埃特莫斯能源 (ATO) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Atmos Energy fiscal 2010 third 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, Investor Relations for Atmos. Thank you, Miss Giles, you may begin.

Thank you Claudia, and good morning, everyone. 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 the website that summarize the results and will not review them in detail, but we will be happy to take any questions at the end of our prepared remark. 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 are Bob Best, Chairman and CEO, and Fred Meisenheimer, Senior Vice President, CFO and treasurer. There are also 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 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 would like to turn the call over to Bob Best. Bob?

Thank you, Susan. Good morning, everyone. As always we appreciate you joining us today and thank you for your interest in Atmos Energy. Yesterday after the market closed we did report our fiscal third quarter financial results, which were a net loss of $3.2 millionor a negative $0.03 per diluted share, compared with net income of $2 million or $0.02 per diluted share in the prior year quarter. As a reminder, due to the seasonality of our business, primarily the utility distribution business, we generally report negative financial results during our fiscal third and fourth quarters.

For the nine months we reported $209 million of net income or $2.18 per diluted share, compared with $207 million or $2.25 per diluted share for the same period a year ago. However, if you eliminate the one-time items in all periods and the mark to market impact in our nonregulated operations, the Company's financial results are $0.09 per share in the current quarter versus a negative $0.04 for the prior year quarter, and $2.20 per share versus $2.17 for the nine month period.

Our debt capitalization ratio improved to 48.4% at June 30 compared with 49.7% one year ago, with no short-term debt outstanding in either period. We did borrow short-term debt on July 26 when we placed about $78 million of commercial paper to pay our bills for gas purchases at a rate of just 36 basis points. In June, we did receive very positive news from Finch, who raised their outlook on our corporate senior debt from stable to positive, and reaffirmed their existing credit rating and BBB+ rating on our senior unsecured debt, an F2 rating on our commercial paper.

Finally, our Board of Directors declared our 107th consecutive quarterly cash dividend, which currently is paying an indicated annual dividend rate of $1.34 for fiscal 2010. Now I will ask Fred to review the financial drivers for the quarter and fiscal year-to-date periods, and then I will return for a few closing comments, and then we will take your questions. Fred?

Thanks, Bob, and good morning, everyone. I will speak to the more significant items in the quarter and nine months, and then discuss the outlook for the remainder of our fiscal year. As Bob pointed out, by eliminating one-time items in all periods and the mark to market accounting treatment required by GAAP in our nonregulated operations, which we have done for you on slides 52 and 53, the Company's financial results are $0.09 per share in the current quarter versus a negative $0.04 for the prior year quarter, and $2.20 versus $2.17 for the nine month periods.

Now let's take a closer look at the major drivers by segment. In our regulated natural gas distribution segment, gross profit rose $5 million in the quarter and about $20 million for the current nine months compared to the same periods one year ago. Both current periods the distribution business benefited from rate case increases and rate design improvements. The current nine month period includes $28 million in rate adjustments, primarily from annual filing mechanisms in Texas, Louisiana and Mississippi. The Distribution segment also experienced colder than normal weather, which provided a 13% increase in consolidated throughput and improved gross profit by almost $11 million.

The Regulated Transmission and Storage segment, which is the Atmos Pipeline-Texas division, experienced a reduction of $4 million in gross profit from the current quarter and $16 million for the nine month period compared to one year ago. The pipeline is continuing to experience lower per unit transportation fees on through system deliveries due to much narrower basis spreads. This resulted in a decline of about $4 million in the quarter and an $11 million decrease for the nine months compared to the same periods one year ago. Spreads between the Waha and Houston ship channel hubs averaged about $0.11 in the third quarter compared to spreads of about $0.45 one year ago.

Transportation of through system volumes for Barnett Shale producers and marketers also declined due to depressed market conditions, reducing gross profit by about $4 million for the quarter and year-to-date periods. We expect to receive about $39 million or 75% of our 2010 through system transportation revenues from the multiyear demand-based contracts we negotiated with producers and marketers at a time when basis differentials were more robust. These agreements run through 2011.

