埃特莫斯能源 (ATO) 2010 Q1 法說會逐字稿

Good morning everyone and thank you all 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 them in detail but we will be happy to take questions on any of them 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. Our speakers today are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President, CFO, and Treasurer. 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 Securities Exchange Act. Any forward-looking statements are intended to fall within the Safe Harbor rule of the Private Securities Litigation Reform Act of 1995. With that I'll turn the call over to Mr. Bob Best. Bob?

Thank you, Susan and good morning everyone. As always we appreciate your interest and we appreciate you joining us on the call this morning. Yesterday, we were pleased to report first quarter consolidated net income of $93 million or $1 per diluted share. Our regulated operations contributed 64% of our total net income while the non-regulated operations contributed 36%. During the quarter we also renewed two committed credit facilities.

In October we renewed Atmos Energy Corporation's $200 million, 364 day facility and in December Atmos Energy marketings $450 million, 364 day facility was also renewed. During the quarter our debt-to-capitalization ratio improved to 51% at December 31 compared with 54.4% one year ago. Short-term debt this quarter is about half of what it was one year ago. I'll remind you that the amount of unused borrowing capacity is effected by the seasonal nature of our business. Our working capital requirements increase as we begin the winter heating season. Our high water mark for short-term debt is traditionally in late January and should begin to decline as customers begin paying their winter heating bills.

Yesterday our Board of Directors declared our 105th consecutive quarterly cash dividend. Our indicated annual dividend rate for fiscal 2010 is now $1.34. Now I'll ask Fred Meisenheimer to review the financial drivers for the first quarter of fiscal 2010 and then I'll return for closing comments and we'll all be glad to take your questions at that time. Fred?

Thank you, Bob, and good morning, everyone. The first quarter of fiscal 2010 consolidated net income rose 23% and earnings per share were up 20% compared to the same period one year ago. As Bob stated our current financial results were positively impacted by the mark-to-market accounting treatment required by GAAP and our non-regulated operations, and include non-cash unrealized net gains of about $27 million or $0.29 per diluted share. In comparison for the same period last year the mark resulted in a net loss of $14 million or $0.16 per diluted share, a positive swing of $41 million or $0.45 per share quarter-over-quarter. Also, the positive impact of $3.6 million of net adjustments are $0.04 per share which occurred in last years quarter did not recur this year.

For comparison purposes, if you eliminate the mark-to-market accounting treatment and the one-time items, our adjusted earnings per diluted share for the current quarter are $0.71 compared to $0.95 for the same quarter last year. You may want to look at slide 38 for this comparison. Let's take a closer look at the drivers this quarter. The regulated distribution business experienced incremental improvement from rate increases primarily in Texas, Louisiana, and Mississippi. All jurisdictions with annual recovery mechanisms which collectively increase gross profit by about $10 million. Distribution also benefited from a 7% increase primarily in residential and commercial throughput as a result of extremely cold weather particularly in December. In the Regulated Transmission and Storage segment which were referred to as Atmos Pipeline Texas Division, gross profit decreased about $8 million compared to a year ago primarily from lower transportation (inaudible) as well as lower per unit margins.

Quarter-over-quarter third party throughput decreased by 35 Bcf due to reduced system spreads, increased competition from new pipeline construction, a decline in Barnett Shale activity and a reduction in electric generation demand; however, the regulated pipeline did experience an increase in industrial volumes of almost 4% quarter-over-quarter. You can see that on Slide 40. The decline in per unit margins is largely due to the substantial decline in basis spreads, spreads between the Waha and the Houston ship channel hubs were basically flat this quarter.

I'll remind you that we expect to be insulated on about $39 million or 76% of our 2010 projected through system transportation revenues from the multiyear demand based contracts we were able to negotiate with producers and marketers at a time when basis differentials were more robust. These agreements run through 2011. We'll discuss the reprojected revenues in just a minute. Partially offsetting these negative impacts was a $1.5 million increase due to the implementation of rates from a group filing in Texas to recover 2008 capital expenditures.

Turning now to the non-regulated operations and you may want to look at Slide number seven, delivered gas margins declined by about $2.5 million quarter-over-quarter primarily due to a 7% decrease in overall sales volumes in the non-regulated marketing segment and $0.01 decrease in per unit margins from $0.17 to $0.16 this year, largely due to the significant decline in basis spreads. During the quarter we experienced the ongoing impact of the challenging economic times with industrial demand continuing to decline albeit at a moderating rate. Quarter-over-quarter, industrial volumes dropped by 15% compared to 20% last quarter and 23% in the June quarter. Again, slide 40 will give you some detail.

