Atmos Energy Corporation (ATO) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to Atmos Energy Fourth Quarter 2015 Earnings Conference Call.\ At this time all 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. It is now my pleasure to turn the conference over to your host, Susan Giles, Vice President, Investor Relations. You may begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us. Our speakers this morning are Kim Cocklin, CEO, and Bret Eckert, Senior Vice President and CFO. There are other members of our Leadership Team here to assist with questions as needed. Our earnings release and conference call slide presentation are available on the website, and to access these materials, please visit our website at AtmosEnergy.com. We will refer to just a few of slides during this live call, but we are happy to take questions on any of them at the end of our prepared remarks. Also, we expect to file a Form 10-K tomorrow. 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 25 more information regarding the risks and uncertainties we consider in making these forward-looking statements, and where to go to get more information about them. Now, I'd like to turn the call over to Kim Cocklin.

Thank you, Susan, very much, and good morning, everyone. We certainly appreciate you joining us and your continued interest and investment in Atmos Energy. Yesterday, we recorded earnings of $3.09 per diluted share for fiscal '15, representing the 13th consecutive year of increasing earnings per share. Our performance continues to reflect the successful execution of our strategy with the goal of becoming the nation's safest utility. And our journey to safety has required and will continue to require a significant capital investment, as well as a strong partnership, built on relationships with our regulators and the communities and customers we serve. Finally, it requires exceptional employees who are well-trained and take pride in rendering an essential safe service. Since commencing our journey to safety in our fiscal 2012, we've invested about $2.7 billion in safety and reliability, which has fortified and significantly upgraded our distribution and transmission system. The investments are only possible because of again, the good relationships that have been achieved with the communities we serve and the regulators who recognize the critical need to balance the interests of consumers and businesses like Atmos Energy. While safety is a primary goal of our strategy, shareholders have also benefited with the total return during fiscal 2015 of 25.5%, and since 2012, a total return of 106%. As a result of this strong performance, our Board of Directors authorized a 7.7% increase to our quarterly dividend. The fiscal '16 indicated dividend rate is now $1.68, an increase of $0.12. This is the 32nd consecutive year of increasing the dividend. The increase reflects our commitment to providing an attractive return to our investors, while continuing to execute our growth strategy by reinvesting capital in our system. Additionally, our liquidity, financial position, and balance sheet remain strong. In September, we replaced our revolving $1.25 billion credit facility with a new facility effective through September 2020 on substantially the same terms. The credit facility also retained the $250 million accordion feature that expands our borrowing capacity to $1.5 billion. At the end of September, we had almost $1 billion of capacity from our short-term facilities, and our debt to capital ratio at September 30, 2015 was 47.7%. Finally, I want to comment on the recent promotions we announced for the management committee and senior leadership team. Mike Haefner has moved from his role as Executive Vice President, to the President and Chief Operating Officer, effective October 1. Mike will be with us and present at the analyst day later this month. A very important responsibility of the Board of Directors is to ensure a succession plan that exists which is seamless, transparent, and continues the successful growth of the company. Any successful succession plan is also one that is controlled by the Company, one is that is not required by poor performance, poor health or financial distress. Our plan has been very deliberate and carefully considered, and reflects the Board's confidence that it will be successful. Mike has been within a Senior Leadership role for seven years, and is now responsible for all the businesses in our portfolio, the pipeline, and the utility, and the marketing company. We also appointed Marvin Sweetin to the new role of Senior Vice President of Safety and Enterprise Services. We recognize our business, being a utility, totally depends on being safe, and the primary mission of our existence is safety. The straw that stirs the drink is safety. Without safety, every other metric is severely crippled, negatively impacted, and without merit. Federal and state regulations will continue to be issued and clarified, and compliance will become more challenging. Over 80% of our capital is spent on safety. We have to elevate our game, and we have, with this new senior management position, reporting to the CEO and with a seat on the management committee. Marvin brings the background, the experience and education necessary to make this position successful. Fiscal '15 was a remarkable year on many accounts, and our financial performance followed. Bret Eckert, our CFO, will review the financial results in greater detail, and then we'll return for closing comments and questions. Bret?

