DALLAS Jun 16, 2015 (Thomson StreetEvents) -- Edited Transcript of Atmos Energy Corp earnings conference call or presentation Thursday, May 7, 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 and CEO * Bret Eckert Atmos Energy Corporation - SVP and CFO ================================================================================ Conference Call Participants ================================================================================ * Brian Russo Ladenburg Thalmann & Company - Analyst * Charles Fishman Morningstar - Analyst * Spencer Joyce Hilliard Lyons - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Atmos Energy FY15 second quarter 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. I will now turn the call over to your host, Ms. Susan Giles, Vice President of Investor Relations. Thank you. You may begin. -------------------------------------------------------------------------------- Susan Giles, Atmos Energy Corporation - VP of IR [2] -------------------------------------------------------------------------------- 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 that was filed last night 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. 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 20 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 these 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 and CEO [3] -------------------------------------------------------------------------------- Thank you very much, Susan, and good morning, everyone. We certainly appreciate you joining us on the call this morning and your continued interest in Atmos Energy. Yesterday we did report second quarter consolidated net income of about $138 million, or $1.35 per diluted share, and for the first six months of our FY15, reported consolidated debt income was about $235 million or $2.31 per diluted share. Our financial results reflect the continued successful execution of our strategy, which we began 3.5 years ago to grow by investing in our regulated assets. Our strategy continues to be very simple, consistent, and transparent. We're on track to invest this year between $900 million to $1 billion of capital into the regulated assets as we strive to become the nation's safest utility. Our strategy to grow by infrastructure investment was first implemented at the beginning of our FY12 year. Since then our total return to shareholders through March 31, of 2015, has been 92.7%. The successful execution of our rate and regulatory strategy has continued to enhance the safety of our system and reliability of our services. Our regulators continue to support and encourage this goal to become the nation's safest utility by providing us balanced rate treatment and very progressive regulatory policies. The rate impact of the investment on residential customer bills remains very acceptable due to the continued low nature of natural gas prices and the exceptional performance of our gas supply management team. Rate relief for our regulated distribution and pipeline operations combined generated about $41 million of margin in the current quarter, and $73 million of margin for the current six-month period. Our liquidity and financial position, as Bret will discuss, remains very strong. Our debt capitalization ratio at March 31 was 46.1%, and our liquidity remains strong with over $1 billion of capacity available from our facility. Yesterday our Board declared our 126th consecutive quarterly cash dividend. The indicated annual rate for FY15 is $1.56. I'm going to turn the call over now to our CFO, Bret Eckert, for a more detailed discussion of the results. -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [4] -------------------------------------------------------------------------------- Thanks, Kim, and good morning, everyone. Slides 2 and 3 detail reported net income, and income excluding net unrealized margin, for the three and six-month periods of FY15 and FY14. As Kim mentioned, reported earnings for the second quarter of FY15 were $138 million, or $1.35 per diluted share, compared with $133 million, or $1.38 per diluted share one year ago. Excluding unrealized margins, earnings in the current quarter were $1.36 per diluted share, versus $1.37 per diluted share last year. On slide 3 you can see reported earnings were $2.31 per diluted share, compared with $2.34 last year. If you eliminate the unrealized gains in both years, earnings per diluted share were $2.27 this year, compared to $2.26 one year ago. Increased gross profit from regulatory outcomes, and the favorable impact of colder than normal weather, more than offset the effect of weather that was warmer than the prior year and the increased levels of pipeline maintenance spending. Slides 4 outlines gross profit in our regulated distribution business. Rate increases lifted distribution gross profit by $26.1 million in the current quarter, and $45.4 million for the current six months, reflecting the infrastructure improvements made during the last 12 to 18 months. Additionally, results for the current quarter and current six months benefited from weather that was 15% colder than normal for the quarter, and 10% colder than normal for the current six months. However last year weather was 20% colder than normal in both periods. As a result to the warmer weather versus the year-ago, distributions gross profit was $6 million lower in the quarter, and $8 million lower for the six months compared to the same period one year ago. Customers in our regulated distribution operation benefited from weather normalization riders, which returned approximately $22 million to customers in the first six months of FY15 versus $35 million returned in FY14. Slide 5 details gross profit in our regulated intrastate pipeline, APT, for the three and six-month periods. Increases from APT's annual GRIP filing increased rates by $15.3 million in the quarter, and $27.8 million for the six months, from the filings approved in 2014 and 2015. Our Nonregulated segment is detailed on slides 14 and 15. Gross profit decreased $14.7 million in the quarter, and $17.2 million for the current six months in our nonregulated segment, primarily due to lower realized margin. The decreases in both the current periods reflect the absence of gas price volatility experienced last year. In the prior period, strong market demand caused by the extreme cold weather, resulted in the acceleration of physical withdraws to capture gross margin. However, realized margins for gas delivery and related services increased by $5.4 million in the quarter, and $3.7 million in the current six months. Deliveries of natural gas decreased 12% in the quarter, and 8% in the current six months, reflecting the impact of fewer deliveries to power generation customers and other marketers as a result of the warmer weather during