Asset optimization margins decreased about $30.5 million quarter-over-quarter due to the timing of realized gains from our storage and trading activities. Gains were realized primarily in last years first quarter but this year we expect to realize gains primarily in our second quarter. As a result of the decision this quarter to defer storage withdraw gains and roll the corresponding financial instruments to forward months coupled with the narrowing of spreads between current cash prices and forward prices, unrealized margins increased $62.7 million. During the quarter we were a net storage injector and reset our financial hedges to enhance the economic value of our storage book.

At December 31, we had $22.7 million of economic value, most of which is expected to be realized in margins next quarter. Turning now to the expense side of our income statement. O&M expense decreased by about $9 million or 7% in the quarter, mainly from lower pipeline maintenance costs at Atmos Pipeline Texas. Additionally bad debt expense fell by $800,000 to $2.5 million as a result of strong collection efforts, lower gas costs and our ability to recover the gas cost portion of bad debt expense for rate mechanisms in several of our jurisdictions, we were able to keep bad debt expense within our budgeted range of 0.3% of residential and commercial revenues.

Our CapEx and cash flow capital expenditures rose about $8 million quarter-over-quarter. The increase reflects spending to relocate our Dallas Data Center. Operating cash flow was down about $56 million from one year ago, primarily due to the drop in natural gas prices. Gas costs which were unusually high during the 2008 injection season dropped sharply when the economy slipped into recession and have remained relatively stable since that time. Operating cash flow from fiscal 2010 first quarter reflects a recovery of lower gas costs through purchase recovery mechanisms and sales. This is in contrast to the fiscal 2009 first quarter where operating cash flow was favorably influenced by the recovery of high gas costs during a period of falling gas prices.

Moving now to our earnings guidance for fiscal 2010, we have firmed our fiscal 2010 earnings per share guidance of $2.15 to $2.25 per diluted share and have updated the expected contribution by business segment. So let me draw your attention to slides 27-29 where we have outlined our budget assumptions, net income and income statement component estimates. Our projections now include a $7 million increase to net income and the regulated distribution segment with an equal and offsetting decrease in the Regulated Transmission and Storage segment, and lowering of our expectations for Atmos Pipeline Texas, due to our belief that we will continue to experience lower transport opportunities out of the Barnett Shale, relatively narrow basis spreads and further downward pressure from competitors for the remainder of our fiscal year.

As a result we are reforecasting a reduction of about $11 million in third party market based transportation margin for fiscal 2010. This reduction pertains to the third party transportation volumes that are not covered by our demand based contracts with the large producers. The original budgeted through system revenue of about $62 million is now expected to be $51 million with about $39 million under contract. We expect a $7 million increase at distribution to be obtainable given our better than expected operating results for the first quarter and with our second quarter generating the greatest revenue historically, we remain optimistic that we can achieve net income of $116 million to $120 million for fiscal 2010.

On the expense side we have reduced our interest expense projection to a range of $152 million to $158 million. The original estimate of $158 million to $162 million was based on winter gas cost of $68 per Mcf, short-term interest rates of 1.5%. Our average cost of gas at December 31 was $5.12, thereby reducing our short-term borrowings and associated interest. We are now projecting gas costs to be in the $4 to $6 range for the remainder of the fiscal year. We estimate that a $1 decrease in gas cost would reduce interest expense and increase pre-tax earnings by about $500,000. Additionally we are assuming short-term interest rates to a level of about 0.5% as a result of the return to a more stable credit market. We estimate if 1% dropped in a short-term borrowing rate would decrease interest expense and increase pretax earnings by about $500,000. The remaining assumptions that underlie our budget are unchanged.

They include continued successful execution of our rate strategy and collection efforts, marketing margins of between $95 million and $105 million, again with no mark-to-market impact, no material acquisitions, and limiting our bad debt expense to no more than $9 million. Currently our bad debt expense is running at the budgeted rate of about 0.3%. As a reminder beginning this year, 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.

In the regulated business, maintenance capital equals depreciation expense, growth capital equals capital spent in excess of depreciation. We are 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 and $15 million. That concludes my remarks and once again here is Bob.

Thanks, Fred. I'll make a few closing comments and we'll be glad to take your questions. As Fred has outlined we are encouraged by our earnings report for the first quarter of fiscal 2010. Our fundamental business is delivering safe and reliable natural gas under the rules of our regulatory agencies in the states that we serve. Successful rate activity is critical to the financial performance of our gas distribution segment.

