埃特莫斯能源 (ATO) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Atmos Energy 2009 third quarter conference call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce host, Susan Giles, Vice President, Investor Relations for Atmos Energy. Thank you.

Ms. Giles, you may begin.

Thank you, Rob. Good morning, all, 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 website that summarize our financial results. We will not review all of them, but we will reference the following slides. Slide number 7, 16, 46, 48, 49, 53, and 54. And of course we will be happy to take any questions about any of them 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. Also, we plan to file the company's 10Q later today.

Our speakers this morning are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President and CFO. There are other members of our leadership team to assist with questions as needed. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Any forward-looking statements were intended to fall within the Safe Harbor rules of the Private Securities Litigation Reform Act of 1995. And now I would like to turn the call over to Bob Best.

Thank you, Susan, and good morning, everyone. As always, we appreciate your interest in Atmos and we appreciate you joining us this morning. Yesterday, after the market closed, we reported consolidated net income of $2 million or $0.02 per diluted share for the three months ended June 30, 2009, compared with a net loss of $6.6 million, or $0.07 per diluted share in the prior year quarter. For the nine-month period, net income rose to $206.9 million, or $2.26 per diluted share, as compared to $178.7 million or $1.99 per diluted share for the same period a year ago. Year to date, our regulated operations contributed 85% of our net income with the remaining 15% coming from our nonregulated businesses. Additionally, our board declared our 103rd consecutive cash dividend. Our indicated annual dividend rate for fiscal 2009 is $1.32 per share which calculates to a yield of almost 5%.

In May, we were pleased to see that Moody's investment service raised its credit rating on our corporate senior debt from Baa3 to Baa2, and our commercial paper rating was upgraded from P-3 to P-2. Our outlook was changed from positive to stable. This upgrade has allowed us to access the commercial paper market on much more economically favorable terms. Although we had no short-term debt at June 30, we did place about $32 million of commercial paper last week to pay our bills for gas purchases at a rate of just 45 basis points. At the end of June, our debt capitalization ratio was 49.7% compared with 54.6% at September 30 and 51.5% at June 30, 2008. Now I'll ask Fred Meisenheimer to review the financial drivers and then we'll return for closing comments and we'll be glad at that time for your questions. Fred?

Thanks, Bob, and good morning, everyone. As Bob said for the three months ended June 30, 2009, we earned net income of $2 million, or $0.02 per diluted share, compared with a net loss of $6.6 million, or $0.07 per diluted share in the prior year quarter. Quarter over quarter improvement reflects higher gross profit and a regulated transmission and storage segment and also the natural gas marketing segment, as well as lower consolidated operating and maintenance expense offset in part by higher interest expense. For the first nine months of fiscal 2009, net income rose to about $207 million or $2.26 per diluted share compared to $179 million or $1.99 per diluted share for the same period a year ago. Keep in mind that the current nine-month period includes one-time items that when combined total $17 million of net income or $0.19 per diluted share. These are detailed on slide 46 of the conference call slides.

Results for the current nine-month period reflect increased gross profit across all of our business segments, partially offset by higher depreciation expense, pipeline maintenance costs, employee labor and benefits costs and interest expense. Challenging economic times have impacted our company across all business segments and are most apparent in our general decline in throughput. Year-over-year, our natural gas distribution segment experienced a 4% decrease in total consolidated throughput with the sharpest decline experienced in the industrial customer class, where volumes dropped 16%. However, let me remind you that industrial throughput only accounts for 4% of total distribution volumes. Declines in the demand for natural gas are largely a result of idle production and plant closures have contributed to a 7% decrease in throughput in our regulated transmission and storage operations and a 5% decrease in consolidated sales volumes in our natural gas marketing segment. We saw the trend in industrial demand continue to decline slightly in the current quarter in both our regulated pipeline and nonregulated marketing operations.

We've included some detail on slides 48 and 49 to show the demand decline by segment. However, recent improvements in rate design in the distribution segment and the ability to earn higher preunit margins on our regulated transmission and storage of natural gas marketing segments has more than offset the decline in throughput and sales volumes. Regulated natural gas distribution business contributed to benefit from the cumulative effect of changes in rate design and several of our service areas. On the current quarter, however, rate design changes on most of the Mid-Tex division customers actually reduced margins by $5.4 million compared to one year ago as a result of shifting costs from the base charge to the volumetric portion of the customer field, resulting in lower margins in summer months.

