埃特莫斯能源 (ATO) 2009 Q4 法說會逐字稿

Greetings and welcome to the Atmos Energy Fiscal 2009 fourth quarter earnings Conference Call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Susan Giles, Vice President of Investor Relations for Atmos Energy. Thank you, you may begin.

Thank you, Claudia. Good morning everyone and thank you for joining us. This call is open to the general public and media but designed for analysts. It is being webcast live over the internet. We have put slides on our website to summarize our financial results. We will not review them in detail but we will take comments and questions on them at the end of our remarks. If you would like to access the webcast or slides please visit our website at AtmosEnergy. com and click on the conference call link.

Our speakers today are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President and CFO. There are also other members of our leadership team here to assist with questions as needed. As we review these financial results and discuss future expectations, please keep in mind that some of our discussions 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, and now I'll turn the call over to Mr Bob Best. Bob?

Thank you, Susan. Good morning, everyone and as always we appreciate your interest and we appreciate very much you joining us today. Yesterday, we reported earnings of $2.08 per diluted share, an increase of 4% from last year again meeting our committment to deliver average annual earnings per share growth in the 4% to 6% range; however if you exclude the impact of the mark-to-market accounting and the impact of our one-time items, our baselines earnings per share were $2.12 for fiscal 2009. Our regulated operations contributed 83% of total net income while the non-regulated operations contributed the remaining 17%. Our debt capitalization ratio improved to 50.7% at the end of fiscal 2009 compared with 54.6% one year ago. This metric remains a top priority as we strive to preserve our debt capitalization range of 50% to 55% while maintaining solid investment grade credit ratings.

Yesterday, our Board of Directors declared our 104th consecutive cash dividend and raised the dividend $0.02, bringing our indicated annual dividend for fiscal 2010 to $1.34 per share. Now I'm going to ask Fred to review the financial drivers for Fiscal 2009 and then I'll return for closing comments and then we will take your questions. Fred?

Thank you, Bob. Good morning, everyone. Since the quarter is really a shelter period for us, my remarks will focus on the fiscal year and then I'll review earnings guidance for fiscal 2010. As Bob mentioned, fiscal 2009 included some positive one-time items that we've discussed with you throughout the year. These items totaled $17 million of net income or $0.19 per diluted share as detailed on your slide 51 in your conference call slide deck. Further our consolidated results were negatively impacted by the mark-to-market accounting treatment required by GAAP. Fiscal 2009 had an unrealized net loss of $21.6 million or negative $0.23 per share shown on slide 52, but as you know, unrealized markets are temporary and should reverse in future periods. The elimination of both the one-time items which totaled $0.19 per diluted share, and the mark-to-market accounting treatment which totals $0.23 per share will result in fiscal 2009 earnings of $2.12 per diluted share as Bob said. Like many of the companies in our sector, our business was impacted by the economic conditions experienced in fiscal 2009 which contributed to the general decline in sales and transportation throughput. The real story for the year is incremental improvement from rate increases and rate design enhancements in the distribution business, which increased margin by about $30 million.

We also had the ability to earn higher per unit margins on our regulated Texas intrastate pipeline and in our non-regulated gas marketing business. Due to prior planning and the diversified contract portfolio enjoyed by Atmos Pipeline Texas, the revenue stream was insulated on about 56% of fiscal 2009 through system transportation revenues and we expect to be insulated on about 67% of our 2010 budgeted through system transportation revenues. We successfully executed multi-year demand base contracts for producers and marketers at a time when basis differentials were more robust. These agreements run through 2011. The non-regulated gas marketing business experienced delivered gas margins of $0.17 per Mcf, which offset the 5% decline in sales volumes which is were primarily associated with the industrial margins. Margins benefited from robust year-over-year basis gains and the continued practice of closely monitoring the credit worthiness of our customer base. Although the marketing business recorded some sizeable unrealized losses, over $37 million of realized margins were generated in the storage and trading business. This was a result of the unrealized gains captured in fiscal 2008 that were realized primarily in the first quarter of 2009.