Thank you, Kim and good morning, everybody. My remarks will primarily focus on the full-year results. Slides 3 and 4 detail reported net income and income excluding net unrealized margins for the three and 12-month periods of fiscal years 2015 and 2014. Reported earnings were $315 million or $3.09 per diluted share this year, compared with $290 million, or $2.96 per diluted share last year. Earnings excluding unrealized margins were $316 million, or $3.10 per diluted share in fiscal 2015, compared with $284 million, or $2.90 per diluted share in fiscal 2014. Also, fiscal 2015 earnings included the impact of colder than normal weather of $4.8 million, or $0.05 per share compared with $17.1 million, or $0.17 per share in fiscal 2014. Consolidated results for the year benefited from rate outcomes implemented in fiscal 2014 and 2015, and weather that was 8% colder than normal. Overall, spending levels for maintenance and capital activities were in line with expectations. We continue to execute on our long-term strategy of enhancing the safety and reliability of our infrastructure, coupled with constructive regulation in our service areas. Slides Five and Six provide financial highlights for our regulated operations for the three and 12-month periods. The execution of the regulatory strategy continues to drive our financial performance. Rate increases had a positive effect during the year, lifting distribution gross profit by about $71 million, and regulated pipeline gross profit by another $47 million. For the year, the annualized operating income increases from rate activity implemented during fiscal 2015 was $92 million. Slides Seven through 15 provide more detail on our rate filings in fiscal 2015. Our non-regulated operations continued its focus on the delivered gas business and represented about 5% of consolidated earnings this year, which is in line with their expected contribution level. Details on our non-regulated segment can be found on slide 16. Shifting now to the expense side of the income statement, as expected, O&M increased by about $18 million in the quarter and $37 million in fiscal 2015. In both periods, we experienced anticipated higher levels of pipeline maintenance expenses. In addition, we experienced increased employee-related costs. Interest charges decreased by $13 million for the year, primarily due to replacing the $500 million of 10-year debt with $500 million of 30-year debt at a lower rate back in October of 2014. As we anticipated, capital expenditures increased by about $140 million this year to $975 million. Over 80% of the capital expenditures were associated with safety and reliability spending, and we will be earning on over 90% of capital expenditures within six months of test year end. Moving now to our earnings guidance for fiscal 2016, we have announced our fiscal 2016 earnings per share guidance of $3.20 to $3.40 per diluted share, excluding unrealized margins. Slides 19 and 20 detail our net income and expense projections for fiscal 2016. The midpoint of fiscal 2016 guidance represent an 8.2% earnings per share growth rate from the weather-adjusted 2015 earnings of $3.05, excluding unrealized margins. All of our growth in fiscal 2016 is expected to be driven by our regulated operations. We project regulated operations to generate net income in the range of $315 million to $335 million. We continue to expect constructive rate outcomes to be the primary driver of next year's results, and we anticipate receiving annualized increases from implemented rate activity in fiscal 2016 of between $100 million and $125 million. Our non-regulated business is expected to remain flat relative to fiscal 2015 levels, and generate net income in the $14 million to $19 million range, driven by its core delivered gas business. Non-regulated earnings are expected to contribute 5% or less of consolidated earnings in 2016. Consolidated net income for fiscal 2016 is expected to range between $329 million and $354 million, and average diluted shares are expected to range from 103 million to 105 million shares. O&M expense is projected to range between $535 million and $560 million, with a continued emphasis on pipeline maintenance spending. Additionally, our budget assumes normal weather. Other assumptions are detailed on slide 20. Slide 23 details our capital budget and its expected range of between $1 billion and $1.1 billion in fiscal 2016. This will allow us to continue our focus on systems safety and infrastructure spending, to fortify our natural gas delivery system. Thank you for your time, and now I'll hand the call back to Kim.