Last week the Railroad Commission of Texas issued a final order on our November 2008 rate case with the City of Dallas and environs served by our Mid Tex Division. In the final award the Railroad Commission approved a $3 million increase in operating income, a 10.4% return on equity, and overall rate of return of 8.6% and a capital structure of 51% debt and 49% equity. Additionally the residential monthly customer charge was raised from $14 to $16. We appreciate the commission's recognition of the return level necessary to attract capital in today's environment. By increasing our allowed ROE to 10.4% it provides support to discuss an increase as we pursue the renewal of our rate review mechanism with the settled cities in our Mid Tex division, and we have begun negotiations with the cities and we are very optimistic that the mechanism will be extended.

We currently have rate actions filed and pending in our Kansas, Missouri, Kentucky, Georgia, and Louisiana service area with total about $28 million in request. We intend to file another 10 to 15 cases, in total would request about $50 million by fiscal year end. Even though Atmos Pipeline Texas as has gone through some challenging times this quarter with volumes being lost out of the Barnett Shale, a contracting of basis spreads that increase competition in the region, the regulated pipeline remains a very solid asset and has performed very well for us over the years. We expect to file a full rate case in September of this year on the pipeline, our first since we acquired the pipeline in 2004. In the near term we expect to make a filing by the end of March under the Texas GRIP legislation to recover the 2009 capital expenditures on the Atmos Pipeline Texas system. In our non-regulated pipeline business, we are in negotiations to enter into a joint venture agreement with a third party to develop the Fort Necessity Storage Project and are actively pursuing a reasonable outcome. We have nothing further to report on this matter at this time, but we will continue to update you with any material developments when they occur.

Our non-regulated operations will continue to compliment the regulated businesses by pursuing and adding value around the utility assets. Over 75% of the marketing segments margins are estimated to be predictable, delivered gas sales. Our marketing business is in a very good competitive position, operating on 38 pipelines in 22 states. We are expanding into new markets, most recently in Kansas and Virginia. Atmos Energy Marketing is in a strong credit position having just renewed the $450 million committed revolving credit facility in December. At today's natural gas prices this is more than ample credit to serve the operational needs of the business.

In closing I'll just say our Company continues to perform in a very high level. As always we strive for consistency and dependability. Our goal remains as it has to grow our earnings per share 4 to 6% a year and we are on track to do that this year for the tenth consecutive year. That concludes my prepared remarks and now we'll open-- we'll be glad to take your questions .

Operator?

Thank you. Ladies and Gentlemen, (Operator Instructions) Thank you. Our first question is coming from Jon Lefebvre of Wells Fargo securities.

Thank you, good morning everybody.

Good morning.

Just wanted to touch on Fort Necessity. I know it's probably a sensitive topic and you can't say much but last time you talked about selling that asset and now it seems like you're looking at a JV. Who should we be thinking about and why the shift and can you give us any sense about the timing?

Well, we continued to, we're hopeful that we'll have something to announce in the near future. We continue to negotiate on that, really our goal going in was either to-- either to sell the properties. We said before it's a very good asset but we recognize the development of storage as a long term project and it's not something that we have particular expertise in and secondly, it's going to take a lot of capital and as we've reviewed our three to five year plan we recognize that we have many other projects to spend our capital on, so the joint venture part is just, either a sale or joint venture was always our goal going into the negotiations so it really hasn't been a change in strategy and either way, as we said it's a good asset and we just realized there's others who do this and we're not in that business so that's the reason we're trying to make this a sale of Fort Necessity.

Thanks.

This is Ken. I wouldn't characterize it as a shift in our philosophy either. Essentially instead of taking our money out we're just taking a portion of equity and the project representing our level of investment and as Bob said the key is we aren't going to put anymore money in the project and we're going to continue to pursue execution of the documents to close the transaction.

Got it, and would you be a minority interest or would it be 50/50 and would you just finance that at the Fort Necessity level?

Very minority. We got $20 million in the project and it's estimated to be priced out and will be higher than that.

Got it, and just in terms of the acquisition markets, I was wondering if you could give us any updates there of what you're seeing, if you're anymore or less optimistic on that front if it's still a focus.

Well, it is still a focus for us. We continue to look for good opportunities to grow. In recent times I think probably if you look back five or six years the prices that were being paid were just beyond what we thought we could compete with or should compete with and I think we see better opportunity in the market but we just-- we will continue to look for good opportunities particularly near our existing assets, so we have nothing to report at this time but we'll continue to talk and look and our balance sheet is in good shape so that's what we always try to do is be ready and be prepared and if a good opportunity comes up, we are able to take advantage of it.