As expected, the distribution segment experienced a net loss of $15 million this quarter, but for the nine months ended, net income was about $137 million. The regulated transmission and storage segments saw net income rise 26% to about $13 million in the quarter and rise 13% to $40 million in the current nine-month period. This segment continues to benefit from the ability to earn higher unit margins on through system (inaudible), higher demand-based charges and group-related rate increases, all of which offset the throughput decline from Barnett Shale activity and reduced industrial and electric generation demand.

Moving to our nonregulated businesses, the nonregulated natural gas marketing segment reported net income of about $2 million, an increase of $8 million quarter over quarter. For the current nine-month period, this segment reported net income of $16 million, down almost $4 million, or 18% from the same period one year ago. Since there are many moving parts to the marketing business, let's start with a look at gross profit for this segment. You may want to follow along on your slide deck on slide seven. Delivered gas margins increased $5.4 million quarter over quarter, largely due to a 48% increase in per unit margins on similar sales volumes as a result of greater basis opportunities in certain market areas and successful contract renewals. However, the biggest driver of gross profit for the quarter was a $23 million increase in asset optimization margins, as a result of experiencing a smaller loss on the settlement of financial hedges in the current quarter when compared to last year's quarter.

During both quarters, as a result of falling current cash prices relative to future prices, it was financially advantageous to leave gas in storage and roll the financial hedges forward in order to increase the economic value of those positions in future periods. However, the settlement losses experienced this quarter were smaller as a result of reduced price volatility in the current quarter when compared to a year ago. Corresponding quarter over quarter decrease in unrealized margins of $11 million is primarily from marking to market the physical gas and storage and the related financial hedges at the end of each period. On slide 53, you can see that during the quarter, we experienced lower volatility between the current cash prices and forward natural gas prices. Change in the mark between March and June and the prior year quarter was $1.99 per Mcf compared with just a $0.73 per Mcf increase between March and June of this year. Referring again to slide 53, you can see the difference between the economic bay or cash, which is what we use to manage the business, and the GAAP reported value at the end of the reporting period.

As you will note, we increased our economic value by $8.6 million during the quarter as a result of rolling positions forward. However, the spread captured in our storage book was about 24% less than a year ago, $2.10 per Mcf versus $2.75 per Mcf as of June 30, 2008. Based on the current setup of June 30th, we expect to realize about $16 million of this economic value in the last quarter of fiscal 2009, with the remainder in the first half of fiscal 2010. Looking at year-over-year results, please turn to slide 16 in your slide deck. You will see that the gross profit margin increased almost $9 million. Delivered gas margins increased $2.7 million, largely due to a 9% increase in per unit margins due to favorable basis spreads in certain markets and successful contract renewals partially offset by decrease in sales volumes, largely a result of lower industrial demand as we've discussed previously. Again, like the quarter results, the biggest driver of margins for the full nine months of this year lies in our asset optimization activity, which saw margins rise by almost $31 million year-over-year.

During the first quarter of this year, AEM withdrew fiscal storage inventory and realized more favorable spreads that it captured from deferring storage withdrawals in fiscal 2008 and rolling the financials forward. These gains were partially offset by margin losses in the second and third quarters of fiscal 2009 as a result of deferring storage withdrawals and injecting gas into storage to increase the future gross profit. This contrast in prior year when AEM deferred storage withdrawals from the first quarter into the second quarter and recognized the storage withdrawal gains during the second quarter of fiscal 2008.

Additionally, unrealized margins decreased about $24 million period over period as a result of greater volatility, widening spreads between current cash prices and future prices in the current period compared to the same period last year. On slide 54, the change in the market between September and June and the prior year increased by $1.08 per Mcf, compared with a decrease of about $3.73 per Mcf between September and June of this year. As a reminder, Atmos Energy marketing maintains a flat trading book and does not engage in speculative training.