Thank you, Bret, what a report and what a year. By all measures, it was an excellent year and history is going to be very, very kind to Atmos when we look back on this year. Our performance and the execution of our strategy continues to build credibility and trust with our key constituents, regulators, customers, employees and shareholders. We were among the first to recognize by partnering with our regulation communities and taking advantage of very favorable market conditions that we could significantly increase capital investments to improve the safety of our system and services, and grow shareholder value. We continue to have the wind at our back like others in this business, as commodity prices remain low, and reliable forecasts continue to identify long-term prices that will remain extremely competitive and affordable to customers from an abundant supply of available natural gas. We believe these market conditions will allow us to continue to render very safe and reliable service at a competitive price. Our strategy of investing in the safety and reliability of our system is the highest and best use of our capital. These capital investments are projected to grow rate base by 9% to 10%, earnings per share by 6% to 8% on an annual basis, and provide a projected total return to shareholders of 9% to 11%. I know we sound like a broken record, but it can't be repeated often enough in today's challenging economy and volatile stock market. We continue to improve on our daily trade volume, our stock price and our market capitalization. We're getting out and we're sharing our growth strategy at every opportunity to support this journey to safety. We continue to have a very solid plan through Thank you, Bret, what a report and what a year. By all measures, it was an excellent year and history is going to be very, very kind to Atmos when we look back on this year. Our performance and the execution of our strategy continues to build credibility and trust with our key constituents, regulators, customers, employees and shareholders. We were among the first to recognize by partnering with our regulation communities and taking advantage of very favorable market conditions that we could significantly increase capital investments to improve the safety of our system and services, and grow shareholder value. We continue to have the wind at our back like others in this business, as commodity prices remain low, and reliable forecasts continue to identify long-term prices that will remain extremely competitive and affordable to customers from an abundant supply of available natural gas. We believe these market conditions will allow us to continue to render very safe and reliable service at a competitive price. Our strategy of investing in the safety and reliability of our system is the highest and best use of our capital. These capital investments are projected to grow rate base by 9% to 10%, earnings per share by 6% to 8% on an annual basis, and provide a projected total return to shareholders of 9% to 11%. I know we sound like a broken record, but it can't be repeated often enough in today's challenging economy and volatile stock market. We continue to improve on our daily trade volume, our stock price and our market capitalization. We're getting out and we're sharing our growth strategy at every opportunity to support this journey to safety. We continue to have a very solid plan through Thank you, Bret, what a report and what a year. By all measures, it was an excellent year and history is going to be very, very kind to Atmos when we look back on this year. Our performance and the execution of our strategy continues to build credibility and trust with our key constituents, regulators, customers, employees and shareholders. We were among the first to recognize by partnering with our regulation communities and taking advantage of very favorable market conditions that we could significantly increase capital investments to improve the safety of our system and services, and grow shareholder value. We continue to have the wind at our back like others in this business, as commodity prices remain low, and reliable forecasts continue to identify long-term prices that will remain extremely competitive and affordable to customers from an abundant supply of available natural gas. We believe these market conditions will allow us to continue to render very safe and reliable service at a competitive price. Our strategy of investing in the safety and reliability of our system is the highest and best use of our capital. These capital investments are projected to grow rate base by 9% to 10%, earnings per share by 6% to 8% on an annual basis, and provide a projected total return to shareholders of 9% to 11%. I know we sound like a broken record, but it can't be repeated often enough in today's challenging economy and volatile stock market. We continue to improve on our daily trade volume, our stock price and our market capitalization. We're getting out and we're sharing our growth strategy at every opportunity to support this journey to safety. We continue to have a very solid plan through 2020, which we look forward to discussing at our upcoming Analyst Meeting. We appreciate your time this morning, and we're certainly ready to take any questions. Rob?

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Charles Fishman with Morningstar. Please proceed with your question.

Good morning. O&M, on regulated pipeline, was up significantly 2015 over 2014, and I realize you just gave guidance for O&M of all the regulated operations for 2016, but it looked sort of flat. I look at the footnotes, a little over $27 million in the increased maintenance, higher employee-related expenses. Can I assume a lot of that was the incentive payments, at least in 2015, just because you had such a terrific year?

Well a portion of that was, but really the bigger driver, and it was anticipated, was the continued spending at the pipeline for increased pipeline integrity maintenance work. That's federal and state pipeline safety compliance work. The regulations continue to get stronger every single year, and that plans compliance for items such as integrity management smart digging, hydrostatic testing, you're doing right of way maintenance, and that's going to continue to be an area of focus for the pipeline in 2016.

And that is not capitalized just because that's a step up in preventative maintenance, that's ongoing annual type O&M?

It's just recurring annual maintenance, the pegging of the pipe and things of that nature is expense, the facilities, the launchers and things of that nature, that would be a capital item -- but the process of pegging or hydrostatic testing or right of way clearing is all maintenance expense.

And I assume all that's recognized in the rate cases?

Correct.

Okay. Thank you. That was it.

Our next question is from Brian Russo with Ladenburg Thalmann. Please proceed with your question.

Hi. Good morning.

Good morning, Brian.

Just curious, the debt to cap ratio of 47.7%, looking forward, will we see that trend higher or lower through retained earnings and the issuance of more debt?

Yes. Good question. We're going to be -- we've got our analyst day on the 18th of November. We will be announcing our spending levels. Right now our plan goes through 2018, we're going to be announcing the spending levels through 2020, and we'll update the earnings per share growth rate through 2020, and we'll put out guidance for fiscal year 2020, and we'll also talk about how we're going to fund that growth over that period.

Okay. Great. I'll wait for that. I realize you've got well above average and robust rate based growth of 9% to 10% but I'm just curious, could you possibly increase your multi-year CapEx more than the level it is now, without having to issue equity and without having customers experience rate shock?

One of the things we'll update when we come up with our updated five-year plan is the slide that we have in our deck currently that talks about the impacts to the customer, and we'll run that through 2020, and I think you will continue to see that we're able to make these levels of investments to fund it in a balanced way and to not have an impact on the customer.

Got it. Are there any other refinancing opportunities over the next couple of years?

The next expiring tranche debt is our June of 2017, senior notes, $250 million. We do have a forward starting swap that has fixed that rate, and then the next expiring tranche is March of 2019 $450 million senior note.

Okay. Got it. Thank you very much.

[Operator Instructions] There are no further questions. At this time, I would like to turn the call back over to Susan Giles.

Thank you, Rob, and I just want to remind everyone that a recording of this call is available for a replay on our website through February 3. We appreciate your interest in Atmos and thank you for joining us. Goodbye.