埃特莫斯能源 (ATO) 2015 Q1 法說會逐字稿

Welcome to the Atmos Energy first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Miss Susan Giles, Vice President Investor Relations for Atmos Energy. Thank you, please begin.

Thank you, Melissa. Good morning, everyone. Thank you all for joining us. Our speakers this morning 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. Additionally, the Company's Form 10-Q was filed last night and is also available on our website.

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 17 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.

Thank you very much, Susan. Good morning, everyone. We certainly appreciate you joining us and your interest in Atmos Energy. Congratulations to anybody that's a New England Patriots fan. Next year is the Cowboys' year again.

Yesterday, we did report first-quarter consolidated net income of $98 million or $0.96 per diluted share. After excluding the unrealized margins, net income was $93 million or $0.91 per diluted share.

The regulated operations drove substantially all of our quarter-over-quarter growth. These operations are driven by a very focused rate and regulatory strategy which renders stable and predictable earnings.

The rate relief for our regulated distribution and pipeline operations combined generated about $32 million of incremental margin in our first quarter of FY15. Our liquidity and financial position remain very strong. In October, you'll recall we issued $500 million of senior notes at a rate of 4.125%, replacing the $500 million of senior notes with a rate of 4.95%. Our debt capital ratio was 49.5% at December 31, compared with 54.2% one year ago.

Yesterday, at our Board meeting, our Board of Directors declared our 125th consecutive quarterly cash dividend. The indicated annual dividend rate for FY15 was $1.56.

Then last month, we announced the appointment of Mike Haefner as Executive Vice President. This allows us the opportunity to strengthen the bench within the organization, as Mike will become more involved in managing the operations of the Company. The appointment also affords me the luxury and time to focus on building shareholder value, devoting more time to existing and potential investors and to continue to promote the exceptional value proposition of Atmos Energy.

Our CFO, Bret Eckert is going to now review our financial results in greater detail. Bret?

Thanks, Kim. Good morning, everyone. If you follow me, on slide 2, as Kim mentioned, reported net income for the quarter was $98 million or $0.96 per diluted share compared with $87 million or $0.95 one year ago. After excluding unrealized margins in both periods, net income was $93 million or $0.91 per diluted share compared with $81 million or $0.88 per share last year. We experienced business as usual in the first quarter of FY15.

With a return to more normal weather conditions during the quarter, spending levels for maintenance and capital activities were more in line with expectations compared to last year. We continue to execute on our long-term strategy of enhancing the safety and the reliability of our infrastructure, coupled with constructive regulation across our service areas.

Turning now to slide 3. Quarter-over-quarter gross profit in our regulated distribution segment increased by about $25 million. $19 million of the increase is a result of rate outcomes received during FY14 primarily in Texas and Kentucky. We also experienced a 13% increase in transportation volumes in the current quarter versus last year's quarter, primarily due to increased economic activity in our West Texas and Kentucky mid-state division, which added about $2 million of incremental gross profit.

Service fee revenues were up quarter-over-quarter by about $2 million. That was largely driven by increased customer reconnection activity following our FY14 customer collection efforts. These increases were partially offset by lower margins resulting to a return to more normal weather conditions during the quarter.

Weather during the current quarter was slightly colder than normal, but 14% warmer than the prior-year quarter. Therefore, although we experienced a 12% decrease in sales volumes, gross profit declined by just $2 million or less than 1%. This demonstrates how our weather normalization mechanisms insulates both the Company and our customers during periods of atypical weather.

Turning to slide 4, our regulated pipeline generated over $12 million of incremental margin quarter-over-quarter, primarily the result of a $12.5 million increase in rates from the approved 2014 GRIP filing. APT experienced an increase in third-party transportation volumes, transportation rates and pipeline demand fees. That generated about $3 million of additional revenue.

However, these increases were partially offset by declines in other third-party ancillary services, blending, parking and loan, treating and storage of about $1 million. As a reminder, the prior-year quarter included a non-recurring $2 million benefit associated with the renewal of APTs annual adjustment mechanism.

