Atmos Energy Corp (ATO) — Q4 2016 Earnings Call Transcript

Thank you, Donna, good morning, everyone. And thank you all for joining us. This call is being webcast live on the Internet. Our earnings release and conference call slide presentation are available on our website at atmosenergy.com. 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. Our forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 29 and more fully described in our SEC filings. Additionally, we will refer to certain non-GAAP financial measures during our discussion. Slides 2, 3 provide information regarding these financial measures. Our first speaker is Bret Eckert, Senior Vice President and CFO of Atmos Energy. Bret?

Thank you, Susan, good morning, everyone. We do appreciate you joining us, as well as your continued interest in Atmos Energy. My remarks will primarily focus on the financial results for the full fiscal year. Slide three and four summarize our net income and earnings per share. Yesterday, we reported earnings of $3.38 per diluted share for fiscal 2016, representing the 14th consecutive year of increased earnings per share. Earnings excluding unrealized margins were $349 million or $3.37 per diluted share in 2016, compared with $316 million or $3.10 per share last year. Results for 2016 include a $5 million or $0.05 per diluted share income tax benefit as a result of adopting new accounting guidance for stock-based compensation. As expected, our regulated operations drove all of our earnings growth during 2016. Rate increases lifted regulated margins by $87 million during 2016 with almost 80% coming from our Texas utilities and our regulated pipeline APT. Slide eight to 17 provide more detail on the results of our rate filings in 2016. These increases more than offset the negative effect of weather, which was 25% warmer than the prior year. In the distribution segment, we experienced a 17% decrease in sales volumes due to weather. However, with our weather normalization mechanisms covering about 97% of utility margin, the impact on gross profit was only about $3.4 million. And APT experienced a 4% year-over-year decrease in consolidated throughput and lower storage and blending fees, which negatively impacted gross profit by about $4 million. Additionally, we saw our average distribution customer count increase by about 7 to 10%, primarily in our Louisiana, North Texas and Tennessee service areas, which contributed $6.6 million in incremental gross margin. O&M spending increased year-over-year driven by a $26 million increase in the regulated business, and we anticipated higher levels of pipeline maintenance spending related to safety. Finally, capital spending in our regulated segment increased by about $124 million for the year, primarily due to higher planned spending in each segment. Over 80% of our capital expenditures were associated with safety and reliability spending, and we will earn at over 95% of CapEx within six months of test year end. Slide seven gives some detail around the spending in 2016. Our non-regulated segment's performance for 2016 was in line with expectations. As announced last week, we entered into a definitive agreement to sell all of the equity interest in Atmos Energy Marketing LLC to CenterPoint Energy Services. This transaction will include the transfer of approximately 800 delivered gas customers and AEM's related optimization business at an all-cash price of $40 million, plus working capital at the date of closing. Assuming receipt of customer approvals, we expect the transaction to close in the first calendar quarter of 2017. These assets contribute about a third of the non-regulated 2016 earnings, down from the prior year, primarily due to the effects of warmer weather and lower realized margins from asset optimization activity. Beginning in the first quarter of fiscal 2017, these results will be reported as discontinued operations. The remaining contribution from the non-regulated segment for 2016 was primarily from our storage and transportation assets. These generate demand fees and other revenues subject to regulatory oversight from our regulated operations in Louisiana and Kentucky. These assets will be retained because of the support they provide to regulated operations. Moving now to our earnings guidance for fiscal 2017. Slide 23 details our earnings and selected expenses projected for 2017. We have announced that 2017 earnings from continuing operations are expected to range from between $3.45 and $3.65 per diluted share. Net income from continuing operations is expected to range from $365 million to $390 million. We expect the continued successful execution of rate strategy to be the primary driver of next year's results. We anticipate receiving annual increases from implemented rate activity in 2017 of $90 million to $110 million. Slide 25 provides a rate filing outlook for the upcoming year. We have assumed normal weather and weighted average gas cost purchases to be in the range of $4 to $6 per Mcf. O&M expenses are projected to range between $535 million and $560 million for the year with a continued emphasis on pipeline maintenance spending. Depreciation expense is higher, as you would expect, as a result of our higher capital spending. Capital expenditures for 2017 are expected to range between $1.1 billion and $1.25 billion. This will allow us to continue our focus on system safety and infrastructure pending and upgrading of the natural gas delivery system. With respect to our financing plans, we currently anticipate incremental long-term financing of $1.5 billion to $2 billion through fiscal 2020, funded through long-term debt and continued equity issuances through aftermarket equity programs, the direct stock purchase plan, and retirement savings. Further details can be found on Slide 27. Most importantly, these financing plans have been contemplated and are included in our guidance range for 2017, as well as our guidance that we've established to fiscal 2020. It's important to note that the sale of Atmos Energy Marketing will not impact our ability to continue to grow earnings per share by 6% to 8% annually through 2020, nor would it impact our ability to meet our earnings per share guidance of $4.10 to $4.40 in 2020. Thank you for your time. And I'll now turn the call over to Kim for his closing remarks. Kim, are you ready?

