埃特莫斯能源 (ATO) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Atmos Energy second-quarter 2012 earnings conference call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan Giles, Vice President, Investor Relations for Atmos Energy Corporation. Thank you, Ms. Giles. You may begin.

Thank you, Claudia, and good morning everyone. Thank you all for joining us.

This call is open to the general public and media, but designed for financial analysts. It is being webcast live over the internet. We have placed slides on our website that summarize our financial 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 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 this morning 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 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.

And now, I'd like to turn the call over to Kim Cocklin.

Thank you very much, Susan, and good morning everyone. We certainly appreciate you joining us, and your interest in Atmos Energy.

Yesterday we reported second-quarter consolidated net income of $109 million, or $1.20 per diluted share, compared to $132 million, or $1.45 per share one year ago. When you exclude the unrealized losses, net income was $117 million, or $1.28 this quarter, compared to $134 million, or $1.47 last year. Last year's quarter had one-time items totaling $11 million, or $0.12 per share. After eliminating both the one-time items and the unrealized net losses, net income was $1.35 per share last year, versus $1.28 per diluted share in the current quarter. For the first six months of last year, recorded earnings were $2.26 per share, compared with $1.94 this year. Again, after eliminating the one-time items last year, and the unrealized gains and losses in both years, adjusted earnings were $1.88 this year, compared to $2.16 a year ago.

Our liquidity and financial position remains very strong. We have healthy credit ratings, and our debt-capital ratio was 50.2% at March 31, compared to 47.6% one year ago. We have contributed over $40 million to our employee pension and retirement plan to date this year, to obtain an 80% funding target for the pension plan. Yesterday, our Board of Directors declared the 114th consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal '12 is $1.38.

Our CFO, Fred Meisenheimer, will review our financial results in greater detail now, and we'll return for closing comments, and open the call up for any questions. Fred?

Thanks, Kim; good morning everyone. As a reminder, because of the agreement to sell our distribution assets in Missouri, Illinois, and Iowa, we combined and report the financial results for those assets on the net income statement as discontinued operations, for the periods presented. Therefore, the corresponding detail by line item will be excluded from my comparative discussions.

Rate relief remains the primary driver of our success in Regulated operations. Rate increases for Distribution and Atmos Pipeline Texas combined, generated almost $15 million of incremental margin quarter-over-quarter, and about $28 million for the six months, compared to the same period last year.

Weather for the second quarter was 27% warmer than normal, and 17% warmer than normal for the six months across our distribution service area. However, with WNA mechanisms protecting about 94% of our utility margins, we have largely mitigated the negative effects of a warm winter like we experienced this year. Despite of a period-over-period 10% decline in consolidated throughput at the utilities, the overall negative revenue impact of warmer weather this past six months, after adjusting for WNA, was just $2.9 million.

In spite of the warm weather that caused deliveries to the Mid-Tex utility customers to decline, the Texas intrastate pipeline continued to experience an increase in its consolidated throughput, which was 17% higher quarter-over-quarter, and 11% higher year-to-date. This increase is primarily from incremental through-system demand, resulting from the execution of new delivery contracts with local producers, albeit at lower transportation rates. Much of this increased throughput is gas being produced in association with crude oil wells.

Turning now to the expense side of the income statement. This silver lining to all this warm weather this winter, in addition to having WNA, was that our crews were able to focus on capital projects, thereby reducing [quantitative] expenses by about $1 million for the quarter, and about $4 million for the six months, compared to the same periods last year. Additionally, in the current quarter, we implemented regulatory asset treatment in Texas for our pension and post-retirement liabilities, which allows us to defer the difference between our actual costs, and what we are currently recovering in rates. These costs will become eligible for recovery in our next rate proceeding.

In the current quarter, we deferred about $1.5 million of expense, and we expect to defer about $4 million of expense by the end of the fiscal year. Partially offsetting these [costs] was a rise in legal costs. As we discussed on our first-quarter call, these increases are primarily due to higher settlements, and overall higher outside attorneys fees at the utility. And the Texas interstate pipeline experienced pipeline integrity spending that is running slightly up ahead of last year, about $1.8 million year-to-date, and $500,000 quarter-over-quarter.

