埃特莫斯能源 (ATO) 2012 Q4 法說會逐字稿

Greetings and welcome to the Atmos Energy fiscal 2012 year-end earnings 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, Susan Giles, VP, investor relations for Atmos Energy Corporation. Thank you, Ms. Giles, you may begin.

Thank you, Brenda, 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 live call, but we will be happy to questions on any of them at the end of our prepared remarks. If you would like access the webcast and slide, please visit our website at atmosenergy.com and click on the conference call link. Additionally, we plan to file the Company's Form 10-K next week. Our speakers today are Kim Cocklin, President and CEO, and Bret Eckert, 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 within the meaning of the Securities Act and the Securities Exchange Act. Please see slide 2 for more information regarding the risks and uncertainties we consider in making these forward-looking statements and where to go to get more information on such risks and uncertainties. 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 your interest in Atmos Energy. Our thoughts do continue for all of those impacted by Sandy. We remain in contact with the affected utilities up in the Northeast and stand ready, when called, to send people, equipment and supplies. And anybody that was personally impacted we certainly send our continued thoughts and prayers for you during the recovery process.

Yesterday we were very pleased to report consolidated results, excluding the mark, of $221.7 million, or $2.42 per diluted share compared to results last year of $214.2 million, or $2.34 per diluted share. When you add back the negative mark of $5 million, or a negative $0.05 per share, reported consolidated net income was $217 million, or $2.37 per diluted share for fiscal 2012, compared to net income of $208 million, or $2.27 per share a year ago. This represents the tenth consecutive year we've increased earnings per share and compares very favorably to our guidance range of $2.30 to $2.40, which also excluded unrealized gains and losses. Regulated operations have continued to increase its contribution of stable, predictable and reliable earnings for the enterprise, driven by a very focused and well executed rates and regulatory strategy. Rate relief for distribution and Atmos Pipeline Texas combined generated about $47 million of incremental margin in fiscal 2012. We did take advantage of the warmer-than-normal heating season and accelerated the start of many capital projects to fortify, strengthen and/or replace our infrastructure to make our system even more safe and reliable.

Also during the year we closed on the sale of our distribution assets in Missouri, Illinois and Iowa to Liberty Energy and recorded an after-tax gain of about $6 million, or $0.07 per diluted share. Additionally during the year, we announced an agreement to sell our distribution assets in Georgia, also to Liberty Energy, for about $141 million. We estimate a $6 million after-tax gain on that sale and expect the transaction to close in late fiscal 2013. Net proceeds from the sale will be redeployed to fund beneficial capital projects in the remaining jurisdictions we serve. With these divestitures we have become much more geographically efficient and do not anticipate any additional asset sales. Our non-regulated operations successfully executed their strategy of injecting gas into storage into the first half of fiscal-year 2012 and rolling financial positions to the third and fourth quarters, and delivered overall positive results for the year.

Our board of directors declared the 116th consecutive quarterly dividend and also raised the annual divided by $0.02. The indicated annual dividend rate for fiscal 2013 is $1.40 per share. The increase in the dividend reflects our continued support of providing an attractive return to our investors while continuing to execute our growth strategy by reinvesting capital in our system. Our shareholders experienced a 15% total return on their investment for the fiscal 2012 year. Our liquidity, financial position and balance sheet remain very strong. Our debt capital ratio of 51.7% at September 30 was unchanged from last year. On August 28, 2012 we redeemed all of our outstanding 5.125% senior notes due January 13, and on September 27, 2012 we entered into a $260 million term loan credit agreement to pay down the commercial paper sold in August from this early redemption. We plan to issue $350 million of new, unsecured 30-year notes in January 2013 and use the those proceeds to repay the borrowings on this short-term facility.

As a result of the sale of distribution assets in Missouri, Illinois and Iowa, as well as the future sale of Georgia assets, we updated our tax rate used to determine our deferred tax obligations and recorded a non-cash deferred tax benefit of $13.6 million in the fourth quarter. We contributed cash of $10 million to a charitable donor-advised fund. This is a 501c3 not-for-profit fund in the custody of Vanguard where investment proceeds will be used by the Company for future charitable giving. With respect to our defined benefit plans, we contributed $46.5 million to our defined benefit pension plans to achieve an 80% funding level. We contributed an additional $22 million to other post-retirement benefit plans during fiscal 2012. The increase in funding is primarily due to a decrease in the discount rate year over year, coupled with lower plan asset valuations when we established the funding requirement last January. And as a reminder, these expenses are typically recovered in general rate cases.

While we've had a very busy and successful year financially and important leadership change transpired. With the retirement of Fred Meisenheimer, Bret Eckert assumed the role of CFO at the beginning of fiscal 2013. Bret brings over 22 years of utility experience from his career in public accounting. We will certainly miss Fred but are very fortunate to have Bret. Bret's going to review our consolidated financial results in greater detail and I'll return for closing comments and then we'll open up the call for questions. Bret?

