Atmos Energy Corporation (ATO) Q1 2010 Earnings Report, Transcript and Summary

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 not review them in detail but we 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 www.AtlasEnergy.com and click on the conference call link. Additionally, we plan to file the company’s Form 10Q later today. Our speakers today are Bob Best, Chairman and CEO and Fred Meisenheimer, Senior Vice President, CFO and Treasurer. There are also other members of our leadership team here to assist with questions as needed. As we review these financial results and discuss future expectations, please keep in mind that some of our discussions might contain forward-looking statements within the meaning of the Securities Act and Securities Exchange Act. Any forward-looking statements are intended to fall within the Safe Harbor rules of the Private Securities Litigation Reform Act of 1995. With that, I’ll turn the call over to Mr. Bob Best.

Yesterday we were pleased to report first quarter consolidated net income of $93 million or $1.00 per diluted share. Our regulated operations contributed 64% of our total net income while the non-regulated operations contributed 35%. During the quarter we also renewed two committed credit facilities. In October we renewed Atmos Energy Corporation’s $200 million 364 day facility and in December Atmos Energy Marketing’s $450 million 364 day facility was also renewed. During the quarter our debt to capitalization ratio improved to 51% at December 31 compared with 54.4% one year ago. In short term debt this quarter is about half of what it was one year ago. I’ll remind you that the amount of unused borrowing capacity is affected by the seasonal nature of our business. Our working capital requirements increased as we begin the winter heating season. Our high water market for short term debt is traditionally in late January and should begin to decline as customers begin paying their winter heating bills. Yesterday our board of directors declared our 105th consecutive quarterly cash dividend. Our indicated annual dividend rate for fiscal 2010 is now $1.34. Now, I’ll ask Fred Meisenheimer to review the financial drivers for the first quarter of fiscal 2010 and then I’ll return for closing comments and we’ll all be glad to take your questions at that time.

For the first quarter of fiscal 2010, consolidated net income rose 23% and earnings per share were up 20% compared to the same period one year ago. As Bob stated, our current financial results were positively impacted by the mark-to-market accounting treatment required by GAAP and our non-regulated operations and included non-cash unrealized net gains of about $27 million or $0.29 per diluted share. In comparison, for the same period last year the market resulted in a net loss of $14 million or $0.16 per diluted share, a positive swing of $41 million or $0.45 per share quarter-over-quarter. Also, the positive impact of $3.6 million of net adjustments are $0.04 per share which occurred in last year’s quarter did not recur this year. For comparison purposes if you eliminate the mark-to-market accounting treatment and the onetime items, our adjusted earnings per diluted share for the current quarter are $0.71 compared to $0.95 for the same quarter last year. You may want to look at Slide 38 for this comparison. Let’s take a closer look at the drivers this quarter. The regulated distribution business experienced incremental improvement from rate increase primarily in Texas, Louisiana and Mississippi. All jurisdictions with recovery mechanisms which collectively increased gross profit by about $2 million. Distribution also benefited from the 7% increase primarily in residential and commercial throughput as a result of extremely cold weather particularly in December. In the regulated transmission and storage segment which we refer to as Atmos Pipeline Texas Division, gross profit decreased about $8 million compared to a year ago primarily from lower transportation profits as well as lower per unit margins. Quarter-over-quarter third party throughput decreased by 35 bcf due to reduced systems spreads, increased competition from new pipeline construction, a decline in Barnett Shale activity and a reduction in…

