埃特莫斯能源 (ATO) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Atmos Energy fiscal 2013 financial results conference call.

(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, Miss, you may begin.

Thank you, Donna, 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 a few of the slides during this live 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-K no later than next week.

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 to assist with questions, as needed.

As we review the financial results and discuss future expectations, please keep into mind that some of our discussion my contain forward-looking statements, within the meaning of the Securities Act and the Securities Exchange Act. Please see slide 29 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.

And now I would 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, again, your interest in Atmos Energy. Yesterday, we reported exceptional results for fiscal 2013, after excluding the gain on the sale of Georgia, and unrealized margin, consolidated net income was $233 million, or $2.53 per diluted share, compared to $212 million, or $2.31 per share one year ago, 9.5% increase in adjusted earnings per share year-over-year. As you recall, we did close the sale of our Georgia distribution assets earlier than planned, in April of 2013, receiving $153 million and recording an after-tax gain of $5.3 million, or $0.06 per share. However, our operational and financial performance proved more than strong enough to absorb the 6 months of lost income as a result of the sale.

Monetizing our non-core distribution assets over the last two years has really allowed us to redeploy the cash proceeds into our remaining portfolio of regulated assets, generating much better returns. These investments, and safety and reliability were made possibly by our constructive partnership with our regulators and customers who understand and embrace making safety our top priority.

We've significantly strengthened our balance sheet and enhanced our financial profile this past year. We amended our revolving credit agreement to extend the term through 2018, and increased our borrowing capacity to $950 million, which, coupled with the accordion feature, effectively expands our credit capacity to $1.2 billion. We also terminated Atmos Energy Marketing's $200 million committed facility, and replaced it with a $50 million of capacity through two one-year facilities, which resulted in lower external credit expense in our non-regulated operations. In January 2013, we issued 30-year unsecured senior notes in the amount of $500 million, at a rate of 4.15%. These replaced $250 million of notes carrying a 10-year term, and interest rate of 5-1/8%. As a result, our weighted average cost to debt has decreased to 6.2%, and our average maturities have been extended to almost 15 years.

Standard and Poor's recognized our continued effort to strengthen our balance sheet. In early October, S&P upgraded our corporate credit rating to A- from BBB+, with a ratings outlook of stable, citing an improved business risk profile. And, of course, yesterday, we announced that our Board of Directors authorized a 5.7% increase to our quarterly dividend. The fiscal 2014 indicated dividend rate is now at $1.48 per share, an increase of $0.08. This dividend increase, which is more commensurate with our earnings-per-share growth, is supported by our regulated operating and financial performance. With this increase, our dividend payout ratio remains about 55%, and continues to position us very well for delivering superior shareholder returns. Our commitment to increasing shareholder value remains a top priority. For the year ended September 30, we delivered a total return to shareholders of over 23%.

Bret Eckert, our CFO, will discuss the financial results for fiscal 2013, and the outlook for 2014. Then we'll return for some closing comments before taking questions. Thank you. Brett?

Thanks, Kim, and good morning, everyone.

If you follow me on slide 3, reported net income was $243 million, or $2.64 per diluted share, compared with $217 million, or $2.37, one year ago. As Kim mentioned, we completed the sale of our distribution assets in Georgia this past April. So the corresponding gain of $5.3 million, or $0.06, is included in the results for the current year. I'll remind you that last year included the net positive impact of several one-time items, totaling $10 million, or $0.11 per share.

Earnings were $233 million, or $2.53 per share in the current year, compared with $212 million or $2.31 per share last year, after excluding net unrealized margins, the gains on the sale, and the prior year one-time items. The execution of our regulatory strategy is driving our financial performance, and has improved the stability and predictability of earnings for the enterprise.

In fiscal 2013, we completed rate proceedings in our combined right-weighted operations, resulting in $122 million annual increase to operating income. As you can see on slide 5, distribution gross profit increased by $ 59 million for the year, and about $43 million for the quarter, compared to the same periods one year ago. The increase in both periods was driven from rate increases across all of our divisions, with the largest increases occurring in our Mid-Tex and West Texas jurisdiction. You will recall that rate outcomes in our Texas jurisdiction increased the customer base charge and decreased the commodity charge applied to customer consumption. Therefore, as expected, margins shifted out of the first and second fiscal quarters, and into the third and fourth fiscal quarters of 2013.

Turning to slide 6, our regulated interstate pipeline, Atmos Pipeline Texas, generated over $21 million of incremental margin during fiscal 2013, with about $7 million earned during the fourth quarter. These increases reflect the impact of our 2012 and 2013 GRIP filings. This past May, Texas Railroad commission approved APT's 2013 GRIP filing, with an annual operating income increase of $26.7 million, that went into effect that month.

