Atmos Energy Corp (ATO) — Q3 2015 Earnings Call Transcript

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 consolidated net income of about $56 million or $0.55 per diluted share. For the first nine months of fiscal 2015 the reported consolidated net income was about $292 million or $2.86 per diluted share. 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 fiscal 2015 earnings guidance to a range between $3.10 from the previously announced ranges 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 as of June 30 was 45.5%, and all liquidity remained 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 fiscal 2015 is $1.56 per share. I’m going to turn the call over to our CFO Bret Eckert for more detailed discussion of the results.

Thanks, Kim, and good morning to everyone. Slides 2 and 3 detail reported net income and income excluding net unrealized margins for the three and nine month periods of fiscal year 2015 and 2014. Earnings excluding unrealized margins for the current three month 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 in the 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 quarter, rate increases lifted distribution gross profit by $16 million and about $62 million for the current nine months. The approved GRIP filings in fiscal 2014 and 2015 listed 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, as detailed on Slide 15 and 16, delivered gas increased in both the quarter and year-to-date period 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 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 write-off expenses despite a very wet spring that impacted the amount of maintenance that could be performed. We do anticipate the maintenance expenses to continue and accelerate in the fourth quarter as the weather rises. 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 will be partially offset by lower legal expenses. 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 debt at a lower rate back in October 2014. Details of capital spending are represented on Slide 6, over 80% of our capital expenditures were associated with safety and reliability spending. Our capital expenditures increased by about $115 million in the current nine-month period compared to one year ago. Moving now to earnings guidance for fiscal 2015, and you may want to turn to Slide 18 where we've detailed 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 the earnings guidance range for fiscal 2015 with earnings per diluted share now expected to range from $3 to $3.10 excluding unrealized margins. We now project regulated operations will generate net income in the range of $290 million and $305 million, and non-regulated operations will generate net income in the range of $14 million to $18 million. The updated guidance primarily reflects stronger than anticipated consumption in our distributions segment. This increased consumption level not only reflects the impact of colder-than-normal 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 fiscal 2015 to range from $85 million to $95 million. This is slightly different from 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.

Thank you very much for that report, Bret. Our performance again confirms that what we’re doing is working. We are experiencing very good results all around both operationally and financially as we strive to become the nation’s safest gas utility. We’ve fostered good relationships with our regulators who are tasked with balancing the needs of consumers and businesses like Atmos Energy, and we’ve built and established partnerships 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 that provided annual operating increases of about $87 million thus far in fiscal 2015. 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 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 for the foreseeable future, this 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’ve heard this before, we may sound like a broken record or you might think you are watching the movie Groundhog Day, but we have been and will 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% and 11%. In November, we’ll look forward to meeting with you and communicating our refreshed five-year plan, which will provide projections through fiscal 2020. We certainly appreciate your time this morning and now we’ll take any questions that you have.

Hi, good morning.

Good morning, Brian.

Just in terms of the increased guidance, if you can kind of back into the EPS for the reg or non-reg, it looks like it’s split fairly evenly with $0.05 of EPS increase on the reg and another $0.05 on the regulated side. Is that just sustainable or is it related to weather and it’s not - and it shouldn’t really reoccur? I mean is the base earnings power $0.10 higher now than it was previously?

Well, as we mentioned last call, Brian, we expect weather to contribute about $0.04 to $0.06 to earnings in fiscal 2015. We talked about the delivery gas business with the slight increase in our guidance, which is really driven by the delivery gas business. We see per unit margins strengthened toward the end of the year, expecting margins in the $0.10 to $0.11 range, and we see margins closer to the $0.11 to $0.12 range, which is really what is causing the lift in that business. So we’re only planning to come out with guidance for fiscal 2016 as we announce our full-year results in November, but those are the main drivers of the increase in earnings this year.

Now the increase in unit margins on the non-reg side, is that sustainable?

