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Atmos Energy Corporation (NYSE:ATO)

Analyst Meeting Conference Call

November 15, 2012, 12:15 pm ET

Executives

Susan Giles - VP, Investor Relations

Kim Cocklin - President & CEO

Bret Eckert - SVP & CFO

Dick Erskine - President, Atmos Pipeline - Texas

Analysts

Susan Giles

Good afternoon everyone. I am Susan Giles, and I want to thank you all for coming here today in New York and also for those who are listening on the webcast. We will have a replay of this event on our website beginning this afternoon and running through December 31st. We anticipate the presentation will run about an hour and a half including the Q&A at the end and we are not planning on taking a break. So for those of you here in the room, please feel free to come and go as needed.

Also, we would like to ask that you please turn off your BlackBerries and cell phones to keep from interfering with the audio.

As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements and are intended to fall within the Safe Harbor rules of the Private Securities Litigation Reform Act of 1995. And as a reminder, results are as of our last earnings release day which was November the7th.

Now I would like to introduce members of our leadership team that are here today. First, we have Kim Cocklin, President and CEO. Next to Kim, on the other end of the table actually is Bret Eckert, Senior Vice President and CFO and Dick Erskine in the middle who is President of our Regulated Interstate Pipeline, Atmos Pipeline, Texas.

With that I’ll turn it over to Kim.

Kim Cocklin

Thank you very much Susan. Good afternoon everyone and I too want to express appreciation for all of you being here. I know that it’s a very busy time and that your schedules are tight and we certainly appreciate you making time for Atmos and your interest in Atmos.

We do hope that any of you and I am sure many of you probably or others you are connected to were impacted by Sandy. You have our thoughts and good wishes as you repair through that process. I will say that we have deployed about 20 of our employees from the Kentucky, Tennessee area. They drove up here, it took them three days. They are staying in a service center, but they have worked the last couple of days and expect to work until Thanksgiving in response to request for help and in aiding in the restoration process.

So I think many of you are familiar with Atmos Energy. To remind you, we are one of the nation’s largest pure natural gas distribution companies. We have six utility companies serving about 3 million customers in nine states. We also have a very valuable intrastate pipeline located in the Barnett Shale production field in Texas and RA Erskine is here, we’re going to drill down on that and provide you some more detail in today’s presentation. And then we have a non-regulated marketing company which serves about a 1,000 customers.

Our company initially grew through acquisitions. We completed 10 of them from ‘86 to 2004 and that provided us today with a portfolio of very valuable assets which supports our current growth strategy to invest in our regulated assets and generate rate base growth through 2016 at an average annual rate of 8% to 8.5%. This investment and rate based growth will in turn create a projected earnings growth rate of 6% to 8% on average annual rate through 2016. And then with the dividend, the total shareholder return is annually projected to be 10% to 13% range.

We reached several milestones, important milestones in fiscal ‘12 with the company. First of all, we continued our solid track record of earnings and dividend increases. 2012 was the 10th consecutive year for increased earnings for the company and the 29th consecutive year for increasing the dividend. That financial performance was again driven by the continued successful execution of our regulatory strategy which focuses on three principle and desired outcomes.

First, to reduce regulatory lag; second, to improve the recovery of fixed cost and then third to increase our margins. It also highly depend upon the successful execution of our financing strategy which again focuses on reducing interest expense and extending the average maturity term for our long-term debt.

We delivered on our commitment to close the sale of assets in Missouri, Illinois and Iowa and we announced the sale of our Georgia assets. Our non-regulated marketing business provided positive financial results in 2012 and we continue to position that company for long-term success with a focus on risk management and a business model that’s consistent with today’s market dynamics. We also met our revenue target for rate outcomes in 2012 and we completed first year of our five year growth strategy.