Turning now to our non-regulated segment. You may want to turn to slide 12. Gross profit decreased about $2.5 million in our non-regulated segment due to a decrease in unrealized margins quarter-over-quarter. Realized margins for gas delivery and related services decreased $1.7 million, largely due to a decrease in gas delivery per-unit margins to $0.10 per MCF from $0.12 a year ago and a 2% decrease in consolidated sales volumes.

The decrease in both per-unit margins and consolidated sales volumes reflects the impact of warmer weather during the current quarter compared to last year's quarter. Additionally, increased transportation costs adversely impacted per-unit margins. Offsetting the decrease in delivered gas margins was a $2.2 million increase in other realized margin, primarily due to a reduction in third-party storage fees and the timing and magnitude of settled financial positions quarter-over-quarter.

Turning briefly to the expense side of the income statement. O&M increased by almost $3 million quarter-over-quarter, mainly due to higher labor and benefits expense and increased pipeline maintenance spending. Offsetting these increases was a reduction in legal expenses. As expected, interest expense decreased about $2 million quarter-over-quarter due to the replacing of the $500 million of tenured debt at an interest rate of 4.95%, with $500 million of 30-year debt at an interest rate of 4.125%.

Details about our capital spending are presented on slide 5. As you can see, CapEx increased almost $81 million in the first quarter compared to one year ago.

Spending in our regulated pipeline segment increased by almost $42 million due to the enhancement and fortification of the Bethel and Tri-City storage fields. We are drilling horizontal wells to improve the storage capabilities at the Tri-City facility and installing pipelines to connect the high term salt dome Bethel storage to Tri-City's to better utilize the combined compression capabilities at the storage facility and to better meet peak day requirements of the Mid-Tex division and other LBC customers.

Spending in the regulated distribution segment increased almost $39 million, primarily due to our continued focus on the safety and the reliability of our system. You may recall, our construction crews were sidelined for a portion of December 2013 due to the wintry weather, which also contributed to the increase in spending in the current quarter compared to the prior-year quarter.

Moving now to our earnings guidance for FY15. You may want to turn to slide 14. We expect FY15 earnings per share to be in the previously announced range of $2.90 to $3.05 per diluted share, excluding unrealized margins at September 30, 2015.

Details on the slide are the expected contributions from our regulated and non-regulated operation, as well as selected expenses for the year; none of which has changed since our year-end earnings call in early November. We expect the continued execution of our infrastructure investment strategy coupled with constructive regulation to be the primary driver for this year's results.

Looking on slide 24, we anticipate annual operating income increases of $105 million to $125 million from approved rate outcomes in the year. Looking now on slide 15, our capital budget range has not changed and remains between $900 million and $1 billion for FY15.

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

Thank you, Bret, exceptional report and a solid earnings report for the first quarter of FY15. Regulated rate relief does remain the primary driver of our financial performance. Through the first quarter of 2015, rate outcomes and incremental deferrals have provided annual operating increases of about $6 million.

Additionally, yesterday, we settled the Mississippi stable rate filing which will provide an increase in annual operating income of $4.4 million. Other rate actions year-to-date that are filed and pending total about $18 million of annual operating increases.

The more significant filings include: the Tennessee rate case, seeking an increase of about $6 million; the rate review mechanism for the West Texas cities, seeking an increase of about $5 million; and the Mid-Tex rate review mechanism for the city of Dallas, which is requesting about $7 million. We do expect an additional 10 to 12 filings in FY15 requesting between $80 million and $90 million of additional increases to operating income. You can see those details on slide 7 through 11 in the deck that was provided.

Our earnings are straightforward with the business model of delivering safe and reliable natural gas in the states we serve. Our Company is totally domestic with no direct exposure to risk associated with foreign currency or unstable economies outside the United States.

Atmos Energy and our regulated distribution customers are significant beneficiaries of the falling energy prices. We are able to pass through these lower natural gas prices to our customers.

This has provided us the continued opportunity to proactively upgrade our system, as we strive to be the safest gas utility in the nation while keeping customers' bills affordable. Assuming normal weather and pricing conditions, we do expect through at least FY18, that our customer bills will be flat to lower than the average bill that they've incurred for most of the last 10 years.