As natural gas prices have continued to trend downward throughout fiscal fourth quarter, we've been a net storage injector and have reset our financial hedges to enhance the economic value of our storage book in fiscal 2010. At September 30th, we had $28.6 million of economic value which is expected to be realized in March, which is primarily the fiscal first and second quarters of 2010. At the macro level, lower natural gas demand translated to lower natural gas prices. Our average cost of gas at the utility was 23% lower than the previous year. These lower prices reduced our bad debt expense from $16 million last year to just $8 million this year and helped to drive the $548 million increase in our operating cash flow.

On the expense side our focus on conserving cash kept O&M, excluding bad debt expense, flat year-over-year. Interest charges increased $15 million or 11% from a year ago. About $7 million of that increase can be directly tied to the replacing of the 400 million, 4% notes with 450 million of 8.5% notes in the March/April time frame. The remaining increase is due to the tightening of the credit markets beginning last fall which made it more expensive to access the capital markets. As a result, we experienced higher commercial paper rates and higher committment fees on our lines of credit. We also experienced higher average short-term debt balances particularly during the first fiscal quarter of 2009. At September 30th last year we had about $350 million in short-term debt and a weighted average cost of just over 3.5% with only $20 million of commercial paper placed while the remainder was drawn directly from our five year revolver.

Fast forward to September 30th of this year where we had just $73 million of short-term debt all placed in the CP market at a rate of just a quarter of 1%. Of course, since we received upgrades by both Moody's and S&P, we're in certainly a better position to access the capital markets to satisfy our liquidity requirements with economical terms. It's also important to mention that all our financing costs are placed into rates as quickly as possible. After we did the refinancing in March, we split to several of our jurisdictions and updated our outstanding filings to adjust from the incremental debt costs we would be incurring this year. Capital expenditures for fiscal 2009 rose about $37 million to about $510 million, mainly due to the $33 million in capital spend on line BP extension project at Atmos Pipeline-Texas. As you'll recall this was placed into service in June of this year and we expect the capital expenditure to be eligible for GRIP recovery in fiscal 2010.

Moving now to our earnings guidance for fiscal 2010. We've announced our fiscal 2010 earnings per share guidance of $2.15 to $2.25 per diluted share. The guidance range assumes no material mark-to-market impact from September 30, 2010. As you can understand, we have no way of determining what the mark will be until the end of our fiscal year. Let me draw your attention to slides 41 and 42 where we have outlined our budget assumptions and net income by segment for fiscal 2010. Some of the assumptions that under lie our budget include continued successful execution of our rate strategy and collection efforts.

Over the next three year horizon we project operating income increases of about $50 million to $60 million annually from our rate outcomes. Marketing margins of between $95 million and $105 million, again with no material impact from mark-to-market of our fiscal storage and offsetting financial hedges. We're projecting asset optimization margins of $23 million to $25 million assuming gas price time spreads of the forward spreads of about $2 per Decotherm, storage demand fees of about $10 million and index minus deals of between $4 million and $6 million on about 18-20 Bcf of storage. Average gas costs ranging from $6 to $8 per Mcf for the winter purchases and summer gas prices of about $5 per Mcf for refilling storage. We're assuming short-term interest rates is a level of about 1.5% as a result of stronger credit ratings and the return of a more stable credit market. No material acquisitions and limiting our bad debt expense to no more than $9 million.

Let me make you aware that our historical presentation of CapEx on slide 47 has changed and the split between maintenance capital and gross capital has been revised. In the past our definition of regulated growth capital is limited to capital that generated incremental margin through metered growth and metered growth only. We found we were applying too narrow a view when compared to our peers so going forward we've broadened our definition of regulated growth capital to include all capital expenditures that add to rate base, which ultimately drives regulated margin growth. The regulated businesses growth capital equals capital spend in excess of depreciation, because we have rate mechanisms in place that we project will allow us to recover about 86% of our capital on an accelerated basis and when you factor in our timely filings, we expect to have all of about 4% of our budgeted 2010 regulated capital and rate base and earning (inaudible) 12 months of the capital outlook.

Regulated maintenance capital equals depreciation expense. We're projecting between $520 million and $535 million in capital expenditures in fiscal 2010. Of that, regulated CapEx is projected to be between $507 million and $520 million and non-regulated CapEx is projected to fall between $13 million $15 million. No capital is budgeted for necessity in fiscal 2010. We continue negotiations with potential buyers, however market conditions are not favorable. Overall, low gas prices of summer/winter spreads are influencing the value of storage which impacted potential returns a buyer would require. We are actively pursuing a reasonable outcome and will update you with any material developments when appropriate. That concludes my remarks and once again here is Bob.