Turning now to the expense side of the income statement, O&M for the year increased about $34 million. We experienced an increase in pipeline and right of way maintenance work in our regulated operation. Additionally, throughout the year, we experienced higher line locate expenses, from increased construction in the DFW Metroplex, and that throws the demand for locating gas lines. We also experienced rising costs associated with higher employee salaries and benefits expense, coupled with increased variable compensation expense related to fiscal year 2013 performance. In addition, we experienced higher bad debt expense this year, from increased revenues and temporary suspension of active customer collection activities, following the implementation of a new customer information system during the third fiscal quarter. These increases were offset by decreases in administrative expenses and depreciation expense due to new depreciation rates approved in the most recent Mid-Tex rate case.

Finally, our non-regulated operations continued to be a valuable contributor to our consolidated results, with net income of about $6 million this fiscal year, excluding the mark. We experienced a slight decrease in consolidated sales volumes during to increased competition, which reduced industrial and power generation sales, along with per-unit margins decreasing from $0.116 per Mcf to $0.10 per Mcf. Non-regulated earnings were also impacted by higher litigation costs that we do not expect to repeat in future periods.

Turning to capital expenditures, fiscal 2013 CapEx increased $112 million, to $845 million for the year. The increase reflects our commitment to increase infrastructure investment across our distribution system, as well as spending on pipeline expansion products, and increased cathodic protection APT.

Moving now to earnings guidance for fiscal 2014, we have announced our fiscal 2014 earnings per share guidance of $2.66, to $2.76 per diluted share, excluding unrealized margins, and have updated the expected contribution of regulated and non-regulated operations. Let me draw your attention to slides 16 through 18, where we have outlined the budget assumptions and net income for fiscal 2014. We expect continued successful execution of our rates strategy to be the primary driver for next year's results. We anticipate annual operating income increases up between $110 million and $130 million, from approved rate outcomes in fiscal 2014. Normal weather, weighted-average gas cost purchases to be in the range of $4 to $6 per Mcf. We expect the regulated business to generate between $237 million and $247 million of net income in fiscal 2014. Our non-regulated business is expected to generate net income in the $9 million to $11 million range, with an assumption of non-regulated delivered gas volumes of between 390 and 410 Bcf, at a per-unit margin of $0.10 to $0.11. Consolidated net income for fiscal 2014 ranges between $246 million to $258 million, with an estimated 92 million to 94 million average diluted shares.

Slide 21 provides the rate filing outlook for the upcoming year. As I mentioned, we anticipate approved increases to annual operating income of between $110 million and $130 million in fiscal 2014, which will continue to drive our earnings.

Slide 22 gives the historical comparison to fiscal 2014 projections for several expense categories. As you can see, key drivers from fiscal 2013 to fiscal 2014 include lower O&M in the $8 million to $18 million range, due to lower employee salary expense as variable compensation returns to base levels. We also expect a more normal run rate for bad debt expense in fiscal 2014. Increased depreciation expense ranging from $13 million to $20 million, primarily as a result of increased capital investment, and increased interest expense of $2 million to $7 million, largely due to higher short term debt borrowing costs. We will continue on our path to invest capital in our gas infrastructure, and utilize regulatory mechanisms that reduce or eliminate lag and financially support the investments.

If you turn to slide 23, we project spending between $830 million and $850 million in Fiscal 2014. Regulated CapEx is all but about $1 million of the annual total, and is largely driven by expenditures for enhanced infrastructure replacement programs such as those in Texas and Kentucky, among others. The majority of CapEx, over $500 million, will be spent on safety and compliance, focused on system and pipeline integrity projects. We'll spend approximately another $150 million on expansion, which includes spending at Atmos Pipeline Texas, along with compression projects and new customer additions on the distribution system. Finally, we'll spend $100 million to $150 million on improvements, including relocations, fortifications, measurement, and road projects.

I'll remind you we have rate provisions and timely rate filings, which should result in about 95% of our 2014 regulated capital being included in rate base and providing a return on the investment within 12 months of spend. We have also updated our five-year plan through FY 2018, as shown on slides 25 through 27.

Looking forward to slide 26, our infrastructure growth opportunities have grown faster than originally anticipated, and we now expect to invest approximately $850 million to $950 million annually, through Fiscal 2018, and enhancing the safety and the reliability of our regulated operations. We will continue to finance these investments via cash flows, long-term debt security, and, to a lesser extent, equity. Most importantly, our financing plans have been reflected in both our 2014 earnings-per-share guidance of $2.66 to $2.76 per diluted share, as well as our commitment to grow earnings per share by 6% to 8% annually, through Fiscal 2018. Thank you for your time this morning, and now I'll hand the call back over to Kim.

Thank you very much, Bret. Great report.

