埃特莫斯能源 (ATO) 2010 Q2 法說會逐字稿

Thank you, Claudia. 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 any questions at the end of our prepared remarks. If you would like to access the webcast and slides, please visit our website at atmosenergy.com and click on the conference call link. Additionally, we plan to file the Company's Form 10-Q later today.

Our speakers today are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President, CFO and Treasurer. There are other members of our leadership team here to assist with questions as needed.

As we look and 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 are intended to fall within the safe harbor rules of the Private Securities Litigation Reform Act of 1995.

Now I'd like to turn the call over to Bob Best. Bob?

Thank you, Susan, and good morning, everyone. We appreciate you joining us this morning, as always, and thank you for your interest in Atmos Energy.

Yesterday, we reported second-quarter consolidated net income of $114 million, or $1.22 per diluted share. After eliminating the impact of unrealized net losses, earnings per share were $1.49 for the quarter. For the first six months of the year, net income was $208 million, or $2.22 per diluted share, and after eliminating unrealized net gains, net income was $2.19 per share. Our debt capitalization ratio improved to 48% at March 31 compared with 54% one year ago, with no short-term debt outstanding in either period.

Yesterday, we announced that our Board of Directors declared our 106th consecutive quarterly cash dividend. Our indicated annual dividend rate for fiscal 2010 is $1.34. In March, Moody's upgraded our rating outlook from stable to positive and reaffirmed the credit rating of Baa2 on our senior long-term debt. Also in March, S&P reaffirmed our credit rating of BBB+ and our rating outlook as stable.

Now I'm going to turn it over to our Chief Financial Officer, Fred Meisenheimer, to review the financial drivers for the quarter, and then I'll return for our closing comments, and then after that, we'll be glad to take your questions. Fred?

Thanks, Bob. Good morning, everyone. I'll 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 Bob stated, consolidated net income for the quarter was $114 million, or $1.22 per diluted share. And for the six months, net income reached $208 million, or $2.22 per diluted share. As we stated in the earnings release, the current quarter and the year-to-date results were favorably impacted by a one-time benefit of $4.5 million, or $0.05 per diluted share, the result of a Texas state sales tax refund.

By eliminating the one-time items in all periods and the mark-to-market accounting treatment required by GAAP in our non-regulated operations, which we've done for you on slides 54 and 55, the Company earned $1.44 per share for the current quarter, versus $1.27 for the prior-year quarter, and $2.14 per share versus $2.21 for the year-over-year six months.

Now, let's take a closer look at the major drivers by segment. In our regulated Natural Gas Distribution segment, gross profit rose $18 million, or 5%, quarter over quarter and $15 million, or 2%, for the first six months of fiscal 2010 compared to the 2009 period. In both current periods, the Natural Gas Distribution business benefited from rate case settlements with rate design improvements. Rate-related adjustments provided a net increase in gross profit of nearly $13 million in the quarter and almost $23 million for the six-month period.

Colder-than-normal weather increased consumption and accounted for a 26% increase in consolidated throughput for the current quarter, improving gross profit by about $9 million. For the six months, our distribution gross profit rose $11 million due to an 18% increase in throughput. After taking into account the weather normalization impact in the service areas where we have WNA approved rates, we were 1% colder than normal for the quarter and 3% colder than normal for the six months.

The Regulated Transmission and Storage segment, which is the Atmos Pipeline Texas Division, experienced a reduction in gross profit of $4 million for the current quarter and $12 million for the six-month period. The decreases are due to narrower basis spreads, which have impacted transportation services for third parties and reduced per-unit margins. Transportation fees decreased about $3.5 million in the current quarter and declined $7.5 million for the current six-month period. Spreads between the Waha and Houston Ship Channel hubs were basically flat in the second quarter compared to spreads of about $0.65 one year ago.

As we discussed last quarter, we are experienced reduced system spreads and a decline in Barnett Shale activity due to low gas prices. We expect to remain insulated on about $39 million, or 76%, of our 2010 through system transportation revenues from the multi-year 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.

