埃特莫斯能源 (ATO) 2013 Q1 法說會逐字稿

Greetings and welcome to the Atmos Energy fiscal 2013 first quarter 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, Vice President Investor Relations for Atmos Energy Corporation. Thank you. Ms. Giles, you may now begin.

Thank you, Rob, and good morning, everyone, and 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 to summarize our financial results. We will refer to just a few of the slides during the slide call, but we will be happy to take any 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 atmosenergey.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 Bret Eckert, Senior Vice President and CFO. There are other members of our leadership team here as well 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 would like to turn the call over to Kim Cocklin. Kim.

Thank you, Susan, very much. Good morning, everyone. We certainly appreciate you joining us and your interest in Atmos Energy. We are glad to be here to share some good news on our first quarter. Yesterday, we did report first quarter consolidated net income of $80 million or $0.88 per diluted share compared to $69 million or $0.75 per diluted share one year ago. However, when you exclude the unrealized gains in both periods, net income was $67 million or $0.74 per share this quarter compared to $56 million or $0.61 last year, an increase of $0.13 quarter over quarter.

Regulated operations have continued to deliver stable and predictable earnings for the enterprise, and recent rate design changes in Texas allow for a much more stabilized revenue stream with an increase to the customer's monthly base charge and a decrease to the commodity charge, and weather-driven customer consumption continues to be even less important to us, and Bret is going to talk more about the impact of this rate design during his remarks.

Our balance sheet remains very strong. Our debt capitalization ratio is 53.5% at December 31, basically flat to last year. And in January you'll recall that we did issue $500 million of 30-year senior notes at 4.15% which in effect replaced our 250 million senior notes which were redeemed in August. As a result, the weighted average cost of our long-term debt has improved 5.9% and average maturities have been extended from about 12 years to over 15 years.

Also during the first quarter we continue to optimize our credit facilities to ensure adequate liquidity to fund our working capital needs. We were able to reduce our cost and now have access to over $1 billion of working capital. Our Board of Directors declared our 117th consecutive quarterly cash dividend and that indicated an annual dividend rate for fiscal '13 as $1.40. Our CFO, Bret Eckert, will review our financial results in greater detail now and then we'll return for some closing comments and questions. Bret.

Thanks, Kim, and good morning, everyone. As Kim mentioned, reported earnings for the first quarter of fiscal 2013 were $80 million or $0.88 per share compared with $69 million or $0.75 one year ago. When you eliminate the positive mark of $13 million or $0.14 per share, adjusted net income was $67 million or $0.74 per share compared with $56 million or $0.61 last year. As a reminder, because we executed an agreement in August 2012 to sell our distribution assets in Georgia, the financial results for those assets on the income statement are reported as discontinued operations in the current quarter. Prior-year results also includes the discontinued operations of Illinois, Iowa, and Missouri service areas which were sold in August 2012.

In our natural gas distribution business, we completed seven regulatory proceedings, which should result in a $64 million increase in annual operating income. A portion of these rate increases began to materialize during the first quarter and we expect to see a more significant impact beginning in the second quarter of our fiscal year. In the current quarter, gross profit in our natural gas distribution segment decreased $4 million mainly driven by rate design changes granted during the quarter in our Mid-Tex division. Under the new rate design effective January 1, 2013, there was an increase in the monthly customer charge and a decrease in the consumption charge. The current quarter was impacted as revenues recorded for December gas deliveries filled in January were calculated using the new rates that are effective for bills rendered on or after January 1, 2013. We expect these decreases to be offset by increased margins in the third and fourth quarters of fiscal 2013 as I will address later in my comments.

Moving now to regulated transmission and storage. Atmos Pipeline Texas generated almost $4 million of incremental margin quarter over quarter. GRIP filings approved in fiscal 2012 accounted for $3.7 million of the increase and the sale of access retention gas increased gross profit by about $1 million. These increases were partially offset by a decrease in demand fees of about $600,000. Quarter over quarter APTs consolidated throughput rose about 3.5% primarily from incremental through-system demand from new delivery contracts with local producers.