the current period compared to a year ago. However, in the prior year quarter, we incurred losses to meet peaking requirements to certain customers, which did not recur in the current year. As a result, per unit margins increased in both periods from $0.09 to $0.15 per Mcf in the quarter, and from $0.10 to $0.12 per Mcf in the six-month period. Turning now to the expense side of the income statement, O&M increased by about $9 million in the quarter and $12 million for the year-to-date period, mainly due to higher levels of pipeline maintenance, right of way and legal expenses, partially offset by lower incentive compensation expense compared to the prior period. As expected, interest charges decreased by about $4 million in the quarter, and by about $6.5 million in the current six months, primarily due to replacing the $500 million of 10-year debt at an interest rate of 4.95%, with $500 million of 30-year notes at an interest rate of 4.125% in October 2014. Details of our capital spending are presented on slide 6. As you can see, CapEx increased about $83 million in the current six-month period compared to one year ago. Close to 80% of our capital expenditures were associated with safety and reliability spending. Moving now to our earnings guidance for FY15, as shown on slide 17. We expect FY15 earnings per share to be within 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 nonregulated operations, as well as selected expenses for the year, none of which has changed since our first fiscal quarter report in early February of this year. We expect the continued execution of our infrastructure and investment strategy, coupled with constructive regulation to be the primary drivers for the year's results. Slides 7 through 13 provide more detail on our rate cases. Our capital budget range has not changed and remains between $900 million and $1 billion for FY15. Thank you for your time this morning, and now I'll hand the call back over to Kim. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [5] -------------------------------------------------------------------------------- Thank you very much, Bret. Very, very good report. As you can see and as you've heard, we've had a very solid quarter, and we've had an exceptional and solid first half of the FY15 year. Our regulated rate relief continues as the primary driver of our excellent financial results. As of May 6, yesterday rate outcomes and incremented deferrals have provided annual operating increases of about $59 million so far this FY15. Rate actions that we have filed and pending, total requested increases of about $39 million, and we expect to file another four to five cases by our fiscal year-end that in total would request $20 million to $25 million of additional increases. In late April, we did receive the proposal for decision in the Mid-Tex 2013 rate review mechanism filing, and in that proposal for decision, the hearing examiner recommended an increase for the Company of approximately $32.7 million. That compares to our request of $33.4 million. We anticipate a final decision, which will be made by the Texas Railroad Commission by the end of June or early July. Our Company fundamentals are extremely sound. Our performance is the result of organic growth as we continue to believe that investing in the safety and reliability of our system is the highest and best use of our capital. We are resolute on that commitment that we made in 2012, and we haven't wavered from any of our commitments to become the nation's safest utility and the capital investments that we're making to grow rate base by 9% to 10% and earnings per share 6% to 8% on an annual basis. We very much appreciate your time this morning. Now we'll take any questions, comments, or suggestions that you might have. Donna? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Brian Russo, Ladenburg Thalmann. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company - Analyst [2] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [3] -------------------------------------------------------------------------------- Good morning, Brian. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company - Analyst [4] -------------------------------------------------------------------------------- Just on the guidance, the $2.90 to $3.05, that's unchanged. But we've seen a lot of gas LBCs report good earnings due to the February cold weather, and I'm just wondering, was that captured in your initial guidance and/or why couldn't we see anymore upside there? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [5] -------------------------------------------------------------------------------- Well, obviously our initial guidance of $2.90 to $3.05 is based on normal weather. But we are reaffirming our earnings to be within that $2.90 to $3.05 range. We did have, obviously, weather in the prior six-month period and also had some weather in the current six-month period. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [6] -------------------------------------------------------------------------------- The reaffirmation of the guidance, as Bret said, would incorporate the results from February since they're in the book and closed. -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [7] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company - Analyst [8] -------------------------------------------------------------------------------- Okay. Understood. And you mentioned the debt to capital I believe at the parent. Could you talk about the debt to capital ratio at the regulated pipeline in Texas and the trends you see there? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [9] -------------------------------------------------------------------------------- We're a consolidated cap structure entity, Brian, so we file on a consolidated cap structure basis. So, on an overall cap structure basis you're at 54% equity 46% debt, roughly. In certain jurisdictions, like Texas, short term debt excluded. So from that standpoint you'd be closer to 57% or so equity, 43% debt when you look at it from a regulated standpoint, but it varies by jurisdiction. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company - Analyst [10] -------------------------------------------------------------------------------- Okay, and I may have missed this earlier, but can you just comment on the Texas economy in your service territory and are you seeing any slowdown there? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [11] -------------------------------------------------------------------------------- We, as a utility are not seeing any slowdown. We really feel that we're a beneficiary actually of the lower energy prices in Texas. If you look at the overall economy in Texas, there have been several studies that indicate that there's probably no more than 2% to 4% of the overall economy that's impacted by what's transpired with the reduction in energy prices, but now you're seeing the recent uptick with West Texas coming back over $60. So you're seeing even a ramp-up in the activity out in the west. But again, it has been a non-factor for us and our business. We feel like it's helped our customers and since reduced what they're paying at the pump for gas and given them a little more discretionary income. Natural gas prices obviously help our business significantly and continue to provide us the room that's necessary to invest this capital and reflect it in the rate on a very quick basis in Texas where the regulators have been very, very balanced and fair relative to the investment and the lag associated with that. -------------------------------------------------------------------------------- Brian Russo, Ladenburg Thalmann & Company - Analyst [12] -------------------------------------------------------------------------------- Okay, great. Thank you very much. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [13] -------------------------------------------------------------------------------- Thank you, Brian. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- (Operator Instructions) Charles Fishman, Morningstar Research. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [15] -------------------------------------------------------------------------------- Good morning. Just one question. Slide 14, third line down, other. The $16.8 million negative variance year-over-year. And I see the comments on the right there, but can you explain the volatility driving that line, is that from trading, from customers utilizing your storage more? What drives that line? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [16] -------------------------------------------------------------------------------- It's really just timing within the asset optimization line. We're still projecting that the nonregulated business will meet the previously announced guidance range at $10 million to $12 million. So it's just the timing of when the realized positions come through. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [17] -------------------------------------------------------------------------------- Okay. So the volatility allows you to optimize purchases and sales and you're able to take advantage of that. That's what's going on in that line? -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [18] -------------------------------------------------------------------------------- Yes, and that's driven by timing as well. Timing of when positions close within a quarter versus within the fiscal year. -------------------------------------------------------------------------------- Charles Fishman, Morningstar - Analyst [19] -------------------------------------------------------------------------------- Okay. Thank you. That was it. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [21] -------------------------------------------------------------------------------- Hey, good morning. Thanks for the good quarter we got this morning. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [22] -------------------------------------------------------------------------------- Thank you. Thanks for your shout-out again, Spencer. It wouldn't be a call without you coming in. How about that Derby winner too, now? -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [23] -------------------------------------------------------------------------------- Yes. He's favored to keep winning. A contrarian like me is going to go broke. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [24] -------------------------------------------------------------------------------- Well, it's just like the Atmos stock, the favors just keep showing up. The fundamentals keep performing. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [25] -------------------------------------------------------------------------------- Yes. Yes. Just one quick one here for me. I believe, Bret, you touched on weather a little bit and I tried to jot some notes down here. But I know we entered FY15 knowing we'd have a bit of a headwind assuming normal weather, and if I heard you correctly, the weather versus an average, if you will, was favorable over the first half of the fiscal year here, but we may still anticipate a slight headwind in first half 2016 versus maybe first half 2015? -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [26] -------------------------------------------------------------------------------- Yes, I'd figure you'd ask that question, Spencer. If you look at this, we announced in last year's results, we had about $0.17 of weather, and about $0.12 of that came on the nonregulated side with about $0.05 in the regulated side. Obviously, we budget normal weather. We have again seen -- a lot of the numbers if you looked on the release are comparing quarter to quarter and six-month to six-month and skew it when you compare it against normal. But if you look at it overall, probably on a year-to-date basis, last year at this point we probably had about $0.10 of weather. You probably have $0.04 to $0.06 of weather in the six-month period of 2015. -------------------------------------------------------------------------------- Spencer Joyce, Hilliard Lyons - Analyst [27] -------------------------------------------------------------------------------- Okay. Perfect. That's almost exactly what I was basing on. In any case, good quarter. That's all I had. You folks travel safe. -------------------------------------------------------------------------------- Bret Eckert, Atmos Energy Corporation - SVP and CFO [28] -------------------------------------------------------------------------------- You too. -------------------------------------------------------------------------------- Kim Cocklin, Atmos Energy Corporation - President and CEO [29] -------------------------------------------------------------------------------- Thank you, Spencer. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- (Operator Instructions) Ms. Giles, at this time I'd like to turn the floor back over to you for any additional or closing comments. -------------------------------------------------------------------------------- Susan Giles, Atmos Energy Corporation - VP of IR [31] -------------------------------------------------------------------------------- Thank you, Donna. Just to remind you all that a recording of this call is available for replay on our website through August 6, and we look forward to visiting with many of you at the AGA Financial Forum later this month. We appreciate your interest in Atmos, and thank you for joining us this morning. Goodbye.
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