DALLAS Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Atmos Energy Corp earnings conference call or presentation Thursday, August 6, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Susan Giles Atmos Energy Corporation - VP of IR * Kim Cocklin Atmos Energy Corporation - President & CEO * Bret Eckert Atmos Energy Corporation - SVP, CFO ================================================================================ Conference Call Participants ================================================================================ * Brian Russo Ladenburg Thalmann & Company Inc - Analyst * Charles Fishman Morningstar - Analyst * Spencer Joyce Hilliard Lyons - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Atmos Energy FY15 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 of Investor Relations for Atmos Energy. Thank you, Ms. Giles, you may begin. -------------------------------------------------------------------------------- Susan Giles, Atmos Energy Corporation - VP of IR [2] -------------------------------------------------------------------------------- Thank you, Devon. Good morning, everyone, and thank you for joining us. 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 to assist with questions as needed. Our earnings release, conference call slide presentation, and our Form 10-Q as filed last night, are available on our website at atmosenergy.com. We will refer to just a few of the slides during this live call, but we'll take questions on any of them at the end of our prepared remarks. 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 Securities Exchange Act. Please see slide 21 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 our President and CEO, Mr. Kim Cocklin. Kim? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thank you very much, Susan, and good morning, everyone. We certainly appreciate you joining us this morning, and your continued interest in our Company, Atmos Energy. Yesterday as you are aware, we reported third-quarter consolidated net income of about $56 million or $0.55 per diluted share. For the first nine months of FY15, reported consolidated net income was about $292 million or $2.86 per diluted share. The Company's performance during the quarter offers yet another confirmation that our long-term strategy to grow by investing in the safety and reliability of our regulated infrastructure continues to generate consistent operational and financial results. As a result, we are pleased to increase our FY15 earnings guidance to a range between $3.00 to $3.10, from a previously announced of between $2.90 and $3.05 per diluted share. Bret will provide a little bit more color around that in his remarks. The execution of our strategy has also allowed us to strengthen our financial position, and this was recognized by Fitch when they upgraded our long-term debt rating to A from A minus on July 1. Our debt capital ratio at June 30 was 45.5%, and our liquidity remains strong, with over $1 billion of capacity available from our credit facilities. Yesterday, our Board declared our 127th consecutive quarterly cash dividend. The indicated annual dividend rate for FY15 is $1.56 per share. We're going to turn the call over to our CFO, Bret Eckert, for a more detailed discussion of the results. Bret? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [4] -------------------------------------------------------------------------------- Thanks, Jim, and good morning, everyone. Slides 2 and 3 detail reported net income, and income excluding net unrealized margin for the three and nine month periods of FY15 and FY14. Excluding earnings -- earnings excluding unrealized margins for the current three months were $55 million or $0.54 per diluted share, versus $46 million or $0.45 per diluted share in the prior year quarter. Earnings excluding unrealized margins for the current nine months were $287 million or $2.81 per diluted share, compared with $259 million or $2.69 per diluted share last year. Remember last year's nine month results included the favorable impact of significantly colder than normal weather. Slides 4 and 5 provide financial highlights for our regulated operations. In the current quarter, rate increases lifted distribution gross profit by $16 million, and about $62 million for the current nine months. At APT approved GRIP filings in FY14 and 2015 lifted margins by over $9 million in the quarter, and $37 million for the nine months. However, period over period results in our distribution segment were negatively impacted by weather that was 31% warmer than the prior year quarter, and 9% warmer than the prior year nine months. This reduced gross profit by about $1 million for the quarter, and $9 million for the nine-month period. Our non-regulated segment is detailed on slides 15 and 16. Delivered gas margins increased in both the quarter and year-to-date periods, driven by stronger per unit margin, offset by a slight decrease in delivered gas volumes. Other margins decreased about $3 million in the quarter, and $17 million in the current nine months, as less volatile market conditions created fewer opportunities to capture incremental gross profit, compared to the same periods one year ago. Shifting now to the expense side of the income statement, O&M increased by about $7 million in the quarter, and about $18 million for the current nine months. As we expected, both periods experienced higher levels of pipeline maintenance and right-of-way expenses, despite a very wet spring that impacted the amount of maintenance that could be performed. We do anticipate these maintenance expenses to continue and accelerate in the fourth quarter as the weather dries out. In addition, the current quarter saw increased employee-related costs associated with the timing of the recognition of higher variable incentive compensation expense, as a result of increased operating results. These increases were partially offset by lower legal expense. Interest charges decreased by $4 million in the quarter, and about $10 million for the