Turning now to the expense side of our income statement, consolidated operation and maintenance expense declined about $7 million or 6% quarter over quarter. The decrease in O&M expense is due primarily to $4 million decrease in contract labor due to timing of spending at Atmos pipeline Texas, $3.3 million decrease in legal and administrative and fuel costs. However, employee costs rose about $2.7 million. We also experienced a $1.3 million decrease in the provision for [bad] accounts resulting from accelerated gas cost recovery at the mid-Tex division coupled with a decrease in average gas costs. Our current bad debt expense is running about 0.2%. We experienced an increase in operating expense of $3.3 million during the quarter to recognize an impairment to certain available for sale investments because of the decline in the financial markets.

As we talked about on last quarter's call, the market had rebounded somewhat, but not enough to sufficiently recover the value of the loss in these investments. Interest charges quarter over quarter increased about $8 million, a result in redeeming the $400 million of 4% center notes with the higher priced issuance of $450 million of 8.5% senior notes in April. Our year to date operating cash flow was $825 million. It nearly doubled from last year, mainly from higher net income, considerably lower gas prices experienced this year, a reduction in margin requirements in the nonregulated marketing segment and quicker recovery of gas costs through rate mechanisms. Our strong cash flow position kept us from having to access the commercial paper market until last week, as Bob mentioned earlier. We contributed $21 million to a pension plan in June to reach compliance with the [arisa] 94% funding requirements that were effective beginning this year, slightly less than original projected at an amount up to $25 million.

Moving to our earnings guidance for fiscal 2009, we are maintaining our previously announced earnings 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 from 2009 fiscal year, although we have increased the nonregulated marketing margins by about $5 million. We're at $2.26 per diluted share year to date, but you must factor into that number the $0.19 of one-time items discussed earlier and remember that our fiscal fourth quarter is historically a loss quarter for us. We are projecting between $500 million and $515 million in capital expenditures in fiscal 2009. Of that amount, $375 million to $385 million will be maintenance capital and about $125 million to $130 million will be rough capital. Once again, here's Bob.

Thanks, Fred. I'll make a few closing comments and then we'll be glad to take your questions. In the distribution business, we made considerable progress this year. In the regulatory arena, partnering with customers on rates and regulatory matters has proven to be a win-win for our shareholders, our customers, and our communities. By fostering this partnership, costly litigation expenses are avoided, investment and infrastructure and pipeline projects are made based on consumer feedback and trust, and efficiencies occur both in the company and in our communities that we serve. A fine example of this partnering is reflected in the rate review mechanisms in the west Texas division and the settled cities in the Mid-Tex division, whereby rate changes are working as both sides anticipated with no surprises. Increases of $2 million in the Mid-Tex division and $7.8 million in the west Texas cities will become effective this month.

The cities of Lubbock and Amarillo are currently reviewing their respective RRM filings and a termination is expected in October. Additionally, in the Mid-Tex divide, the $7.7 million case for the city of Dallas and the [envirs] customers, both of which are not part of the settled cities, is pending at the railroad commission. A hearing is scheduled with the commission later this month and a final ruling is expected on -- in November. I assure you we will take every opportunity for settlement discussions with the city of Dallas to hopefully include them in the more efficient and fair RRM process. We currently have rate cases pending, which request a total of about $20 million of increases in operating income. As of August 1st, over $53 million of an incremental operating income increases have been approved for fiscal 2009.

Financial performance at the distribution business relies heavily on the success and the rates and regulatory arena, so we will continue to be very focused in this area. We continue to be pleased with our regulated transmission and storage segments, which includes Atmos pipeline Texas. During the quarter, we placed into service a 25-mile pipeline extension we refer to as the line BP extension project. The addition of this pipeline will increase the capacity of the Atmos pipeline Texas system serving the Austin-Round Rock area by 100 Mcf per day, also gives us the ability to continue to provide existing and future residential customers safe and reliable service and to provide commercial and industrial customers the firm capacity that they desire in this fast-growing market.

Capital costs for this project were $33 million, down from original estimates of $50 million to $55 million because of lower steel pipe costs and the general construction efficiencies. These capital expenditures are eligible for GRIP recovery. The pipeline in Texas has been a very, very valuable asset to us, especially during the drilling boom, which has occurred in Texas the past few years. Although production has recently declined, we have been insulated somewhat since we have executed demand-based contracts with producers and marketers that run through 2011. Let me update you on where we stand on our nonregulated [fork] necessity project. We previously disclosed that we had engaged the services of an investment bank to help us determine the most optimal ownership development mix for these projects. We are now in serious discussions and negotiations to sell our entire interest in this project.

