埃特莫斯能源 (ATO) 2011 Q4 法說會逐字稿

Greetings and welcome to the Atmos Energy's fourth quarter and fiscal year 2011 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 my pleasure to introduce your host, Susan Giles, Vice President, Investor Relations for Atmos Energy Corporation. Thank you, Ms. Giles, you may begin.

Thank you, Latonya. 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 additional slides in an appendix to this deck on our website. We will not speak to them directly, but are happy to take questions after 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. Our speakers today are Kim Cocklin, President and CEO, and Fred Meisenheimer, Senior Vice President and CFO. There are other members of the 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. With that, I'd like to turn the call over to Kim Cocklin. Kim?

Thank you, Susan, and good morning, everyone. And, thank you very much for taking time out of your busy schedule to join us. Certainly appreciate that, and we appreciate your interest in Atmos Energy. Yesterday, as you are aware we recorded earnings of $2.27 per diluted share for fiscal '11, which represents very importantly, the ninth consecutive year of earnings per share growth for Atmos Energy. Additionally, our Board of Directors declared the 112th consecutive quarterly dividend, and raised the annual dividend by $0.02, making the indicated annual dividend for fiscal '12 $1.38. We had a very good year at Atmos Energy in 2011. The excellent financial performance in the regulated operations was primarily from the execution of the rate and regulatory strategy again. And in fiscal 2011, we did achieved over $70 million from authorized rate outcomes.

Throughout the year, we also focused on enhancing our financial profile, and did a very good job. We reduced the number of credit facilities from 3 to 2. We extended the length of the terms, lowered interest costs, and also lowered our weighted average cost to debt. Moody's and Fitch recognized our performance and our strength in credit profile efforts, and raised our corporate credit rating for 2011. Additionally in fiscal '11, we concluded an accelerated share repurchase of 3.3 million shares, and an effective repurchase price of $29.99 per diluted share. And in September, we announced a new share repurchase program of up to 5 million shares over 5 years. Operationally, we announced the sale of distribution assets in Missouri, Illinois and Iowa, and we impaired the non-regulated Ft. Necessity storage project, as well as a portion our Kentucky gathering assets.

Turning to slide 4, and looking more closely at the reported results for fiscal 2011, GAAP net income grew to $207.6 million from $205.8 million, one year ago. Again, the results of the Missouri, Illinois and Iowa properties will remain a part of our total, consolidated results, and contribute to our overall earnings until we close those -- that transaction. Combined rate relief for distribution and Atmos Pipeline Texas generated about $67 million of incremental margin in fiscal '11. Our business units and shared service operations have done an amazing and stellar job of managing O&M expense again this year, and they will continue that focus going forward. We have been able to absorb varying government mandated costs again, and the uncollectible expense was at a remarkably low rate of [0.16 of 1%] of residential and commercial revenue. Increased operating expenses were experienced this year, due to the non-cash impairment charges at our non-regulated business. But offsetting these impairment charges was a $27.8 million pretax gain that was associated with the unwinding of 2 Treasury lock agreements.

Now, if you turn to slide 5, we can look at the diluted earnings per share. And here you see the reported GAAP earnings of $2.27 in fiscal '11, versus $2.20 in '10. Both years were impacted by unrealized mark-to-market net losses, some positive impacts from some one-time items, and the effect of the accelerated share buyback program. Slide 6, you can see that we've stripped out the effect of the mark and the one-time items, giving an adjusted EPS in fiscal '11 of $2.31 versus $2.20 in fiscal '10. You can also see the effect of the accelerated share buyback program with the year-over-year decrease in the weighted average shares outstanding, which resulted in an $0.08 of additional earnings in fiscal '11, compared with a $0.01 increase in fiscal '10.

Slide 7 shows our record of consistent earnings growth since 2008 on a GAAP basis. And we have achieved a compounded annual growth rate of over 4% over the last 3 years. And we will make it 4 years, assuming that we reached the middle of our fiscal '12 guidance range which is $2.30 to $2.40 per diluted share, and which is going to be addressed by Fred. The annual growth rate does meet our commitment to achieve earnings growth in the range of 4% to 6% every year. We've also identified the relative earning contributions from the regulated, non-regulated operations on this slide 7. And a key takeaway on the slide, is obviously the steady growth from this very stable and predictable regulated operations.

