埃特莫斯能源 (ATO) 2011 Q1 法說會逐字稿

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Thank you, Rob. 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 refer to just a few of the slides during this live call 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 Kim Cocklin, President 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 will 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 would like to turn the call over to Kim Cocklin. Kim?

Thank you, Susan, and good morning, everyone. We certainly appreciate you joining us today, and we're enjoying another day of sleet and ice here in balmy Dallas at the DFW Metroplex. After about four days last week of record cold temperatures which have been very, very good for our business. As you know, we reported first quarter consolidated net income of $74 million, or $0.81 per diluted share, compared to $93 million or $1 per share one year ago. However, when you exclude the unrealized gains in both periods, net income was $74 million or $0.81 per share this quarter compared to $66 million or $0.71 last year. This represents an 11% increase in consolidated net income and a 14% increase in earnings per share.

Regulated operations contributed 91% of our net income and non-regulated operations contributed the remaining 9%. A very important balance has been struck as well as customers continue to benefit from lower average natural gas prices. One of our goals at Atmos is to improve all aspects of our financial position, and during the quarter, we executed on our strategy to streamline our letters of credit. In October, we replaced our $200 million, 364-day revolving credit facility with a 180-day facility. In December, we replaced Atmos Energy marketing's 364-day $450 million facility with a $200 million three-year facility.

There's also an accordion feature that could increase Atmos Energy marketing's borrowing capacity to $500 million. The new facilities will continue to ensure that we have sufficient liquidity to fund our working capital needs while reducing our financing costs. Our liquidity and financial position remain very strong. Our debt capitalization ratio was 51.4% at December 31, basically flat compared to last year. Short-term debt this quarter was $248 million compared to $180 million in last year's quarter, primarily due to seasonal borrowings to fund our working capital needs.

Our working capital requirements increased as we entered the winter heating season. In fact, short-term debt traditionally peaks in late January, and we should begin to decline as customer payments for the winter heating bills start coming in. Yesterday, our Board of Directors declared our 109th consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal 2011 is $1.36. Now I'll ask Fred to review our financial results in greater detail. Then we'll return for closing comments and open it up for any questions. Fred?

Thanks, Kim. Good morning, everyone. Before I discuss the financial results, I would like to point out a change to our reporting segments. During the first quarter, we began reporting our non-regulated natural gas marketing segment with our non-regulated pipeline, storage and other segment in one non-regulated segment. Both the regulated gas distribution and regulated transmission and storage segments remain unchanged. Now let's take a look at the financial drivers for this quarter. Once again, rate relief remains a primary driver of our success in the regulated operations. Rate increases for distribution and Atmos Pipeline Texas combined generated $17 million of incremental margin quarter over quarter, with $14 million for distribution and $3 million for APT.

However, the unseasonably cold weather experienced in last year's quarter did not recur this year, which resulted in throughput declines and associated margin decreases of about $5 million for distribution and about $1 million for Atmos Pipeline Texas. The pipeline delivers gas to our Mid-Tex utility customers and is not weather normalized. APT experienced a 4% quarter-over-quarter overall increase in throughput and a 14% increase in industrial volumes, both of which seemed to confirm that the economy has at least stabilized, and is even growing at a slower pace. You may want to look at slide 26 for additional volume comparisons for all of our segments.

Also during the current quarter, APT successfully executed five separate one-year demand-based agreements, totaling 90,000 MMBTUs per day, which are expected to generate about $3 million in margins from the full fiscal year. And partially as a result of this success, we now expect about 86% of our 2011 through system transportation revenue to be generated from these demand-based contracts. And although through system volumes were up about 15% this quarter compared to last year's quarter, Atmos Pipeline Texas continues to experience lower per unit margins on the remaining 14% of volumes not covered by demand contract prices, but transported at market-based rates. This decrease in per unit market-based rates translates into a decrease in gross margins of about $1.5 million.

Turning now to the non-regulated operations, you may want to turn to slide eight. The biggest driver of the $45 million decline in non-regulated gross profit is due to the absence in the current-year quarter of a $44 million unrealized gain, recognized in the prior-year quarter. Operationally, margins from gas deliveries were basically flat quarter over quarter. Similar to our pipeline segment, we also experienced an increase of volume quarter over quarter, offset by a decrease of per unit delivery margins. Unregulated sales volumes increased 8%, and industrial volumes rose 20%. Per unit gas delivery margins fell from $0.16 per MCF last year to $0.15 in the current quarter.

We continue to experience low natural gas price volatility, which translated into a $2 million decrease in asset optimization margins quarter over quarter. In the prior-year quarter, we were able to take advantage of more favorable trading opportunities in the daily cash market. These opportunities were not as readily available in the current quarter. Additionally, we realized lower spread values on positions that were closed during the quarter compared with the prior-year quarter due to the decline in the fiscal or spread base experienced in the last 12 months to 15 months.