Our investment in the Shrewsbury and Park City's project is essentially complete and we do not anticipate any additional large capital outlay for these projects. Unfortunately, the economics of gathering and processing business have weakened. So we are not actively pursuing this line of business at this time. We also determined that now is not the time for us to pursue or commence Greenfield storage or gathering projects. However, we continue to look for good projects on our regulated pipeline similar to the line BP project. We are frequently asked how will we grow this business going forward. Oft times, the past is the best indicator. We've grown this business by making 10 acquisitions over the course of its history.

For a while, infrastructure funds and private equity funds were driving up acquisition premiums, but that has subsided. So we continue to improve our balance sheet and remain poised to take advantage of acquisition opportunities as they unfold to provide our company future growth. If we were to consider a transaction, we would expect a transaction to be accretive to earnings in the first year. We would have to be confident that we could earn a return on investment that's higher than our cost of capital. We would want the rating agencies to be comfortable with the transaction, and we would have to maintain investment grade status, and the capitalization of the deal would be in a range we could tolerate. We remain steadfast to soundly operating this company and remain committed to growing our consolidated earnings at our stated goal of 4% to 6% a year on average. We appreciate your taking time with us this morning and now we'll turn it back to the operator to take any of your questions.

Thank you. We'll now be conducting the question and answer session. (Operator Instructions) One moment, please, while we poll for questions. (Operator Instructions) Our first question is from the line of Shneur Gershuni with UBS. Please state your question.

Hi, good morning, guys.

Good morning.

I've noticed your cash flow from operations, kind of your expectation for the year is much higher than it was when you gave the analyst update back in February. I was wondering if you could sort of prioritize how you plan to utilize the extra free cash flow from operations that you have this year from changes in liabilities.

Well, first of all, we are gratified that our cash flow has been so strong this year. I think what we see as we move forward, we -- there certainly has been pressure on us to continue to operate, replace steel pipe and replace other pipe that's older. There's also we've been working to put in automated meter reading and so we have lots of -- plus our pipeline projects that we talked about. So what we see -- and those are all good rate base investment projects that we're able to earn a good return on. So I think for the moment, that that's really where we're concentrating and we're hoping that we'll -- we're continuing to look for projects off of our pipeline and that will really be our -- that will be our level of concentration.

If you don't mind a follow-up, I was wondering if you can talk about your maintenance capital relative to your depreciation rate and the fact it happened to be higher and so forth. I was wondering if you can help us rectify why there is such a difference.

Some of that goes back to some of the acquisitions we've made where some of the systems were not in the condition that we would like them to be. And so we continue to improve and work on those systems, bringing them up to our standards, and we, over the years, have been making improvements in that area, but we're not totally there yet, but continue to work on it.

When, when do you see a time when the -- you'll get to a level where your maintenance CapEx is under your depreciation?

This is Kim Cocklin, who's our President.

I'll take a shot at that. I mean, I guess for starters in a regulated utility, it doesn't matter how you bucket the capital investment, whether it's maintenance or growth, because it all generates additional revenue and margin. As you see this year, we throw in about $53 million of additional margin from our rate filings and that has been from investments that we've made beginning three years ago and now it's ramping up and we'll continue to see.

So whether we invest in maintenance capital or growth capital or efficiency projects, it really doesn't matter, and the fact we utilize the depreciation as a benchmark to try to identify the level of maintenance capital, but right now, I mean there's a significant appetite, as Bob was talking about earlier with replacing aging pipe and getting our infrastructure up to, I guess up to current standards. So that's essentially -- I don't know if that's an answer directly to your question, but I think it's gotten to the point where we're going to invest everything we have to invest every year in the systems to maintain safety and reliability.

Great, thank you very much.

Thank you.

(Operator Instructions) One moment, please, while we poll for questions. Thank you. There are no further questions at this time. I would like to turn the floor back to Ms. Giles for any further comments.

Thank you, Rob. And just as a reminder, a recording of this call is available for replay on our website through November 11th. Again, we appreciate your interest in Atmos, and thank you for joining us. Bye-bye.