I’ll make a few closing comments and then we’ll be glad to take your questions. As Fred has outlined, we are encouraged by our earnings report for the first quarter of fiscal 2010. Our fundamental business is delivering safe and reliable natural gas under the rules of our regulatory agencies in the states that we serve. Successful rate activity is critical to the financial performance of our gas distribution segment. Last week the Railroad Commission of Texas issued a final order on our November 2008 rate case with the city of Dallas and ENVIRON, served by our mid Texas division. In the final order the Railroad Commission approved a $3 million increase in operating income, a 10.4% return on equity, an overall rate of return of 8.6% and a capital structure of 51% debt and 49% equity. Additionally, the residential monthly customer charge was raised from $14 to $16. We appreciate the Commission’s recognition of the return level necessary to attract capital in today’s environment. By increasing our allowed ROE to 10.4% it provides support to discuss an increase as we pursue the renewal of our rate review mechanism with the [settled] cities in our mid Texas division. We have begun negotiations with the cities and we are very optimistic that the mechanism will be extended. We currently have rate actions filed and pending in our Kansas, Missouri, Kentucky and Louisiana service area with total about $28 million in requests. We intend to file another 10 to 15 cases in total with requests about $50 million by fiscal year end. Even though Atmos Pipeline Texas has gone through some challenging times this quarter with volumes being lost out of the Barnett Shale and contracting of basis spreads and increased competition in the region, the regulated pipeline remains a very solid…

(Operator Instructions) Your first question comes from Jonathan Lefebvre – Wells Fargo Securities. Jonathan Lefebvre – Wells Fargo Securities: I just wanted to touch on Fort Necessity, I know that it’s probably a sensitive topic and you can’t say much but last time you talked about selling that asset and now it looks like you’re looking at a JV. Who should we be thinking about and why the shift? Can you give us any sense about the timing?

We’re hopeful that we’ll have something to announce in the near future. We continue to negotiate on that. Really, our goal going in was either to sell the properties – we’ve said before it’s a very good asset but we recognize that the development of storage and a long term project and it’s not something we have particular expertise in. Secondly, it’s going to take a lot of capital and as we’ve reviewed our three to five year plan we recognize that we have many other projects to spend our capital on. The joint venture part, really either a sale or joint venture was always our goal going in to the negotiations so it really hasn’t been a change in strategy. Either way, as we said, it’s a good asset and we just realize there are others who do this and we’re not in that business so that’s the reason we’re trying to make this sale of Fort Necessity.

I wouldn’t characterize it as a shift in our philosophy either. Essentially instead of taking our money out we’re just taking a portion of equity in the project representing our level of investment. As Bob said, the key is we’re not putting more money in the project and we’re going to continue to pursue execution of the documents to close the transaction. Jonathan Lefebvre – Wells Fargo Securities: Would you be a minority interest or would it be 50/50? Would you try to finance that at the Fort Necessity level?

Very minority. We’ve got $20 million in the project and it’s estimated to be priced out at considerably higher than that. Jonathan Lefebvre – Wells Fargo Securities: Then jus in terms of the acquisition markets, I was wondering if you could give us an updates there, what you’re seeing? If you’re any more or less optimistic on that front? If it’s still a focus?

Well, it is still a focus for us I think we will continue to look for good opportunities to grow. In recent times I think if you look back five or six years the prices that were being paid were just beyond what we thought we could compete with or should compete with. I think we see better opportunity in the market but we will continue to look for good opportunities particularly near our existing assets. But, we have nothing to report at this time but we’ll continue to talk and look. Our balance sheet is in good shape so that’s what we always try to do is be ready and be prepared and if a good opportunity comes up we’re able to take advantage of it.

Your next question comes from Barry Klein – Citigroup. Barry Klein – Citigroup: With regard to the Atmos Pipeline, you mentioned that increased competition, reduction in the electric demand in Barnett activity were to blame for the pretty significant volume declines. How much of that should we expect to come back and should we expect at least for the rest of the year and maybe going forward this sort of downward impact on volumes?

The increase competition is from additional pipes that have been put in to service recently. The basis spreads are down there flat basically all the way across and we don’t necessarily see those coming back any time soon. We think that that basis spread will stay down. We think the increased competition will stay out there and so we will lose some amount of throughput to that competition. As industrial demand begins to rise, we had a slight rise this time 4%, as we see that improving we will see margin of throughput increasing again. That will depend upon recovery in the economy and recovery of the industrial base. Barry Klein – Citigroup: Are lower volume numbers included in your guidance number, that $215 to $225 for the rest of the year or only for this quarter?

