埃特莫斯能源 (ATO) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Atmos Energy FY14 year-end conference call. At this time all of the 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. I would now like to turn the conference over to your host, Ms. Susan Giles, Vice President of Investor Relations. Thank you Ms. Giles. You may begin.

Thank you, Jenna. Good morning, everyone, and thank you for joining us this morning. Our speakers are Kim Cocklin, President and CEO; and Bret Eckert, Senior Vice President and CFO. There are also other members of our leadership team here to assist with questions as needed.

Our earnings release and conference call slide presentation are available on our website. To access these materials please visit our website at atmosenergy.com. We will refer to just a few of the slides during this live call, but will take questions on any of them at the end of our prepared remarks. Also, we expect to file our form 10-K later today.

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 27 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 to everyone. We certainly appreciate you joining us and your continued interest in Atmos Energy.

Yesterday, as you know, we were pleased to report earnings of $2.96 per diluted share for FY14. These results reflect the third year since we initiated our growth strategy to invest in our regulated assets as we strive to be the nation's safest utility. Our success was attributable again to the exceptional dedication and outstanding performance of all of our employees who met the challenges presented by the unusually cold weather to ensure safe, reliable, and competitively priced customer service.

Additionally, these operational and financial results are impacted significantly by the important relationships that we have with our regulators, agency staff, city officials, and customers who understand the critical importance of making safety the top priority.

Our regulated operations continued to contribute stable and predictable earnings, driven by a very focused rates and regulatory strategy. Rate relief for our regulated distribution and pipeline operations combined, generated about $74 million of incremental margin in FY14. Our non-regulated operations took advantage of the volatility in the natural gas markets that occurred earlier in the year.

Although the delivered gas business remains its core focus, our marketing group was able to seize opportunities associated with weather and generated incremental gross profit by accelerating physical withdrawals in a very volatile natural gas price environment. Our liquidity, financial position and balance sheet remain very strong.

During FY14, and early fiscal 2015, we carried out several initiatives to enhance our financial profile. In mid-February, you will recall, we strengthened our equity ratio with the sale of 9.2 million shares of common stock. Our first public offering since 2006. Equally impressive was the fact that we absorbed the dilution from these additional shares as a result of the colder than normal weather and constructive rate outcomes.

Our revolving $950 million credit facility was increased to $1.25 billion, with the term extended through August 2019. This increase, coupled with the accordion feature, expands our borrowing capacity to $1.5 billion. We also replaced $500 million of long-term debt, which carried an interest rate of 4.95%, with $500 million of 30-year unsecured notes carrying an interest rate of 4.125%, reducing our interest expense by $8 million per year.

Our debt to capital ratio at year-end 2014, September 30, 2014, was 46.2%, and our liquidity remains strong with over $1 billion of capacity available from our short-term facilities. Last, but not least, our Board of Directors authorized an increased to our dividend for the 31st consecutive year. The FY15 indicated rate is now $1.56, an increase of $0.08 per share, or 5.4%. The dividend hike sustains last year's increase and delivers a commitment that we identified at that time.

We will continue our philosophy of providing sustained annual increases and believe the increase in the dividend reflects our goal to provide both an attractive return, while executing on our growth strategy. Our strategy to grow by infrastructure investment was first implemented in FY12. Since then, for the fiscal three-year period, our total return to shareholders has been 63.8%.

We have not swayed from this plan. These capital investments continue to improve the safety and reliability of our utilities. And when the colder than normal weather occurred, our systems operational performance was exceptional.

FY14 was a remarkable year and the financial performance followed suit as Bret Eckert, our CFO, will now discuss. Bret?

Thank you, Kim, and good morning, everyone. My remarks will primarily focus on the full-year results.

If you follow me on slide 3, reported earnings were $290 million or $2.96 per diluted share this year, compared with $243 million or $2.64 per share last year. After excluding the net unrealized margins in both periods, and the prior-year gain on the sale of our Georgia operations, earnings were $284 million or $2.90 per diluted share in FY14, compared with $233 million or $2.53 per share last year.

Consolidated results for the year were favorably impacted by weather what that was 20% colder than normal, which drove higher throughput across all of our segments and created natural gas price volatility for our non-regulated segments. Customers in our regulated distribution operations benefited from weather normalization riders, which returned approximately $35 million to customers in FY14.

After giving consideration to this adjustment, and adjusting for other weather driven operating expenses, the impact of colder than normal weather contributed $17.1 million or $0.17 per diluted share on a consolidated basis in fiscal 2014.