Turning now to our non-regulated operation. Realized margins for gas delivery, storage and transportation services and other services were $14.6 million in the current quarter compared with $15.3 million one year ago. The decrease primarily reflects a 7% decrease in consolidated sales volume largely due to warmer weather. Gas delivery per unit margins were $0.10 per mcf in both quarters. Asset optimization margins increased $6.5 million primarily due to smaller losses incurred from the settlement of financial position partially offset by higher storage demand fees. Additionally, during last year's quarter, we took a $1.7 million charge to write down some natural gas inventories that no longer qualified for fair value hedge accounting.

Turning now to the expense side of the income statement. Operation and maintenance expense declined by $8 million quarter over quarter mainly due to establishing regulatory assets of about $3 million for pension and post retirement costs and regulatory costs at APT, a $3 million reduction in legal costs, and a $1 million decrease due to increased capital spending in the current quarter. Interest charges were $5 million lower this quarter as a result of interest capitalized related to Texas Railroad Commission Rule 8209 pending in the current quarter and the early redemption of our 5-1/8% 250 million senior notes due if January 2013 with funds borrowed under a $260 million short-term debt facility back in August 2012.

As Kim mentioned, we have been actively working to strengthen our balance sheet and liquidity profile in a cost effective manner. We had a successful debt offering in January 2013. There was strong demand for our 30-year paper with the offering over subscribed three-fold. As a result, we were able to up size the offering from 350 million to 500 million with the senior notes issued at 110 basis point credit spread and an effective yields maturity of 4.636%.

During the quarter we also took advantage of the low interest rate environment and executed forward-starting interest rate swaps that effectively fixed the treasury component of our planned issuances for debt expiring in fiscal years 2015 and 2017. We also further optimized our credit facility this quarter. In December we amended and upsized our $750 million credit facility to $950 million. We terminated Atmos Energy marketing's [$200] million three-year committed facility replacing it with two $25 million, 364 day process.

Moving now to our earnings guidance for fiscal 2013. We expect fiscal 2013 earnings to be at the higher end of the previously announced range of $2.40 to $2.50 per diluted shared excluding unrealized margins and the gain on sale of the Company's Georgia operation due to constructive rate out comes in a number of our jurisdictions partially offset by the acceleration and the anticipated timing of the sale of our Georgia operation into our third fiscal quarter. As mentioned earlier, and you may want to turn to slide 16, rate design changes during the first quarter primarily related to our Mid-Tex operation, resulted in an increase to the customer's monthly base charge and a decrease to the customer's consumption charge, the amount added to the commodity cost effective January 1, 2013. We believe these rate design changes will result in a more stabilized earnings stream for our Mid-Tex operation on a go-forward basis, but will cause a shift in margin out of our first and second fiscal quarters and into our third and fourth fiscal quarters compared to historical results, resulting in a more ratably distribution of Mid-Tex margins through the year. As a result, we expect margins for our Mid-Tex operation to be approximately $20 million to $25 million less than our second fiscal quarter of 2013 offset by higher margins in the $25 million to $30 million range per quarter for the third and fourth fiscal quarters of 2013 during periods of lower consumption. The ratable distribution of margins results from the new rate design at Mid-Tex which now provides for approximately 84% of our cost of service being recouped through the customer base charge compared to approximately 40% under the previous rate design.

Let me draw your attention to slides 23 and 24 where we have outlined our budget assumptions and net income by segment. These include continued successful execution of our rate strategy with projected operating income increases at the higher end of the previously announced range of between $90 million and $110 million from approved rate outcomes in fiscal 2013. Our original guidance assumed a full-year contribution from the Georgia discontinued operations in fiscal 2013. However, the Georgia Commission is scheduled to rule on the transaction on February 19, so closing could be accelerated into our third fiscal quarter. Among other things, it depends on several factors including when back-office functions can be assumed by the buyer and the integration work on both sides can be completed.

In the non-regulated segment, we expect gross margin contribution to now range between $56 million and $63 million excluding any unrealized gains and losses. Projected delivery gas margins remain strong, but due to warmer weather experienced during the first fiscal quarter, we now expect delivery gas volumes to be in the 400 to 410 Bcf range. Additionally, we have rationalized the back-office functions for our non-regulated operations consistent with our strategy to focus primarily on our non-regulated natural gas delivery. As a result, we expect operating and maintenance costs in the non-regulated segment to be less than originally projected which will help offset the production in non-regulated volume.