Turning now to our non-regulated operations, you may want to turn to slides 8 and 15. The ongoing, unfavorable natural gas market conditions continued to pressure the segment. We anticipate natural gas storage levels will remain high for an extended period of time, gas prices to remain relatively low with little volatility, and [spot] to form spread values, and basis differentials to remain compressed. As a result, while we anticipate continuing to profit from our Non-Regulated activities on a fiscal year basis, we expect per-unit margins from our delivered-gas activities, and margins earned from our asset optimization activities, will be lower than in previous years.

Realized delivered gas margins decreased about $5 million quarter-over-quarter, and almost $2 million year-over-year, due to a 7% decrease for the quarter, and a 6% decrease year-over-year in consolidated sales volumes, mainly due to less consumption by weather-sensitive customers, due to the warm weather. And, a decrease in gas delivery per-unit margins, from $0.15 per Mcf in the prior-year-quarter to $0.13 per Mcf in the current-year-quarter, and from $0.15 per Mcf in the prior six months to $0.12 per Mcf in the current six months, primarily due to lower basis differentials resulting from increased natural gas supply.

Realized asset-optimization margins decreased about $9 million from the prior-year quarter, and almost $30 million from the prior six-month period. About the current quarter and the six-month period, AEH took advantage of falling natural gas prices by purchasing and injecting into storage a net 9 Bcf for the quarter, and a net 25 Bcf for the six months, and capturing incremental fiscal-forward spread values that should be realized primarily in the third and fourth quarters of fiscal 2012. As a result of this decision and falling prices, we realized significantly higher losses on the settlement of financial instruments used to hedge these natural gas purchases, and like the regulated segments, operating expenses tracking low last year. Excluding the $19 million non-cash asset impairment charge recorded in last year's second quarter, operating expense is down $6 million year-over-year. The decrease is primarily due to capitalization of labor, related to the development and implementation of a new energy, trading, and risk management system, and lower legal fees related to litigation in the Non-Regulated business.

Moving now to our earnings guidance for fiscal 2012, we have reaffirmed our fiscal 2012 earnings-per-share guidance of $2.30 to $2.40 per diluted share, and have updated the expected contribution by business segment. This range assumes no mark-to-market impact at September 30, 2012. Let me draw your attention to slides 32 through 38, where we have outlined our budget assumptions and earnings re-projections. We expect the Regulated businesses to generate over 90% of total net income for fiscal 2012. The Distribution segment is now expected to achieve net income in the range of $134 million to $138 million, and the regulated pipeline in Texas to earn between $59 million and $62 million. The Non-Regulated business is re-projected to generate net income in the range of $17 million to $20 million.

As a result of the continued challenges of higher natural gas storage levels, and the unseasonably warm weather, we re-project unregulated delivered gas, and storage and transportation margins, to range between $57 million to $62 million. We also now anticipate delivered gas pipes of 420 Bcf to 430 Bcf at a per-unit rate of $0.09 to $0.10. Our expectations for asset optimization margins continue to remain in the range of break-even to $2 million. For the near term, we are expecting asset optimization activities to at least offset the [down-track in] storage demand fees. Keep in mind, however, that storage is essential for the over-1,000 customers, which AEH provides services, such as our Distribution divisions, utilities, and other regulated financial [polities], contracting for firm natural gas supply.

We are working to shorten the lease terms for the contract of storage to one year, to better manage our cost. Original earnings projection assumed that $5 million pre-tax gain on the sale of the distribution properties in Missouri, Illinois and Iowa. As we have continued to refine the investment in those assets that will transfer to the purchaser, we now anticipate a pre-tax gain of approximately $10 million. And as we have already discussed, the unseasonably warm weather this past quarter enabled us to accelerate our capital spending, and slow the O&M run rate. As a result, we now project a $5 million reduction in O&M expense, to a range of $460 million to $470 million for the full fiscal year.

Our capital budget was increased by $50 million last quarter, and another $10 million this quarter. This sets the new range of between $690 million to $710 million for fiscal 2012. The increased capital spending will primarily be at the Texas intrastate pipeline, on our two previously-announced infrastructure projects. We are also increasing our operating cash flow projection by $40 million this quarter, to a range of $550 million to $570 million.

Driven by the warm weather, we cycled less gas from storage, made fewer gas purchases to replenish the storage withdrawals, and the gas purchases that were made, were made at reduced prices.