Now that we can -- we're going to take a closer look at the business operations. We're organized with 2 primary lines of business, a regulated and a non-regulated segment. The regulated businesses are very capital-intensive operations with some 4,800 employees in serving over 3 million regulated customers. And again, we emphasize, that they do provide a very stable, predictable and reliable revenue base. Slide 9 identifies our geographical footprint with the regulated operations, that's identified in gold. And then the non-regulated operations are conducting business in the 22 states, that are identified in grey. Over 50% of our utility customers, margins and rate base are concentrated in Texas, which has enjoyed favorable, economic conditions compared to the rest of the country. And over 75% of our regulated market is in Texas, Louisiana and Mississippi.

Growth in the regulated operations occurs simply by either adding customers or investing capital. Capital investment is an extremely important component of our earnings growth, because it increases our rate base, and the more valuable the rate base, the greater the opportunity for increased revenues and growth. We do expect to deploy significant capital investment under relatively new infrastructure replacement programs over the next 5 years, and are projecting -- growing our rate base from between 6% and 6.5% on a compound annual basis, which previously, we had talked of growing rate base in the neighborhood of 4% to 4.5%. So that's a significant uptick. The successful execution of our rate and regulatory strategy, is obviously another major driver of our financial performance. And, we will continue to project annual operating income increases of between $50 million and $60 million on average. And we will continue to pursue mechanisms in the rate and regulatory environment that reduce lag, as well as improved margin stability and recovery.

Looking at slide 10, the execution of our regulatory strategy has significantly derisked or reduced the risk in our distribution business, making those revenues even more stable, predictable and easier to model. Importantly, we have over 94% of our margins protected by weather normalization mechanisms. And in 73% of our markets, we have mechanisms which provide for the annual adjustment of rates to reflect changes to cost, revenues and capital investment, without the need to file a rate case. We also recover the gas cost portion of bad debt through trackers for about 73% of the total cost of gas, which has helped on the uncollectible side of the business. And with the addition of the infrastructure replacement program, now authorized in Texas, we have accelerated capital recovery on 73% of our margins.

Our regulated operations also include our intrastate Texas pipelines which we creatively call, Atmos Pipeline Texas, and that is shown on slide 11. It traverses the Barnett shale production field, and does feed our Mid-Tex distribution division which serves over 1.5 million regulated customers. The Atmos Pipeline Texas is regulated by the Texas Railroad Commission. It connects the major market hubs at Waha, Katy and Carthage, and has 5 storage facilities with a working capacity of 46 Bcf, and a maximum daily withdrawal ability of 1.2 Bcf.

In April 2011, the Railroad Commission of Texas did issue a final order in the Atmos Pipeline Texas rate case that was filed during that fiscal period. The Commission granted a net annual operating income increase of about $20 million, and those new rates became effective on May 1, 2011. Other major components of the case included approval of about $808 million of rate base, compared to $417 million of rate base that was approved in the last case in 2004. We also were given the opportunity for an authorized return on equity of 11.8% with a 50/50 capital structure, equating to an overall rate of return of 9.361%. Importantly, we also achieved approval of straight fixed variable rate design, and we were able to achieve an annual adjustment mechanism, which we'll talk about, as detailed on the next slide, 12.

Slide 12, if you look at it, it does identify the pipeline throughput and margin composition. Historically, about 30% of the pipeline throughput and [60%] of the pipeline projected revenues are provided from the services that are provided at the Mid-Tex utility division. The market-based revenues, which account for the other 40% of the pipeline revenues, include service to power generators and various ancillary services involving compression, blending, park and loan, and also through system transportation that is provided to producers and marketers in the Barnett shale field. These rates for the market-based services are less stable, but they do take advantage of geographical spreads that may exist from time to time. And the adjustment mechanism that I referred, is a 3 year pilot program that will adjust the regulated rates up or down, by 75% of the difference between the actual market-based revenues that are generated by the pipeline, against the base credit of $84 million. And obviously, the annual tracking mechanism does mitigate the volatility of the Atmos Pipeline revenue stream.

If you look at slide 13, we are comparing the various regulatory mechanisms under which we operate, and the percentage of capital that qualifies under each of them. You can see that over 90% of the fiscal '12 regulated capital is included in rate base within 12 months of the investment, which significantly reduces the lag associated with that. 57% of the regulated capital investment is recovered through various annual mechanisms that are filed in Texas, Louisiana, Mississippi and Virginia. And about 33% of all regulated capital is being deployed in several enhanced, infrastructure replacement mechanisms.

The Railroad Commission of Texas recently promulgated Rule 8.209, and that is a program that encourages capital spending by utilities for safety -- system safety and reliability in Texas. The plan has been approved in advance by the Pipeline Safety Division for us, and it does allow rate asset treatment for carrying costs, which includes depreciation, taxes, interest in return, and provides for any additional rate adjustments at the conclusion of the next rate case.