As you can see, Fiscal 2013 was a remarkable year, and represented another important chapter in our Company's history to deliver increased value to our shareholders. This was our 11th consecutive year in increasing earnings, and I believe it's worth noting that this progress continued during critical periods of economic uncertainty and certainly challenging times for our country. We have delivered on our commitments on a sustained basis, and this momentum has carried over into Fiscal 2014. At September 30, we had rate cases filed and pending for annual operating increases of $44.6 million, and have already received approval for annual operating income totaling $12.5 million this year. Increased capital spending and constructive regulatory outcomes are key factors underlying our 2014 guidance of $2.66 to $2.76 per diluted share.

Two years ago, we rolled out the parameters of our infrastructure investment growth strategy, which has generated better returns than originally planned, while improving the safety and reliability of our system. There was no sophomore slump for Atmos in Fiscal 2013, and we are not backing away from plans to invest in our systems. Our expected annual capital spending levels range from $850 million to $950 million, through Fiscal 2018, and should drive rate-base growth. Looking on slide 25, we do project rate-base growth to be between $6.9 million to $7.1 billion by fiscal 2018. We will continue to execute on our very deliberate rate strategy. This provides a solid platform for continued growth, and we continue to demonstrate to our regulators and customers our commitment to safety and reliability and keeping our services affordable and competitive.

As shown on slide 27, successful execution of our plan is projected to grow earnings in the 6% to 8% range on an annual basis, which equates to estimated earnings per share of $3.45 to $3.65 by Fiscal 2018.

So, in summary, what is the value proposition for an Atmos shareholder? On a forward PE basis, we continue to trade at a discount to our peers, yet, we offer higher-than-expected five-year total return estimates compared to the peer group. So Atmos Energy is a very unique investment with a very focused strategy, a solid financial foundation, and a solid track record of creating shareholder value. Earnings have grown consistently and predictably, and we offer a competitive dividend whose growth is now better aligned with our earnings growth.

Thank you very much for your time this morning, and we'll open up the call for questions. Donna?

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Ted Durbin, Goldman Sachs.

Good morning, everybody.

Good morning, Ted.

Few questions for me on the guidance here. I just want to understand the $110 million to $130 million of operating income we're looking for in 2014. I think you said you got $12.5 million done with the Mid-Tex, and then you got $46 million or so filed. I'm just trying -- can you help bridge us to where else we're expecting to get those increases? Because obviously Mid-Tex is one of your biggest jurisdictions.

Yes, you'll have the Mid-Tex ROM, you'll the GRIP filing, that obviously comes in, Ted, as we get into the early spring, as you run through that, and the rest of your filings are fairly typical from what we have year-over-year, commensurate with the increased investments.

You've got slide 21. If you look at that, I think that identifies most of everything that we are going to anticipate filing.

Got it. And so, these increases, these will be filed and sort of accepted, but may not fully hit the earnings. In other words, we have carry over from last year's coming into this year's increases.

Oh, yes.

I'm trying to follow the timing.

You're correct. The $110 million to $130 million is annual impact. If you look at the impact that we expected to have in Fiscal 2014, it's somewhere in the $80 million to $90 million range.

Yes. Got it. Okay. You made some comments around O&M, and I was wondering if you could give us a little bit more on that in terms of the year-over-year decrease, because it did look like the fourth quarter came in pretty high. I'm just making sure I understand all the mechanics there of why we have a year-over-year decrease in 2014 versus 2013.

I think a lot of it is related to salary expense. We've higher variable convention in Fiscal 2013, as you would expect with the stronger-than-expected earnings. We did have the new system implementation in the third quarter, where we did suspend collections for a period of time as we got through that implementation, we got that turned on across all the divisions, but we did have a slight run-up in bad debt expense in Fiscal 2013that we did not anticipate recurring in 2014, so that's a piece of it. Somewhat offset, I would see on the depreciation side, but those are the main drivers from an O&M perspective.

Got it. Okay. And then last one for me, you have got the, you talked about having the need for equity at some point down the road. I'm wondering if you can give us a sense of the size you might need and timing, and then thoughts about how you might actually get that done, if you dribble it out, or do an overnight, or how you think about that.

Yes, as you would expect, Ted, we're going to continue to be opportunistic in the timing and the nature of meeting our financing plans to fund our rate-base growth opportunities. You know, whether or not it's an overnight, whether it's a block trade, or a dribble, or a forward, we'll look at all options available when we get to that point. I direct you to slide 17 where we have included or 2014 estimate of earnings as well as average diluted share.

Right.

Our financing plans, as I said, were reflected in both our 2014 earnings-per-share guidance, as well as our commitment to grow earnings by 6% to 8% annually through 2018, and we don't plan on doing anything from a financing perspective that would impact our ability to deliver on those commitments.

Okay. That's it for me. Thanks.

Thank you.

(Operator Instructions)

We're showing no further questions at this time. Ms. Giles, I'll turn the floor back over to you for any additional or closing comments.

Great, thank you, Donna. I just want to remind everything one that a recording of this call is available for replay on our website through February 4th. We appreciate your interest in Atmos Energy, and thank you for joining us this morning. Good-bye.