

Yes.

Thank you. (Operator Instructions). And our next question comes from the line of Faisel Khan with Citigroup. Please go ahead.

This is actually Barry. Just for follow-up on Gabe's question, relating to the price of gas in storage. What is the effective price that you're assuming for the gas that you are putting into storage?

Give us just a second here, Barry. See if we can.

In the ballpark.

Just a second. I think we got it. They need to -- do you have another question while we are?

Gabe actually asked a couple of my questions.

Okay. Okay.

You can get back to me on it.

I will call you Barry.

Is he looking for the assumption for the rest of the year, right?

No, he is looking for the cost today

Are you looking for the cost?

For the gas you are putting in the storage, I guess, what price were you assuming for your working capital forecast?

Oh, okay.

I guess what also I was getting at, what type of sensitivity do you see on the gas going into storage, like $1.00 per Mcf would equate to what in working capital?

On the projection and what with we are looking at is just a forward curve. I thought you were looking at what was our weighted average cost that we have in today.

No, no, no.

Okay.

Sorry.

Okay.

Just a forward curve.

What would be the sensitivity on, if gas prices were to fall more typically? What do you see for dollar and cost of gas, versus working capital requirements?

We will, can get that answer and get back to you on it. It is not something we have right here.

Okay, great. Thanks for time. I guess I will see you guys at AGA.

Yes, thank you. We will be there.

Thank you. At this time, there are no further questions in the queue. I would like to turn the call back over to management for any closing remarks.

Thank you all for joining us. As a reminder, a recording of this call is available for replay on our web site through August 5. Again if you have any additional questions, just call me or come visit us at the upcoming AGA financial forum. We appreciate your interest and thank you for joining us. Bye-bye.