Our Mid-Tex division also has an approved plan to replace 100,000 steel service lines over a 2 year period that began October 1, 2010 and ends this fiscal period, September 30, 2012. Through the end of fiscal '11, we have replaced about 36,000 of these lines, at a cost of about $49.7 million. And program importantly, provides for the recovery of carrying costs and return, in advance of the spend through a customer surcharge. The Kentucky pipeline replacement program also encourages capital spending related to safety, by allowing the carrying costs and return to be collected in advance, again through a customer surcharge. And we expect that this program is going to be approved for a 10 to 15 year period. All of these mechanisms certainly ensure the safety and the reliability of our system, without the usual regulatory lag and risk of recovery that often accompanies these types of expenditures.

If you look at slide 14, you'll see that again, rate relief remains the primary driver and growth vehicle for the success in our regulated businesses. The slide does show the impact on the rate strategy on our operating income in the regulated operations. And as I mentioned, we are continuing to project annual rate approvals to increase operating income in the range of $50 million to $60 million per year on average. For fiscal 2011, we received about $72 million of new operating income from rate outcomes, which exceeds the average because of the accelerated timing of the cases in 2011, coupled with the successful conclusion of the Atmos Pipeline Texas general rate case.

Additionally, as a result of the success of fiscal '11, fiscal '12 rate increases are going to dip somewhat, and we are also currently negotiating the extension of the rate review mechanisms, the annual mechanisms in Texas, and as a result, that corresponding rate relief might be delayed into fiscal 2013. We've already received about $4 million of rate relief in fiscal '12, and we have a stable rate filing pending in Missouri -- Mississippi, excuse me, for about $5 million. And in fiscal '12 we'll -- we do plan to file about another $60 million in rate requests. All of that information appears in the appendix in the back of this presentation, for your information.

Slide 15 identifies some potential upside to improve our financial performance. This slide depicts the fact, that we expect to earn a regulated return of about 8.8% in fiscal '12 against a targeted opportunity ROE at 10%. And the difference between what we earn, and what we have the opportunity to earn, is about $45 million. And that represents the impact of inflation, lag, and the imperfect nature of the rate-making process. And also, many of the settlements and compromises that we have entered into, to provide win-win outcomes for all of the parties that are involved in those cases.

Now we are going to shift gears, and look at the non-regulated operations. If you look at slide 17, again, it shows the geographical areas served by our non-regulated group. That group is headquartered in Houston, and they have about 135 very dedicated, experienced and competent employees. The operation does provide a bundled natural gas service, principally. That's it's principal line of business to over 1,000 customers, and they have over 92% customer retention rate. Our goal is very simple in that business, is to saturate the market behind our regulated distribution footprint and assets, which are shown here in gold. And, the key growth -- the growth strategy of the business is pretty simple. We either want to increase sales and market share, or we want to increase and maximize the unit margins associated with those sales and market share.

The margins from the delivered gas services, our contract base, as you see here on slide 18, and primarily include a fixed fee, which makes the -- those margins, more stable and more predictable, year-over-year. For fiscal '12 we do project, the delivered gas and storage and transport margins to be in the $74 million to $82 million revenue range. This does assume a delivered gas volume for 2012 of between 445 Bcf of 455 Bcf at a $0.13 to $0.14 margin. Our asset optimization margins have experienced a decline, because of continued weak market fundamentals and the erosion of spread values. Our unit margins for '12 are based on an average summer/winter spread of $0.49, less our storage costs of $0.34, which nets to a $0.15 per decatherm. We project between $8 million and $12 million in fiscal 2012 from asset optimization. And we expect that optimum -- asset optimization revenues will be much less a significant contributor to earnings and revenues going forward. So, total non-regulated margins are assumed to be between $82 million and $94 million, with no mark-to-market impact at year-end.

Slide 19, again, gives you a historical perspective of the delivered gas margins. And as you can see, our 2011 volumes rose 6%, but again the margins declined, due to increased competition and reduce basis spreads. And I want to remind you that the fiscal '12 projections assume volumes of between 445 Bcf, 455 Bcf at a per unit margin range of $0.13 to $0.14. Slide 20 shows the historical impact of the unrealized margins on the non-rate business, and that is -- appears in green. The unrealized margins are the result of marking to market our physical storage gas, the associated financial hedges and basis swaps. And, as you are aware, these unrealized margins ultimately reverse, and become realized, when the physical gas in storage is cycled, and the associate financial derivative is settled. So our projections for fiscal '12 margins also exclude any mark-to-market impact.