Offsetting the decline in the through system volumes for the nine month period was the increase in deliveries to Mid-Tex during the unusually cold winter in Texas. Mid-Tex volumes increased 18% for the current nine month period, resulting in an improvement in gross margin of $6 million. GRIP filings for the regulated pipeline increased gross profit by $3 million in the current quarter and about $6 million for the nine months compared to last year.

Turning now to the nonregulated operations. I will focus on the quarter over quarter results, because the quarterly explanations also apply to the year-over-year changes. You a may want to turn to slide 7 and 16. The levered gas margins declined by about $4 million quarter over quarter and almost $13 million year-over-year. We experienced a $0.02 drop in per unit margins in the quarter and a $0.03 decline year-over-year, primarily due to narrowing basis spreads. Traditionally sales volumes decrease 11% quarter over quarter and a 5% year-over-year. However, once again, we saw industrial volumes bounce back this quarter at AEM, with a 16.5% quarter over quarter increase essentially reversing the declines experienced earlier in the year and bringing the year-over-year comparison slightly positive. Industrial activities [spiked out] on slides 55 and 56.

Asset optimization margins increased by about $23 million for the quarter and $19 million year over year. During the current period, spot to forward spread values were very narrow due to unfavorable natural gas fundamentals. As a result, AEM elected to maintain short-term trading positions and generated incremental realized gains from rolling positions throughout the quarter. This is in contrast to last year's quarter where AEM realized losses on the settlement of financial instruments after it elected to defer storage withdrawals and reset corresponding financial instruments to capture additional summer-winter spread values. The increase in realized gross profit was more than offset by almost a $28 million decrease for the quarter and about a $3 million decrease year-over-year in unrealized margins, largely due to the timing of storage withdrawal gains and the associated reversal of unrealized gains into realized gain is.

As a result of weak market fundamentals that affect us throughout much of the year, cash prices have continued to remain low and enforce spot to forward spread values to contract. Consequently we have limited opportunity to capture economic value. We did not anticipate spot to forward spread values to expand in the near term, and we expect to be able to roll positions and capture greater economic value than what we can capture currently. However, the short rated nature of AEM's trading portfolio combined with current short-term forward prices that are lower than the cost of gas that was injected inside storage in prior periods resulted in negative economic value at June 30, 2010. You can see this on slides 60 and 61.

Turning now to the expense side of our income statement. Consolidated operation and maintenance expense rose about $3 million in the quarter, but declined by $11 million for the current nine months compared to the same periods a year ago. Current nine month period includes a $7 million state sales tax refund received in the second quarter, lower pipeline maintenance cost at Atmos Pipeline-Texas of about $7 million, and reduced legal and administrative expenses of about $3 million. Partially offsetting these decreases were higher employee and benefit related costs of almost $8 million.

Operating expense decreased about $5 million in the current nine month period due to a noncash charge to impair certain available for investments in fiscal 2009 that did not recur in the current year. In addition, income tax expense rose about $18 million in the current nine month period, primarily from the absence of a one-time benefit of $11.3 million from updating the Company's deferred tax rates, which occurred in fiscal 2009.

Turning to cash flow, our year-to-date operating cash flow was about $595 million, down from $825 million one year ago, primarilydue to the large fluctuation in gas costs. Gas costs, which reached historically high levels during the 2008 injection season, fell sharply when the economy slipped into recession and have remained relatively stable since that time. Operating cash flow from fiscal 2010 period reflects a recovery of lower gas costs if purchased gas recovery mechanisms and sales. 2009 operating cash flow was favorably influenced by recovery of high gas costs during the period of falling prices.

Moving now to our earnings guidance for fiscal 2010. We are maintaining our previously announced earnings estimate for fiscal 2010 in the range of $2.15 to $2.25 per diluted share of common stock, excluding any unrealized gains and losses. Let me draw your attention to slides 42 through 48 where we have outlined our budget assumptions.

O&M expenses reprojected in the range of $470 million to $480 million due to our summer labor now working on capital intensive projects, especially at the regulated pipeline. We are now projecting between $525 million and $540 million in capital expenditures in fiscal 2010. This $5 million increase in projected CapEx is the result of completing projects originally scheduled for 2011. You will also notice that our cash flow projection is up substantially from last quarter and in includes the impact of an $80 million IRS refund we expect to receive in the fourth quarter.