Partially offsetting the decline in these through system volumes was a significant increase in deliveries to Mid-Tex during the unusually cold weather in Texas. Mid-Tex volumes increased 34% in the quarter and 23% for the current six-month period, resulting in an improvement in gross margin of $5 million for the quarter and $6 million for the six months. Remember, Atmos Pipeline Texas is not weather normalized. For the quarter, the pipeline experienced weather that was 35% colder than normal and 51% colder than last year. For the six months, weather was 30% colder than normal and 41% colder than last year

We also saw our industrial demand rise about 1.5 Bcf for the quarter and six months in APT. We've included some detail on slides 57 and 58 to show this demand by segment.

The Mid-Tex utility customers and industrial customers served by APT pay a rate established by the Texas Railroad Commission, which is higher than the rates for our other customer classes to ensure firm transportation and storage service. GRIP filings for the regulated pipeline increased gross profit by $1.5 million in the current quarter and $3.1 million for the six-month period compared to the same periods one year ago.

Turning now to the non-regulated operations, I'll begin with the quarter-over-quarter results first. You may want to turn to slide number eight. Delivered gas margins declined by about $6 million quarter over quarter driven by a $0.05 drop in per-unit margins, from about $0.19 to $0.14, largely due to the narrowing of basis spreads and comparative pressures in our market areas.

Asset optimization margins increased by $27 million quarter over quarter due to the timing of the settlement of open positions in our storage and trading activities. During the current quarter, we recognized the gains we had originally captured through the first fiscal quarter of 2010. Contrast that to the prior year, when we realized similar gains from withdrawing gas and settling the associated financial instruments in the first quarter.

Overall, sales volumes remained basically flat quarter over quarter. However, economic pressures eased slightly, resulting in a 2% increase in our industrial load quarter over quarter. Slide 57 will give you some detail on that.

The increase in realized margins was more than offset by a $38 million decrease in unrealized margins from the recognition during the current quarter of previously unrealized gains recorded in the first quarter of 2010.

Looking now at year-over-year results, you may want to turn to slide 17. Delivered gas margins declined about $8.5 million due to lower per-unit margins and lower delivered sales volumes. Per-unit margins were $0.15 in the current period, compared with $0.18 in the prior-year period, primarily due to narrowing basis spreads.

Year over year, total sales volumes declined 3%, largely driven by the almost 7% decline in industrial volumes, as shown on slide 58. Period over period, asset optimization margins decreased about $3.5 million, primarily due to lower natural gas price volatility in the current-year period, which created fewer opportunities to optimize assets. If you take a look at slide 63, you can see the change in the [mark] from September to March of fiscal 2009 was $4.46 per Mcf, compared with just $0.47 per Mcf in the current six months.

Unrealized margins increased year over year by almost $25 million, primarily due to the period-over-period timing of storage withdrawal gains and the associated recognition of unrealized gains into realized gains.

Cash prices have continued to fall, and weak market fundamentals have created limited opportunities to capture economic value. Therefore, during the second quarter, we injected additional gas into storage, and as of March 31, we have set our financial hedges to short-dated months. At March 31, we had about $600,000 of economic value, which we expect to reset before the end of the fiscal year, when we believe market conditions will create improved opportunities to capture summer-winter spreads for fiscal 2011.

Turning now to the expense side of our income statement, consolidated operation and maintenance expense decreased about $5 million from the second quarter and about $13 million during the first six months compared to the same periods one year ago. The decreases were mainly from lower pipeline maintenance costs at Atmos Pipeline Texas, reduced legal and administrative expenses, and the effect of the $7 million state sales tax refund received in the second quarter.