Here we see our GAAP earnings for the period 2008 to 2013, and while this does reflect a compounded annual growth rate of 4.3% over that period, it’s very important to remember that we are increasing our projected annual earnings growth rate from the 4% to 6% level to 6% to 8% for the period 2011 to 2016. Another key takeaway here I think is the relative contribution to consolidated earnings from the regulated and non-regulated group. The regulated companies will contribute at least 90% of the earnings going forward and they will remain as the growth engine for us.

Here we are showing our geographic footprint; as I have stated, closing the sale of Missouri, Illinois and Iowa assets and then announcing the sale of Georgia, we have become much more geographically efficient. Over 60% of our customers end market is in Texas. The economy, that’s important, because the economy is very good in Texas in relation to the rest of the country. Texas is again the largest producing and consuming state for our product, natural gas in the lower 48.

Texas uniquely understands the importance of natural gas and energy to help the economy consequently of the State with a progressive regulatory construct and the regulators provide a very fair and balanced approach. This is supported by the rate outcomes that were received by our intrastate pipeline in a rate case that was resolved in 2011 which RA is going to touch upon.

And then the current, good morning, PFD, the Proposed Final Decision that was issued yesterday by the Hearing Examiner in the Mid-Tex rate case. And if you recall, we filed that case sometime ago; we expected the outcome it was issued yesterday. The Commission meetings will occur in early December; I think it’s the 4th, and maybe two weeks after that date, but the final orders should issue in that case no later than December 28th, and we’ll talk a little about, a bit later about the detail in the Hearing Examiner’s decision.

Okay, let's talk about our growth strategy; you essentially can grow a utility by increasing customers which we did with the 10 acquisitions from ‘86 to 2004, or by investing capital and increasing the value of your rate base, which to any regulated utility the rate base is the earning engine that you will rely upon to drive your revenues.

We do expect to invest enough capital from the period 2011 to 2016, as I said before to generate a compound annual rate of growth for that rate base of between 8% and 8.5%. And at the end of fiscal 2012, our rate base value was about $4.5 billion. By September 30, 2006 it will have a value of between $5.7 billion and $5.9 billion.

Again that rate base growth will translate into earnings growth in the 6% to 8% range. This slide shows the geography of our intrastate pipeline which RA is going to discuss. I am not going to steal much of his thunder. I will say that the pipeline, the intrastate pipeline is regulated by the Texas Railroad Commission. As I said it had a rate case that issued in 2011 which the current rates are structured on.

It has an opportunity to earn very attractive 11.8% return on equity on a 50-50 cap structure and it enjoys straight fixed variable rate design. That's why it’s driving a significant part of our success in the future and we've invested and allocated a lot of capital to that asset as well and we will continue to do so.

The next slide provides the location for customer search via our non-regulated marketing company. This business unit is located in Houston has about 115 employees. The business model that we've changed to is consistent with the current market conditions which low prices, narrow spreads, very little volatility. This company provides a delivered gas sales service to approximately 1000 customers. We have a 92% retention rate with those customers and we received the number two rating for customer service in the most recent [Maceo] survey.

Growing this business is pretty simple; it requires you to increase your annual sales volume or your market share or increasing your margins or any combination of all three. We do not expect revenue contribution from asset optimization and as our storage and transportation contracts expire, we are recontracting for shorter terms at market prices.

As I said we’ll expect no more than 5% to 10% of the earnings from this group going forward but we do believe it’s a very valuable added asset to our portfolio and we will continue to manage the market risk that's associated with it. Okay, this slide identifies how we continue to focus on derisking our regulated business making those revenues from that business more stable, more reliable and more predictable.

97% of our margins are weather normalized. Its very important, we have 77% of our markets that are covered by annual rate adjustment mechanisms meaning that we can reflect changes and costs revenue and capital investment every year without the need to file a rate case, means we reduce lag, we avoid litigation expense and you also avoid all of the emotional turmoil associated with litigation and continue to strengthen relationships with those customers and stakeholders that are critically important to our future success. We do recover the gas cost portion of bad debt with trackers for about 75% of our total cost of gas and have done a wonderful job managing the uncollectable expense.