Slide five outlines gross profit in our regulated distribution business, and slide six details gross profit for our regulated pipeline segment for the 3 month and 12 month periods. The execution of our regulatory strategy continues to drive our financial performance. Rate increases had a positive effect during the year, lifting distribution gross profit by $35.3 million, and regulated pipeline gross profit by another $38.5 million.

For the year, we implemented $134 million in operating income increases on an annual basis. Slides 8 through 16 provide more details on our rate filings for FY14. As I previously mentioned, FY14 was benefited from colder than normal weather. Increased customer consumption in our LDCs, and higher throughput and related margins at APT, contributed about $19 million of the gross profit increase this year.

Slide 17 provide the details for our non-regulated segment. Gross profit in our non-regulated operations increased $24.6 million in FY14.

Although the delivered gas business remains AEM's core focus, AEM was opportunistic during the significantly colder weather earlier in the year by accelerating physical withdrawals into the second quarter from future periods to capture gross profit during the volatile natural gas price environment that was associated with the colder weather. We don't anticipate this will be repeated in FY15 as non-regulated earnings are expected to return to normal levels driven by its core delivered gas business in FY15.

Shifting now to the expense side of the income statement. The rise in O&M expense for the year was primarily due to increased levels of pipeline maintenance activity, employee wage increases and higher weather related costs, including higher variable incentive compensation expense, increased standby and overtime costs during the cold months, and higher bad debt expense as a result of higher customer bills during the much colder winter. These increases were partially offset by lower legal and administrative expenses due to the resolution of two legal matters in the non-regulated segments during 2014.

Fourth quarter O&M expense was down $10 million, primarily from the timing of variable incentive compensation that was recorded in the second quarter in the current year compared to the fourth quarter last year. Capital expenditures were $835 million for the year, compared with $845 million last year. The decrease primarily reflects the $64 million decrease in capital in our regulated pipeline segment that was associated with the completion of Line WX expansion project, partially offset by $55 million increase in capital spending and our regulated distribution segment due to increased spending under our infrastructure replacement programs.

Over 75% of 2014 CapEx was invested to enhance the safety and the reliability of our systems, and approximately 91% of 2014 capital expenditures was incurred under mechanisms that reduced lag to six months or less. Moving now to our earnings guidance for FY15. We've announced our FY15 earnings per share guidance of $2.90 to $3.05 per diluted share excluding unrealized margin.

Slides 21 and 22 detail our net income and expense projections for FY15. As I previously stated, the impact of colder than normal weather contributed $17.1 million or $0.17 per diluted share in FY14. After excluding the impact of colder than normal weather, 2014 weather adjusted net income was $267 million or $2.73 per diluted share as shown on slide 21. The midpoint of FY15 guidance would represent an 8.8% earnings per share growth rate from the weather adjusted 2014 earnings of $2.73 excluding unrealized margins.

All of our growth in FY15 is expected to be driven by our regulated operations, as non-regulated earnings are expected to return to normal levels driven by its core delivered gas business. We project regulated operations to generate net income in the range of $285 million to $300 million. We continue to expect constructive rate outcomes to be the primary driver of next year's results and anticipate annual operating income increases of between $105 million and $125 million from implemented rate outcomes in FY15.

Our non-regulated business is expected to generate net income in the $10 million to $12 million range with an assumption of non-regulated delivered gas volumes of between 390 Bcf and 410 Bcf, at a per-unit margin of $0.10 to $0.11. Consolidated net income for this fiscal 2015 is expected to range from $295 million to $312 million, and average diluted shares are expected to range from 102 million to 104 million shares.

O&M expense is projected to range between $495 million and $515 million. We are assuming a return to normal weather with variable compensation, overtime and standby time, and bad debt expense reverting to more normal levels. However, we do expect normal employee-based compensation increases, along with employee benefits inflation, primarily medical and dental costs.

Depreciation and amortization expected to range between $265 million and $285 million due to increase capital investment in FY14. Interest expense is expected to decrease from FY14 due to the replacement of the $500 million 4.95% senior notes with $500 million 4.125% senior notes on October 15 of this year. Income tax expense is expected to decrease and range between $175 million and $185 million. Our effective income tax rate is expected to be in the 37% to 38% range.

Our capital budget is expected to range between $900 million and $1 billion in fiscal 2015, and will allow us to further enhance and upgrade our natural gas delivery system. We continue our focus on strategic infrastructure spending by utilizing rate mechanisms and timely rate filings. About 91% of our 2015 CapEx will begin earning a return within six months of test year-end.