During the quarter ended December 31, our non-regulated segment's economic value improved from a negative of almost $8 million or a negative $0.48 per MCF at September 30, to a negative $2.6 million, or a negative $0.13 per MCF. You can see details of this on slide 29. The improvement in our economic value reflects an increase in spread value resulting from two things. First, we entered the financial hedges with higher average prices, and we reduced the weighted average cost of gas held in storage by cycling higher cost gas and injecting gas into storage at lower prices. We anticipate the majority of the economic value and corresponding reversal of unrealized mark-to-market gains will occur over the remainder of fiscal 2011.

Now moving to our earnings guidance for fiscal 2011. As a reminder, we've made it a practice for the last several years to only provide annual guidance projections. Therefore, we have affirmed our fiscal 2011 earnings per share guidance of $2.25 to $2.35 per diluted share, and have updated the expected contribution by business segment. This rate assumes no material mark-to-market impact at September 30, 2011. Let me draw your attention to slides 17 and 18, where we have outlined our budget assumptions and net income by segment. Our projections now include $10 million increase to net income in the regulated gas distribution segment with an equal and offsetting decrease in the non-regulated segment.

Our original fiscal 2011 budget for non-regulated asset optimization margins assumes summer-winter spreads prompting forward spreads of about $1.50 per decatherm, down from $2 in the previous year. However, as a result of continued weak market fundamentals, cash prices have remained low and have forced spot to forward spread values to remain narrow. The current summer-winter spread is around $0.60 to $0.70 per decatherm. Consequently we have had even more limited opportunity to capture economic value than originally anticipated. Therefore, we've lowered our expectations for asset optimization margins to $24 million to $28 million.

Total non-regulated margins are assumed to be between $100 million and $110 million, again, with no material impact from mark-to-market of our fiscal storage and offsetting financial hedges. Several factors give us confidence that we can achieve a $10 million increase in net income in our distribution business. The extreme colder than normal weather we've experienced primarily in the first half of January and then just last week in all of our service areas provide upside, even with WNA rates in the bulk of our service areas.

In fact, the Mid-Tex system here in Texas hit its all-time peak delivery day, exceeding the designed capacity. Our original earnings projection assumed a 1% short-term interest rate, which is currently running at just 33 basis points, and we think we've got some upside there of about $1 million from the remainder of the fiscal year. Additionally, we've experienced better than expected results in our property tax negotiations, which should provide about $1 million in upside for our (inaudible) expenses going forward. The second fiscal quarter historically generates the greatest revenue, and we're off to very a great start. We remain optimistic that we can achieve consolidated net income of $206 million to $215 million for fiscal 2011. Thank you for your time, and I'll hand the call back over to Kim. Kim?

Thank you very much, Greg. We have had a very good first quarter, and we're off to a solid start to fiscal 2011, and this quarter has provided a glimpse of what we think are several positive economic indicators, primarily a 17% rise in consolidated industrial demand compared to last year. Our fundamental business, as you know, is delivering safe and reliable natural gas under the rules of our regulatory agencies. Successful rate activity is critical to the financial performance of our regulated businesses. We currently have rate actions filed and pending, which total about $36 million in requests, the largest being the Atmos Pipeline Texas rate case, which requested about a $35 million operating income increase. Hearings were held in that case two weeks ago, and we are expecting the initial decision from the hearing examiner by March 14. The statutory deadline for a decision by the Railroad Commission here in Texas in that case is April 20.

We also intend to file another 15 to 20 cases this fiscal year, rate proceedings that in total would request between $35 million and $40 million. We excel at managing our utility distribution assets, and we have developed a very good and proficient niche with our intra-state pipeline asset. Our non-regulated marketing business will continue to complement the regulated businesses through asset management arrangements and saturating the market behind the regulated utility footprint. Growth in this business will be targeted by increasing market share and improving margins. Our focus remains on enhancing shareholder value by growing earnings and providing a targeted total shareholder return in the range of 8% to 11% per year on average. Thank you very much, and now we'll open the call up for questions.Rob?

(Operator Instructions)One moment while we poll for questions. Thank you. Our first question is from the line of Jonathan Lefebvre with Wells Fargo Investments.

Just wanted to touch on the storage project at Fort Necessity. Was wondering, one, why the developers decided not to move forward? Was it geology, market fundamentals, and then, secondly, could there be any impairment for this, to this project?

Jonathan, this is Kim. There's not an impairment question with the project currently, and the option that the party held expired on December 14, and they decided not to pursue an extension of that option principally because of where the current storage market conditions were. And they were about the obligated -- if the auction was extended, invest a considerable sum of money, which they made a business decision not to do that. So what we have is the project -- we have the project back, and we are currently conducting an analysis to determine exactly what is the best course of action going forward, and we expect to make that decision no later than the end of this fiscal year.