And now, I'm going to invite Fred Meisenheimer to give you a little bit more detail on our finances. Fred?

Thank you, Kim. Now that you have an overview of our business segments and strategy, let's take a look at the financial review. We've announced our fiscal 2012 earnings per share guidance of $2.30 to $2.40 per diluted share, assuming no mark-to-market impact at September 30. Slide 22 outlines our assumptions. They include in the non-regulated business, we expect gross margin contribution in the range of $82 million to $94 million, excluding any material mark-to-market. The regulated business assumes discontinued operations to contribute between $0.09 to $0.11 to fiscal 2012 earnings, and assumes a pre-tax book gain of approximately $5 million.

We expect continued, successful execution of our rate strategy and collection efforts. We project approvals for operating income increases about $40 million, which Kim discussed. Atmos Pipeline Texas projections include normal demand for [city gate] services, again in fiscal 2012. We anticipate average gas cost purchases to be in the range of $4.00 to $6.00 per Mcf, average annual short-term interest rate of approximately 60 basis points, and no net issuances of common stock. We expect to offset the dilution from shares issued for the various benefit plans, with shares repurchased under the new, 5 year, 5 million share buyback. And we anticipate no material acquisitions.

Slide 23 provides a history on the net income contributions by segment, excluding mark-to-market and one-time items, to compare with the fiscal 2012 projections. Assuming we reach the EPS midpoint of $2.35 in fiscal 2012, the compound annual growth rate for adjusted earnings per share since 2008, is 7%. This slide clearly shows the impact of the rate increases on our regulated businesses. In 2011, natural gas distribution increased from rate relief by the RRM, primarily in [Mid-Tex]. The reduction in fiscal 2012 is a result of some delay in relief achieved in the current RRM proceedings. Also, the relief achieved in the general rate case for the regulated pipeline [BT] drove the increase in 2011, and continues to generate incremental results, as the new rate structure will be included in the results for the full fiscal year 2012.

Slide 24 gives a historical comparison to fiscal 2012 projections for several expense categories. This comparison includes the discontinued operations. We are projecting fiscal 2012 consolidated O&M to fall more in line with 2010 levels. Fiscal 2011 O&M expense was unusually low, primarily from a reduction of about $10 million in employee-related costs, and better than expected receivables collection experience. In fiscal 2012, we're projecting employee wage and benefit increases combined of about $9 million, IT systems maintenance costs increase about $3 million, and liability insurance premiums are expected to rise about $3 million.

We expect interest expense to decline in fiscal 2012 as a result of the refinances we did in fiscal 2011, primarily refinancing $350 million of debt, for almost 200 basis points less. And even with the $50 million of incremental debt issued, we still expect to generate year-over-year interest savings of about $3 million. Also by reducing the number of credit facilities and extending the length of their terms, we expect to eliminate about $3.8 million of interest expense. The increase in depreciation expense is a function of increased capital spend. And income tax expense is not expected to increase year-over-year, largely due to higher pre-tax income due to the drivers I just mentioned, and the absence of the $5 million tax benefit recognized in '11.

Turning now to cash flows shown on slide 25, fiscal 2012 available cash is projected to be in the $134 million to $149 million range, with cash flow from operations of $510 million to $530 million. Our fiscal 2012 cash flow projection is lower than actual cash flows from operations for fiscal '11, primarily due to an increase in pension and post-retirement contributions. The remaining differences are primarily driven by changes in various working capital components.

Turning to slide 26, we project consolidated capital spending of between $630 million and $650 million for 2012. Regulated CapEx is projected to be between $624 million and $642 million, and is largely driven by expenditures for enhanced infrastructure replacement programs, such as the steel service line replacement program in Mid-Tex, Rule 8 in all Texas distribution jurisdictions, and the PRP program in Kentucky. Fortunately, we have a rate settlement provisions and timely rate filings, which result in 90% of our 2012 regulated capital being included in the rate base, and providing a return on the investment within 12 months of the spend. Non-regulated capital is projected to range between $6 million and $8 million

On slide 27, you see our debt maturity schedule and liquidity profile, both of which are favorably positioned. In June, we issued $400 million of 5.5% senior notes with a 30 year maturity due June15, 2041. Executing $300 million of Treasury bonds, brought the effective yield to maturity to 5.381%. Our 7.375% senior notes matured on May 15, and in the interim, we utilized the commercial paper market to fund our operations. At September 30, we had about [$834] million of available liquidity, and about $206 million of commercial paper outstanding at 29 basis points. In August, we executed 3 Treasury locks on $350 million notional amount, at an all-in cost of 4.07%. This is in anticipation of refinancing the $250 million of 5.125% senior notes that are set to mature in 2013, and in issuing an additional $100 million of 30 year debt.