With respect to our pensions, we have determined that we will not be required to make a contribution this fiscal year. Regarding our post retirement medical plans we anticipate contributing a total of about $12 million during fiscal 2010 to these plans, with an additional contribution of about $3 million expected by the end of September.

As Bob indicated, fiscal third and fourth quarters are typically loss quarters for us, so we will stay focused on keeping our financial house in order for the remainder of fiscal 2010. We are currently scrubbing our fiscal 2011 budget and anticipate sharing our 2011 guidance with you at our next earnings report in November. And, once again, here is Bob.

Thanks, Fred. I will make a few closing comments, and then we will open it up for questions. As Fred reported, we are extremely encouraged by our earnings report for the first nine months of fiscal 2010. Our business is performing well in this very uncertain economic environment. We are focusing on what we can control, which is dedicated to precision spending and expense management, choosing where to spend, how to spend, when to spend and what to spend. We have done a good job of expense management, and we will continue that focus going forward.

Our strong cash position supported our announcement on July 1 to enter into an accelerated share buyback agreement with Goldman Sachs to repurchase $100 million worth of our outstanding common stock. On July 7 we received and immediately retired nearly 3 million common shares. The actual number of shares that will ultimately be repurchased and retired will be based on the weighted average share price during the contract period, which is scheduled to end no later than March 2011. The [re]purchased of shares will offset stock grants issued under various incentive compensation plans. It is estimated that fiscal -- that the fiscal 2010 diluted earnings per share will increase from $0.01 to $0.02 as a result of this buyback program.

We continue to evaluate opportunities in the market for acquisitions, but at the moment nothing is imminent. We believe in the upside to our business is at the regulated level, with the continued focus on executing our rate and regulatory strategy. We have been resolute in stabilizing our distribution margins to reduce lag, improve returns and to design rates to increase with stability and predictability of margins. We have made significant progress in achieving rate designs that mitigate fluctuations in earnings. As of August 2 we have received rate relief this fiscal year totaling about $46 million of operating income and have six cases spent -- have six cases pending with a total of $70 million.

The Mid-Tex RRM filing of $57 million made in March is still pending. We continue negotiations with the settled cities on this filing and other matters. We hope to reach a comprehensive settlement, which would resolve the current filing, extend the RRM agreement for a progressed two year period, and agree to a steel service line replacement program for infrastructure enhancements.

We anticipate a rate filing in September for Atmos Pipeline-Texas. As you know, this filing is required by the GRIP statute and will provide a comprehensive review of our existing rates as well as a review of all capital investments made under the GRIP statute. The test period for the Atmos Pipeline-Texas 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.

We like our position as we enter the final quarter of our fiscal year. Gas prices are low as we continue gas injections for the coming season -- for the upcoming heating season. And there has never been a better time for natural gas. As you all know, it is American, abundant, affordable and the cleanest and most efficient fossil fuel. As I said, we like our position in the Company, and we like our fuel. And we appreciate your interest, and your taking time with us this morning. We will now open the floor for questions.

(Operator Instructions). Our first question is coming from Ted Durbin with Goldman Sachs.

Good morning.

Good morning.

Good morning, Ted.

Maybe we can just start with the Mid-Tex filing. You had asked for true-up on some of the under-earning, and you are going to do your usual forward book. Tell me where you are in the negotiations? Just give us a little more detail on that.

Ted, Kim Cocklin, our President, is here, and he has really been leading that effort, so I'm going to turn it over to him.

Good morning, Ted. Well, this is the third of the filings that we have made under the settlement. It is for $57 million, as we have said. We are very close to the end of the negotiation process we think. And it has been a very, very positive and cooperative process with the customers, because they are now familiar with it after three of the filings have gone through very -- this is the third of the filings. So, the only thing I can report is that, we are very close and very hopeful of reaching a settlement and of extending the current RRM period.

Okay. So no sense of timing, though, when we might get as a results?

This fiscal period for sure.

Okay. That's great. And then just shifting over to the regulated transmission business. How are you thinking about some of our growth capital spending there going forward? Feels like we are pretty well piped in Texas. You have volumes dropping. The Barnett has kind of flattened out. Where do you see the spending going into 2011 and even beyond that?

