埃特莫斯能源 (ATO) 2011 Q3 法說會逐字稿

Greetings and welcome to the Atmos Energy's fiscal 2011 third-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 recorded.

It is now my pleasure to introduce your host, Ms. Susan Giles, VP Investor Relations for Atmos Energy Corporation. Thank you, Mrs. Giles you may begin.

Thanks, Jen, 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 our website that summarize our financial results. We will refer to just a few of the slides during the call but, of course, we're happy to take any questions on line 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 this afternoon. Our speakers today are Kim Cocklin, President and CEO, and Fred Meisenheimer, Senior Vice President and CFO. There are other members of our Leadership team here 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 and are intended to fall within the Safe Harbor rules of the Private Securities Litigation Reform Act of 1995. And now I'd like to turn the call over to Kim Cocklin. Kim?

Thank you very much, Susan, and good morning, everyone. We certainly appreciate you joining us and thank you for your interest in Atmos Energy. It looks like the market is in for a wild ride as we begin our call too, but yesterday we did report a third-quarter consolidated net loss of $600,000, or a negative $0.01 per diluted share. For the current 9-month period, reported net income was almost $206 million, or $2.25 per diluted share. There were a lot of moving parts which are going to be addressed by Fred Meisenheimer.

During the quarter, we did announce the sale of our distribution assets in Missouri, Illinois and Iowa, which comprised about 84,000 meters at a price of approximately $124 million, and the purchaser is Liberty Energy, a subsidiary of Algonquin Power & Utilities Corp. From a geographical standpoint, this is very rational decision. We've had a limited presence in these jurisdictions and we did not foresee growing our market share or expanding our footprint in the areas. And this transaction will allow us to better focus on the remaining jurisdictions where we operate.

Applications with the Illinois and Missouri agencies -- or commissions were filed on Monday, August 1, and we do anticipate the transaction to close in the latter half of our fiscal 2012. Currently we expect to use the proceeds to fund capital programs, but looking further out, we could also redeploy the proceeds to fund, or partially fund an acquisition if a worthwhile asset presents itself.

Also this quarter we recognized a partial impairment of our non-regulated segments gathering facilities in Kentucky, which we call the Shrewsbury and Park City systems. Taking this action was the result of examining our capabilities and recognizing that we simply do not have the depth of expertise that's needed to pursue and develop greenfield projects such as this. Fred is also going to talk about the financial implications of this action.

We do continue to focus on enhancing our financial profile. And as part of our strategy this year, we've reduced the number of credit facilities, extended the length of their terms and reduced financing costs. Most recently on June 10, we issued $400 million of 30-year senior notes at a rate of 5.5% which replaced the $350 million note which had matured in May and carried a 7.375 interest rate. Taking into account the effect of our treasury locks, the effective rate of the new issue is 5.38%. Refinancing the $350 million note, and even adding an incremental $50 million in debt, will generate interest savings of over $4 million per year for the next 30 years. And as a result of unprecedented demand for our paper, coupled with the greater appetite for capital dollars this year for pipeline integrity projects, we upsized the debt offering to $400 million from the originally anticipated $300 million.

Of course, throughout the year, we've been in step with the rating agencies on all of our actions. Overall our strategy received quite favorably by the agencies and warranted the following rating A upgrades. On May 11, Moody's raised its corporate credit rating on Atmos Energy to be Baa1 from Baa2. And on June 2, Fitch raised it's corporate rating on us to A minus from BBB plus. Both agencies indicated a stable outlook for the Company. The upgrades will allow us to continue to access the capital markets on more economically favorable terms.

As of last night, we had about $56 million of commercial paper outstanding at about 30 basis points. And at the end of June, our debt capital ratio was 48.6% compared with 51.3% at September 30 and 48.4% a year ago. Our Board of Directors yesterday declared the 111 consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal 2011 is $1.36. Now Fred Meisenheimer, our CFO, will review our financial results in greater detail and then we'll return for closing comments and questions. Fred?

Thanks, Kim. Good morning, everyone. I'll speak to the more significant items in the quarter and 9 months, and then discuss the outlook for the remainder of our fiscal year. As a result of the agreement to sell our distribution assets in Missouri, Illinois and Iowa, we must now combine and report the financial results for these assets on one line item on the income statement entitled discontinued operations for all periods presented. Therefore the corresponding detail by line item will be excluded from my comparative discussions.

In accordance with accounting pronouncements, the discontinued operations results do not receive allocated corporate overhead or interest expense. Of course until we close the sale of these properties, they will remain a part of our total consolidated results and contribute to our overall earnings. As we stated in the earnings release, the current quarter and year-to-date results were impacted by several one-time items. In the current quarter, the impairment of our non-regulated segments gathering facilities that Kim just mentioned, equated to a negative $6 million or $0.06 per diluted share. We still have about $6 million on the books for these assets. Revenues are currently sufficient to support this level of investment.