Additionally, we are assuming the following in our guidance. Normal weather for the remainder of the fiscal year, weighted average gas costs ranging from $4 to $6 per mcf, average annual short-term interest rates of approximately 60 basis points, and no material acquisition. Our capital budget range has not changed and remains between $770 million and $790 million for fiscal 2013. We remain optimistic that we can achieve the higher end of the range of $2.40 to $2.50 per diluted share and a consolidated net income range between $220 million and $230 million for fiscal 2013, excluding unrealized margins and the gain on the sale of the Georgia operations. Thank you for your time, and now I hand the call back to Kim. Kim.

Thank you very much, Bret, for that good report. We have reported a solid start to fiscal 2013 and are encouraged with what we anticipate will be another good year. So far during fiscal '13 we completed several rate proceedings, as Bret indicated, which, when combined with regulatory expense deferrals, result in an increase of about $78 million in annual operating income. These cases include results from several jurisdictions with the largest one in our Mid-Tex division where the Texas Railroad Commission issued a final order in early December authorizing a net increase to annual operating income of $42.6 million which results from the rate increase of about $30 million spread out more ratably throughout the year, plus a decrease in depreciation rates of $13 million. With lower depreciation expense obviously we preserve rate base longer and there's a reduction to the customer bill.

Also in Texas, our West Texas division achieved a rate settlement which was approved by the railroad commission for $6.6 million and we were also granted system-wide rates in that case. Like the Mid-Tex case, there was a shift between the consumption charge and the customer charge, but to a lesser degree. New rates were reflected on customer bills beginning October 1. Currently, we have four cases pending requesting increases of about $8 million in other jurisdictions and we anticipate filing another 10 to 15 cases this fiscal period, requesting increases totaling between $60 million and $70 million. Slides 15 to 22 of our presentation provide more details on the rate cases.

On our regulated Texas intrastate pipeline we continue to invest capital to increase capacity, secure long-term gas supply and enhance the reliability of our service to Mid-Tex -- to the Mid-Tex division in certain necessary and critical locations, and those capital expenses I'll remind you are GRIP eligible with the 11.8% return on equity granted to Atmos Pipeline Texas. The Line W Looping project was completed on schedule and on budget, and from the time it went online we were moving gas and serving customers. It's a 34-mile, 24-inch high pressure pipeline north of Fort Worth and is supported by a multi phase firm transportation agreement with the producer for deliveries to the densely populated north side loop area through the year 2019. The total project cost was $55 million and was placed in service in late December, making these expenses eligible for the GRIP filing that we anticipate making this month. The rates are designed on a straight fixed variable basis and consist of [demand fees] which are expected to generate incremental annual revenue of between $10 million to $14 million which began in January.

The Line WX project is a 67-mile, 24-inch high pressure pipeline which will improve service reliability during critical peak period for the current regulated customers of Atmos Pipeline Texas. The first phase of that project is complete at a total cost of about $26 million and is also included in the upcoming GRIP filings. We expect phases two and three to be complete in December 2013 at a total project cost of between $113 million and $116 million. CapEx increased $10 million to accommodate a re-routeing of about 8 miles of the original planned project.

We are focused on executing our capital plan of strategically spending close to $800 million annually through 2016. Safety is our top priority with the investments we're making. While we can't control third party damage to our facilities, we can control how we respond. We have a team dedicated to pipeline safety. We have a state of the art training center at Gas City in Plano, Texas, where all employed gas operators and technicians think, practice, and train for the safest out comes in routine and emergency situations.

In fiscal 2013, we estimate that roughly 58% of our total CapEx outlay will be allocated to safety and compliance work on our system. We are spending to fortify, strengthen, and enhance infrastructure to make our system even more safe and reliable. In our non-regulated operations, the focus remains on the delivered gas service business, providing value-added customer service on top of the delivery of gas is where this group excels with the 1,000 customers that need energy management expertise. Overall, we expect the contribution from the non-regulated business to be less than 5% of our annual earnings portfolio.