As a result, our customers will be able to affordably benefit from a much safer and more reliable system as we continue to invest. As Bret said, these quarter results really are a result of business as usual for us.

Our earnings report should come as no surprise, as we have continuously communicated our growth through investment -- in infrastructure investment. We remain dedicated to this strategy and remain focused on spending between $900 million to $1.1 billion of capital annually through FY18 to enhance the safety and reliability of our system. The enhanced value of the rate base is expected to generate earnings per share growth of 6% to 8% through FY18.

We thank you very much for your time. Now, we will open up the call for your questions. Melissa?

(Operator Instructions)

Brian Russo, Ladenburg Thalmann.

Just noticed the debt-to-cap ratio now at 49.5% up from 46%. I noticed the short-term debt balance up meaningfully at $550 million. Just kind of curious when you might term that out? Or kind of where you see the debt-to-cap ratio kind of play out towards the end of 2015?

Brian, this is Bret Eckert. The debt-to-cap ratio that you saw move obviously is through the growth of the short-term debt balance. We use that to fund seasonal gas purchases.

So you're always going to see it spike when you get to the -- our end of our first fiscal quarter. Then those balances tend to come down as you come out of the spring and into the summer.

So, last year at this same time, there was about $690 million of short-term debt outstanding. So it's lower than last year but it really is just the ebb and flow of gas purchases.

Okay. Got it. With the first quarter now behind you, any sense of where you might fall within that $105 million to $125 million rate revenue range that you're forecasting for 2015?

No. We still remain confident were going to fall within the $105 million to $125 million range based on what we've seen so far this year.

Okay. Then just with the decline in oil and the expected impacts to the Texas economy, can you just talk about any impact, if at all, to your Texas-based regulated operations?

Brian, this is Kim. There's really -- as we said, we are a significant beneficiary of the falling oil prices, as are all of our customers. Consequently, it gives them much more discretionary income as their utility bills continues to fall. It has an immediate benefit, primarily to our -- the uncollectibles or the doubtful account balance as well, is reduced as a result of the reduced oil price -- or gas prices and oil prices.

No, I noticed an increase in transportation revenues. Is that tied to, kind of, the energy industry? Or is that separate from that?

It's separate from that. I mean, we have traditional customers -- commercial and industrial customers. We are picking additional loads as some of the economies continue to come back that we've been serving, primarily, because of the reduction in oil and gas prices as part of the process for their manufacture of the products that they are manufacturing.

Okay. Understood. Then lastly, if you annualize your first-quarter 2015 O&M, it's tracking below the $495 million to $515 million assumption in your guidance. I'm just curious, is there any seasonality around that O&M where it would be higher in subsequent quarters?

Well, you always have the weather to contend with in our first fiscal quarter, Brian. So, we still feel confident in the $495 million to $515 million O&M range that we put out.

But you'll see -- if you look back at the first quarter last year, O&M was clearly lower but we had such wintry weather at the time, that it was difficult to get out and get things completed. So, I think you still will find us falling in the range disclosed.

Okay. Great. Thank you very much.

Thank you.

Spencer Joyce, Hilliard Lyons.

Great quarter.

Thank you. Thank you very much.

One question here, kind of in the minutia. Have you all noted the potential size of this year's GRIP filing for the pipeline segments?

Well, Spencer, the teams obviously are in the process of putting that filing together. But it's going to fall within the range that's driving the $105 million to the $125 million of annual increases that we've disclosed.

Okay, great. Fair enough. From a filing standpoint, we're still looking at a filing of that this month sometime?

That's correct.

Okay. Finally -- you all have sort of touched on this a little bit throughout the call. Can you just spend a little bit more time explaining to us the impact you all of the low gas prices? I know it's pretty easy on the retail side to understand the following customer bills and the ability for you all to perhaps do some extra infrastructure on the retail side.

But, particularly on the pipeline segment, is there a risk that, perhaps, some contraction on the industrial growth could either hamper growth or perhaps, even drive a decline there? Just help us get a little better handle on what the falling energy prices could do there?