As can be seen by the graph on slide 28, our weighted average cost of debt declined after the refinancings in fiscal 2011, and are not expected to change until we refinanced the $250 million in calendar 2013. Additionally, by replacing $350 million of maturing debt with $400 million of 30 year senior notes, we extended the average life of the long-term debt from about 7 years to about 12 years. Agencies recognized our strength in credit profile, and raised our corporate credit ratings this year. On June 2, Fitch upgraded our rating to A minus with a stable outlook. On May the 11th, Moody's upgraded our rating to BAA1, and changed their outlook to stable. And on March 29, S&P reaffirmed our credit rating of BBB plus and our rating outlook as stable. We're well positioned to access the capital markets to satisfy our liquidity requirements on economical terms.

Slide 29 illustrates our solid track record of increasing dividends, and a steady decline in the payout ratio. Our dividend has increased each year for the past 28 years, when adjusted for mergers and acquisitions. Dividends have been paid from regulated earnings for the past 4 years, largely driven by our regulatory success, and it's been 7 out of the last 12 years have been paid from the regulated operations. The current indicated annual dividend rate in fiscal 2012 was $1.38 per share, and we expect to cover it again this year from regulated operations. Growing our earnings per share faster than our dividends per share with has allowed us to reduce our payout ratio.

That concludes the financial review. I'll now turn the call back over to Ken for closing remarks. Kim?

Thank you, Fred, for that very excellent report. And again, we're very probably had another solid year of financial operating -- financial and operating results in 2011, against the backdrop of a continuing, challenging economic conditions. We reached positive outcomes in the regulatory arena, continued to improve relationships with the regulators and our customers, strengthened our financial profile. And again, delivered on earnings within our guidance. Our focus will be to continue to operate a very safe and reliable system, to grow our revenues, and to strengthen our business.

Looking forward to fiscal '12, we are going to continue to focus -- at a laser focus on delivering earnings per share within our guidance of $2.30 to $2.40, continue to preserve our strong balance sheet, execute our rate and regulatory strategy, complete the sale of the Missouri, Illinois and Iowa properties. And we will be on the lookout for evaluating any merger and acquisition opportunities as they arise, to raise our level of earnings and enhance shareholder value. We certainly believe we are on track to achieve another very good year at Atmos Energy in 2012. And with that, we'll thank you, and take your questions. So Ms. Latonya?

Thank you.

(Operator Instructions).

Our first question comes from Ted Durbin with Goldman Sachs. Please proceed with your question.

Thanks, good morning.

Good morning, Ted.

So, I guess I would just like to start with the guidance for gas distribution, down pretty significantly year-over-year on slide 23. It sounds like it's more of a timing issue with -- when you think the rates are coming into play with Mid-Tex. Is there anything else going on there with -- it's actually pre -- a 15 million drop -- just a little bit more detail there?

We have -- we are currently renegotiating the rate review mechanisms in Mid-Tex division as well. And with those negotiations going on, if we are unsuccessful in extending that, we may have to file a case, which would preclude any potential rate outcome in 2012 from the Mid-Tex division. And, I think the other thing we've backed off, is obviously the one-time items that dropped in '11.

Right. So are you not assuming any rate increases in your guidance then in mid-Tex?

What's the -- is that in the appendix? We are expecting about $40 million of new rate outcomes -- well, I thought they were spiked out there.

Had we have -- in the second quarter, fiscal quarter, we have the city of Dallas, we are going to file a case there, and we expect that to come in, in the fourth quarter of '12. We've got GRIP filings in some of our [Environs] locations, but nothing really sizable, I mean the big one, obviously is Mid-Tex.

Yes, the big one would be Mid-Tex, I don't think we have any -- I don't believe we've budgeted anything for '12, Ted.

Okay.

But we are in negotiations with those folks. And we've had -- we've got what we consider, an extremely good relationship. We've had -- people have been very satisfied with the operation of the rate review mechanism in the Mid-Tex division over the last, I think it's now 4 years. But there maybe a need for everybody to have an opportunity to have a full review of a filed case, and that's what the current discussions are around. And we're certainly not opposed to that, but, obviously, it would extend the time line for any rate adjustments that would be justified, or be included in an RRM. So I think we're going to know in January, whether we are going to file -- whether we would file a new case that would provide everybody an opportunity of full review, or whether the discussions that we have going on right now, would be satisfactory to folks to provide for the recovery of the cost that we have incurred up to this point. So -- a long answer, no. (Multiple Speakers).