Thanks, Fred. I'll make a few final comments and then we'll be glad to take your questions. In fiscal 2009 we were able to overcome challenging economic times both financially and operationally to deliver our earnings results. Not only did we increase our earnings, we improved our debt-to-capitalization ratio, reached positive outcomes in the regulatory arena and completed the line BP extension project on the Atmos Pipeline-Texas system. We will continue to emphasize blocking and tackling fundamentals to reach our financial goals as we move into the future. We continue to access the commercial paper markets on very reasonable terms. Our credit and liquidity positions are strong, aided in part by the two upgrades we received in fiscal 2009 by S&P and Moody's. With this financial situation we remain poised to take advantage of acquisition opportunities which could provide us earnings growth. We recognize that growth, along with consistency and predictability, are important as we move into fiscal 2010. This covers our highlights for the year. I want to mention before we open it up for questions that yesterday, our Board elected Kim Cocklin, our President to the Atmos Board of Directors so with that we'll now turn it back to Susan and questions.

Ladies and gentlemen, we will now be conducting the question and answer session. (Operator Instructions) Our first question is coming from Jim Lykins with Hillyard Lyons.

Good morning, everybody. First a couple question about Fort Necessity. If you could just give us any idea about the timing of the negotiations and is there any chance of this moving forward or are you just looking to sell at this point?

Well, we've said publicly before that as we've looked at our capital needs for the longer term and as Fred outlined for you this morning, we just felt like it wouldn't be with all of the other capital requirements we have on our system, that it would probably be better for someone else to develop that story. Secondly, we're not in the storage development business so again, we thought that it would be better for us to not go forward with these expenditures that we would have to make to develop the story, so we're continuing to negotiate. We don't have anything to announce today, but we remain hopeful that we will be able to reach agreement and sell the Fort Necessity property.

And then I know you can't comment specifically but if you do go forward with the sale of Fort Necessity, are there some other storage projects that you might be looking at or do you think you might focus on pipeline assist, if you could give us any kind of feel for what type of projects to maybe expect over the next year or so or what the next catalyst might be.

I think we would not intend to be in the storage development project business. Our focus is going to be mainly on our pipeline. We still feel longer term because of where we're positioned in Texas and the Barnett Shale area that there's going to be some good opportunities for project development there as well as focusing on our other utility business where I think we still feel particularly in the metroplex in Dallas as housing industry comes back, that we'll have some good growth in our residential market. Right now, it's fairly stagnant but we feel confident long term that that will be a growth engine for us too.

Okay, one last question and I'll let someone else ask one, but is there anything else out there that you're looking at now for what could be next with rate design?

Well, Jim, our concentration really for a very long time now has been on insulating ourselves from weather and also getting bad debt in our rates to the extent that we're allowed to and I think we've done that to over 60% of our customer base and also working on decoupling and, frankly, working on mechanisms that allow us -- in our three largest states, the mechanisms that Fred described to you, allow us to make our recoveries on a very timely basis and that's really been a focus for us, so that as we spend this capital we don't have huge lags and so those are the things that we'll continue to work on but in Louisiana, Texas, and Mississippi, we have very good rate design mechanisms, and then frankly in weather normalization, the only large state of our 12 states that we don't have weather normalization would be Colorado and we really don't need it there, so we're better off without it.

Okay.

Kim, do you want to add something?

Good morning. This is Kim Cocklin. We feel like we've done a very good job in the rate arena over the last three years and obviously our focus has been on trying to reduce lag and improve margin recovery and we've done it as Bob said through WNA and bad debt through gas cost trackers and then increasing the recovery of fixed costs or customer demand charges. That all is going to continue to move forward and as we follow the rule that we're going to partner up with our regulators particularly in difficult economic times and we feel like that they've understood where we're going, why we're trying to go where we're going. We're going to continue to do that and obviously, the biggest issue we have is the level of the return that we're awarded and have the opportunity to pursue and earn.