That’s a good question, Brian. I mean we didn’t experience that same performance last year from them, and this year was the trend of increasing margins. We’re also seeing increased consumption on the regulated side of the business. I think there is some traction that is being gained nationwide 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, particularly in the industrial sector. The other thing is that our delivered share gas focus is continuing to emphasize providing additional value to customers who are willing to recognize that value. So they’re being a little more selective in who they’re serving and high-grading their customer base, which has translated this year into those better margins we’re seeing. We’re going to continue to have that strategy of emphasizing service to customers who recognize the additional value they bring to the table in terms of all of the energy services available, and then providing the premium product in the form of natural gas. Some folks are willing to pay more right now because of the competitive edge that gas brings to their product and their process.

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 kind of a good target trend lower as you raise that financial CapEx?

We are committed to kind of growing this spending of $900 million to $1.1 billion through 2018 in a balanced form. The 55% is the product of the equity issuance we did back in February of 2014.

Okay. And then just lastly the upcoming regulated pipeline, GRC filing I think it is December 2016. Can you just comment on what the major drivers are there that we should be aware of at this time?

Generally, there are no unusual drivers; it is going to be a typical rate case with a focus on cap structure, on return, and on service levels and rights. But it won’t be anything unusual.

Okay, great. Thank you very much.

Thank you, Brian.

Spencer? He dropped off, lost Spencer.

Good morning. The variance on O&M, which were attributed to the employee incentive plan, is that something you just recognize in the third quarter that is not ongoing? We won’t see that next quarter, is that correct?

You recognize an incentive compensation based on your initial targets, and then with the revision of the guidance upwards, it will only come in higher. In the quarter, once you change that is when we catch up on the higher level of expense, and so this time we got recorded in the third quarter.

Okay, got it. And then the second question was, Bret, you made the comment that you were experiencing higher consumptions following the heating season. I would appreciate if you could add some color to that, whatever you can.

Yeah, we have seen, through the nine-month period, consumption higher than historical norms continuing on into the first nine months of this fiscal year. It’s hard to highlight exactly what’s driving consumer consumption patterns, but we have seen higher consumption this year.

Charles, I mean that’s kind of a national, nationwide circumstance. We looked at AGA statistics that recently came out—I think it was last week or two weeks ago—and it indicated a better reversal of the trend for the declining use of natural gas. For the last two years running, there has been an increase in the consumption trend by residential customers. Again, I think the traction associated with our industry getting out a little bit and promoting the competitiveness in the abundance and the environmental qualities of natural gas has contributed to this.

Okay.

Certainly in the competition against other alternative fuel sources.

Okay, thank you for that.

Let’s try this again. User error on my part. I apologize.

Okay.

Well, first mistake of the year for you.

Yes, I’ve got to say so. Keeping with the Bill Murray movies, it is clear that the Cinderella story continues to execute here—nice quarter. Right, what becomes of the broken record? It is another one when that comes to mind. If you are not in the stock by now, what in the world applies with what is the sector doing?

It is flattish; it is mostly interest rates on say. We are kind of drawn to a tough comp of where a lot of the stocks ended last year, but optimistic here as we look towards the back half.

Yes. I guess to be long-term. In any case, just want to kind of have a question from me. We are inching kind of ever closer to the endpoint of standing 2018 guidance, if you will. I know we are still a couple of years out, but can you talk about any clarity that is maybe developing as we look maybe towards the tips of the decade here and potentially when we can see you all roll that target out another year or two?

Great question, Spencer. We do plan in November when we release earnings for fiscal 2015 to come out and extend that plan to four or five years through 2020. We have launched and updated the plan last in 2014 to 2018. We didn’t want to get into the practice of rolling out another year every year, so we kind of do it every two years. We will put out a revised or updated plan, if you will, through 2020 and put guidance out there for 2020. As we talked before, we continue to see the ability to invest at these levels enhancing the safety and reliability of our systems, so we expect that in our analyst meeting in November.

Perfect, we will eagerly await that roll-out there. Again, good quarter and nice year; shaping out to be a good one. That is all I have.

Thanks, Spencer. End of Q&A.