埃特莫斯能源 (ATO) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Atmos Energy fiscal 2013 third-quarter earning 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 of Investor Relations for Atmos Energy Corporation. Thank you, you may begin.

Thank you, Christine 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 website to summarize our financial results. We will refer to a few of the slides during the call, and 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 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. Yesterday, we reported third quarter consolidated net income of $39 million or $0.42 per diluted share, compared to $31 million, or $0.34 per diluted share one year ago. For the nine months reported earnings were $2.57 per share, compared with $2.28 last year.

As you recall, we closed the sale of our Georgia distribution assets on April 1 for $153 million. This quarter, we recorded an after tax gain of $5.3 million on the sale, or $0.06 per diluted share. The net proceeds are being reinvested in our regulated capital investment opportunities. This sale, along with the sale of our Missouri, Illinois and Iowa distribution assets last year, delivers on our commitment to become more geographically efficient, and continues our sharp focus on growing our regulated rate base by 8% to 8.5% by the end of our fiscal 2016. As a result of our strong financial performance for the first nine months, we remain on track to achieve our previously announced earnings guidance of between $2.45 and $2.55 per diluted share, excluding the marks and the gain on the Georgia sale.

Yesterday, our Board of Directors declared our 119th consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal 2013 is $1.40 per share. Our commitment to increasing and sustaining shareholder value remains a top priority. For the 12 months ended June 30, we delivered a total return to shareholders of 22%. Our CFO, Bret Eckert, will review our financial results in greater details and we'll return for closing comments, and take your questions. Bret?

Thanks, Jim, and good morning, everyone. If you follow me on slide 3, fiscal third-quarter earnings, excluding net unrealized margins and the gain on the sale of Georgia were approximately $40 million or $0.42 per share, compared with $29 million or $0.32 per share one year ago. Now, turning to the nine month period on slide 4, earnings excluding net unrealized margins and the gain on Georgia were $221 million or $2.40 per share in the current year, compared with $202 million or $2.20 per share last year. As Kim mentioned, we completed the sale of our distribution assets in Georgia on April 1, and the gain of $5.3 million or $0.06 is included in the results for the quarter. Rate relief remains the primary driver of our success in the distribution business.

Looking now on slide 5 for the current quarter and nine-month period, distribution gross profit increased by $44 million in the quarter, and about $15 million for nine months, compared to the same periods one year ago. The increase this quarter is primarily the result of the shift in margins from the rate design changes in Texas we have been discussing this year. As a reminder, the new rate design increased the customer's monthly base charge, and decreased the consumption charge. As a result of this change, 84% of our cost to service is recouped through the customer base charge, compared to only 41% under the previous rate design as shown on slide 11, which provides a more stabilized earnings stream for the Company. Because of this shift, margin is about $25 million higher than historical results in the fiscal third quarter, and we expect margins from our Texas operations to be approximately $25 million to $30 million higher in the fourth fiscal quarter of 2013. We also experienced an increase of over $10 million in margins due to colder weather experienced outside of the weather normalization adjustment period, across all of our service areas.

Turning to slide 6, our regulated interest rate pipeline storage operation, Atmos Pipeline Texas, generated $7 million incremental margin quarter-over-quarter and about $15 million in the current nine month period, reflecting the impact of our 2012 and 2013 GRIP filings. On May 7, the Texas Railroad Commission approved pipeline's 2013 GRIP filing, with an annual operating income increase of $26.7 million, that went into effect with the bills rendered on or after May. Finally, as detailed on slide 13, our regulated businesses concluded rate proceedings this fiscal year to date, which should result in a $98 million increase in annual operating income.

Turning now to our non-regulated operation, you may want to turn to slide 15. Total realized margins, compared to last year, declined $15 million quarter-over-quarter, but rose over $3 million for the nine-month period. I'll remind you that in the prior year, AEH took advantage of falling natural gas prices by injecting gas into storage, to capture incremental forward spread values and rolling financial positions forward for settlement. Those margins were realized during the third and fourth quarters of last year. Realized margins for gas delivery and related services decreased about $3 million quarter-over-quarter in the nine-month period, mainly due to lower per unit margins in the current periods compared to one year ago. Consolidated sales volumes rose by 3.7 Bcf quarter-over-quarter but decreased 4.6 Bcf in the nine months. Our non-regulated business has continued to experience increased competition for industrial customers. Power generation sales volumes also decreased, as coal prices were less expensive than natural gas prices for power generators.

Turning now to the expense side of the income statement, our land for the quarter increased about $15 million and increased by $9 million in the current nine month period. Both periods experienced rising costs associated with higher employee, legal and other administrative costs, increased demand for line locators in the DFW Metroplex and higher pipelines and [right of one] maintenance activities. Interest charges were about $2 million lower this quarter, and about $11 million lower to the current nine months, as a result of interest deferral related to Texas infrastructure rule 8.209 spending in both periods. Moving now to our earnings guidance for fiscal 2013, based on continued strong earnings through our third fiscal quarter of 2013, we are reaffirming fiscal 2013 earnings per share guidance of $2.45 to $2.55, excluding unrealized margins and the gain on the sale of our Georgia asset.