Very much, Bret. As you heard, fiscal '16 for Atmos was a remarkable year on many counts and the financial performance followed as a result of the very strong performance. Our Board of Directors authorized a 7.1% increase for our quarterly dividend. The fiscal '17 indicated dividend rate is now $1.80, an increase of $0.12 per share. This is our 33rd consecutive year of increasing the dividend and supports our commitment to provide an attractive return to our investors while continuing to successfully execute our infrastructure investment strategy. Our shareholders experienced a 31% total shareholder return on their investment for the fiscal '15 year, compared to a peer group average of about 24%. Our liquidity, financial position and balance sheet remain exceptionally strong. Our debt to capital ratio was 48.5% at September 30, 2016. Last month, we increased our credit facility from $1.25 billion to $1.5 billion and retained the $250 million accordion feature. This facility was extended to September 25, 2021, with all other terms remaining substantially the same. During fiscal '16, we launched the aftermarket equity offering and issued 1.4 million shares for $98.6 million in net proceeds. Also during the year, Standard & Poor's upgraded our corporate credit rating from A with a stable outlook. I'd like to comment on the sale of our non-regulated gas delivery business. Texas-based CenterPoint Energy is an excellent fit for this business and for the phenomenal employees that are engaged in it. CenterPoint provides the scale and capabilities that will enable growth in this business. Our decision was driven by our long-term vision of becoming the safest natural gas utilities. This vision directs all of our investment of time, energy and capital to our regulated businesses with much of that investment focused on replacing and modernizing our utility and pipeline assets. The proceeds from this transaction will be redeployed to fund infrastructure investment in the regulated business. Most importantly, upon completion of the transaction, Atmos Energy will become a fully regulated pure-play natural gas utility. Our growth continues to be driven by our focus and well-executed rates and regulatory strategy. For fiscal '17, we anticipate receiving annual increases from implemented rate activity in the $90 million to $110 million range. Our CapEx spending budget of $1.1 billion to $1.25 billion in fiscal '17 will enhance the value of our rate base, which is expected to support our earnings per share growth of 6% to 8%. We remain committed to delivering dependable, long-term financial success. Our earnings growth, plus the dividend will support our projected total return to shareholders of 9% to 11%. We recognize that growth, along with consistency and predictability, are important as we move into fiscal '17. Thank you very much for your time, attention, and interest this morning. We're ready to take any questions that you have. Donna?

Hi, good morning.

Morning, Brian.

Just want to get your thoughts on your forecasted EPS CAGR of 6% to 8%, as noted in the slide presentation. '16 CAGR over '15 was 8.9%. And it seems that over the last several years you have consistently reached the high end of the range or exceeded that range, and I just want to get your thoughts…

Your observation, Brian, is very astute.

I mean, I would imagine there seems to be a bias towards the higher end of the range, given past performance?

Past performance is no guarantee of future performance or whatever that SEC disclaimer is.

Understood. Can you remind us what the base year is or does it just kind of roll forward each year when you update the CAGR?

So our base year – our base year related to that plan was our '16 through '20 plan. And so we're building that off, you know it came out with the five-year plan when we launched it last year. So…

Okay. So we should use the $3.37 of '16 as a base year for the five-year plan?

Maybe base it off the $3.05 that we actually launched off of in '15. So when you put this '16 to '20 plan out, I'd say put guidance down based on the weather adjusted $3.05 for 2015.

Okay. Got it. And the sale of the marketing business. If I recall correctly, I've been assuming about a $27 million EBITDA run rate. The sale price is $40 million plus working capital. Could you disclose for us what the working capital is to try to get a better feel for what the multiple was that the sale was at?

Well, you're starting with the wrong EBITDA number.

Okay.

We retained some of the assets. About two thirds of revenues that were generated are retained by us with assets that are traditionally characterized as regulated operations. And those are intrastate pipeline and storage facilities that we owned and that were relied upon by the marketing group to serve certain customers behind our city gate. Those are customers that are not being transferred with the sale. So about one third of the operations are gone…

Okay. So one third of $27 million of estimated EBITDA?

Correct.

Okay. Got it. Understood.

And working capital is just a wash.

Okay. Understood. And then could you just talk a little bit about the new pending gas infrastructure compliance regulations that I think are going to be implemented maybe next year?

Are you talking about the Trump plan or what are you referring to?

No, I was just hearing from other companies that there is incremental gas infrastructure compliance being contemplated by the regulatory agency?

I guess that stems us…

Yes, Brian, this is Mike Haefner. That’s still working its way through. The expected earliest implementation date will be 2018. And as we've said before, we always welcome fair balance, safety regulations because it really drives incremental investment in our system.