Thanks, Kim, and good morning, everyone. Since this quarter is really a shoulder period for us, our remarks will focus on the fiscal year and earnings guidance for fiscal 2013. As Kim mentioned, consolidated results for fiscal 2012, excluding unrealized margins, were $221.7 million, or $2.42 per diluted share. When you add back the negative mark of $5 million, or $0.05 per diluted share, reported consolidated net income was $217 million, or $2.37 per diluted share for fiscal 2012, compared to net income of $208 million, or $2.27 per share one year ago. As expected, in our fiscal 2012 results was a net gain on the sale of our Missouri, Illinois and Iowa assets of $6.3 million, or $0.07 per diluted share. Additionally, current year net income includes another $4 million, or $0.04 per diluted share from the net positive impact of several one-time items. When comparing this year to last year, slide 3 shows that after eliminating the one-time items and the unrealized gains and losses in both years, adjusted earning per share were $2.31 for both periods.

Drilling down into our regulated businesses. In our distribution business, rate increases drove margin by about $18 million, with minimal impact on average customer bill. Consolidated distribution throughput decreased 8% this year, mainly due to lower consumption primarily from warmer weather. With WNA mechanisms protecting about 94% of utility margins this past winter, we have largely mitigated the negative affect of a warm winter and, in fact, we received over $50 million of WNA relief to improve lost throughput.

The Texas intrastate pipeline, Atmos Pipeline Texas, experienced over a $28 million increase primarily associated with the last GRIP filing, as well as an additional $18 million increase from the rate case effective in May of 2011. APT continued to experience an increase in its consolidated throughput, which was 7% higher in fiscal 2012. This increase is largely from incremental through system demand resulting from the execution of new transportation agreements with local producers for deliveries to Fort Worth Basin, Howard and Katy, albeit at lower transportation rate. Much of this increase throughput is [gaspien] produced in association with crude oil well.

Turning now to our non-regulated operations -- and you may want to turn to slide 8 -- macro economic conditions continued to adversely affect results for companies in our industry with non-regulated gas marketing and trading operations. Additionally, we continue to experience compressed spot-to-forward spread values and basis differentials. That said, our realized non-regulated asset optimization margins increased $19.6 million in the current quarter and $2.8 million for the year from the trading strategy Kim mentioned. Realized delivered gas margins for the year decreased $12.4 million year over year due to a 9% decrease year over year in consolidated sales volumes, mainly due to less consumption by weather-sensitive customers due to warmer weather, and gas delivery per unit margins decreased $0.02 per MCF, primarily due to lower basis differentials resulting from increased natural gas supply and increased transportation costs. Realized asset optimization margins increased almost $3 million compared to the prior period, despite real gas price volatility and compressed spot-to-forward spread values.

Turning now to the expense side of the income statement, as we stated previously, the mild weather allowed our crews to focus on capital projects. We did not encounter an adverse weather event like last year, which drives incremental O&M, the overtime and general expenses associated with such a weather event. This held true for both our distribution and regulated pipeline customers. Also, we implemented the regulatory asset treatment in Texas for our pension and post-retirement liability, which allows us to defer the difference between our actual costs and what we currently recover in rates. These costs will become eligible for recovery in our next rate proceedings.

For the year we deferred about $4.3 million of pension and post-requirement expense. Partially offsetting these positives was an increase in depreciation and amortization of 6%, or about $14 million for the current year, due to an increase in net plant as a result of our ramped-up capital spending. Legal and administrative costs rose to about $7 million year over year and employee-related costs rose over $3 million. Asset impairment this year included a $5.3 million non-cash charge to impair the remaining investment in the gathering assets in Kentucky. The initial impairment of $11 million on these assets was recognized in fiscal 2011, along with a $19.3 million impairment of Ft. Necessity.

Miscellaneous expense in fiscal 2012 included the one time $10 million cash donation to fund the Company's charitable donor advised fund, which Kim discussed in his opening remarks. Fiscal 2011 included a $ 27.8 million pretax cash gain associated with unwinding two Treasury lock agreements. Interest charges were about $10 million lower, primarily due to maturing long-term debt being replaced at lower interest rates in fiscal 2011, coupled with reducing commitment fees in fiscal 2011 by decreasing the number of credit facilities and expanding the length of their term, and the early reduction in the fourth quarter of fiscal 2012 of the Company's 5.125% $250 million senior notes due January 2013. Income tax expense decreased $8.6 million from last year after recognizing a tax benefit of $13.6 million associated with reducing the deferred tax rate used to calculate our deferred tax obligation triggered by the sale of Missouri, Illinois and Iowa distribution assets in August.