Partially offsetting these decreases were higher employee-related costs. Bad debt expense rose nominally in the current period. Bad debt for the quarter increased $1.6 million and rose about $800,000 in the current six-month period primarily due to higher revenues. However, lower gas costs coupled with our ability to recover the gas cost portion of bad debt expense in several jurisdictions allowed us to keep bad debt expense within our budgeted range of 0.3% of residential and commercial revenues.

Capital expenditures rose about $11 million to about $233 million in the first six months compared to one year ago. The increase reflects spending to relocate our Dallas data center, as we mentioned last quarter.

Operating cash flow for the six months ended was about $484 million, down about $131 million from one year ago, and primarily reflects a recovery of lower gas costs through purchased gas cost recovery mechanisms and sales due to the drop in natural gas prices.

Moving now to our earnings guidance for fiscal 2010, we have reaffirmed our fiscal 2010 earnings per share guidance of $2.15 to $2.25 and have updated the expected contribution by business segment. Let me draw your attention to slides 43 through 45, where we have outlined our budget assumptions, net income by segment, and income statement component estimates. Our projections now include an $8 million increase in our net income estimates made last quarter in the Regulated Gas Distribution segment, with an equal and offsetting decrease in the non-regulated segments.

Due to the strong second quarter in our regulated gas distribution business and a continued focus on expense management we are confident that we can meet this revised net income target at the utility.

Natural Gas Marketing's net income was lower by $2 million due to the continued pressure on their delivered gas margins and volumes. [Taxes] are about $6 million lower at the non-regulated Pipeline, Storage & Other segment. The current low gas price environment has slowed production and, consequently, the revenue stream of Park City and Shrewsbury Gathering Systems. Natural gas pricing was around $11 to $13 when we executed these deals. Revenue is not coming in as planned, but we are evaluating strategies to add new customers and increase volumes.

The remaining assumptions that underlie our budget are unchanged. They 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 mark-to-market impact.

We are now projecting asset optimization margins of $29 million to $32 million, primarily as a result of better-than-planned asset optimization margins realized during the first six months from rolling positions during the first fiscal quarter and strong results from inter-month trading during the second quarter, 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%.

And once again, here's Bob.

Thanks, Fred. I'll make a few closing comments, and then we'll be glad to take your questions.

As Fred has just reported, we are encouraged by our earnings report for the first six months of fiscal 2010. It has been said that the nation's utilities are a proxy for how the economy is doing. Signs of improved demand would be an indication that the health of the economy is improving. We remain very active in the regulatory arena and continue to focus on rate design. It is the hallmark and core of our financial strength.

In March, we filed the final Mid-Tex RRM of $57 million under the original agreement reached with our cities. We continue negotiations with the cities and are optimistic that the mechanism will be extended. As of April 30, we have received rate relief this fiscal year totaling about $32 million of operating income and have about 10 rate cases pending, which total almost $95 million. We expect to file another five or six smaller cases by the end of fiscal 2010.

At Atmos Pipeline Texas, we continue to utilize the GRIP mechanism to implement rate increases for our capital expenses. On April 20, we received approval to increase rates by $13.4 million from the Texas Railroad Commission. A full rate case for APT is being put together, and we expect to file it in September of this year. The test period for the APT rate case ended on March 31.

Our nonregulated operations will continue to complement the regulated businesses by pursuing and adding value around the utility assets. They continue to execute as planned, sometimes masked by fluctuations in the mark-to-market accounting treatment required for those activities.

In March, we entered into a joint venture agreement to develop the nonregulated Fort Necessity storage project. If the option is exercised, we will retain a noncontrolling equity position in the project, and we will share in a percentage of the profits. We do not intend to deploy additional capital to this project.

The second quarter and this first six months of fiscal 2010 have been very strong. Our system was tested during the extended cold weather periods, and we were able to reliably and dependably deliver gas to meet the needs of our customers. Investments made to enhance our system allowed this to happen. Timely recognition of these investments into our rates is critical to our success and to sustaining the $500 million of regulated CapEx we spend annually.