Here you can see importantly the annual increases to operating income that is generated from rate activity. We continue to receive very fair and balanced outcomes in the jurisdictions where we are situated. This year fiscal 2013, we do anticipate the adjustments in the Mid-Tex case. As I said, we received the proposal for decision from the hearing examiner yesterday, being reviewed. We can say that on a limited basis that it was a very fair and balanced decision.

As I said, the commission action and final order will be available on before December 20. The important information and facts coming out of the examiner, he does recommend a return on equity of 10.4%. He does recommend an increase to our customer charge to a level of about $17.70. Texas continues again to be very progressive.

They become, they are very balanced. Again they understand the importance of natural gas and they do an excellent job of balancing the interest of the utility and the customers and we saw that in the outcome that was generated in intrastate decision in 2011.

So we do project an increase in operating income in 2013 in the $90 million to $110 million range from rate activity as a result of the decision in the Mid-Tex case and other filings that are pending and it will be filed and resolved during fiscal 2013.

Okay, then the key message and takeaway from this slide is really how we have successfully reduced regulatory lag. Over 90% of our regulated capital investment which is the lion’s share, the non-regulated company has about an appetite for $2 million every year. So the lion’s share of what we invest goes to the regulated assets and over 90% of that capital investment begins to earn a return on and off capital within 12 months of filing for it.

We'll talk in a little bit about a specific piece of the capital investment Rule 8.209 is a rule that was propagated in Texas by the Railroad Commission principally to encourage and promote safety and reliability. And they did this by providing special rate treatments for capital that was invested to replace, repair, rehab or fortify ageing infrastructure. Their focus is significantly on safety as we have seen the federal and state level and all of your state regulators have a tremendous focus on safety and Texas is leading the way right now with this Rule 8.209 treatment to get ahead of any issues around continued incidence that they don’t want occurring in the state.

The investment plan for Rule 8.209 spend is pre-approved, prior to spending it by the safety division of the Railroad Commission. And there is no lag for risk of denied recovery of amounts spent for 8.209. The investment plus the carrying cost which includes interest, taxes and depreciation is recorded in a deferred asset account and then included in rate base at the next rate adjustment which for us occurs annually either in a group filing or some other form of filing with the Commission and Rule 8.209 spending in 2013 is projected to be in the $170 million to $180 million range.

While this slide show our growth strategy from 2011 to 2016, as you can see we invested $723 million of capital in our regulated assets in ‘12 and we are projecting to invest in the range of $770 million to $790 million in 2013. Infrastructure spending is a huge driver as it’s projected to increase from what we spent in 2011 $65 million to between $225 million and $235 million in 2016. This growth and increased capital spending is going to be financed from internal cash flow and a combination of debt and equity.

We assume a net increased to debt $450 million over that period and some moderate level of equity in the out years principally to maintain an acceptable capital ratio for regulated purposes. Okay, I don't know if I’ve mentioned that we have got a growth strategy, that’s going to grow rate base by 8% and 8.5% annually and I don't know if I said that's going to translate into 6% to 8% earnings growth, but if not, we have drawn a picture for you here and that obviously is a very key takeaway and what we think separates us from others in the business.

Okay, our growth strategy it does incorporate a couple of assumptions. First, that long-term interest rates are going to be between 5.5% and 6.5%. O&M increases of about 4% annually, gas prices in the 250 to 450 range and then we do assume that bonus depreciation goes away with the cliff in 2012.

So that's it from my presentation. I am going to now introduce Mr. RA Erskine who is President of our Texas Intrastate Pipeline, Atmos Pipeline - Texas. RA has been, I know he is looking, but he is been with the company for 39 years. He began his carrier in the field, worked during summers while pursuing his college degree and became President of this division in 2004. He is a tremendous leader and people love him. Under his leadership, the earnings engine for the pipeline rate the base has more than doubled in value and the GAAP earnings from 2008 to 2012 have grown by more than 50%, that's why we are going to continue to experience a great deal of success. We are very fortunate to have RA leading this very successful business and we continue to see APT as a very key and critical component of our success going forward. So RA?