Of the current 9 months, one time items equaled almost a positive $7 million, or $0.07 per diluted share. These items included the impairment I just mentioned, as well as the earlier impairment of the Fort Necessity storage project, the benefit from unwinding treasury locks and a tax benefit from settling various income tax positions. 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 44 and 45, the Company earned $0.05 per share for the current quarter versus $0.09 per share for the prior-year quarter and $2.20 per share for both 9-month periods.

Now let's take a closer look at the major drivers by segment. Rate relief remains the primary driver of our success in the Distribution business. Rate increases generated almost $8 million of incremental margin. Quarter over quarter, and almost $36 million of incremental margins for the 9 months, mainly from the mid-Tex, Louisiana, Kentucky and Kansas service areas. For the 9-months, consolidated Distribution throughput was 8% lower which decreased gross profit by about $11 million as the unseasonably cold weather experienced last year did not recur this year.

Atmos Pipeline - Texas' gross profit increased by almost $9 million for the quarter and almost $11 million for the 9 months. Like the Distribution segment, rate relief is also the main driver of our success at the regulated pipeline. The quarter-over-quarter increase is primarily the result of the Texas Railroad Commission's order, granting annual operating increases of about $20 million, which became effective on our May 1 bills.

The current 9 months also benefited from the roughly $9 million of incremental rate relief from the last rate case, but in addition, the pipeline experienced a $6 million increase as a result of the annual grip recovery period over period. Partially offsetting the positive impact from rate actions was almost a $3 million decline in throughput to our mid -Tex utility division as a result of warmer winter weather. Remember the pipeline delivers gas to our mid -Tex utility division and is not weather normalized. The rates to the utility customers are established by the Texas Railroad Commission and are higher than rates for other APT customer classes to ensure firm transportation storage service to these customers.

Additionally, the pipeline experienced about a $2 million decline in third-party market-based per unit transportation margins. Looking ahead, we expect to be insulated on about 81% of our fiscal 2011 through system transportation revenues under the demand-based contracts executed with producers and marketers. We're continuing to seek replacement contracts when they expire.

Turning now to the non-regulated operations, and you may want to turn to slides 8 and 16. Period-over-period, gross profit increased by almost $2 million for the quarter and declined about $37 million for the 9 months. Margins from gas deliveries decreased about $1 million quarter over quarter due to a $0.03 decrease in unit margins. Overall, we experienced an 18% rise in sales volumes, largely due to increased power generation demand. Our market areas continue to experience strong competition, which serves to drive per unit margins lower.

For the 9 months, delivered gas margins increased $1 million year over year, due to a 9% increase in sales volumes with comparable average margins of about $0.14 for both periods. Industrial volumes for the 9 months rose 18% year over 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 sizable reductions in realized asset optimization margins. In the prior-year periods we were able to take advantage of more favorable trading opportunities in the daily cash market.

Quarter-over-quarter, realized asset optimization margin declined $13 million and $47 million for the comparable 9-month period. Additionally, during the prior-year quarter, we were able to recognize higher spread values that were captured from rolling positions. The quarter-over-quarter decrease in realized asset optimization margins was more than offset by about a $15 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 9 months, unrealized margins increased about $8 million.

Consolidated operation and maintenance expense for the 9 months decreased about $7 million compared to the same period 1 year ago. Our employee-related costs decreased about $11 million and bad debt expense decreased about $2 million. These expense reductions were partially offset by the absence of about a $7 million state sales tax refund received in the prior year. Quarter-were-quarter, operating expense increased primarily as a result of an $11 million non-cash impairment charge on the Park City and Shrewsbury gathering assets in Kentucky. Operating expense increased for the 9 months primarily from $30 million of asset impairments, which includes the $11 million of gathering assets I just mentioned, plus the $19 million non-cash impairment charge from the Fort Necessity that we announced last quarter.

Income tax expense was favorably impacted in the current 9 months from a $5 million income tax benefit related to the administrative settlement of various income tax positions recognized earlier this year. Now that we have completed 3 quarters of our fiscal year, we expect our fiscal 2011 earnings per share guidance will be lower-- in the lower end of the range of the $2.25 to $2.35 per diluted share. As you know, with the seasonality of our business, we often experience breakeven or even negative financial results during our fourth quarter. We have updated the expected contribution by business segment and this range assumes no material mark-to-market impact at September 30, 2011.