The distribution business is seasonal in nature. The strongest earnings quarters have concluded, and we will remain focused on continuous improvement and, as Fred mentioned, expense management during the second half of fiscal 2010.

We believe we are on track to achieve another excellent year at Atmos Energy. We appreciate you taking time for us this morning, and now we'll be glad to take your questions. And we also have with us, as Susan mentioned, other leaders, including Kim Cocklin, our President.

Ladies and gentlemen, we'll now be conducting the question-and-answer session. (Operator instructions). Our first question is coming from Gordon Howald with East Shore Partners. Please state your question. Mr. Howald, your line is live.

Hi, guys. Can you hear me?

We can, Gordon. Yes, sir.

Sorry about that. Good morning.

Good morning.

A question for you on guidance. Does your guidance now include warmer-than-normal temperatures so far? I think you said 3% colder than normal through the first six months. Were you just referring to the inclusion of rate relief, which I believe you said was going to offset weaker than expected nonregulated performance? And will you be able to quantify the impact of colder-than-normal temperatures over the first six months?

Well, the colder-than-normal temperatures have benefited us in the regulated piece of the business, as you saw. And we increased our projection for the regulated piece of the business for the year by the $8 million, and offset that in the nonregulated piece of the business due to the basis going away and the narrowing of spreads that we are seeing.

Okay, great. Got you. Thank you very much.

Essentially, Gordon, the regulated offsets the diminution of the nonregulated because of the basis issues and the spreads.

Right. That was just mostly coming then from the, I guess, greater than expected rate relief?

Well, on the regulated you're talking about? No, it will be --

We pretty well expected the rate relief that we're getting. It was the colder weather which gave us a 26% increase in our throughput during the quarter. And that improved gross profit by about $9 million in this first quarter and about $11 million for the six months. And so that is due to the colder weather that we experienced in this (inaudible - multiple speakers.)

Got you. Okay. Thank you for clarifying that. I appreciate it.

(Operator instructions). Our next question is coming from Barry Klein with Citigroup. Please state your question.

How are you doing?

Oh, good, Barry.

Good. With regard to Mid-Tex, the RRM is about $57 million. Can you, I guess, give a little bit more detail surrounding when it would be effective? And also, if the whole -- if you were to succeed in getting the whole $57 million, does that all drop down to operating income?

I'm going to let Kim address that question for you, Barry. Thank you.

Good morning, Barry.

Good morning.

The $57 million just represents the actual true-up of the expenses from the last filing that we made. And we make those filings in March, and then they have until, I believe, July to examine. And we've discussed -- and obviously we're in meetings with them right now, and the rate change is effective on July 1 -- or July 15? I think it's July 15.

I think it's 15.

July 15, okay. I was getting it confused with Louisiana. Louisiana is July 1. Anyway, we make the filing in March, and then the rates become effective in July. It's not much different than a normal rate filing that we would make with the Commission, except obviously it's part of the overall settlement with the customer. So we're in discussions with the customers right now, and the $57 million represents the request that we're making.

And the actual makeup of the amounts is -- the prospective amounts that we're looking at is about $30 million. And then there's a true-up mechanism, which really identifies the difference between what the allowed return is and what the return was that we actually made. And there's a shortfall there of about $29 million. So all told, that comprises the $57 million. But we wouldn't -- it's part of a negotiation process.

Okay. Is it fair to say that the $30 million that you were talking about, if you were to get the full amount that you were asking to, only the $37 million would drop down to operating income, or would the full $57 million drop down to operating income?

All of it.

All of it. Okay.

Whatever we recover gets -- drops in.

Okay. Thank you very much.

Thank you.

There are no further questions at this time. I'd now like to turn the floor back over to Ms. Susan Giles for any closing comments.

Thank you, Claudia. And just as a reminder, a recording of this call is available for replay on our website through August the 5th. And if you have any additional questions, please call me or visit us at the upcoming AGA Financial Forum. Thanks so much for joining us. Bye-bye.