Dick Erskine

Thank you Kim. As you can see I'm the token bald guy in this group. I'm not used to being kind of the only guy that is of this vintage in a group. I appreciate the opportunity to be here. This is my first inaugural trip to New York. They have kept me hidden away as probably you will find as appropriate after today's presentation, but I will enjoy talking about something it is near and dear to my heart. I have grown up with these assets. I have followed them through three acquisitions, finally with Atmos Energy and over the last eight years, these assets I believe are positioned in the best possible regulatory geographic market, any measure you want to apply to these assets and you put that together with a company that believes in investment and looks to invest in an appropriate set of assets we are positioned better than at any time in my 39 years and so for me its an exciting time and I can't think of a better way to wrap up a career.

All you have to do for me is give me a map and I may not get off of these slides, so I will apologize. There will be several other maps to follow this, but what I thought I would do is start off and provide some history, because history leads us to where we are at both from a market standpoint and from a regulatory standpoint and it sets a stage for where we are going in terms of earning growth. This pipeline system, as you can see, it all centers around the Dallas Fort Worth Metroplex. It is going on a 100 years old now. It has grown organically. It began with the market area being a very, very kind of small but upwardly mobile and growing Metroplex area long before it was even called that and it is just spanned out from that area over time.

We are blessed with being in a market area that continues to be dynamic, but through our entire history we have overlaid production areas that has given us the opportunity to have natural gas available to serve that growing market, and so we've taken advantage of that over time. We've laid major pipelines out to West Texas, that's a 36 inch line that goes out to what is called the Waha hub. Hub simply being a confluence of a lot of pipelines both inter and intrastate that we interconnect with.

It also goes out to the Permian Basin which has been prolific producing area over time, and as we will talk about a little bit in a few minutes, it’s experiencing a rebirth. We've laid a 30 inch pipeline in the late 60s and early 70s, that's South Texas near Katy in the Houston area. The old Exxon Katy gas field purely and simply to connect to natural gas supply. But in doing so now, Katy is also another major hub, it connects with all of the pipelines that go through what's called pipeline alley and every T-pipe, Tennessee, Transco, all those pipes that go up to the northeast we interconnect with in some way, shape or form in the Katy area that provides an opportunity for gas supply to our system, but then deliveries off our system.

This pipeline system as I mentioned grew organically. It's primary mission overtime was simply to serve the growing the residential, commercial and industrial needs of Lone Star Gas Company, now Atmos Mid-Tex division. That’s our primarily mission, to do what it takes to make sure those customers are served and so that’s how we said about doing that. But in doing that, APT being an affiliate of Mid-Tex division. That put us in a unique position within Texas and led to the regulatory construct that we have. Because of that affiliate status, the Railroad Commission, who is our primarily regulator, sought and believes that we need to have a cost-to-service rate set, one that’s set at arms length that don’t trust two affiliates to be able to deal with another and a set of fair rate.

So we have a cost-of-service rate that’s set at the Railroad Commission. And for us, after this last rate case, what that has done is positioned as uniquely. The Railroad Commission recognizes us as a pipeline. We compete against other pipelines for supply, third-party transportation and all those other elements of the market place that are relevant, and so they established a pipeline rate of return for us. As Kim mentioned, 11.8% rate of return. So in doing that all of the business that we do; all of our cost are taken in to consideration by the Railroad Commission and they strike a tariff rate for our city gate services as well as industrials.