Let me draw your attention to slide 36 where we've outlined our reprojected income by segment. The increase in projected net income of about $4 million for the Regulated Distribution segment is a result of our continued focus on expense management and higher than planned capitalization from our increased capital spending. The increase in projected net income of about $6 million for the Regulated Transmission and Storage segment is due to the favorable outcome of the APT rate case that went into effect on May 1, 2011. An increase of about $400 million to the rate base and an ROE increase to 11.8% from 10% are the main factors driving the uptick in APT's reprojections.

The Non-regulated segment, net income projection decreased by $10 million since last quarter, $6 million of which reflects a partial impairment of the gathering assets. The remaining decrease is due to lower asset optimization margins, resulting from the continued weak market fundamentals and erosion in spread values. We've had more limited opportunities to capture economic value and have lowered our expectations for our asset optimization margins to between $1 million and $3 million. Total non-regulated margins are now soon to be between $75 million and $85 million, again with no material impact from mark-to-market of our fiscal storage and offsetting financial hedges.

Capital expenditures for fiscal 2011 have been revised upward by about $30 million and are now expected to range between $610 million and $625 million. The increase is largely the result of additional pipeline upgrades and replacements from the aging Atmos Pipeline-Texas infrastructure. Thank you for your time and now I'll hand the call back over to Kim. Kim?

Thank you very much, Fred. I'll make a few closing comments, and then we will take your questions. And as you can see from hearing Fred, we had a busy third quarter. In spite of a few speed bumps, we have had a very good run in the first 9 months of our fiscal 2011. We've taken measures to clean up our balance sheet, we've eliminated under earning assets which will ultimately remove more risk from the business going forward.

Although there is no market sense of improvement in the economy, our business continues to perform steadily. We've done a very good job of managing expense and will continue that focus going forward. Our O&M expense is down this year without reducing [compliment]. But also been able to provide annual wage increases to our employees while absorbing government mandated costs. And our uncollectible expense is currently less than 0.25% of total revenues, despite the current economic conditions.

Our fundamental business is delivering safe and reliable natural gas. We continue to successfully execute our rate strategy focusing on reducing our lag, improving our return on equity and increasing the recovery of fixed costs. The stability and predictability of our margins remain vital to our growth. Today, rate outcomes have provided an increase to operating income of about $70 million, which exceeds our original target of between $50 million and $60 million of approved annual operating income increases from rate actions in fiscal 2011.

On June 22, a rate settlement -- a very important rate settlement was reached with the City of Dallas. This allows an annual increase in operating income to take effect of about $2 million July 1. The settlement provides also for an annual rate review process which is patterned after our other rate structures in Texas. The Dallas annual rate review allows an ROE of 10.1% and a 13 month average capital structure. Rate base was established at $1.27 billion, and the first filing under this annual rate review will be made by next January 15 on a September 30 ending test year.

We've also talked previously about the final order issued in April on the Atmos Pipeline-Texas rate case. It's very important to note that not only were we granted over a $20 million increase to operating income and an ROE of 11.8%, as well as the rate base increase from $417 million to $808 million, but this case does lessen our exposure to the market-based contract revenues. The Rider Rev mechanism in that case establishes a represented level of revenues for third-party services of $84 million. And at the end of each year, either a credit or surcharge will be rendered after calculating whether we fell above or below the $84 million threshold. The Company retains the refunds 25% of any increase or decrease from that representative level.

Additionally, on July 26, APT received approval for a $12.6 million increase in operating income from their most recent GRIP filing. Our focus in the Non-regulated operation remains in the delivered gas business. We are on target to sell 440 to 450 Bcf in fiscal 2011 at somewhat lower unit margins of between $0.13 and $0.14 per Mcf. The Non-regulated business continues to experience downward pressure and lower margins in a very highly competitive market, especially electric generation demand for power peaking plants this summer. There are some lost leader deals, but we are mining for the future to pick up more market share.

Low gas prices continue, as well as little to no spread values, and we do expect optimization revenues to make a negligible contribution to earnings going forward. We are lowering our exposure to non-regulated risk. We found that the market simply does not reward us for our non-regulated earnings.

We're principally a utility and we expect the earnings contribution from our regulated operations to remain at about 90% or greater going forward. We're going to continue to focus on the fundamentals, hit singles and doubles in our business and remain focused on enhancing shareholder values. We very much appreciate you taking time with us this morning and now we'll take your questions. Jen?

(Operator Instructions)

Should we sing happy birthday to the President?

It appears there are no questions at this time.

Okay.

Okay, Jen, thank you, everyone. And as a reminder, a recording of this call is available for replay on our website through November 9. Again we appreciate your interest in Atmos Energy and thank you for joining us. Good day.