As Kim mentioned, we contributed $43.3 million to our pension and post-retirement plans. The pension obligation was driven by both the reduction in the discount rate, and a decline in the fair value of the plan assets, compared to last year. We expect to contribute an additional $23 million to $28 million to the claims before September 15, 2012.

Thank you for your time. Now I'll hand the call back over to Kim.

Thank you very much, Fred, for that very thorough and excellent report.

Obviously, while the weather has been anything but cooperative, the weather service -- it has created excellent conditions to jumpstart our strategy to grow the Company by investing in our Regulated asset base. As we previously discussed, we are targeting significant capital investment over the next five years, to fortify, strengthen, and/or replace our infrastructure, to make our system even safer, and our service even more reliable, all while spurring economic growth and jobs in our service territory.

As a result of various policy pronouncements, encouraging investments, we expect to increase our rate base from about $4 billion at the beginning of the current fiscal year, to between $5.8 billion and $6 billion by the end of fiscal 2016, which equates to a compounded annual growth rate and rate base of 8% to 8.5%, over that time frame. You can find the details on slides 42 through 45 in the appendix of the slide deck. We do plan to finance this growth from internally-generated cash flow, and a combination of debt and equity. Our current plan assumes a net $200 million increase in debt over that period.

Additionally, an equity issue may be necessary in the out-years, to optimize the debt-to-equity balance for rate-making purposes. Despite the slight dilution from issuing equity, the enhanced value of the rate base is expected to generate earnings growth in the range of 6% to 8% on a compounded annual basis by 2016.

As we announced last quarter, we have begun investing significant capital in our Texas intrastate pipeline system, to increase its capacity to secure new, long-term gas supply on a firm, reliable basis, and also to enhance the reliability of our service in certain critical locations along the Mid-Tex system. The Line W looping project is designed to secure new long-term gas supply for the Dallas-Fort Worth Metroplex, and will require capital of between $47 million and $52 million. Also during fiscal 2012 through fiscal 2014, we will spend between $110 million and $120 million in capital on the Texas intrastate pipeline, to construct Line X, which will improve service reliability for our customers. These capital expenses are GRIP eligible, with an 11.8% return on equity, and the project improves the reliability of our pipeline system for all the customers that we serve.

Moving to the Distribution business -- in Texas, we do have a risk-based program that encourages spending for system safety and reliability pursuant to Rule 8.209. Projects under Rule 8.209 are approved in advance, and the rule allows regulatory asset treatment for the carrying costs. We expect ruling spending to be about $100 million in fiscal '12, and increase to more than $200 million by fiscal 2016. Also in Texas, we have the field service line replacement program, which is expected to be completed by the end of September. This is also a risk-based program, where the carrying costs and return are collected in advance of the spend, by way of a customer surcharge. This program is set to expire at the end of this fiscal year, September 30, 2012, and we expect to have spent almost $70 million during that period in fiscal '12.

The Kentucky pipeline replacement program also encourages capital spending related to safety, by allowing carrying costs and return to be collected in advance by way of a customer surcharge. This program is expected to run for 10 to 15 years, and coupled with similar projects in Georgia and Kansas, we expect to spend almost $40 million of capital in these three states, in fiscal 2012. All told, we anticipate spending over $200 million on enhanced infrastructure replacement programs this fiscal year, compared to about $65 million spent on similar programs last year. And over the five years, we expect this type of spending to grow at a compounded annual rate of about 27%.

We continue to execute our rate strategy, to reduce lag, improve return on equities, and increase the recovery of fixed costs. Fiscal year-to-date, we have received operating income increases of about $23 million from rate outcomes. In total, we have almost $70 million in rate requests pending, and anticipate filing another five to seven cases this fiscal year, requesting between $10 million and $15 million of incremental operating income increase.

We anticipate closing the sale of our Missouri, Illinois, and Iowa distribution assets by July 1. Final approval by Illinois is pending, and all other requisite regulatory approvals have been obtained. Our transition team communicates weekly with the purchaser, which is Liberty, to ensure that a smooth transfer of these assets will occur. Cash proceeds for the sale will be redeployed into the rate base investment opportunity that we have identified.

