埃特莫斯能源 (ATO) 2011 Q2 法說會逐字稿

Welcome to the Atmos Energy fiscal 2011 second quarter conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being records. It is now my pleasure to introduce your host, Susan Giles, VP Investor Relations for Atmos Energy Corporation. Thank you, Mrs. Giles. You nay now begin.

Thank you, Danielle, and good morning, everyone. Thank you all for joining you 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 the finance results. We will refer to just a few of the slides during the call, but we will be happy to take questions on any of them. 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 and CFO. There are also other members of our leadership team here to assist with questions as needed.

As we review these finance results and discuss future expectations please keep in mind that some of our discussion might contain forward-looking statements and are intended to full 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.

Thank you, Susan and good morning everyone. We certainly appreciate you joining us this morning.

Yesterday we reported our fiscal second quarter consolidated net income of $132 million, or $1.45 per diluted share. After eliminating the impact of the unrealized net losses, earnings per share were $1.47 for the quarter. And after you further eliminate the one-time adjustments in the quarter, earnings were $1.35, which Fred is going to detail.

For the six months of the year net income was $206 million, or $2.26 per diluted share. And again after eliminating the unrealized net losses, net income was $2.28 per share. After eliminating the one-time adjustments in the first six months, year-to-date earns per share were $2.16. Regulated operations contributed over 99% of our net income for the three and six month periods, again reflecting stability, predictability and the reliability of earnings from the core business.

Yesterday our Board of Directors declared the 110th consecutive quarterly cash dividend, and as you are aware they indicated annual dividend rate for the fiscal 2011 year is $1.36.

Our liquidity and financial position remain very strong. Our debt capitalization ratio improved to 47.6% at the end of March, down from 48.1% a year ago. As part of our financing strategy, we have reduced the number of credit facilities, extended length of term and reduced financing costs. Our $200 million180-day unsecured facility expired on April 13 and was not replaced. And on May 2 we replaced our five-year $567 million committed facility with a $750 million five-year committed facility that also contains an accordion feature, increasing the capacity to $1 billion.

During the quarter we announced unwinding of two treasury lock, generating a cash pre-tax gain of about $28 million. We entered into these locks last September to fix the treasury yield component on $250 million of senior notes we originally planned to issue later this year. The need to issue that debt was eliminated, primarily because of higher-than-anticipated cash flows from the bonus depreciation rules included in the extension of the Bush tax cuts last fall. We still plan on issuing $300 million of 30 year debt in June to replace our $350 million of debt that's maturing on May 15. And we've executed treasury locks to fix the treasury yield component of the interest costs at an all-in rate of 3.89%.

These action have been very well received by the rating agencies. On March 31, Moody's revised our outlook from positive to under review for possible upgrade, and reaffirmed the credit rating of Baa2 on our senior long-term debt. Also in March, S&P reaffirmed our credit rating BBB+, and our rating outlook is stable.

Now I will ask Fred mice especially humor to review our financial results in greater detail and then we will return foreclosing comments and questions. Fred.

Thanks, Kim. Good morning, everyone. I'll speak to the more significant items in the quarter and the six months, and then discuss the outlook for the remainder of our fiscal year.

As we stated in the earnings release, the current quarter and year-to-date results were favorably impacted by one-time items totaling $11 million or $0.12 per diluted share. These items included the unwinding of the treasury locks Kim discussed, a tax benefit from settling various income tax positions, and the impairment of Fort Necessity storage project. By eliminating the one time items in all periods and the market to market accounting treatment required by our GAAP in our non-regulated operations, which we have done for you on slides 41 and 42, the Company earned $1.35 per share for the current quarter, versus $1.44 for the prior year quarter, and $2.16 per share versus $2.14 for the year-over-year six months.

Now let's take a closer look at the major drivers by segment, looking first at our regulated Distribution. Our rate relief remains the primary driver of our success in the Distribution business. Rate increases generated $18 million of incremental margin quarter-over-quarter and $32 million of incremental margin for the six months. However, the unseasonably cold weather experienced primarily in Texas in the three and six month periods last year did not recur this year. Distribution gross profit decreased by $8 million in the quarter and $13 million year-to-date on an 11% decrease in consolidated throughput in both periods.