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

Thank you, Bret. Exceptional report. We do continue to have an exceptional portfolio of assets and this year we did increase earnings for the 12th consecutive year.

We will continue to emphasize the sustainability and reliability of meeting our commitments to the shareholder for earnings per share growth and total shareholder return. We are achieving desired regulatory outcomes in most jurisdictions where we operate.

Most recently, the rate stabilization clause in Louisiana was modified to include an infrastructure mechanism that authorizes deferral treatment very similar to rule 8209 that exists in Texas. Going forward, we would expect to increase capital expenditures in Louisiana as a result of this change.

In Kansas, the regulatory environment continues to be challenging. We, along with other utilities that operate there, are pursuing all remedies to enhance the opportunity for more reasonable rate outcomes. Our latest rate filings resulted in a 9.1% return on equity component in Kansas. We will continue to strengthen our relationships in Kansas with the regulators and the customers and maintain our steadfast desire to be the safest provider of natural gas utility services. In FY15, we are projecting between $105 million and $125 million in operating income increases on an annual basis from rate outcomes.

Lastly, our $33 million Mid-Tex rate review mechanism filing is still pending before the Railroad Commission. We did begin collecting these rates, June 1, subject to refund. The issue in that case is whether the filing conforms to the terms of the rate review mechanism tariff that was established with our city customers in Texas. We are hopeful for a decision to be rendered by calendar year-end.

We are continuing to take our commitments to the shareholders and the Street very seriously. Our $900 million to $1 billion of annual capital investment remains focused on enhancing the safety and reliability of our infrastructure, investing in our own system assets versus taking on an acquisition to grow the business.

Our story is very simple. In fact, we are one of the few in the utility space with the level of competence to put out a long-range plan. In FY18 we are projecting $3.50 to $3.75 of earnings per share, and although we have narrowed the PE gap, our multiple is still below the average of our peers.

We continue to project 9% to 10% annual rate-based growth, and 6% to 8% annual earnings growth through FY18. Coupled with the dividend yield, total annual return is expected to be in the 9% to 11% range through FY18.

We've had another solid year and we remain committed to delivering dependable consistent and long-term shareholder value. We do appreciate your time this morning and we are ready to take any questions you have. Jenna?

(Operator Instructions)

Chris [Churchiner], JPMorgan.

I wanted to touch on your increased CapEx guidance. You briefly mentioned it and, obviously, part of it is going to be due to the Louisiana rider that was just implemented there, but could you give us a little more granularity on both the 2015 outlook and then beyond that as well?

Yes, we do plan to get into a bit more granularity on the CapEx at our analyst conference on the 19th, Chris. But, you really hit it.

You see increased capital spending-- continue the increased capital spending in connection with our deferral mechanisms in Texas. With the new infrastructure wordings that is part of the rate stabilization clause in Louisiana, you'll see increased capital spending in that jurisdiction as well.

You're also going to have a bit of an increase in capital spending at the pipeline this year. Those are the main drivers of the increase year over year.

Okay, great.

And then you don't anticipate any incremental financing needs outside of your current plan in terms of equity?

No. We will roll out an update of our financing plans through 2018 on the 19th. We just, as we talked about, replaced the expiring tranche of $500 million senior notes that came due on the October 15 this year.

We did not upsize that facility. We announced that it will not grow and we are able to tighten the pricing and to lower our interest cost. We had about $197 million of short-term debt outstanding with about $1.2 billion of liquidity at September 30. Our plans, as we have previously presented them, have not changed from that.

Okay, great. And then I would love to hear your thoughts on some of the changes at the Texas Railroad Commission.

Recently, you have a relatively new chairperson that has been seated, and then the elections the other day resulted in the appointment of a new commissioner as well. Were there any major surprises there? Is there anything we should be thinking about for the long term of your regulatory relationships there?

No. Chris, this is Kim. That's a good question.

The election results -- thy came out as we expected. There is a new commissioner, Ryan Sitton, who has an engineering-based energy firm, consulting firm, in Houston, Texas with about 300-plus employees. We have visited with him. He's visited our training center here.

He's very familiar with the industry. He will continue to strike a very appropriate balance between the needs of us to continue to invest in our infrastructure to be the safest utility in the country against the interest of the consumer. Christi Craddick will be appointed the Chairperson and she will continue to do a very good job along with Commissioner Porter.

So, no, the Texas economy continues to be significantly pushed along by the energy, and in particular, natural gas. We continue to see them as leading the country in terms of proactive and visionary regulation or motivating investment while the shale gas prices continue to provide that opportunity.

Great. Thanks a lot, guys.