The rest of the year.

Back on slide 28 Barry, you’ll see the breakdown and regulated transmission and storage capture is the APT numbers. APT I think Fred captured it right, it’s all a function of the through system business and the decline there. This year we have stepped it down considerably, we’ve reduced our budget estimate to about $51 million from upwards of $62 I think. We started at $62 brought it down to $51 so everything is baked in for the rest of the year so they’re pretty confident we’ve got a good estimate in place right now. We don’t see the basis coming back this year at all. Whether it will be next year or the following year, at some point it will swing back but that portion of the business has been reflected in the annual budget numbers. Barry Klein – Citigroup: You mentioned 76% of the earnings are insulated, is that for all of Atmos pipeline? Is that basically your take or pay contracts firm transportation is about 76% of the earnings there?

That’s exactly the transportation that’s been affected by the reductions in the budget. So it’s the transportation we provide for producers in the Barnett Shale that are taking gas from the field to the interstate market. The $39 million represents the demand charges of the $51 million that we have budgeted. So, we’ve got $51 budgeted, we’ve got $39 million for sure. Barry Klein – Citigroup: $39 is sort of like for just a capacity that it is take or pay, right?

It’s demand charges for transportation. We consider take or pay for supply purposes and it’s $39 million for demand charges for just reserving capacity for moving the volumes. Barry Klein – Citigroup: Then, I’m not sure if I missed it but I think I heard a comment on the call about the marketing division how the unrealized margins during 1Q will be realized in the second quarter or did I miss hear?

That’s correct. Last year we realized all of that in the majority of our first quarter last year whereas this year where as this year we deferred storage withdrawals and rolled contracts and so we will see that coming in in the second quarter this year. Barry Klein – Citigroup: So is it fair to say or is this too simple to say that margins on top of whatever you realize normally in the second quarter will be up by above that $37 million in the second quarter or is that too simplistic?

If you’ll look at the economic value schedule that we have, we show that we have economic value of about $22.7 million and the vast majority, nearly all of that, will come in in the second quarter.

It’s $545 Barry.

Your next question comes from James Lykins – Hilliard Lyons. James Lykins – Hilliard Lyons: Just a follow up question to the last caller, is it possible that any of those unrealized gains could actually come in 2011 or will they all come in 2010?

They’re coming in in 2010 the vast majority. James Lykins – Hilliard Lyons: So the vast majority in 2010 and then also the vast majority in Q2?

Yes. James Lykins – Hilliard Lyons: So there will be some in 2011 but a small amount, is that correct?

Very small. James Lykins – Hilliard Lyons: Just a couple of quick follow up questions with Fort Necessity. I wonder if there are any potential incremental costs involved with that and also if you can give us any idea when you think, if everything goes okay with the negotiations with the JV, any idea when you think this could potentially come on line?

Well there aren’t any incremental costs on our side of the equation. We are not going to invest anymore in to it and the in service date is kind of moving around but from the time they would start the project or pick it up from where we left off it would probably be about a three year time line before the first cavern which would have a 5 bcf capacity would come on line. So, we’re looking at 2014 probably. James Lykins – Hilliard Lyons: 2014?

Is the sweet spot of the market probably with the storage would be more valuable.

Your next question comes from Paul Patterson – Glenrock Associates. Paul Patterson – Glenrock Associates: Just a quick follow up, I got sort of the picture of the pipeline, just on the Barnett shale drilling activity can you give us a little more flavor what your expectations are there longer term?