The Non-Regulated marketing group will continue to focus on its delivered-gas sales business, and its track record for excellent customer service. Growth for this business is difficult, given current market conditions, but we intend to continue focus on increasing annual sales and improving margins, and will be realistic by expecting less than 10% of the consolidated earnings to be generated in this year.

Our company has long-emphasized a growth-through-acquisition strategy. We are clearly departing from that strategy, at least for the foreseeable future. We believe the internal capital investment opportunities that we just described and talked about, will facilitate growth faster and with less risk, than an acquisition in the current market environment. Low natural gas prices are reducing the total customer bill, creating head room for tariffs supporting these infrastructure investments.

All constituents win, under these circumstances -- our shareholders, our customers, our communities, and the regulators. Therefore, we will focus on the earnings-growth potential from our accelerated rate-base investment, over the next five years. We remain committed to growing our assets and delivering consistent long-term financial success.

We thank you for your time this morning, and we will now open it up for the questions now. Claudia?

Thank you. (Operator Instructions) Ted Durbin with Goldman Sachs.

Thank you. Thanks for the extra slides on the growth capital, I appreciate that. I guess, I am trying to understand for this 8.209, what is the ROE that you will book on that? Is that tied to what you will get on the Mid-Tex case that you are currently in?

Yes.

Okay.

It's also West Texas.

So for both West Texas and Mid-Tex? Okay. Until you get a decision on that, you will book it at your historical ROE, and then whatever that decision is, you will then implement that?

Right.

Update us on -- where are you on Mid-Tex for the $46 million ask, what should we think about in terms of timing, how the negotiation is going with the cities, et cetera?

Well, the negotiations are going fairly well. There seems to be -- continue to be a lot of discussion, at this point in time. It doesn't appear that we are headed for a settlement in the short-term. We are continuing to anticipate that that case may go before the commission and be heard, and that's really what -- we hope to settle it, but were not -- at this point, it is hard to handicap it, Ted. We are planning as if we are not going to have an outcome, probably until the fiscal 2013 period.

Yes, you had made that pretty clear, that you had not really put anything in guidance for that. Okay. And then just shifting over to the -- on the Texas pipeline side, I guess I'm wondering what's the nature of all the spending you will be doing. Is this new build pipeline or just sort of fortifying the [existing]? Part of the reason I ask is, I keep hearing that we are -- we have -- we are well-piped in Texas, you have low basis differentials, you have energy transfer, talking about converting some gas pipelines to liquid service; I'm just trying to understand the need for the pipeline spending in Texas.

The need for the pipelines, obviously the line W that is going in right now, and that we expect to be in service by the end of this fiscal period, is supported by an eight-year contract with EOG. And they have are already -- essentially that's a demand-charge based contract. It's involved with, what we understand to be, wet gas that they're drilling up right now, and there's not enough capacity coming out of the Montague County area. We have essentially got firm contracts to backup the investment there.

And then the other project, the line X, is really the southern part of the system, and it is really fortifying the pipe that we have down there, and improving the system reliability. We experienced some weak spots on that system during the cold snap that occurred last winter, and as a consequence, it was identified by the engineers as necessary to be bolstered up, and so that is going to be a GRIP-eligible project, and it's really being utilized to serve the needs of the regulated customers that are serviced by the pipeline itself. So, neither one of those projects are at risk, in terms of being forced to have competition from whatever other discussions you are hearing about.

That's fair, I'm just maybe thinking about beyond the two announced projects; looks like maybe $150 million in the '13 through '16, how are you envisioning those type of projects?

That's all infrastructure improvements, which we're getting a lot of support from the regulators, and various people to do that, because of the events that have occurred in the past few years; San Bruno, et cetera. And I think both the Company and the regulators see this as a good time to spend this type of money to make these infrastructure improvements while gas prices are very low, at as minimal impact, if any, on the customer base.

(Operator Instructions) Mark Barnett with Morningstar Equity Research.

Good morning everyone. Thanks for all the detailed comments. I guess I'm just wondering -- you obviously had the weather impact so far in the year, in the quarter. Outside of the weather-related consumption changes, can you talk about some of the economic factors that you're seeing in your results, thus far? I'm seeing a little bit of a tick-up in your bad debt; are there any large accounts driving it, or is it more across-the-system?