Well, most of the spending is going to continue to focus on system upgrades for that part of the system where -- the end where there is low pressure spots, first of all. Second of all, we continue to look at opportunities to enhance our storage operations that are utilized to serve the Mid-Tex division, because we did experience a very good winter this year, and there appear to be some opportunities on the operational side of the business. And we do expect Mid-Tex, the utility division there to continue to grow. Texas has continued to enjoy a more robust economy than the rest of the nation, and ten years out Texas is supposed to increase pretty significantly, particularly in the market area that we serve with Mid-Tex. So we think that there will be an appetite for peaking services and storage, and that is principally where we are looking.

Okay.

And they continue throughout Barnett Shale. I mean Barnett, it is running about 4.5 Bcf a day right now, but people are continuing to drill and hold their acreage. We are still seeing a little uptick in the out years for moving transport volumes for producers and marketers.

Okay, that is helpful. And then if I could one last one. I'm just trying to understand in the marketing business. You have now locked in a pretty significant amount of negative economic value. I mean how do we expect that to roll out over the next few quarters? How do you offset that with some of the intraquarter trading? Just kind of walk us through that.

That negative economic value is basically the inventory that we have in the ground, the cash value of that inventory. Of course, that has been written to market in our financials -- in our GAAP financials. The $8 million of negative were will roll off about -- the way it is scheduled now, about $7 million of it will roll off next quarter, and the bulk of it then will go out the next -- the following quarter. But again, that is the, if you will, kind of sunk cost from a cash standpoint only. Is also already been reflected in our financials, so when it does roll off, it will haveno net income impact. It will be a change between unrealized and realized gains and losses.

That's helpful. That's it for me.

Thank you, Ted.

(Operator Instructions). Our next question is coming from Gordon Howald with East Shore Partners.

Hi, guys, good morning. Can you hear me?

We can hear you loud and clear, Gordon.

Right. You guys had a big $180 million of cash on the balance sheet at quarter end. $100 million, I guess, went on July 7 for the share buyback. Where do you anticipate ending the fiscal year from a cash standpoint? And I guess related, was the lack of a possible acquisition or acquisition opportunities a reason for pursuing the buyback?

Well, we are in a very strong cash position this year. We are projecting cash flows from operations for 2010 to be somewhere in the $560 million, $580 million range. That is before regular -- that is from operations. We have not been in the debt markets at all short term until just July 26 when we borrowed $78 million at very favorable rates, as Bob mentioned earlier. The low gas prices has been beneficial to us for improving our cash, and we are in a very strong cash position and believe that it where we will be come year end.

Gordon, I would also say that our balance sheet is really pretty much where we want it, and it is in good strong position, and our credit ratings are good. So we saw this opportunity for this buyback, and you know it will help us this year, and it will help us next year. So we felt that was a good plan and good investment for us at the time. Obviously we just continue -- we will continue to evaluate as we go.

Gordon, this is Kim. The fact that we entered the share buyback had no influence on our acquisition opportunities. We have been talking, we have been looking that this minimal share buyback to meet certain of our incentive stock plans for at least the last two years. We have been talking about it for a year. It really wasn't that big of a deal. And $100 million certainly wouldn't -- didn't impact our thoughts in and around the acquisition.

Got you.

(Inaudible -- multiple speakers) that we continue to look for.

I appreciate that. And if I could just ask one more quick question here. You guys had shown up, at least according to a report over on SNL Financial, with a big increase in your short share position at the end of calendar second quarter 2010. Any thoughts on that? And could that possibly relate to the buyback that was done by Goldman? It's a 300 basis point increase.

I don't think that that in any way relates to the share buyback by Goldman. We entered into those discussions and executed that in relatively short order. And although internally we had been discussing it for some period of time, we had not discussed it with external people until very, very close to the date we executed. So I really don't know what gives rise to that short position.

Well, we will try to figure it out. I appreciate it, guys. Thank you very much.

Thanks, Gordon.

There are no further questions at this time. I'll turn the floor back over to Ms. Giles for closing comments.

Thank you, Claudia. And just a reminder, a recording of this call is available on our website through November 2. Again, we appreciate your interest, and thank you for joining us. Bye-bye.