Moving now our earnings guidance for fiscal 2013. We have announced our fiscal 2013 earnings per share guidance of $2.40 to $2.50 per diluted share and have updated the expected contribution by business segment. This range excludes unrealized margin and the gain on the sale of our Georgia operations. Let me draw your attention to slides 33 through 38 where we have outlined our budget assumption and net income by segment for fiscal 2013. These include, continued successful execution of our rate strategy and collection efforts, with projected operating income increases of about $90 million to $110 million from approved rate outcomes in fiscal 2013. Guidance assumes a full-year contribution from the Georgia discontinued operations of $0.10 to $0.12 per share in fiscal 2013. The Georgia asset sale is assumed to close in late fiscal 2013.

Expected gross margin contribution from the non-regulated segment in the range of $60 million to $67 million, excluding any unrealized gains and losses. Normal weather weighted-average gas costs ranging from $4 to $6 per MCF. Average annual short-term interest rate of approximately 60-basis points and no material acquisitions. We expect the regulated businesses to generate over 90% of total net income for fiscal 2013. The distribution segment is expected to achieve net income in the range of $143 million to $148 million and the regulated pipeline in Texas should earn between $68 million and $71 million.

The non-regulated business is expected to generate net income in the $9 million to $11 million range in fiscal 2013. We anticipate delivered gas volumes of 425 BCF to 435 BCF and a per-unit margin of $0.10 to $0.11. Our expectations for asset optimization margins continue to remain in the range of breakeven to $2 million. We expect asset optimization activities to at least offset the contracted storage demand fees again in fiscal 2013. We continue to shorten the overall lease terms for the contracted storage by entering into one-year terms for all renewal or new contracts to better manage our storage costs. Our capital budget is projected to range between $770 million and $790 million for fiscal 2013 as we continue to focus on the safety, integrity and reliability of our infrastructure while following various state-approved programs.

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

Thank you very much for that report, Bret. We have an extremely solid year in 2012 and increased earnings per share for the tenth consecutive year. And during fiscal 2012 we did communicate our plans to invest significant capital in our regulated operations over a five-year timeframe ending fiscal 2016, to fortify, strengthen and/or replace our infrastructure to make our systems even more safe and reliable. Fiscal 2012 was the first year of that five-year plan and we invested approximately $723 million in our regulated operations. We will continue to finance this growth from internally-generated cash flow and a combination of debt and equity. Our current plan assumes a net increase of $425 million in debt over that five-year period.

As a result of the various policies encouraging investment by our regulators, we expect to increase our rate base from about $3.9 billion at the beginning of fiscal 2012 to between $5.7 billion and $5.9 billion by the end of fiscal 2016, which equates to a compounded annual growth rate in rate base at 8% to 8.5% over that timeframe. The spending is significant because 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 through 2016. Overall, we have an exceptional portfolio of assets in very constructive business and regulatory environments and have fostered excellent relationships with regulators who are tasked with balancing the needs of consumers and businesses like Atmos, who provide essential utility services. Our rate treatment has improved steadily in all jurisdictions. In fiscal 2012 we received rate approvals to increase operating income by about $31 million.

We were also allowed to create asset deferrals of almost $10 million. This compares to a range of between $90 million to $110 million that's expected to be approved and fiscal 2013, and an additional $20 million to $25 million from asset deferrals in fiscal 2013. We currently have over $50 million of rate filings pending regulatory approval. The majority of this amount includes a $46.5 million Mid-Tex rate pending in Texas. We anticipate a proposed decision from the hearing examiner next week, with final commission action by December 20. We expect to seek over another $100 million in additional rate filings in fiscal 2013 on behalf of our other regulated distribution and Atmos Pipeline Texas operations.

On our regulated Texas intrastate pipeline we continue to invest capital for increased capacity to secure new long-time gas supply on firm, reliable basis and also to enhance the reliability of our service in certain critical locations during peak periods along the Mid-Tex system with our line W looping project and the line X project. In fiscal 2012 we spent $65 million on capital on these projects and we anticipate an additional $115 million to $120 million of capital being spent to complete these projects. These capital expenses are GRIP eligible was an 11.8% return on equity. Looking forward, our non-regulated business strategy will focus on growing margins in a challenging market and continue to provide value-added customer service. With the impairment of the remaining investment in the Park City and Shrewsbury gathering assets located in Kentucky and a focus on managing business risk, we believe our non-regulated businesses will be successful in fiscal 2013 and beyond.

Going forward we will not expect or assume more than 10% of the consolidated earnings to be generated in this business. As we've previously communicated, we have departed from our growth through acquisition strategy. We believe our internal capital investment opportunities will facilitate faster and with less risk than an acquisition. Therefore, we're focused on the earnings growth potential from our accelerated rate-based investment over the next four years and will shrewdly manage this level of spending. We recognize that growth, along with consistency and predictability, are important as we move into fiscal 2013. We remain committed to delivering dependable, long-term financial success. We certainly thank you for your time this morning and now we will open it up for the questions. Brenda?