No, they will not impact the pipeline operations or the expected assumptions we have around the margins and the income associated with that. Primarily, we have fixed contracts on -- for a pretty good term. They're designed on the straight fixed variable basis, so there are not tied to throughput. We are not experiencing any reduction in throughput on the pipeline system, either.

I mean, we're continuing see -- although, they're laying down the rigs in many of the production areas, they are going back in on the wells that they currently producing and doing some secondary and tertiary recovery, mechanisms to continue to increase the production. So, we've looked at that. We see no threat to the pipeline operations through what we consider the near and the mid-term, for sure.

Okay. Fantastic. That's all I had. Nice quarter.

Thank you very much, Spencer.

(Operator Instructions)

Joe Zhou, Avon Capital Advisors.

It's Andy Levi. Just a few questions. Just on bonus depreciation and also on pensions/discount rates. I guess since your analyst's day and since you gave guidance, the year ended and bonus depreciation was extended.

So, I was just wondering if that has any effect on the numbers that you had given us? Then also, as far as pensions and mortality rates and things like that, whether that has any change there?

No. No on both counts, Andy. Both the bonus depreciation -- where we thought it was coming out, it's more of a -- it doesn't impact the income statement. It's more of a cash flow item. From the discount rates, they're -- we're in line with what we expected coming into the year.

Okay. Just remind us pension-wise kind of where you are as far as what percentage funded?

Yes. It's over 90% on a PreMAP21 Basis and on a MAP21 Basis higher than that. I don't have the exact percentages. I think Susan, we could look at that. But I don't -- it's north of 90%.

Okay. Thank you. Then one last question, just a little bit of a fad happening on the electric side. It's happened on the gas side already, but just your thoughts on -- I guess in Texas, it probably wouldn't make any sense, but in some of your other jurisdictions on rate basing nat gas? Prices are low right now.

Are you talking about like, regulated production?

Yes, basically.

You mean like Questar or Wexpro?

Questar, Wexpro or NextEra down --

Yes, we're not -- no. I mean, there is no need to do that with where gas prices are currently. Certainly, where they are anticipated to be if you look at any of the forecast from the EIA or any other forecasting services that are reputable and reliable. They have through the next 10 years gas prices in the $4 to $6 range. I think -- I was looking at yesterday, our WACOG dropped from last year to this year about $0.70.

We were at $4.40, I think last year and this year, we have a WACOG of about $3.70. That's all principally driven as a result of the 50% market purchases that we make annually to fulfill those requirements. So if you set that up, you've got to assume production of the field. Then you've got to assume a ROE. By the time -- a lot of that stuff puts you out of the market or above market prices, which I don't think it's a -- it's not a good -- it's not anything that we would consider doing right now.

Our highest and best use is to put the dollars we have in our infrastructure. We have a significant amount of infrastructure that we can invest in for a long period of time. As long as we're able to have the balanced regulation in all of the jurisdictions where we're situated and achieve the returns and continue to reduce the regulatory lag and continue to improve the recovery of the fixed cost in a customer charge, that's our strategy. But, we want to -- the production side doesn't help us with our continued desire and highest priority to become the safest utility in the country either.

Got it. Then, one last question, I don't know if you can quantify this. But, just the price of gasoline has clearly dropped. You guys have a lot of trucks. I'm just curious if prices were to stay kind of where they are, what the annual benefit could be?

Our trucks run on natural gas. We don't have anything on -- just kidding. No. I don't know.

Andy, I don't -- we'd have to get back to you on the impact.

Not as bad --

(multiple speakers) So I think we'll still be in that same $2.90 to $3.05.

We've got a system which dispatches those trucks very efficiently and effectively so that we minimize the amount of mileage that they travel every day. So -- but, that's not a needle mover, either.

Right. Thank you very much.

Thank you very much.

Thank you. Ms Giles, there are no further questions at this time. I'd like to turn the floor back to you for any final remarks.

Well, thank you, Melissa. I just want to remind all of you that a recording of this call is available for replay on our website through May 6. We appreciate your interest in Atmos. Thank you for joining us.