Not, that's helpful. So it sounds like you prefer to continue with the RRM. I guess --

Very much would love to prefer to do that, but we recognize also, that there is some need by the customers, even though we meet with them very frequently, to give them an opportunity to examine the cost and the capital investment. If they feel a need to test those numbers in a trial-like proceedings, then that's fine. But we have good relationships, and we're -- want to continue that.

Got it. And then, if I could just switch over to the non-regulated operations. It sounds like you're still trying to grow, sort of your leased storage, your transport position, or are you just maintaining --

No.

-- where you are now? And then, if you could also just talk to the recontracted rates, I think you said you were paying $0.34 right now. Directionally, I am assuming those are coming down, given that the storage spreads are weak or whatnot, but maybe you could talk about recontracting too?

Significant, yes. Obviously, whenever there is an opportunity to address the potential extension or renegotiation of any storage contracts that are in place right now as they expire, we're taking advantage of that. And we are reducing our position in storage, as we go forward. We are matching that up, with whatever the peak requirements are with the delivered gas customers that we have, and that again is about 1,000 customers. But the current market we are seeing out there for storage is in the $0.08 to $0.11 that range. And we've been able to take advantage of some of that. And we've seen a small drop in just the revenue responsibility associated with storage, and we would expect that we will continue to see reductions in our revenue responsibility for storage, as well as transportation in the interstate market.

Okay, that's helpful. And then if I could just -- on the dividend here, it looks like you are now at the low end of your target, I think. I'm just wondering what -- kind of -- what was behind the thinking here, just doing a 1.5% dividend raise just recently?

Pretty much the challenging economic conditions that we expect to face in 2012, and many of the uncontrolled variables that may affect the impact of the share price, whether it's the elections in 2012, the 12 disciples that are looking at whatever they are going to do to the debt reduction, the continuing saga in Europe, which we never thought would have an affect. But I -- we think that we're probably getting paid for an 8% total shareholder return, and people are probably going to continue to pay us at that level. And then, as we hopefully grow our earnings, in a little bit closer to the top end of our 4% to 6% range rather than the bottom end, and do that on a sustained basis, that we will probably get investors to recognize that and pay for that additional return. And it will show up in the form of a better multiples.

Okay. Makes sense.

We are kind of keeping our powder dry in '12, just because I think everybody else is, given what -- what do you think is going to happen in 12? (Laughter).

Yes.

I mean, help me out here.

Yes.

Maybe if the Giants win the Super Bowl again, everything will be hunky dory -- (Laughter).

Yes, I will leave that to our economists. And I guess, just one more on the cash inflow from the sale -- I'm just wondering, you say, you got that this buyback authorization. I think you said you will use it, just to offset some of the dilution, the compensation dilution. But would you use it more aggressively, to reduce share count especially given, that you're going to have this cash inflow?

At this time our thinking is -- we'll just use the share purchase just to offset the benefit plan share issuances, is to maintain that, same level of outstanding shares.

I mean we do have -- we've got the opportunity to buy up to 5 million over 5 years. And, I mean the purpose of the plan is principally to take the shares out necessary to fund the benefit plans.

Okay.

But we haven't baked anything in for share repurchases in the guidance for '12.

That's great. Those are my questions. I appreciate it.

Good, good questions.

Our next question comes from Mark Barnett with Morningstar. Please proceed with your question.

Hi, good morning.

Good morning, Mark,

Well, that was pretty thorough there, but just a couple of quick things. I guess more generally, outside of the regular just kind of filing rates, how you thinking about bringing up your earned returns versus those allowed, figures going forward?

Well, we will continue to try to reduce the lag around the investment, when we've made considerable headway in that as you have seen -- well, we talked a little bit about it. You can probably -- it's kind of difficult to understand that, but the new Rule 8 investment rule in Texas, as well as the settlement we have for steel service lines allows an accelerated recovery of that investment. And as you can see we have over 90% of the regulated capital that begins to return on and of that investment within 12 months. And as the states continue to pursue mechanisms to motivate and encourage utilities and pipelines to address their systems from an infrastructure standpoint, I think you're going to see more and more regulatory asset treatment.