That's what we're working on right now, where the economy is, there's not -- you get some support for that, but we've got as we indicated somewhere between $15 million and $20 million of what we're earning and what we could earn if we reached the realized returns that we've been provided in the rate levels and lag is a huge issue, but at the end of the day, we're regulated with utility, we're comfortable in this business, and our focus is on reducing all the lag that we can. We've done a good job improving the returns and getting a regulated return that is competitive in the marketplace to attract the necessary capital we need to grow the business.

All right, thank you, everyone.

Thank you.

Our next question is coming from Ted Durbin with Goldman Sachs. Please state your question.

Hello. I just had a question on your guidance for 2010 for the distribution segment. I'm realizing that you had a few one-time items in 2009 that it probably won't repeat. I guess just maybe a little bit more color on why you see the numbers coming down on a year-over-year basis.

Are you referring to a specific page, Ted?

Yes, page 42, you did $117 million in net income in 2009 and now your new guidance is 109 to 113, so just trying to get a sense of the different drivers that are moving things.

We have a tax benefit that we had this year that was a one-time item. We had a total of $17 million of one-time items, $11 million of which was due to the tax on the deferred tax, a 1% change there, and so that is really a big item that will go away next year. We can't count on that type item for next year and so that's really the difference.

Okay, there are higher costs, you have all of the right rate mechanisms where you'll get sort of the automatic trackers and what not. I guess I'm trying to figure out what else is in that number.

We basically have a flat O&M, costs are not going up, some benefit type costs, pension related type things always go up somewhat. We tend to manage and try to offset those through managing our O&M costs, but really the difference in the business is the $17 million of one-time items.

And those are mostly attributable to utility?

Yes, they are.

Okay. If I can ask about you mentioned the intrastate business and how you had, I think it was 67%, was volume protected in 2010, how does that look in 2011 as you get out there with those contracts, how much rolls off in 2011?

Contracts that we currently have will be expiring in the year 2011. They were three year deals that we negotiated and so they do go into 2011, but they do, the current contracts expire at that point.

Okay, that's helpful, thank you. And then the utility CapEx, it looks like it's bumping up next year on a year-over-year basis. Just sort of what's behind that. Are you expecting a lot more customer growth or is there some AMI in there? What's in those numbers?

No, this year we had the $33 million at Atmos Pipeline-Texas for the line BP, the Austin lateral, that's been completed so that will be an item going away. We spent a good bit of money this year also in our Mid-Tex division on pre-net risers and that will be money going away. We have about $40 million of three significant size projects in the pipeline business replacing some compression and dehydration units. There's three projects there that total about $40 million that will be new for next year. We also are putting in a new data center here in the Dallas area for our systems. That's in the neighborhood of $9 million to $10 million type expenditure next year, and then we are also building a new service center training facility here in the Dallas area that will be in next years budget that will also be in the $9 million to $10 million range. So that basically is what gives rise to the increase in capital for next year.

Okay, that's helpful and if I could just ask one more. The dividend, you took it up 1.5%, EPS was up more than that. I guess how are you thinking about your pay out ratio and the dividends only got up 1% to 2% a year for the last couple years. What are you thinking you want to do with that over the next two years?

It's generally been higher than what we wanted or what we saw in our peer group and if you'll look back year-over-year, you'll see it going down about 2% per year and this year, 2009, our pay out ratio was like 63%. If we hit our budget the middle of our budget next year, we would come in with about a 61% payout ratio, so we're on the lower end of our desired range. We want to be in the low 60% range, so we believe we now have that dividend down where we want it.

Okay, great. Thanks a lot.

Sure.

(Operator Instructions) Our next question is coming from Barry Klein with Citigroup.

Hi.

Hi, Barry.

Good morning.

Going back to a question on Fort Necessity and you mentioned you didn't want to develop any more storage, is that something for the -- whatever you do with the Fort Necessity project would that be something you might be able to lease some capacity for the marketing division to take advantage of that on the marketing side?

Barry, this is Kim. Yes, they're going to be looking for a home for that capacity, obviously, and there was an open season conducted prior to the application that we filed with the FDRC to [commission] this certificate, our marketing group did submit a nomination.

Okay.

So yes, it's an opportunity, and as Bob indicated, while we won't be in the storage development business we continue to grow our market and we continue to have the need to manage supply for a number of our regulated customers and our non-regulated customers and we always are looking for market priced storage that we can contract for.