Another bit of good news. In January, the Kentucky Court of Appeals recognized our position in the case arising out of the Park City gas gathering project and the associated royalties due from a third-party producer to land owners. The court overturned a $28 million jury verdict returned against us and concluded that all of the claims we appealed should have been dismissed by the trial court as a matter of law. The land owners and investor working interest owners may seek discretionary review from the Supreme Court of Kentucky. The decision of the court of appeals will not become final until that process is complete.

On a consolidated basis, we believe our internal capital investment opportunities will facilitate rate-based growth at a compounded annual rate of between 8% to 8.5% annually and generate earnings growth in the range of 6% to 8% on a compounded annual basis through fiscal 2016. We stand committed to this growth along with consistency and predictability to deliver dependable long-term financial success. Thank you very much for your time, and now we'll open up the call for questions. Rob. Thank you.

We will now be conducting a question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Our first question today is from the line of Andy Bishop of Morningstar.

Hi. Good morning. Congrats on a strong first quarter. Just one question for you this morning. For regards to refinancing opportunities, besides the $500 million and your forward interest rate swaps, are there any other advantages that you see or have you kind of taken advantage of all the opportunities out there?

Well, with the few swaps we've put out there on the 2015 issuances, we locked that in at roughly 3.129% and the $250 million in the fiscal year '17 has been effectively fixed at 3.3668%. Right now we've only focused on putting interest rate swaps on expiring issuances and feel comfortable with the positions we've taken there.

Great. Thank you.

(Operator Instructions) The next question is from the line of Faisel Khan with Citigroup. Please proceed with your question.

Good morning, guys. It's [Ahmet Arwaha]. Just a quick question. A good quarter. Just wanted to get an idea, with the adjustments or with respect to the Mid-Tex rate case, could you give us a better idea on a percentage basis what the shaping of the EPS will look like throughout the year?

Shaping?

Yes, if you were to shape it, would you say the first half is, going to be 60% of the overall -- represent 60% of the overall (inaudible), or can you give us an idea of how it might look?

Have to look at it -- we can take a look. I think the challenge you have is we're highlighting the change with regard to Mid-Tex and obviously with the shift of the customer charge and a ways from the commodity consumption charge it is going to make those earnings more ratable, we're going to be much less reliant on the customer consumption feeds, but we've not taken a look at it. So, that's going to smooth that out for the Mid-Tex customers that it serves, but across the rest of our jurisdictions we'll have to take a look at how that plays out from our overall EPS standpoint.

Fair enough.

Ahmet, the overall increase is $42.6 million.

Yes, I'm with you there. I just wanted to get an idea --

So, if you have in your model whatever you had for the total cost of service from Mid-Tex, about less than 40% of that was previously -- the previous rates were collected in the demand charge, now about 84%. If you add $42.6 million to your model for revenues and adjust the recovery on a demand charge basis from to 85%, 84%, the closest we can get is what Bret said. We're probably going to reduce revenues, see a reduction from last year of about $25 million in quarter two, but that will increase by $25 million to $30 million in quarters thee and four in the Mid-Tex division. Susan can probably help you.

Yes. I can help you a little bit.

Sounds good. The second question, I missed the details around the rate cases that you filed to date and what the backlog is for the balance of the year. If you could --

Well, right now we've got cases -- four cases pending requesting increases of about $8 million, and we're going to file another 10 to 15 with requesting $60 million to $70 million. The lion's share, I think if you look on 15 to 22, we have GRIP filings in Texas for both Mid-Tex and the pipeline. The pipeline will be filed this month about the middle of the month and then we anticipate filing a GRIP case for the Mid-Tex division around April 1.

All right. Sounds good. Thank you for your help.

Overall, right now we've collected about $78 million or generated new revenue from rate outcomes plus reg asset treatment and we do expect to achieve the $90 million to $110 million estimate for rate outcomes that we earlier had identified in assumptions for how we were going to get to the higher end of our earnings guidance range this year.

All right. Thanks again, guys.

Thank you, Ahmet.

Thank you. (Operator Instructions) Ms. Giles, there are no further questions at this time. I would like to turn the floor back over to you for closing comments

Great. Thank you, Rob. I just want to remind everyone that there is a recording of this call available for reply on the website through May 2. Again, we appreciate your interest in Atmos Energy and think for joining us this morning. Good-bye.

Thank you.