All of the other businesses on our system, all of the through system business where we take producer gas and move it off the system, that represents the value of revenue credit back against cost of service, and so it all nets to an 11.8% ROE as an investment for our shareholders, and so what we do is go about in this next slide, and we are on page 21. What we do is pursue those capital investments that first target service to Mid-Tex division and the other local distribution companies that we serve. And in doing that we are focusing on safety and reliability so the repayor replacement improvement of existing infrastructure.

We are pursuing those projects that expand capacity, because this is a dynamic market area, we are seeing it grow and move and shift and so we have to keep up that. But then we also have to constantly replenish gas supply, the gas supply that’s necessary to serve those customers but then it also provides the opportunity for the incremental value because the marketplace that we serve a local distribution company by its very nature, it’s demands are highest in the winter. A producer wants its gas to flow year around and they are willing to pay a fee to make that happen to get it to a liquid market, to get it to a place where they can establish commercial relationships and so our pipeline provides an opportunity for them.

And so in doing that, constantly replenishing the gas supply that’s kind of the system, making sure we had adequate supply for our customers but at the same time be able to move gas for producers when our customers don’t need it, creating that value proposition constantly replenishing the revenue credit that comes back against our cost of service that sets our paradigm. What we are is a company that provides firm service to a residential, commercial, LDC customers about 450 cities and towns for Mid-Tex; we also serve a couple of other local distribution companies CoServ, which are the back one. CoServ operates in the Northern Metroplex area. There are other LDC that serves most of the same cities and towns that Mid-Tex does, but they are getting upwards of about a 100,000 customers on a peak day close to 100 million a day. So we are diversifying those customers that we are serving.

The one other I will point out on this slide that just kind of represents again the regulatory paradigm we are under and you can see by the graphs, that on a throughput basis our tariff customers represent on average about 30% of our throughput. But then down below, you can see from a revenue standpoint our tariff based customers are paying somewhere in the vicinity of 60% to 70% on a cost to service basis for the through system business the market based business is somewhere more in the 30%-40% range. That seems out of kilter, but in a regulated paradigm where those tariff customers have a 100% call on our system and on the peak day, they are using 70% to 80% of our systems capacity, that match is one for one and so that's where the logic of it makes sense, that's where the balance of it makes sense that our commission has recognized.

Now what I’d like to do is kind of get into the meat of what I do, and that's some of the projects that we have undertaken. Those things that we have currently underway but also set the stage for some that will go into the future past this year, and maybe talk a little bit about how we see the future and the continuation of investment of APT and wide such a wonderful investment for Atmos Energy.

Once again we are back to my system map and I have highlighted five different projects, and you can see that several of them around the Metroplex area which also is the hard to sell with the Barnett Shale. For those of who that have kept up with the Barnett Shale and Shale development in general, we have seen the prolific development of that particular play, but then we have also seen gas prices over the past several years start to taper off and dry gas becoming a lot less attractive to producers and what is called wet gas or associated gas, gas that's produced with oil has become much more popular; the economics of it make a lot more sense.

What we have seen in the Barnett Shale is a tapering off of dry gas exploration, but we have seen a redoubling of efforts up in the Northwest Metroplex, between Dallas and Wichita Falls and what they call it combo play and so we see oil production with associated gas that's driving lots of new opportunities for both producers and us. What I would like to do is talk about each one of these and what they mean to us and what they mean not only to our service for Mid-Tex, but also what it means in terms of incremental value.

The first project, we called our Line W-Looping project and just please pardon the alphabet soup, somewhere even predating my history with the company, we’re starting a naming nomenclature based upon the alphabet; I can't explain it, I don't understand it half the time myself, but I’ve memorized it and its so second nature to me. So please, please pardon this.

We have an existing line that goes from the Dallas, Fort Worth area up toward Wichita Falls. The stars that you see here represent storage fields. These are APTs, two of APT storage fields. For years this line has provided as a conduit to move gas from storages down to the Dallas, Fort Worth Metroplex during the winter.