Thank you.

(Operator Instructions)

Ted Durbin of Goldman Sachs.

If we can just go a little bit into the assumptions for the guidance of 2013, and really I'm -- I sound like a broken record, but on the Mid-Tex stuff is there anything you can give us in terms -- you've asked for $46.5 million, where are you coming out there. How are you reading the way this proposal for a decision might come out next week. Any color you can give us on the Mid-Tex side?

We have not gotten any more information or color or anything on it, but it will be coming up. The hearing examiner's supposed to issue his decision and then we expect by Christmas to have the commission action on it.

Okay, but you've got, obviously, an assumption there on the $90 million to $110 million, you've got your best guess on where you're going to come out on Mid-Texan. The implementation, then would be -- would it be retroactive at all, or just be if you get the final decision December 20th is that when you'd start recognize the revenue?

Any decision is only prospective, but we will be communicating that information as soon as it is available.

Okay, fair enough. Then on the divestitures and quickly. You've obviously closed the sales previously and then you've got the Georgia, I'm wondering if there is any significant overhead savings we should be thinking about from those? I heard your comments around feeling like you had the right footprint now so we should presume that there's probably not other sales of smaller utilities coming?

No, no more sales, we are done. We're in the eight remaining jurisdictions that we are situated in. We think we have a good footprint and we have got excellent relation and we have very good economic conditions compared to the rest of the country, and very good regulatory constructs. In terms of significant overhead savings, no.

Okay, and then last one for me. There's been some commentary around the Barnett and maybe some volumes. At lease stabilizing this -- feeling a little better about gas prices and some of the activity levels, I'm just wondering if you can comment on what you're seeing in the Barnett, the producer interest, and maybe if there's more projects that would be GRIP eligible that you can see down the path there?

Yes, we can, and our -- the connected wellhead volumes are increasing and improving to our system and creating a lot of potential opportunities. Obviously, the ones we have currently on the drawing board and are pursuing are as a result of increased deliveries that are coming on from associated gas plays and they continue to drill up that field. They are moving out in the West Texas area towards the Wahaw connection and we have opportunities out there. So, it is a very, very good situation for Atmos Pipeline Texas and even a better situation for Mid-Tex and West Texas divisions who are going to continue to benefit from additional supply opportunities and diversity and competition to meet their needs because we are seeing continued growth in -- on and around the metro area in DFW and certainly close to where we serve the Austin area. But, yes, it's a lot of sunshine ahead, Ted. A lot of hope and change for us.

(Operator Instructions)

[Cecil Conn] of Citigroup. Please proceed with your question.

Good morning, guys, it's [Amit Marwah] here. Just a quick question here on the non-regulated side. Continue to see the volumes drifting off and the unit margins coming off. Just wondering, is there any opportunity here of some of the smaller players getting squeezed a bit to potentially pick up -- I know this is a non-core area for growth, is there potential here to pick up some incremental volumes from smaller players, and how should we look at run rate? Is there further deterioration, or how should we think about margins going forward given where they peaked?

We had really, really good results in the last quarter from the non-regulated group and it was principally driven by, obviously, some of the positions rolling off, but more importantly we saw an uptick in the average margin that they were collecting out there. Overall, net-net, they did increase customers for 2013 and their focus and their new business strategy obviously is identifying, which is exactly what you are talking about, the municipalities and smaller customers. We are not chasing the bigger industrials since a lot of the producers are going after them and there is a lot of energy managers that are involved in the middle of that, which cuts down on your margin. But they -- indicators are, particularly the last few months of our fiscal year, they succeeded in increasing the number of customers they have and increasing the average margin rate that they are collected. Yes, you're exactly right.

We do see a good opportunity for that group going forward. I think we have them positioned exceptionally well. They are focusing on delivered gas sales strategy and have always done exceptionally well in customer surveys. They have over 90% retention rate with the customers they do business with, meaning that most of those customers sign up for one year at a time and they've got 90% of them that have returned year after year. So, it is -- there is some of that relationship, a lot of value, they are doing well. Continuing to focus and take the opportunity when storage and transmission -- long-haul transportation contracts roll off they are taking advantage of the market opportunities for lower prices and reducing there. Again, we are not -- we don't have any more and we're not assuming any more than a 10% contribution, but we are extremely comfortable and happy and we think that they're an important asset in our portfolio. Contributing at that level is very good.

It seems there are no further questions at that time. I would like to turn the floor back over to you for closing comments.

Thank you, all, and as a reminder a recording of this call is available for replay on our website through February 6. If you have any additional questions, please call me. We appreciate your interest in Atmos Energy and thank you for joining us. Good bye.