Let me draw your attention to slides 17 and 18, where we set our budget assumptions and net income projections by segment. They remain unchanged from last quarter, and consolidated net income remains in the range of $224 million to $234 million, with an estimated 91.6 million average diluted shares. Although we expect margins in our Texas jurisdiction of between $25 million to $30 million higher than Q4 last year, it is important to remember that the fourth quarter is historically a loss quarter, which will affect our average jurisdictions. Additionally, we now expect fiscal 2013 consolidated O&M to tick up a bit in the fourth quarter. We have increased our fiscal 2013 projection to $470 million to $480 million for a number of reasons. We have accelerated pipeline and right-of-way maintenance activities in our regulated operations to further enhance safety and reliability. Line locate expenses on the rise, we have seen an increase in construction, which is driving demand for locating gas lines in the DFW Metroplex, and we anticipate increased performance-based compensation expense as a result of better-than-planned financial performance. We are optimistic we can achieve our earnings guidance range of $2.45 to $2.55 per diluted share, and consolidated net income between $224 million and $234 million for fiscal 2013. Thank you for your time and now I'll hand the call back over to Kim.

Excellent report Bret, thank you very much. As you can tell, we continue to successfully execute our rate and regulatory strategy. Year-to-date, graded rate proceedings, as Bret said, have increased operating income by $98 million. We have also added regulatory expense deferrals of another $24 million, resulting in an increase of about $122 million in annual operating income. We have six active cases pending, requesting annual increases totaling $36 million, the largest of these is the 2012 Mid-Tex RRM filing of $17 million. A few more cases are scheduled to be filed by the end of our fiscal year, requesting increases of another $10 million.

Our portfolio of assets has been refined and streamlined. Completing the sale of Georgia allows us to apply an even stronger focus on this portfolio. We are also constantly striving to strengthen our regulatory relationships. In particular, our regulators recognize the importance of balancing the needs of our customers and our shareholders. They understand the need for expanded safety and reliability investment, coupled with regulatory mechanisms that financially support that investment.

In Texas, there is an increased emphasis on all of these policies. The best evidence is last month's resolution endorsed by Mr. Barry Smitherman, the current Chair of the NARUC Gas Committee and also the Chair of the Texas Railroad Commission, and this resolution, which was adopted, encourages investment in gas utilities, the expedited replacement of distribution mains and service lines, coupled with regulatory mechanisms that financially support that investment by eliminating lag. With an average annual investment in our regulated assets of some $800 million through fiscal 2016, we continue to demonstrate to the regulators and customers our absolute commitment to safety and reliability. Atmos Pipeline Texas continues to perform exceptionally well, and is securing long-term gas supply to enhance the reliability of our service for the Mid-Tex system.

We are still on track to complete phases 2 and 3 of the Line WX project in December 2013 at a capital cost of $115 million to $118 million, to improve reliability and meet peak service needs to areas west of the DFW Metroplex. Construction is also now complete on the installation of two 1500-horsepower compressors, to move gas through multiple interstate and intrastate pipelines in West Texas, near the Permian Basin shale play. Capital expense for this project is approximately $19 million. We will remind you that capital expenses for Atmos Pipeline Texas are all GRIP-eligible, with the opportunity to earn a return on equity of 11.8%. Our non-regulated operations will continue to focus on the delivery gas business to about 1,000 customers. This is an essential business to our distribution divisions, various utilities, and other regulated municipalities contracting for firm natural gas supply. The forecasted earnings contribution from this segment is less than 5% of our annual consolidated income. On a consolidated basis, we will continue to execute on our capital plan of strategically spending close to $800 million annually through fiscal 2016, growing our rate base at a compounded annual rate of between 8% and 8.5% growing earnings of 6% to 8% on a compounded annual basis through fiscal 2016.

Our story remains consistent and transparent. We are enhancing the safety and reliability of our system for the three million customers we serve. We aspire to be the industry leader in safety and training. We are committed to increasing and sustaining shareholder value. We are focused on growing earnings on consistent and predictable basis, and maintaining an attractive dividend yield. We understand how hard it is to gain trust, confidence, and credibility in the market. We've delivered on our commitments on a sustained basis and we believe we can continue this momentum. Thank you for your time, and we'll open it up for questions now. Christine?

(Operator Instructions)

Our first question comes from the line of Ted Durbin with Goldman Sachs.

Maybe I can start with a little bit more of a near-term look here on 2014. I'm sure you are working through the budget as we are coming close to the end of the fiscal year.

You are not going to start with congratulations on a good quarter?