And maybe if I can just ask a follow-up to that, what type of options, if you don't mind me asking, are we considering here?

We're considering opening up another data room. We're considering canvassing the market to determine if there are other potential buyers that may be interested in this project. We continue to hold a certificate from the FERC to construct and go forward with the project. It has been deemed geologically viable. So it's in pretty much a state of readiness to move forward if people want to go ahead and determine that they feel that when they bring it online, it would be economically viable. The other thing we're doing is we're rerunning the economics for the cost of the build-out of the project based on -- what had been reprojected gas prices, since that has a dramatic impact on the investment associated with base gas. So, I mean, we're looking at everything right now. And we're talking to a couple of folks that might help us determine what is the best opportunity to pursue monetization of the asset.

I appreciate those comments. And then, Fred, I have one for you on the AEM. Just wondering, the $24 million to $28 million, what summer-winter spread is that based on?

That's a $0.60 to $0.70 spread.

Okay. So the current market spread.

Yes. We originally had prepared our budgets on $1.50, but we're just not realizing that in today's environment. So we've cut that back to the $0.60 to $0.70.

Great. And then lastly, I saw there was a $4.2 million decrease in O&M. What is that attributable to?

A lot of that is just timing of money that is being spent compared to a year ago as to when we're spending the money. We're experiencing some improvements in some of our labor costs and capitalization rates of labor because of the capital projects that we have going. Our steel service line replacements and all, and so we're using some internal labor there to a larger extent than we have in prior times, and we're able to capitalize a little more cost.

Got you. And then -- sorry. Go ahead.

This is Kim. I was just going to say, we also have a considerable focus, and dedicate a lot of energy to managing our cash in a very prudent manner as well as keeping a very close eye on the expenses that we have in the budget. And we work on that every day and are working on the benefit side of the expense line as well.

Understood. And then the property tax gain that was mentioned. Is that in the $206 million to $215 million of net income guidance?

Yes, it is.

Great. I appreciate the time guys.

Thank you, Jonathan.

Our next question is from Jim Lykins of Hilliard Lyons.

First, another question about the $24 million to $28 million for asset optimization. I was wondering if that includes -- it looks like conditions may have been a little more favorable in January and February. I was wondering if that number includes those two months, or if there might be potential for some additional upside there.

Our projections are what we anticipate for the full fiscal year, so yes, it does -- we've taken that into consideration.

Okay. And also the 15 to 20 rate cases, the $35 million to $40 million, can you give us any more specificity there, if you can maybe talk about what state you're going to file in, or at least a sense for the timing?

Yes.

A total -- you can't say how much in each state but if you can--?

Let me get something. Here we go. We've got filings planned in Illinois, in Texas, in the mid-Texas division. We'll have an annual GRIP filing. We'll also have a refreshing of the rates in the West Texas area. Tennessee is a potential possibility. Louisiana is one that we will probably file. We have planned filings scheduled for Georgia and Kentucky and Mississippi.

And can you give us any sense of the timing on those states?

They will be dropped in between March 1 and September 1.

Okay. All right. Thank you, everyone.

Ted Durbin of Goldman Sachs.

Can we just talk a little bit more about the Atmos Pipeline Texas, the case there? Where is the staff coming out right now in terms of the revenue requirement, ROE, some of the key metrics that we would want to look up?

Good morning, Ted. This is Kim. I guess the most critical metric that the staff has provided their position on is rate of return, and their proposal is an 11.7% return on equity. Now I'm not sure where that puts them in terms of an overall revenue requirement, but the analysis that has been undertaken demonstrated some improvement from the current rate levels. So we were not too far apart from the staff.

It's interesting, because you're in the 9.6% range for the mid -- the distribution business. What's the driver or the difference there?

There's a recognition that the pipes have a little bit more risk, and because it's an intra-state pipeline, they follow and adhere to pretty much the philosophies that are followed at FERC for establishing the bands for a return on equity for pipelines. That was where the staff witness came out, and they did a wonderful job during the presentation at the hearing itself in defending that 11.7%.

Okay. Sounds good. If you can talk about -- it's interesting here. You say you're going to start using your capital structure capped at 50% for the RRM there in Texas. Does that mean we're expected to run the balance sheet at about that 50/50 level going forward, because that's where you're going to earn on it?

Yes. And that's an improvement, I think, over the previous equity component was about 48%, a little bit -- a hair above 48%. So we did get an improvement there, with an increase in the rate base.

And just one more, if I could. You've had this FERC investigation on some of your bidding practices on your gas pipelines. Do we have any update on where we are with that? Maybe I missed it and you settled it, but what's the status there?