Bad debts, we believe, are in excellent condition. Our provision is roughly 0.3%; our net write-offs year-to-date are $200,000 for utility, and so we believe our allowance account is very adequate, and our bad debt situation is well-in-hand. It is something we have a lot of people focused on, working on, dedicated to. And for the past several years, our bad debt experience has been very, very low.

And then you might comment on weather normalization.

Weather normalization, had we not had weather normalization, we would have had an impact of about $47 million from weather. But with the weather normalization, our impact was $2.9 million. So, our WNA worked very, very well for us. There are a few states where we do not have WNA, Colorado being the one that we don't have it, and that we will be retaining; the others where we don't have it are those three states that we are disposing of. Our WNA has worked extremely well for us.

It's been quite the opposite of what you described, because obviously the weather has dampened the price of gas, and obviously that has reduced the exposure on the uncollectible side of the business. But we've got, also, adequate coverage on the recovery of the gas-cost portion of bad debt in a lot of our jurisdictions; so that risk has been minimized and been an excellent job. And again, if there was ever a test for WNA, it was this year. And the silver lining, obviously is that it has worked very beautifully along with the rest of the rate strategy that we deployed over the last five years.

The biggest bonus is that we have had the opportunity to have a construction season, for about the last 14 months going. We have taken full advantage of that, to continue to ramp up the investment in the regulated aspects, and get ahead of the curve on this infrastructure fortification and replacement. The regulators, they are doing a lot of things to incentivize and motivate the utilities right now, to get out in front and to avoid any kind of infrastructure upset, like you saw in Minnesota with bridges, or even, obviously no one wants another San Bruno, and we're doing a lot on that side. We are seeing some very, very good results, in terms of the statistics that we are seeing for leak detection, leak results, and safety outcomes.

Yes, also in addition to that, the industrial demand that we have seen this year, compared to last year on a consolidated basis, is up 2% over last year, on the industrial demand. And, we do have a detailed slide on that in the slide deck, number 54, it will give you a breakdown on that. We've seen a 2% increase in industrial demand.

I wasn't really -- I didn't really mean in the financial results from the usage, because as you said, you have good protection there, and it worked very well. I guess I just wanted more general commentary on the economic environment across your territories.

Texas has generated more jobs than anywhere else in the country, and continues to do so. The economy here is very good. Texas is, in fact I heard on the news this morning, it's been deemed the most business-friendly state in the US. And the economy here has remained better than most of the rest of the country.

(Operator Instructions) Josh Bederman with JPMorgan.

Hi, good morning. Quick question on the increased capital expenditure plan. You did mention that you would be interested in some incremental debt, and potentially some equity. Debt-to-capital has increased slightly. Can you give me an idea of a range that you want to stay, debt-to-capital-wise, throughout the build-out, and comment on your credit ratings.

We -- I have stated and will continue to state, and we will stay within this range of the 50% to 55% of debt-to-cap. That's the sweet-spot from the regulator standpoint. That is where we have the Company now. We are 50/50 right now, and we will stay in the 50% to 55% range throughout our five-year cycle, here, that we're looking at. And it will actually improve a little over time in the out-years.

Okay, excellent, I appreciate it. And any thoughts on the higher credit rating? I know you were recently upgraded, but given the focus on internal growth instead of acquisitions, and the emphasis on the regulated operations, it seems like the organization could actually procure a higher rating. Any thoughts on that?

Well, we visit with three rating-agencies each year, and we have recently visited with them; Fitch did come out the other day, and reaffirmed our ratings as an A-minus and stable. They have us one-notch higher than the other two have us. We believe with the basic numbers, that we are very, very high in the rating grouping, and possibly one-notch higher, but for whatever reasons, the rating agencies -- two of them have not bumped us up into that higher notch. From a regulatory standpoint, we get very good treatment, being in the triple-B class, plus where we are from our standpoint of regulators. While it would be nice to be one-notch higher, it's not something that we feel is absolutely necessary.

Mrs. Giles, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you, Claudia. As a reminder a recording of the call is available for replay on our website through August 8, and if you have any additional questions please call me, I am around all day, or visit us at the upcoming AGA financial forum. We appreciate your interest in Atmos Energy, and thank you all for joining us. Goodbye.