nine months, 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. Details of our capital spending are presented on slide 6. Over 80% of our capital expenditures were associated with safety and reliability spending. As we anticipated, CapEx increased by about $115 million in the current nine month period compared to one year ago. Moving now to our earnings guidance for FY15, and you may want to turn to slide 18, where we've detailed our revised contributions from our regulated and non-regulated operations, as well as selected expenses for the year. As Kim mentioned, we have tightened and slightly increased our earnings guidance range for FY15, with earnings per diluted share now expected to range from $3.00 to $3.10, excluding unrealized margin. We now project regulated operations to generate net income in the range of $290 million to $305 million, and non-regulated operations to generate net income in the range of $14 million to $18 million. The updated guidance primarily reflects stronger than anticipated consumption in our distribution segment. This increased consumption levels, not only reflect the impact of colder than normal weather experienced during the winter heating season, but also higher than anticipated residential and commercial consumption levels following the winter heating season. We also expect higher realized non-regulated gross profit, as a result of the improved delivered gas performance. Consolidated O&M expense is now expected to range from $525 million to $535 million, driven by increased regulated pipeline maintenance activities, and higher employee-related variable incentive compensation expense. Turning to slide 28, we now anticipate the annual operating income impact for rate outcomes implemented in FY15 to range from $85 million to $95 million. This is slightly different than our original projection, largely due to increased customer consumption experienced in the prior fiscal year. As a result, test period revenues were higher, which reduced the size of requested rate increases. Thank you for your time. And now, I'll hand the call back over to Kim. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [5] -------------------------------------------------------------------------------- Thank you very much for that report, Bret. Our performance again confirms that what we're doing is working. We're experiencing very good results all around, both operationally and financially, as we strive to become the nation's safest gas utility. We have fostered good relationships with our regulators, who are tasked with balancing the needs of consumers and businesses like Atmos Energy, and we've also built an established a partnership with them, as well as our customers, employees in the cities we serve. Our regulated operations, as Bret said, continue to provide stable and predictable earnings for the enterprise. As of August 5, rate outcomes and incremental deferrals have provided annual operating increases of about $87 million thus far in FY15. Rate actions that are filed and pending total about another $9 million of requested annual operating increases. We expect to file another three to four cases this fiscal year that combined, that would request anywhere from $15 million to $20 million of additional increases to operating income. As you are well aware, safety is our number one priority, and it does require significant investment, both capital and expense. As gas prices remain low the foreseeable future, the price dynamic continues to facilitate the investment we're committed to making. This year, we'll spend from $900 million to $1 billion of capital to fortify our system. You heard this before, we may sound like a broken record, or you might think you're watching the movie Groundhog Day, but we have been, and we'll continue to deliver on our promises and commitments. Investing in the safety and reliability of our system is the highest and best use of our capital. These capital investments should grow rate base by 9% to 10%, and earnings per share by 6% to 8% on an annual basis, and provide a projected total return to shareholders of between 9% and11%. In November, we will look forward to meeting with you, and communicating our refreshed five-year plan, which will provide projections through FY20. We certainly appreciate your time this morning. And now, we will take any questions that you have. Devon? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Brian Russo, Ladenburg Thalmann. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [2] -------------------------------------------------------------------------------- Hi, good morning. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [3] -------------------------------------------------------------------------------- Good morning, Brian. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [4] -------------------------------------------------------------------------------- Just in terms of the increased guidance, if you back into the EPS for the reg and non-reg, it looks like it's split fairly evenly, $0.05 on the -- of EPS increase on reg, and another $0.05 on the regulated side. Is that just -- is that sustainable? Or is it related weather, and it is not -- and shouldn't really recur? Meaning, is -- did the base earnings power $0.10 higher now than it was previously? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [5] -------------------------------------------------------------------------------- Well, as we had said last call, Brian, it's a good question. We expect weather to -- weather consumption to contribute about $0.04 to $0.06 to earnings in FY15. We talked about delivered gas business with a slight increase in their guidance, that really is driven by the delivered gas business. We've seen per unit margins strengthen. So we went into the year, expecting margins in the $0.10 to $0.11. You're seeing margins closer to the $0.11 to $0.12 range, and that's really what is causing the lift in that business. So we'll be coming out with guidance for FY16 after we -- as we announce our full-year results in November. But those are the main drivers, with the increase in earnings this year. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [6] -------------------------------------------------------------------------------- No, the increase in unit margins on the non-reg side, is that sustainable? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [7] -------------------------------------------------------------------------------- That is a good question Brian. I mean, we didn't experience that same performance last year for them, and this year we're seeing the trend increase for their margins, and we're also seeing an increased consumption on the regulated side of the business. So I think there is some traction that is being gained nationwide by the -- by energy consumers, that are recognizing that natural gas is an extremely good purchase, and it continues to lead the way. So we're seeing that -- they are seeing some of that in the industrial sector. But and the other thing is, that their delivered gas focus is continuing to emphasize, providing additional value to customers that are willing to recognize that value. So they are being -- they being the non-regulated group, are being a little bit more focused on the selection of who they are serving. And so, they are high-grading their customer base, which has translated, at least this year into those better margins that we are seeing. So we're going to continue to have that strategy of emphasizing service to customers that are recognizing the additional value they bring to the table, in terms of just all of the energy services that are available. And then, providing premium product in the form of natural gas that they're getting. And so, some folks are willing to pay up right now, because the competitive edge that gas brings to their product and their process. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [8] -------------------------------------------------------------------------------- Got it, okay. And then, just the -- it looks like you've got about a 55% equity ratio. Can you talk about, maybe the trends you see there. Is that a good target, or will that trend lower, as you raise debt to finance your CapEx? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [9] -------------------------------------------------------------------------------- We continue to say we're committed to growing, by the spending of $900 million to $1.1 billion through 2018 in a balanced form. And the 55% is a product of the equity issuance we did back in February of 2014. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [10] -------------------------------------------------------------------------------- Okay. And then just lastly, the upcoming regulated pipeline, TRC filing, I think it's for December 26, December 2016. Any -- could just you comment, what are the major drivers there, anything we should be aware of at this time? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [11] -------------------------------------------------------------------------------- Generally, there are no unusual drivers. It's going to be a typical rate case, with the focus on cap structure, on return, and on service levels and rates. But it won't be anything unusual. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company Inc - Analyst [12] -------------------------------------------------------------------------------- Okay, great. Thank you very much. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [13] -------------------------------------------------------------------------------- Thank you, Brian. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [15] -------------------------------------------------------------------------------- Spencer? We lost Spencer. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Charles Fishman, Morningstar. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [17] -------------------------------------------------------------------------------- Good morning. The variance on O&M which you attributed to the employee incentive plan, is that something -- you just recognize that in the third quarter? That's not ongoing, we won't see that next quarter, is that correct? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [18] -------------------------------------------------------------------------------- Yes, I mean, you recognize an incentive comp based on your initial targets. And then, with the revision of the guidance upwards, with earnings expected to come in higher, in the quarter in which you change that, is when we catch up on that higher level of expense. And so, this time, it got recorded in the third quarter. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [19] -------------------------------------------------------------------------------- Okay, got it. And then, the second question was, Bret, you made the comment your were experiencing higher consumption, following the heating season. I'd appreciate if you would add some color to that, or whatever you can say? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [20] -------------------------------------------------------------------------------- Yes, we've seen -- through the nine-month period, consumption higher than historical norms coming through. And so, you've always got consumption driven by weather. And then, you've just got the amount of consumption that a consumer would use on an average degree day. And we have seen that be higher than historical norms continuing through the first nine months of this fiscal year -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [21] -------------------------------------------------------------------------------- What do you think is going on (multiple speakers)? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [22] -------------------------------------------------------------------------------- Highlight what exactly is driving customer consumer consumption patterns, but we have seen higher consumption this year. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [23] -------------------------------------------------------------------------------- Charles, I mean, that is kind of a national -- nationwide circumstance. If you've looked at some of the statistics that are coming out. We looked at AGA statistics recently that came out last week or two weeks ago, and it indicated that there has been a reversal of the trend for a declining use of natural gas. And for the last two years running, there has been an increase in the consumption trend by residential customers. Again, I think it's the traction associated with our industry getting out a little bit, and promoting the competitiveness, and the abundance and the environmental qualities of natural gas. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [24] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [25] -------------------------------------------------------------------------------- And it's certainly competitive against other alternative fuel sources. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [26] -------------------------------------------------------------------------------- Okay, thank you for that. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [27] -------------------------------------------------------------------------------- It's good for the industry, and I think we're just experiencing it, because we're one of the biggest darn utilities on the planet (laughter). -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [28] -------------------------------------------------------------------------------- Okay. Thanks a lot. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- (Operator Instructions) Spencer Joyce, Hilliard Lyons. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [30] -------------------------------------------------------------------------------- Let's try this again. User error on my part, I apologize. -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [31] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [32] -------------------------------------------------------------------------------- Well, first mistake of the year for you (laughter). -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [33] -------------------------------------------------------------------------------- Well, I got to say, so keeping with the Bill Murray movies, it is clear that the Cinderella story continues to execute here. Nice quarter. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [34] -------------------------------------------------------------------------------- Darn right. What becomes of the brokenhearted is another one that comes to mind on, if you're not in the stock. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [35] -------------------------------------------------------------------------------- Yes, yes (multiple speakers). -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [36] -------------------------------------------------------------------------------- Try the four tops. What in the world -- what is the sector doing? -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [37] -------------------------------------------------------------------------------- It is flat-ish. It's mostly interest rates, I'd say. We're kind of drawing a tough comp, off where a lot of the stocks ended last year. But optimistic here, as we look towards the back half. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [38] -------------------------------------------------------------------------------- Oh yes, you've got to be long-term. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [39] -------------------------------------------------------------------------------- In any case, just one kind of high-level question from me. We are inching ever closer here, to the endpoint of the standing 2018 guidance, if you will. I know we're still a couple of years out, but can you talk about, any clarity that may be developing as we look towards the tips of the decade here? And potentially, when we could see you all, maybe roll that target out another year or two? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [40] -------------------------------------------------------------------------------- Great question, Spencer. We do plan in November, when we release earnings for FY15, to come out, an extend that plan to a full five years to 2020. We launched the plan -- updated the plan last in 2014 to 2018. We didn't want to get in the practice of rolling out another year, every year. So we kind of do it every two years. But we will put out a revised plan, an updated plan if you will, through 2020. We'll put guidance out there, a guidance range out there in 2020. As we've talked before, nothing magic happens in 2018. We continue to see the ability to invest at these levels, enhancing the safety and reliability of our system. So expect that in our Analyst meeting in November. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [41] -------------------------------------------------------------------------------- Yes, perfect. We will eagerly await that rollout there. Again, a good quarter and nice year, shaping up to be a good one. That's all I had. -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP, CFO [42] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President & CEO [43] -------------------------------------------------------------------------------- Thanks, Spencer. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- There are no further questions at this time. I'd like to turn the floor back over to management for closing comments. -------------------------------------------------------------------------------- Susan Giles, Atmos Energy Corporation - VP of IR [45] -------------------------------------------------------------------------------- Thank you, Devon. I just want to remind you all, a recording of the call is available through November 4, and I'm here all day, if you have any additional questions. Thank you so much for joining us. Good-bye.
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