The status there is that they have communicated back to us that it is on track. We have continued to have a lot of discussions with the enforcement staff. They've -- what we consider are positive discussions. They've been -- we think, productive discussions, and there's been a great deal of information that has been passed back and forth. Because of the complexity of that particular case and the facts, I think it's just been -- it's taken a little bit longer for them to digest the information that we have provided. But we've been very cooperative and given them all the information they've wanted, and we've also set up a very diligent compliance program and have a manager of FERC compliance on our staff now. So all of that has been very helpful and accepted, we think, favorably by the FERC.

Is there a dollar amount that's been discussed in terms of a fine or a penalty or anything like that?

No. We -- no, we have not discussed any dollar amounts yet.

Okay. That's all my questions. I appreciate it.

Thank you. (Operator Instructions)Gordon Howald of East Shore Partners.

Just asking my question on APT. I wanted to follow up on O&M a little bit. What is the outlook for fiscal 2011 for O&M? Was a majority of the improvements that we're seeing -- that we had seen in the fiscal first quarter going to be made up as the year goes on?

Yes, we -- our projections, we believe that we will come in with O&Ms very near what we experienced in 2010 overall, and that, as Kim said earlier, we do a lot of the work on holding down our costs, maintaining our costs.We do have several projects going to where our capitalization rates this year will likely be a little higher maybe than they were last year because of the steel service line work that we're doing. We're also installing a very large -- or starting to work on a very large systems project -- our customer service systems. So there will be people that are in what we consider our shared services, which are normally an overhead type of item, that some of that costs will be capitalized in connection with working on putting in that new system. So overall, our O&M, we anticipate it will run $475 million, $485 million in 2011, which is very comparable to what we've experienced the last couple of years.

Right, right. Thank you for that.If I could follow up one other question. Now looking out to fiscal 2012, from a big picture standpoint, could you talk a little bit about what capital expenditures you could envision seeing in fiscal 2012?

Gordon, this is Kim. We have represented we will probably grow a rate base by anywhere from 3.8% to 4.2%, and in order to beat that growth commitment, we'll obviously have to ramp up the capital budget accordingly. And then if there's any other regulatory pronouncements that -- like the most recent steel service line replacement line, those things always have a way of having to be addressed as well.

Right. And have you seen any infrastructure that's being accelerated as a means within Texas to stimulate the economy? We've seen that with some other utilities.

I know what you're talking about, like in New Jersey and so forth, but no there hasn't been any of the shovel-ready projects that the -- there's an ample amount of capital that's been invested obviously in the energy economy just because of what a dramatic impact and the role that it plays in Texas. But we've continued to represent that we're going to grow revenues and margins by about $50 million to $60 million as a result of rate outcomes each year, and as a result of that, we do have to improve the investment in the rate base to realize that commitment. And we will continue to beat that commitment. So we'll continue to -- there's no shortage of any appetite for capital on our systems.

Absolutely. I appreciate that. Thank you very much.

(Operator Instructions)We'll pause for a moment to poll for questions. Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments. Actually, excuse me gentlemen, I'm sorry. We do have another question. Dan Fidell of Brean Murray.

Thanks. A quick question or two. First, just in terms of the rate case filings, obviously numerous here. Can you tell us if there will be any unique add-ins with those filings, or are they going to be standard rate cases? Will you be asking for trackers or unique additional mechanisms in the cases?

I think they're all going to be fairly standard run-of-the-mill stuff. We've got a lot of trackers in place now, so -- we do have the steel service line settlement in Texas, but there will be pretty much just an updating of the cost and investment in those jurisdictions.

Okay. Great. Thanks. Maybe another question. I think in the past, on different calls you've talked about an appetite for M&A. Notwithstanding the rate case focus is M&A, also a potential near-term focus as well. Is that continuing?

Absolutely. We will continue to look for growth, and it's obviously a high priority for us and a lot of other folks, but being the acquisitive Company that we are and given where the balance sheet is and the cost of money right now it isn't a good time, and an opportune time if the right transaction comes along. We haven't backed away from that. And we'll continue to look very hard and pursue an acquisition that makes sense for the shareholders.

Great. Last question, just on the dividend. Can you just tell us again a quick update on the target payout ratio. What do you think of current levels? Is that a focus going forward, dividend growth, earnings growth, or how would you characterize the dividend we should be looking at going forward?

In recent years, we've gotten our payout ratio down in the 60% range, which is very comparable to our peer group. We had been at a higher percentage a few years ago. We're comfortable with that -- and that's around that 60% range. We have increased our dividends each year for 109 consecutive times, and going forward, of course that's determined by our Board what our ultimate dividend will be. But we anticipate paying a good dividend and having dividend increases going forward, but we will not strike too terribly far from that, around that 60% payout.

Great. Thanks for your comments. Very helpful.

I will now turn the floor back to management for closing comments.

Thank you Rob. I appreciate it. I just want to remind you all that a recording of this call is available for replay on the website until May 4. We appreciate your interest in Atmos Energy, and thank you all for joining us.