Okay, great. And then with big declines in industrial margins in 2009, what are you expecting in your guidance for these volumes in 2010, do you expect sort of flat, up, down?

They're flat I think.

Yes, they're basically flat. We're seeing some gradual improvement, but kind of, we're still thinking it's going to be closer to being flat.

Okay, got it. And with regard to the utility CapEx the last caller was talking about, will that be concentrated in any service areas? Will it basically -- you were mentioning some things about Texas. Do you think most of the growth will be sort of concentrated in the Mid-Tex service area?

Yes.

Yes, it will be in the Texas area. We try concentrate in those areas where we get quicker rate relief on our capital expenditures and try to manage that as best we can.

Okay. And then a couple other questions on the earnings next year. Incremental pension in 2010, should we expect any significant incremental pension expense and any significant pension contributions?

As far as the expense goes, no, no big incremental expense. Of course for the [fodeen] requirements, as you know, we'll have to look at that at January 1. This past January when we looked at it we elected to fund it at the 94% rate and put $21 million in the pension plans. They have improved considerably this year and have improved at an accelerating rate in the third calendar quarter, the quarter just ended September 30th. We saw dramatic improvements in the market and so the market values have improved dramatically. Interest rates have come down so discount rates have come down, but the markets have more than offset that from what we were seeing at this point in time, but we will have to look at it January 1 and do an evaluation to see what if, any funding requirements, if any would be.

Okay, got it, and with regard to the, you talked about I guess you had operating cash flow guidance of about 350 but if you add the net income and D&A, it looks like it's over $400 million and expected cash flow. Is this a consequence of negative working capital, negative impacts on working capital from the higher gas prices or is this something else that brings me from the over 400 down to the 350?

It's the low gas prices that we've had, have contributed to our improved cash flow and of our increase that's $500 million plus in our operating cash flow, 360 to 370 of that, we kind of attribute to the decrease in the gas prices and the improvements in receivables, payables and inventories.

Okay, got it. And you mentioned the regulatory maintenance CapEx level but what is the true maintenance CapEx level assuming that you have no growth projects or do you --

We don't look at it that way. We look at all capital basically is growth capital because we do get it into rates immediately into our rates, within 12 month, all but 4% goes into rates within 12 months that's because of where we spend it, the rate mechanisms that we have and then the time on this was which we file rate cases where we don't have the annual mechanisms. So we get our virtually all of our capital into rates within 12 months period and so we consider it all growth capital.

Barry, it's just in vestment. It's capital investment. That's what we continue to try to, I talk and educate folks on. Whatever we do from an investment to capital investment standpoint goes to increase the rate base which is really the earnings edge upon which we generate margins and we increase the rate base, we could increase our margins and that's why we have the $50 million to $60 million of assumed rate margin coming in over the next three years on an average annual basis, so that's going to put us in the capital appetite range for the regulated businesses at about $500 million a year.

Okay, so you think that over at least medium term, you think that we could expect sort of Capital Expenditures in that sort of 500 --

Yes.

Okay. That's it. Thanks a lot for the time.

Thank you.

Our next question is coming from Vedula Murti with CDP US. Please state your question.

Good morning.

Good morning.

Just to follow-up a little bit in terms of the ongoing capital expenditures, given your modest pay out ratio and balance sheet, is there any reason to consider over the next two years that any equity will be required?

No. We don't foresee any need for any equity in the next couple of years. Under our capital spending that we have and the cash generation that we do. We don't have other cap needs for cash. We don't have any debt coming due until 2011 and then we don't have anymore after that until 2013 and so we believe that we will be able to fund everything that we need here internally.

Thank you very much.

Obviously the target cap structure is about 50 or 45 to 55 and that's driven a lot by the regulations that with the states and they don't recognize or don't want to reward a real thick equity structure.

There are no further questions at this time. I would like to turn the floor back over to Susan Giles for closing comments.

Thank you, Claudia. Just a reminder that a recording of this call is available for replay on our website through February 2nd. And also we will be hosting a live webcast next Thursday, November 19th beginning at 12:15 Eastern to provide a more in depth review of our financial performance in 2009 and our key strategies for maximizing value in fiscal 2010. You will be able to access the webcast on our website at AtmosEnergy.com. Again, we appreciate your interest and thank you for joining us. Good day.