Well longer term obviously we’re very bullish like everybody else is on the drilling activity and most of that stems from the investments that were made by Exxon and Total to take interests out of XPL and Chesapeake. So you’ve got some very major players that are going to come in with some deep capital pockets and have quite a bit of their capital directed towards producing the field. So long term we are very, very excited about the opportunities that are presented in the Barnett Shale. We think it’s ahead of other shale plays that are out there now. Paul Patterson – Glenrock Associates: Where do you see that sort of taking place? I think you guys indicated that you now expect a little less activity and what have you. When do you expect that to turn around and can you just give us more of a flavor of what you’re seeing in the short term versus the long term?

I’d just say we continue to project gas prices at about the $6 to $8 range and I think if prices stay in that range producers are going to develop. It’s really our hope that they do because then all segments are healthy, producers can go ahead and drill, they can develop the shale for that price and I think we’ve got right now demands down a little bit nationally so that’s having an impact on the supply but I think in the next year to 18 months we expect things to pick up. Paul Patterson – Glenrock Associates: So basically it does shield demand and the drilling activity you expect to pick up but the basis differential for some time you expect to basically be not really changing very much.

I think it stays flat for a while. There’s been a lot of capacity that’s been built and when that capacity fills up that’s when basis will probably start reacting and spreads will become a little more – Paul Patterson – Glenrock Associates: How far in to the future do you see that happening?

Oh, golly.

Your next question comes from Ted Durbin – Goldman Sachs. Ted Durbin – Goldman Sachs: Coming back to the marketing, I guess I was just a little surprised that you kept your guidance where it was given on that adjusted basis it looks like the first quarter was down a lot from sort of the first quarter last year. The economic value is kind of at the same level it was last year and you did about $20 million in the segment there so maybe just a little more detail on how you think you’re going to get to the numbers for the full year for ’10?

Well again last year we recognized or realized those gains in the first quarter where this year in that piece of the business we elected to defer storage withdrawals and we rolled those contracts forward and so we will see that coming in in the second quarter and it is nearly all the economic value you see, the $22.7 million, nearly all of that comes in second quarter. We believe that will happen, some of it is already happening and so it is just movement from one quarter to the next in our view.

I think we are also getting some healthy pickups on the utility side with the distribution business. This cold weather is helping throughput. As Fred indicated, we saw a 7% increase in throughput on the utility division and that has helped significantly and we are also continuing to experience pretty cold weather. We had a very good January because when it was cold it was cold and when it was warm it was warm and that’s what we like. February we’ve started out cold in quite a bit of our service territories. The thing that we have to remember is that we’re very geographically diverse so we can take advantage of weather patterns as they move across the country. Ted Durbin – Goldman Sachs: I had just a couple of things on the utility side then. The 10.4 ROE for [inaudible] is definitely a nice bump up from the 9.6 that you negotiated. Would you go back in to the settled cities now and sort of say, “Hey, here’s what the Railroad Commission did. We want to reset rates.” Or, d you stay in your current plan at a 9.6 and then maybe renegotiate after the three year deal expires or how are you thinking about that?

There’s no reopeners but we’re obviously engaged in discussion right now relating to the extension of that mechanism because it does term out and so consequently we have already commenced those discussions and people are very mindful and aware that return is an item that is on the table for discussion and the action by the Commission certainly provides a lot of support and recognition by regulators that a return north of 9.6 is something that is necessary to be competitive to attract capital in today’s market. So we’re very, very optimistic and as Bob said we expect to continue to extend the settlement mechanism. Ted Durbin – Goldman Sachs: Then just a small thing, you side you had $7.6 million decrease in revenue related taxes but then your taxes other than income taxes were only down something like $1.6 million, I thought they would move a little closer together. Is there some sort of reason for the mismatch there at the utility?

They don’t match up exactly dollar for dollar on the dollar in and dollar out. There is some timing that occurs there. As you know we are getting that more in line in recent times and I have included schedules I think in some of the appendix we have with our slide deck showing that information. Over time they are getting closer to a dollar in dollar out and if you look at slide 42 it will show you the effect of the timing on that.

There are no further questions at this time. I would like to hand the floor back over to Susan.