Great. I appreciate the time, thanks.

Thank you.

Thank you. Our next question is coming from [Barry Kline] of Citigroup.

How is it going guys?

Good.

Good. With regard to the Atmos Pipeline, you mentioned increased competition, reduction in electric demand and Barnett activity were to blame for the pretty significant volume declines. How much of that should we expect to come back and should we expect at least for the rest of the year maybe going forward this sort of downward impact on volumes?

The increased competition is from additional pipes that have been put into service recently. The basis spreads are down, they're flat basically all the way across and we don't necessarily see those coming back any time soon. We think that that basis spread will stay down.

We think the increased competition will stay out there and so we will lose some amount of throughput to that competition. As industrial demand begins to rise, we had a slight rise this time, 4%, as we see that improving we will see margin throughput increasing again that will depend upon recovery and the economy and recovery of the industrial base.

Got it Are lower volume numbers included in your guidance number of that $2.15 to $2.25 for the rest of the year or only for this quarter?

The rest of the year.

If you look on slide 28, you'll see the break down and regulated transmission storage captures the APT numbers. And APT, I think Fred captured it right. It's all a function of the through system business and the decline there and this year, we have stepped it down considerably.

We've reduced our budget estimate from to about $51 million from upwards of the 62 I think, so the 62 brought down to 51 so everything is baked in for the rest of the year and they're pretty confident that we probably, we've got good estimate in place right now and we don't see the basis coming back this year at all, whether it will be next year, but at some point it will swing back but that portion of the business has been reflected in the annual budget numbers.

You mentioned 76% of the earnings are insulated. Is that for all of Atmos Pipeline, is that basically your take or pay contracts for transportation about 76% of the earnings there?

That's exactly the transportation that's being affected by the reductions in the budget so it's the transportation we provide for producers in the Barnett Shale that are taking gas from the field to the interstate market and the $39 million represents the demand charges out of the $51 million that we have budgeted, so we've got $51 budgeted, we've got $39 million for sure.

Okay, $39 million is sort of like for just the capacity that it's take or pay, right?

Well it's demand charges for transportation. We consider take or pay for (inaudible) purposes and $39 million of demand charges for just reserving capacity to move the volumes.

Okay, and then I'm not sure if I misheard but you said I think I heard a comment on the call about the marketing division, how unrealized, the unrealized margins during 1Q will be, they will be realized in the second quarter? Or did I misshear?

That's correct. Last year, we took realized all of that in the majority in our first quarter last year where as this year we deferred storage withdrawals and roll contracts so we will see that coming in in the second quarter this year.

Okay so is it fair to say or is this too simple to say that margins on top of whatever you realized normally in the second quarter will be up by about that $37 million in the second quarter or is that too simplistic?

If you'll look at the economic value schedule that we have, we show that we have economic value of about $22.7 million and the vast majority, nearly all of that will come in in the second quarter.

Okay, all right, I think that's it.

545 Barry

545, okay. I think that's it. Thanks for the time guys.

Thanks, Barry.

Thank you. Our next question is coming from Jim Lykins of Hilliard Lyons.

Good morning everybody. Just a follow-up question to the last caller. Is it possible to think the unrealized gains could come in 2011 or will they all come in 2010?

They're coming in in 2010 but the vast majority.

So the vast majority in 2010 and then also the vast majority in Q2?

Yes.

So then they're both coming in 2011 but a small amount; is that correct?

Very very small.

Okay, and just a couple of quick follow-up questions with Fort Necessity. I'm wondering if there are any potential incremental costs involved with that and also if you can give us any idea of when you think this could if everything goes okay with the negotiations for the JV, any idea when you think that this could potentially come on line?

Well there aren't any incremental costs on our side of the equation. We are not going to invest anymore into it and the in service date is kind of moving around but the time they would start a project, pick it up from where we left off it would probably be about a three year timeline before the first cavern which would have a five Bcf capacity would come on line so we're looking at 2014 probably, sweet spot of the market probably where the storage would be more valuable.

Okay, all right, thank you very much.

Thank you.

Thank you, our next question is coming from [Paul Patterson of Glenrock Associates.]

Good morning guys. Can you hear me?

Yes. Hi, Paul.

Just a quick follow-up. I got sort of the picture of the pipeline. Just on the Barnett Shale drilling activity could you give us a little more flavor what your expectations are there, longer term?