After taking into account the weather normalization impact in the service areas where we have WNA approved rates, we were 1% warmer than last year for the quarter and 3% warmer than last year for the six months. Additionally, in the current period we had days where the weather was substantially colder than last year, but the cold snaps were much shorter in duration than last year, providing further evidence that all heating-degree days are not created equal.

Atmos Pipeline-Texas's gross profit was basically flat for the quarter, but up $2 million for the six months. APT also experienced a decline in throughput from warmer weather, resulting in quarter-over-quarter margin decreases of $3 million, and $4 million from the six month periods. Remember, the pipeline delivers gas to our Mid-Tex utility division and is not further normalized. The rates (inaudible -- coughing) customers are established by the Texas Railroad Commission and are higher than the rates for our APT customer classes to ensure firm Transportation and Storage services to the utility customers.

A partial offset to these decreases came from the annual GRIP filings, which increased gross profit by $3 million in the quarter and $6 million for the six months. Looking ahead, we expect to be insulated on 89% of our fiscal 2011 through-system transportation revenues under the demand-based contracts executed with producers and marketers. We are continuing to seek replacement contracts as they expire.

We're quite pleased with the outcome of the APT rate case concluded in April. Kim will review the rate case results in a few minutes. I won't steal his thunder, but I will tell you $21 million increase to operating income went into effect on May.

Turning now to our line regulated operations. You might want to turn to slides eight and 16. Period-over-period gross profit increase the by about $6 million for the quarter and declined $30 million for the six months. Margins from gas deliveries increased almost $2 million quarter-over-quarter from both the 3% rise in sales and a $0.01 increase in unit margins, from $0.14 to $0.15. For the six months delivered gas margins increased $3 million year-over-year due to a 5% increase in sales volumes. Industrial volumes in both three and six month periods rose 20% compared to last year.

The most significant driver in the non-regulated business in the quarter and year-to-date has been the lack of natural gas price volatility, yielding smaller captured spread values, which has translated into sizeable reductions in realized asset optimization margins. In the prior-year periods we were able to take advantage of more favorable trading opportunities introduced in the daily cash market.

Quarter-over-quarter realized assets optimization margin declined $32 million and $34 million from the comparable six month periods. Additionally, during the primary year quarter we were able to recognize higher spread values that were captured from rolling positions through the first quarter of fiscal 2010. The quarter-over-quarter decrease in realized asset optimization margins was more than offset by a $36 million increase in unrealized margins that reflects the quarter-over-quarter timing of realized margins coupled with lower natural gas price volatility.

For the current six months unrealized margins decreased by about $7 million as a result of higher unrealized losses on certain basis swaps. During the last six months on non-regulated segment's economic value improved from the negative of almost $8 million, or a negative $0.48 per Mcf at September 30, to zero at March 31. This improvement reflects an increase in spread values resulting from me things. First, we realized finance instruments with lower spread values during the last six months. Second, we entered into finance hedges with higher average prices and rolled financial instruments to forward periods to capture incremental value. And we reduced the weighted average cost of gas held in storage by cycling higher gas costs and injecting net 2 Bcf of gas into storage at lower prices.

Turning now to the expense side of our income statement. Consolidated operation and maintenance expense for the first six months decreased about $8 million compared to the same period one year ago and was basically flat from for the quarter. Both the three and six month periods benefited from lower employee-related costs and administrative expenses, offset in part by the absence of the $7 million state sales tax refund received in prior periods.

Operating expense increased from three and six month periods, reflecting the $19 million non-cash impairment charge from Fort Necessity storage projects, which we announced in early March. Fort Necessity still has value in the land and the geological work that we advanced, but given the current economic conditions for storage development projects, we would not have been able to achieve our threshold returns and decided to shelf the project. So we recorded the impairment.

Miscellaneous income also rose in both periods of comparison as a result of under winding the two treasury lock agreements, which created a $28 million cash gain, also announced in March. Income tax expense was favorably impacted in both the three and six month periods due to a $5 million income tax benefit related to the administrative settlement of various income tax positions.

Moving now to our earnings guidance for fiscal 2011. As a reminder, our second fiscal quarter historically generates the greatest revenue as we concluded the heating season. We have affirmed our fiscal 2011 earnings per share guidance of $2.25 to $2.35 for diluted share and have updated the expected contribution by [listed] segment. This range assumes no material mark to market impact as of December 30, 2011.