Okay. Great. And then just on slide…

Hold on, I think it's important to recognize that we're not relying on the promulgation or issuance of any new regulations to support our capital budget going forward. The $1.1 to $1.25 billion is essentially the amount that we need to spend in order to get to the point that we want to reach with the current regulatory structure in place. So nothing we have in our guidance for this year through 2020 is based on a hope or prayer or something that might or might not occur in '17, and it also bakes in the equation, you know, the sale of marketing and what has been retained.

Understood. And then just on slide 25, as always, you've got an active regulatory calendar. I'm just wondering if there are any one or two of these filings that we should be more focused on as the gross margin driver that you have outlined of rate recovery in 2017?

Yes, I mean, Brian, this is Bret. If you look at slide 25 and you go back to slide 8, and slide 8 details the key regulatory outcome that we got in '16, but you know the majority of over 80% of our investment is in Texas, Louisiana and Mississippi. And so those rate outcomes continue to drive earnings. The RMM in Texas that we've got in mid-Tex in 2016, those rates won't affect until June 1, so that’s the timing each year those rate impacts go in. And in Louisiana, it varies between the trans-log mechanism going in the 1st of April and LDS going in the 1st of July. So you look at Texas, Louisiana and Mississippi, those are the largest pieces of what drives our rates.

The only case you got to concern yourself with is APT. That's the rate filing that we're going to make probably on January 7th. All this other stuff is formulaic. I mean, it's pretty much settlements that we make on an annual basis, the RRMs and stuff and those will be reported. But filing of the APT case is really the one that you want to watch, and it’s really not going to have any effect in '17 or not very little effect in '17. So you'll have plenty of opportunity to react to anything that comes out of that case, that may be unanticipated but we're not expecting anything. We're filing as we talked about with you and everybody else, we're filing that case down the middle of the fairway. We're not proposing any unique or new features or relying on any policy program, regulations that are not in place already. So that's the one and it will be filed in January, and you along with everybody else will get ample information surrounding that case.

Got it. Okay. And then just lastly, the capital markets activity that you guys laid out in your presentation. Is that consistent with the prior disclosure?

Yes.

Excellent. Thank you.

Thank you, Brian.

Hi. Good morning, guys. Congrats on a nice year. And it looks like your Cowboys have started to imitate ATO? But just a couple of quick ones for me. First one, housekeeping one for you, Bret. I believe you said this, but the marketing will be discontinued ops when we see Q1 results, correct?

Correct.

Okay. And that means that the guidance ranges, particularly O&M, are all excluding the AEM?

That's correct, they are all from continued operations.

Okay, perfect. Then just a second one. A little more broadly, we are several years now from the major sales and footprint shifts that we saw related to Illinois and Missouri, etc. Kim, can you just talk about several years down the road here or how you feel about the current footprint of the to be 100% regulated company?

We're excited about it. We've been focusing for the last five years and really that the marketing company and the assets that we sold to deliver gas business that we sold is an excellent business and it's an excellent fit for CenterPoint Energy, with a great group of employees. You've been in their offices, you know they do a wonderful job, and it brings, I think, a new market to CenterPoint that they are going to benefit from and they are going to grow that business. I mean, for the last five years now when you constrained the business because of the appetite we had or the little appetite we had for risk, and we continue to try to mitigate as much risk as possible and emphasize for as much money as we could into the regulated side of the business. So that being said, you know, we’re going to be the largest pure-play, 100% regulated natural gas utility that’s traded on the exchange and we think that, you know, we bring a very compelling opportunity to a lot of funds, and we’re very excited about the remaining portfolio. We’re very comfortable with what we have because it’s a great possibility. We’re a little bit ahead of the curve on the Trump infrastructure administration that's going to emphasize infrastructure. We think that's going to be great for the country, great for our business for sure, and we're going to continue to try to lead the way there. So you know people have been asking about the non-regulated company and a lot of one-on-one discussions have comprised conversations, and it really has been a very, very minor part of our portfolio, less than 5%. So you know it will be able to talk all about our regulated operations and the opportunity that they present and we think that we're in extremely balanced regulatory jurisdictions right now. We have really good customer base. We continue to work on trust and credibility with the customers, with the regulators, with the politicians and with those folks that represent the customers as well. So we're excited about the future.

Absolutely. Fantastic color there. I know you mentioned the Marketing had taken up a large portion of the conversation. I know just from a publishing and modeling standpoint, it will be nice to be able to set that to the side, even though definitely some good guys and gals over there?

Outstanding people.

All right. Again, great year and we will talk soon.

Okay. Thanks.

Great. Thank you, Donna. And just to remind you, a recording of this call is available for replay on the website through February 6. Again, we appreciate your interest in Atmos and thank you for joining us. Good-bye.