So as we reduce the lag, and get a return on the investment quicker, we'll have an opportunity to close that gap between the 10% allowed, and what we expect to earn in '12. And obviously, I mean our strategy also, is to continue to increase and ramp-up the capital investment on the regulated side. As you saw in this year, or in fiscal '11 we did $623 million, which most of that was in the regulated business. And as Fred pointed out, we've got somewhere between 640 and 650 in that neighborhood, targeted for 2012. And that capital will only continue to increase. And as we reduce the lag -- I mean right now, the return of numbers are not going to go on, that are going to be awarded in cases at the state level, I -- we don't think, principally, because of where -- obviously where interest rates are, and they primarily look at the capital as the attraction that is necessary to vie for capital against the Treasury rates, with some risk associated with that.

Okay. I appreciate that. And then I guess real quickly, obviously with the cash, you have the option to repurchase shares. And as you look kind of at some of your competitors or peers, maybe there is some higher multiples out there. I guess could you talk about the difference or --

There is a whole lot of higher multiples out here -- (Multiple Speakers). (Laughter). -- we're a hell of a good bargain.

-- I feel like or maybe could you talk a little bit about the -- basically investing in your own shares, or the M&A environment out there, with such kind of maybe rich, some might say valuations in the industry?

Yes. I mean, obviously, Atmos has an acquisitive personality. We've done 10 acquisitions since the Company was formed, and we've principally grown the Company through acquisitions. And, I mean we're -- we have our ears and eyes to the ground, constantly looking at the landscape for potential opportunities that might exist. And as you indicated right now, the premiums are getting fairly expensive, which has caused us to keep our powder dry, but I mean we feel like we are in a very, very good position with the financing -- the financial engineering and the strategy steps that we took this year on the finance side of the business. We've strengthened the balance sheet. And we will have some additional cash coming in, that we haven't earmarked for anything, when we closed the transaction for Iowa, Illinois and Missouri. And all of that is directed at providing us the opportunity to participate in any processes, whether they are options or private situations, to look at assets that we find are going to improve and enhance shareholder value.

And in the ramp-up that we are doing in our capital expenditures, with the new Rule 8, where we're able to defer cost until we get them into rates, thereby eliminating lag, is a very good place to put money.

Okay.

Until we get there. But yes, we're going to keep the balance sheet. We want to keep the cash structure about where it is. And obviously, the premiums are high for assets, but the cost of money is also pretty cheap right now, so it kind of balances out. And we will be very diligent in looking at any opportunities.

All right. thanks a lot. Appreciate it.

Thank you.

(Operator Instructions).

Our next question comes from Faisel Khan with Citi. Please proceed with your question.

Hello, good morning.

Good morning, Faisel.

Actually, it is [Amit Marwaha].

Oh, sorry, Amit.

It's all right, Kim, no worries.

I thought you were in disguise. (inaudible).

Yes, yes, that's how we roll over here. (Laughter). Just a quick question. If you could remind us here, what the earnings growth expectations are for the non-regulated segment? And then if you can break that out as well, for the LDC, and the regulated transmission? That would be great.

Earnings growth for the non-regulated business?

Yes, going forward.

Well, we've got -- we are assuming that their contribution to the earnings guidance in '12 is going to be anywhere from $0.28 to $0.32. And, that's coming off a negative $0.08 in '11 so --

I guess to rephrase it, excluding the issues that you are having next year, with respect to the rate cases, I guess, a bit of a lull there. Going forward, longer-term how should we look at, in terms of a longer-term growth rate there in that segment overall?

Long-term growth rate for the non-reg business?

Correct. Correct.

I think it -- we've got a pegged at about flat.

Okay.

Growth is going to come out at the regulated side of the business, with either -- through an acquisition or through the investment that we are making on the rate base, which we've expected to grow the rate base -- 6% to 6.5% on average versus what we had initially or previously targeted 4% to 4.5%.

Right.

With the mechanisms we have in place, we think that's pretty doable.

Okay.

But, non-reg, we're marking down.

Right.

I mean, we are going to stay in the business. They have a very good book of customers that they are able to keep and maintain. They been able to maintain them for almost 20 years, and they have a recontracting rate with that group of over 92%. So, that's a good business. They've got 135 employees. They've got CapEx in the $35 million range, they've got -- they have an appetite for capital of $3 million to $5 million. And they're throwing off $0.28 to $0.32 of net -- of earnings. So, pretty good -- I mean it's a pretty good investment. And they do a really, really good job, on the delivered gas side of the business, principally because they're working behind the regulated marketing asset -- or the regulated assets. So -- we're trying to look at it more, as revenues that are more stable and predictable. And certainly, we backed away entirely from the asset optimization bucket.

