Atmos Energy Corporation (ATO) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Atmos Energy Fiscal 2013 Third Quarter Earnings 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, 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 our website that summarize our financial results. We will refer to a few of the slides during the call and we'll 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'd like to turn the call over to Kim Cocklin. Kim?

Thank you, Susan, very much, and 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 9 months, reported earnings were $2.57 per share compared with $2.28 last year. As you recall, we've 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 9 months, we remain on track to achieve our previously announced earnings guidance of between $2.45 and $2.55 per diluted share, excluding the March 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 '13 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've delivered a total return to shareholders of 22%. Our CFO, Bret Eckert, will review our financial results in greater detail, then we'll return for closing comments and take your questions. Bret?

Thanks, Kim, 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 1 year ago. Now turning to the 9 months 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 a primary driver of our success in the distribution business. Looking now on Slide 5 for the current quarter and 9-month period, distribution gross profit increased by $44 million in the quarter and about $15 million to the 9 months compared to the same period 1 year ago. The increase this quarter is primarily a 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 of 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 to 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 intrastate pipeline and storage operations, Atmos Pipeline Texas, generated $7 million of incremental margin quarter-over-quarter and about $15 million in the current 9-month period, reflecting the impact of our 2012 and 2013 GRIP filing. On May 7, the Texas Railroad Commission approved the 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 7. And finally, as detailed on Slide 13, our regulated businesses completed rate proceedings this fiscal year to date, which should result in a $98 million increase in annual operating income. Turning now to our nonregulated operations, and 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 9-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 physical to 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 and the 9-month period, mainly due to lower per-unit margins in the current periods compared to 1 year ago. Consolidated sales volumes rose by 3.7 Bcf quarter-over-quarter but decreased 4.6 Bcf in the 9 months. Our nonregulated business had 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. O&M for the quarter increased about $15 million and increased by $9 million in the current 9-month period. Both periods experienced rising costs associated with higher employee, legal and other administrative costs, increased demand for line locates in the DFW Metroplex and higher pipeline and right-of-way maintenance activities. Interest charges were about $2 million lower this quarter and about $11 million lower for the current 9 months as a result of interest deferrals 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 assets. Let me draw your attention to Slide 17 and 18 where we set out 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 jurisdictions of between $25 million to $30 million higher than Q4 of last year, it's important to remember that the fourth quarter is historically a loss quarter, which will affect our other 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've accelerated pipeline and right-of-way maintenance activities in our regulated operations to further enhance safety and reliability. Line locate expense is on the rise. We've seen an increase in construction, which is driving the 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 that 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 see, we continue to successfully execute our rate and regulatory strategy. Year-to-date, completed rate proceedings, as Bret said, have increased operating income by $98 million. We've also added regulatory expense deferrals of another $24 million, resulting in an increase of about $122 million in annual operating income. We have 6 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're also constantly striving TO strengthen our regulatory relationships. In particular, our regulators recognized 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's an increased emphasis on all of these policies. The best evidence of last month's revolution -- 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're 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 2 1,500-horsepower compressors to move gas to multiple interstate and intrastate pipelines in West Texas near the Permian Basin shale play. Capital expense for this project is approximately $19 million. We 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 nonregulated operations will continue to focus on the delivered 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 '16. 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 '16. Our story remains consistent and transparent. We're enhancing the safety and reliability of our system for the 3 million customers we serve. We aspire to be the industry leader in safety and training. We're committed to increasing and sustaining shareholder value. We're focused on growing earnings on a 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 of Goldman Sachs.

Maybe I can start with a little bit more of a near-term look here on 2014. I'm sure you're working through the budget as we're coming close to the end of this fiscal year. The -- but just in terms of the 2014, kind of how the budget's looking there in terms of the CapEx but also the amount of rate activity, are we sort of still looking at $800 million of CapEx for '14? And then looking for $90 million to $110 million of rate activity next year as well or just kind of how that's shaping up right now?

Well, we know that we're going to invest the $800 million or thereabouts on the capital side of the business. What about the rate outcomes? I don't -- we haven't looked at the rate outcomes, but we're going to -- I mean the growth is going to continue to be at the 8%, 8.5% for rate base by '16. I mean, all of the assumptions haven't changed that we've talked about through the '16 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 '14 and announce capital budgets and everything. But everything seems -- everything's on track. If nothing that's changed -- if anything, we're having much more faith and confidence on our ability to deliver and sustain the commitments that we made, Ted.

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

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

Okay, that's great. And then if I can just ask about the pipeline itself, and realizing that there's obviously support from some of the regulators on the investments. But you do have some of the projects, your major projects, you mentioned Line X is rolling off here at the end of December. Do you have some other larger-scaled projects in the hopper that we should think about again for '14? Or is it going to be more of the smaller type of projects and smaller spending in the pipeline business?

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

Got it. And then last one for me is just on the dividend here and realizing you are spending a lot of capital, but how you're thinking about the dividend going into the next year, and the payout ratio versus sort of obtaining some cash to reinvest in the business?

We understand where we are relative to our peers and, obviously, there's a significant appetite for capital right now, the highest and best use. And we think for the return to the shareholder is on the capital side of the business, but we're 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's another front burner issue.

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

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 kind of the materiality of those increases? I mean, historically, you have current $98 million increases.

You are talking about the $36 million that are pending, $36 million that's pending?

Yes. Are any of those effective in the -- fiscal period?

No, nothing will be effective in this fiscal period. I think there's a slide on the details of that though. No, all of those would be dropping in next year, '14 so you get a partial year effect in '14. You'd see a full effect in '15. And 2 -- the biggest 2 pieces are the Kentucky rate case and the Mid-Tex RRM.

Yes, but the Mid-Tex was $17 million? The Kentucky is like 7 -- about $13 million.

[Operator Instructions] Our next question comes from the line of Spencer Joyce with Hilliard Lyons.

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 sort of phase 1 of the refocus as mostly complete here?

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

Fair enough, fair enough.

No, 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're 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 '13?

I think you're going to see -- there's a lot of construction going on in our service areas. And so the extent that, 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's a little bit more driven by development in the service areas we serve.

Look, I mean, also I think it points out the fact that we're 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. So it's really a very, very positive sign for our jurisdictions in the economies, the health of the economies where our customers are situated, Spencer.

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

Thank you and I just 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.