Oh congratulations. (laughter) We knew you were going to have this nice seasonality impact from Mid-Tex, so well done. But just in terms of the 2014, how the budget's looking there in terms of the CapEx, but also the amount of rate activity. Are we still looking at $800 million of CapEx for 2014, and then looking for $90 million to $110 million of rate activity next year as well, or just kind of how that is shaping up right now?

Well, we know that we are going to invest the $800 million or thereabouts on the capital side of the business. What about the rate outcomes? We haven't looked at the rate outcomes, but we are going to, the growth is going to continue to be at 8%, 8.5% for rate base by 2016. I mean, all of the assumptions haven't changed we have talked about through the 2016 period. You'll see a little bit more clarity and granularity around that when we come back in November for sure, when we push guidance out for 2014. And announce capital budgets and everything. Everything seems, everything's on track. There is nothing that changed. If anything, we are having much more faith and confidence on our ability to deliver and sustain the commitments that we make.

Understood. I guess, is it fair to say, as you're growing rate base, your rate request numbers should go higher over time, just off of a larger basis. Is that fair, or do you think that $90 million to $110 million is what you need to get closer to your allowed ROE?

I think you are going to see a balance, Ted. As you continue to make those investments, there is going to be a consistency there, at certain level, when you are investing $800 million a year.

That is great. If can I just ask about the pipeline itself, and realizing there is obviously support from some of the regulators on the investments. But you do have some of the project, your major projects, you mentioned Line X is rolling off at the end of December. Do you have some other larger scale projects in the hopper that we should think about again for 2014? Or is it going to be more of the smaller type of projects and smaller spending in the pipeline business?

We don't have any we are going to announce. I think for your purposes, I mean, we have committed to growing rate base, it is the number we talked about, which translates to earnings growth of 6% to 8%. So whatever numbers you are assuming around annual rate outcomes or annual revenues from rate outcomes, we are going to have the investment and the projects to support that level of growth.

Got it. Last one for me is just on the dividend here, and realizing you are spending a lot of capital. But how you are thinking about the dividend going into the next year and the payout ratio versus retaining some cash to reinvest in the business?

We understand where we are relative to our peers. Obviously there is a significant appetite for capital right now, the highest and best use. We think for the return for the shareholder is on the capital side of the business. But we are also mindful, and that discussion occurs every year. And again, we'll have more to say about that when we come back in November when we talk about the indicated dividend yield for 2014. But it is another front burner issue.

Got it. That is it for me. Thanks, everybody.

Our next question comes from the line of Andy Bischof with Morningstar.

I'll start off with congrats on a nice quarter.

That is a better start, Andy. (laughter) Thank you very much.

I guess, maybe I'm misreading this. But can you provide a little bit more clarity on the remaining filed increases for the remainder of the year, and materiality increases? I mean, exactly, you have current $98 million increases.

Talking about the $36 million that's pending?

Yes are any of those effective in--?

None will be effective in this fiscal period. I think there is a slide on the details of that though. All those will be dropping in, next year, 2014, so you get a partial year effect in 2014. You can see a full effect in 2015.

The biggest two pieces are the Kentucky rate case and the Mid-Tex RRM.

The Mid-Tex was $17 million and Kentucky like $7 million.

For 2013.

That's all I had. Appreciate the clarity.

(Operator Instructions)

Spencer Joyce, Hilliard Lyons.

Nice quarter. And I wish you well with that Kentucky rate case up here.

Well intervene and support us for goodness sakes.

I'll do what I can do. Just a couple of quick ones here for you. With the Georgia asset sale now complete and behind us, are you all pretty comfortable with the current footprint? Can we think of the acquisition and/or divestiture, Phase I of the refocus as mostly complete here?

It's all complete. We are who we are and we love who we are. We love ourselves right now.

Fair enough. Fair enough.

Nothing else planned.

Okay. Second other little item, I just wanted to touch on the O&M stuff. You mentioned line relocate expenses being ramped up or maybe accelerated a little bit, as well as some compensation expense, which makes sense, given the good year we are having here. Can we read through maybe the accelerated line relocate stuff into next year? Or do you expect to wrap up most of the extra expense here in fiscal 2013?

I think you're going to see, there's a lot of construction going on in our service areas, so the extent that continues to be driven we'll have those expenses. We are, with the warmer weather, getting ahead of some of that, that we can, here in our third and fourth fiscal quarter, but that is a little bit more driven by development and service areas.

Also, I think it points out the fact that we are remaining to serve jurisdictions that have pretty healthy economies. Because your line locates is a definite indicator of economic activity, construction investment that's going on. It is really a very, very positive sign for our jurisdictions and the economies, the health of the economies where our customers are situated, Spencer.

Okay, yes that makes a lot of sense. Thanks for the color. That's all I had.

Great. Thank you.

Ms. Giles, we have no further questions at this time. I would turn the floor back over to you for further comments.

Thank you. I want to remind everyone that a recording of this call is available for replay on our website through November 6. We appreciate your interest in Atmos Energy, and thank you for joining us this morning. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.