Right.

We're anticipating $8 million to $10 million, $8 million to $11 million of revenues in that space, which is significantly down from last year.

Could you break out or give us your expectations on the LDC versus the regulated transmission? The growth expectations there, going forward?

Oh, for the utilities versus the pipeline?

Yes.

Gosh -- I don't know that we have that. Do we have that?

We are only giving guidance for 2012, Amit. We don't really give that out, any further along than that.

Yes, we're not -- okay, we're not providing any guidance beyond '12, other than the fact that we are committed to growing the rate base 6% to 6.5% with our capital program.

Okay. Thanks. Thanks for your time, guys.

Thank you.

There are no further questions in queue at this time. I would like to turn the call back over to Ms. Giles for closing comments. We do have a question that just came in from Peter Hark. Please proceed with your question.

Thanks, Hi, Kim, Hi, Fred.

Just under the wire, Peter.

I did. Just because I had some housekeeping items, that I did not want to bore everybody with, but sorry about that. (Laughter). I'm just trying to understand O&M line a little bit. First, to make sure that in the financial statements, you had -- have you stripped out the O&M from the properties that are being sold? And then, to help reconcile the step up in O&M from '11 to '12, and what the assumptions are, for instance say, on pensions and discount rates, and return on plan assumptions?

Yes. In the discontinued operations, they do have their typical O&M cost. Now, the accounting rules prohibit us from allocating interest, of what we call our shared service cost which is our administrative type departments here in Dallas, that get allocated out to the divisions. That shared service cost overhead, if you will, is not allowed to be charged to the discontinued operations.

I see.

So, they have their normal, direct, if you will, O&M type cost included in their discontinued operations. The change from '11 to '12 is primarily due to '11 being unusually low, because of the employee-related costs and some items from our Rabbi Trust, some gains on some assets there, in doing some reallocations, employee-related costs being lower, and those will return act to more of a normal level in '12. And that makes that change between '11 and '12.

Got you. (Multiple Speakers).

-- it will be more in line with '10.

Yes, that's what is looking like, more or less. And then any comment on pensions? The impact --?

Our pensions, we are in reasonably good shape, as far as funding requirements and all, though we will have to fund monies in 2012 to our pensions and post retirement contributions. Those will be firmed up as we go along here, but --

Could you give us an idea what that might be -- what was it say -- (Multiple Speakers).

It will be in the $40 million to $60 million range likely, total for all the pensions and post-retirement, somewhere in that range. Of course, those contributions are spread out during the time frame, they don't all occur at one point.

Yes.

They are spread out, and done kind of quarterly throughout the year. So, there is not any one quarter that has an unusually large amount of contribution to it.

Okay. Will you fund that out of free cash, or would you finance it, or?

Yes, we will be funding it out of free (inaudible) cash. We do have the requirements in a few years, as are currently written, that all pension plans will have to be 100% funded. We are in the 80% to 85% range. We maintain at least an 80% funding, because that enable us to do lump sum distributions. If you drop below that 80% funding, you're not allowed to do lump sum distributions out of your pension. So we always maintain at least that level of funding. And the requirements -- ERISA requirements do change in the coming years, and eventually everyone will be 100% funded unless the rules change.

Got you. Thank you very much. And then lastly on income taxes, is there --I might have missed this, do you expect a change in tax rate? I mean, it seems like you get a big jump --?

No. We had a benefit of $5 million in taxes this year. This year, that has spiked out on the slide, that shows the income where we exclude the one-time items and the mark-to-market. I don't recall the slide number off hand --.

Because I was looking at slide 42, which kind of lays out the expectations for '12, excluding discontinued ops, and shows saying, income taxes at 114, and kind of jumping up here to the 130 level.

Yes, if you will go to slide -- well, I'll go find it right now but there is -- but we have a slide that excludes one-time items and mark-to-market. And included in those one-time items, we had a $5 million tax benefit in the current time period.

Okay, that's it, Fred, because I did not know if that one slide was adjusted or not to reflect that and.

You will see us -- speak about the $5 million benefit in our earnings release. If you look at our earnings release, you will see that one of the paragraph there, talks about the $5 million benefit in taxes this year that will not recur.

Got you, yes, sir. Thank you very much. That explains it. Thank you very much, gentlemen. Bye.

Thank you.

Thank you.

I would like to turn the call back over to Ms. Giles for closing comments.

Thank you, Latonya. And just to remind you, that a recording of this call is available for replay on our website through February 7. Again, we appreciate your interest, and thank you for joining us. Bye.