Let me draw your attention to slides 32 and 33, where we have outlined our budget assumptions and net income by segment. Our projects have been update since last quarter to consider the actual experience through March, including the effects of the one-time items affecting this fiscal year. The increase in projected net income for our regulated Gas Distribution segment of $15 million, and $5 million for the regulated Transmission and Storage Segment are entirely a result of the positive impact of a one-time items of $18 million of Distribution and $4 million at the regulated Pipeline occurring in the current quarter.

The non-regulated segments net income projection decreased by $20 million since last quarter, $11 million of which reflects the impairment of the Fort Necessity. The remaining decrease is due to lower asset optimization margins resulting from the continued weak market fundamentals and erosion and spread [backs]. We have had more limited opportunities to capture economic value and have lowered our expectations for asset optimization margins to between $3 million and $7 million. Total non-regulated margins are now assumed to be between $85 million and $95 million, again, with no material impact from marked to market of our fiscal storage and offsetting financial hedges.

Thank you for your time, and now I will turn the call back over to Kim. Kim?

Thank you, Fred, very much. As Fred mentioned, although the quarter did have periods of cold weather, the duration was not for a prolonged period as it was last year. We had a lot of the short burst of cold, which doesn't generate as much consumption as sustained periods of cold does. For the final six months we're going to continue to focus on those things within our ability.

Obviously managing expenses is going to continue to be a very high priority. We have been able to keep O&M flat year-over-year without reducing compliment, being able to continue to provide annual wage increases, and absorbing welfare and benefit increases. Our uncollectible expense continues to be reduced, currently less than 0.25% of total revenues, and we telephone to lead our peers in O&M expense per customer.

Our fundamental business, as well you know, is delivering safe and reliable natural gas. And we're going to continue to successfully execute our rate strategy, which focuses on reducing lag, improving ROA and increasing the recovery of fixed costs. To date, rate outcomes have provided an annual operating income increase of about $45 million, and we currently have requests filed and pending which total about $26 million. We also intend to file another six to eight requests before the end of the fiscal year for another $20 million to $25 million. As a result we fully expect to achieve our target of between $50 million and $60 million of approved annual operating income increases from rate outcomes in fiscal 2011.

On April 18 the Texas Railroad Commission issued its final order in the Atmos Pipeline Texas rate case, which we had filed in September of 2010. An annual increase in base rates of $26.1 million was approved, which included an increase in depreciation rates of $5.7 million, resulting in a net annual operating income increase of $20.4 million effective May 1, 2011.

Other the conditions of the case included a rate base approved of about $808 million, which was compared to the $417 million in the last case in 2004. We also received an authorized return on equity of 11.8%, with a 50/50 capital component, resulting in an overall rate of return of 9.36%. We also received approval of a straight 6% variable rate design, which recovers all fixed costs, including returns associated with transport and storage services through monthly customer charges. As well as an annual adjustment mechanism known as the Rider Rev, which will operate under a three year pilot program.

This Rider Rev will adjust regulated rates by tracking any difference between APT's non-regulated annual revenue and a base credit of $84 million, and sharing that difference 75% to customers and 25% to the Company. Additionally, APT will file it's annual GRIP filing, which will include capital invested from April through December of 2010 to capture those months not included in the base period for the rate case which ended March 31, 2010.

Low gas prices continue, as you well know, as well as little to no spread values. And as a result, we do expect optimization revenues to make a much smaller contribution to earnings going forward. Our focus in the non-regulated operation business remains in the delivered gas business. We're on target to sell 435 to 445 Bcf in fiscal 2011 at units margins of between $0.14 and $0.16 per Mcf. That business will continue to compliment our regulated business by saturating the market behind the utility footprint. Growth in this business will be targeted by increasing market share and improving margins.

Our focus will remain on enhancing shareholder value by growing earnings and providing a total shareholder return in the range of 8% to 11% per year. We appreciate your time this morning, and now we'll take your questions. Danielle?

Thank you. (Operator Instructions). There currently are no questions in the queue. (Operator Instructions).

We do give an awful lot of information, Danielle. Susan and her team do an excellent job, so we can understand if there's no questions.

No questions still have entered the queue. Mrs. Giles, do you have any further comments?

Just as a reminder, a recording of call is available for replay on our website through August 4, and if you have any additional questions, please do call me or visit the us at the upcoming AGA Financial Forum. We appreciate your interest in Atmos, and thank you ford necessity storage joining us. Bye-bye.