Well, longer term, I mean obviously we're very bullish like everybody else is on the drilling activity and most of that stems from the investments that were made by Exxon and [Totell] to take interest out of XTL and Chesapeake, so you've got some very major players that are going to come in with some deep capital pockets and have quite a bit of their capital directed towards producing the field. But long term, we are very very excited about the opportunities that are presented in the Barnett Shale. We think that it's ahead of the other shale plays that are out there right now.

Where do you see that sort of taking place? Because I think you guys indicated that you now expect a little less activity and what have you. When do you expect that to turnaround and could you give us more of a flavor in what you're seeing in the short-term versus the long term?

Well,--

You follow me?

Yes I mean, I'd just say that we continue to project gas prices at about the $6 to $8 range and I think if prices stay in that range producers are going to develop. That is really our hope that they do because then all segments are healthy, producers can go ahead and drill and they can develop the shale for that price and I think we've got, you've got right now demands down a little bit nationally so that's having an impact on the supply but I think in the next year to 18 months, we expect things to pick up.

Okay, so basically industrial demand and the drilling activity expected to pick up but the basis differential for some time you expect to basically be-- to be basically not really changing much?

Not for a while until there's been a lot of capacity that's been built and when that capacity fills up, that's when bases will probably start reacting and spreads will become a little more--

How far in the future do you see that happening?

Oh, Golly.

A long time. Okay, I wanted to follow-up. The rest of my questions have been answered, thank you.

Thank you.

Thank you. (Operator Instructions) Our next question is coming from Ted Durbin of Goldman Sachs.

Yes, hi.

Good morning, Ted.

Good morning. Coming back to the marketing, I guess I was just a little surprised you kept your guidance where it was given that on an adjusted basis it looked like the first quarter was down a lot from the first quarter of last year, the economic values kind of at the same level of what it was last year and you did about $20 million in the segment there so maybe just a little bit more detail on how you think you'll get to the numbers for the full year for ten.

Well again, last year we recognized all of that or realized those gains in the first quarter where this year in the business, we elected to defer storage withdrawals and we rolled those contracts forward so we will see that coming in in the second quarter and it is nearly all of the economic value that you see the $22.7 million, nearly all of that comes in next quarter, second quarter, and we believe that that will happen, some of it is already happening, and so it's just movement from one quarter to the next in our view.

I think we're also getting some healthy pick ups on the utility side. I mean with the distribution business, Ted, this cold weather is helping throughput, as Fred indicated we've got, we saw a 7% increase in throughput on the utility division and that has helped significantly and we are also continuing to experience pretty cold weather.

We had very good January because when it was cold it was cold and when it was warm it was warm and that's what we like. And February is, we started out cold in quite a bit of our service territories and the thing that we have to remember is that we have-- , we're very geographically diverse so we can take advantage of weather patterns as they move across the country.

Okay, that's helpful, thank you. I had just a couple things on the utility side then. The 10 for (inaudible) is definitely a nice bump up from the 9.6 you negotiated. Would you go back into the settled cities now and sort of say that here is what the Railroad Commission did, we want to reset rates or do you sort of stay in your current plan that a 9.6 and then maybe renegotiate after that the three year deal expires or how are you thinking about that?

Yes, there's no reopeners but we obviously are engaged in discussions right now relating to the extension of that mechanism because it does term out and so consequently, we've already commenced those discussions and people are very mindful and aware that return is an item that's on the table for discussion and the action by the commission certainly provides a lot of support and recognition by regulators that return north of 9.6 is something that's necessary to be competitive to attract capital in today's market. So we're very very optimistic and as Bob said we're hopeful, we expect to continue to extend the settlement mechanism.

Okay, and then just a small thing on the-- you said you had a $7.6 million decrease in revenue related taxes but then your taxes other than income taxes were only down something like $1.6 million. I thought they would move a little bit closer together. Is there some sort of reason for the mismatch there at the utility?

Those moves don't match up exactly dollar for dollar on the dollar in and the dollar out. There is some timing that occurs there. As you know, we are getting that more in line in recent times and I have included schedules I think in some of the appendix that we have with our slide deck showing that information and over time, they are getting closer to dollar in dollar out and if you look at slide 42, it will show you the effect of the timing on that.

Okay, that's great. That's my questions, thank you.

Thank you.

Thank you. (Operator Instructions) Thank you. There are no further questions at this time. I'd like to hand the floor back over to Susan.

Thank you, Jackie. Just as a reminder everybody, a recording of the call is available for replay on our website through May 4th and if you have any additional questions please call me. Thank you, have a great day, bye-bye.