And you see Louisiana follow in suit. So we are very, very happy to be in the jurisdictions where we are situated. And Texas, obviously, leads the charge.

That's helpful, thanks.

And the rest of the elections, I think, are going to support that as well. From the Governor and the Lieutenant Governor, it's going to continue to be a very pro-business, healthy-economy-driven situation.

Great.

Spencer Joyce, Hilliard Lyons.

First off, congrats on a great year both operationally and I know here from the shareholders side.

Well, you called it. (laughter) Not a surprise for anybody that's following your good research.

The job is never done.

I want to dive in here. Just a couple of nuance questions. Perhaps, Bret, you on the guidance side. What is the weighted average cost on the commercial paper program? Is that right around 1%?

No. You are getting commercial paper somewhere in the 25 to 30 basis point range right now.

Okay. Got you.

And then on the O&M side, it looks like the midpoint of guidance is roughly flattish from this year. I know we will have some upside from hiring, and healthcare costs, and normal inflationary type pressures, but-- My question is what is the offset or the giveback that we will see next year that was, perhaps, driven by the weather in FY14, and just, in general, increased activity there?

Yes, it really is -- it goes back. We did -- with the cold weather we had that overtime in standby costs that you wouldn't expect to repeat as we made sure that we maintained our service levels.

When you have those higher customer bills when the weather surprises folks, bad debt expense was higher and we do expect that to return to normal levels. And, of course, FY15, we are budgeting that we would achieve target from variables from a compensation standpoint, and so weather and (inaudible) really drove variable incentive comp higher and we would expect that to be removed. Those really are the main drivers of it, with a few offsets that you had mentioned.

Okay. So I guess the inordinary upside in 2014 may have been $15 million or so? On --

I think if you look year over year, it's up about $17 million. If you look actual 2014 versus actual 2013.

Are you talking about weather or --

You're talking about the O&M impact of those? Yes, as far as the O&M impact from those items that were incremental, you're in the range.

Okay, great.

And then, Kim, maybe from a broader standpoint, and the first caller touched on it a little bit, but it really has been a great few years for the ATO stakeholders here. And I was just wondering if, perhaps even anecdotally, if you had seen any populist uprisings or any kind of unrest among either politicians or regulators that says: Hey, how is the utility performing so well there. Or maybe contrary to that, are we really in the same sweet spot that maybe we were in a few years ago, kind of off which we have seen this growth?

No. There has been no uprising and our story and justification for the performance is really driven by our desire to be the safest utility.

And the $900 million to $1 billion that we are putting in our assets is not really stuff that we are dreaming up or - it is really driven by the regulations that are coming out at the federal level, and more importantly, at the state level. And our regulators-- we are taking every opportunity that we have and because the way that we are organized we have business units populated with presidents and officers who have responsibility and accountability out there that are very close to the regulators and the agencies themselves.

And they take every opportunity to visit with those folks and make sure that they understand. So our customers, we meet with them very frequently and they understand what we are spending from a capital standpoint, from an O&M standpoint, what is driving it. And if you look at the management of our gas supply side of our business, we actually -- because of our hedging strategies and the storage capabilities, our weighted average cost for the upcoming winter is expected to be a little bit lower than what we experienced this year.

So we continue to be able to make this investment which, really, is necessary and a lot of it is compliance-driven. We are not a compliance-driven operation. We certainly are going to do all we can to exceed the compliance standards that are out there, to be the safest person and utility in the United States, but the gas prices continue to provide us the opportunity to reflect these bite-size increases.

And the results that you are seeing operationally and from a safety standpoint can't be denied, so we are utilizing all of that as a good story to discuss with anybody that asks: Why are you having such a great run financially? But you've got to look at the operational side of the business, which is really driving that. And it's going to continue.

We've got an extensive line of appetite to continue to address all of the infrastructure that we have plans to do. We don't see any end to the investment in our infrastructure and we don't certainly see any-- we are not expecting to ever back away or not meet the commitments that we have made to the Street to grow the rate base at the level we are talking about, and the earnings at the 6% to 8% level, and then where we are at with the dividend, a very comfortable payout ratio of 52.5%.

We've still got some running room on that if we need it.

Yes, good. All great points there. Thanks for the color.

Again, congrats on a good year, and we will talk soon.

Thank you.

There are no other questions in the question queue. I would like to turn the program over back to Ms. Giles.

Go ahead, please.

Thanks, Jenna. A recording of this call is available for replay on our website through February 3. I'm here all day if anyone has specific questions.

Other than that, we appreciate your interest and thank you for joining us. Goodbye.