Now with the production that is being developed up in the Monterey County area and a significant amount of production, we find ourselves in a position of being able to loop this pipeline with a 24 inch line approximately 33 miles which will be in service before the end of this year, which allows us to take the gas that's being produced in this area and move it to the Metroplex during the winter.

But just as importantly, during all other times of the year, we've entered into a long term transportation agreement with the producer involved in this that will pay incremental revenue that will be applied toward the revenue credit overtime. It also puts us in a position of being able to better utilize these storage facilities in the winter to better serve the Metroplex on the Northwest side. I will ask you to keep this particular project in mind as I build upon it and move to the next phase of really what's a three part project.

From here, as I mentioned before that we have a 36 inch line that goes out to the Waha hub; that's it represented on this map Line X. In 2011, February of 2011 those of you who watched the Super Bowl and you got to see the great freeze over in Dallas and the whole town came to a standstill, that was a very, very revealing winter event for us. It created a circumstance where a great deal of the gas unit, a great deal of the gas and what's called the Fort Worth basin, about 50% of it froze off and we found that even though we had adequate pipeline capacity to serve our customers, what we didn't have was adequate supplies to serve our customers.

We had 70 plus power plants during that cold spell go offline; the loss of electricity brought processing plans, well hedged, anything that was dependent upon electricity to come to its knees and so we looked at that not only as a challenge, but as an opportunity, how do we bring more gas into this area for a more diversified supply portfolio. And so our planners designed a scheme to tie to Line X with a 24 inch line and move it across the South Western part of the Fort Worth Metroplex area and ultimately tie into the W Loop and it creates a continuous pipe that’s going to go from the Wichita Falls area, all the way down toward 36 inch line.

The first phase of this part of the project will be in service as well at end of this year and that allows it to go in to this year’s GRIP filing or Gas Reliability Infrastructure Program where we update our investment on an annual basis. So we will start earning on that as soon as that GRIP filing is made and approved about the middle of next year.

And so being able to tie to this mainline, this 36 inch that goes to Waha and by extension down to Katy, we not only have the conduits through which we can move gas from the hubs, up into this part of the market area and takes a freeze off or other disruption portions here otherwise that we now create one conduit that can bring gas from the Fort Worth basin down into our mainline corridor so that it can go either way, either South to Katy or West toward Waha and give producers a year around option for movement of their gas, once again creating value that we can then take advantage of.

Another project I would like to talk about, this goes back out to the West side of the system. This is the Waha hub and this picture of a compressor and pardon me if you have seen pictures of compressors before with we’ve dominated the map here, but we talk for a moment about the Permian basin. For years it was prolific and then it kind of waned and went down to almost a low ebb, but now it's undergoing a rebirth, anybody who wants to try to find a hotel room in Midland Odessa, Texas, knock yourself out. It's not happening and I think they have trailers and pub tents for you.

But right now, that whole Western quadrant through the Permian basin is boom town. Literally, the oil that is now being accessed through some of the horizontal drilling and fracturing techniques that were perfected in shales are being applied in West Texas and we are seeing oil production that’s coming to the forefront, and with it associated natural gas. We are interested in that supply; we want it tied to our system and in order to tie to our system and have it accessible to Mid-Tex, we have to give it a year round home.

And so what we are doing here is putting compression and in this hub we have what we call our Waha heater that interconnects with low and high pressure heater systems by putting compression in and out there, we can veal gas; we can push gas off this system to those pipelines and have higher pressures in ours, we can pull suction on those and have lower pressure than ours, but we can give the producers in this area a home for their gas year around even as we access it for our primary focus. And so this is another investment that we are undertaking; these compressors will be in service about mid-year of this 2013 and will be in the 2013 GRIP filing.

Next project I would like to talk about, again out in West Texas this is on Line X; this is a third party storage facility; NorTex after exit; it’s tied to two or three different pipelines including ours, our customers like to move gas in and out of it; Mid-Tex and other LDCs in our system like to use it for peaking service. The problem is it’s not pressure compatible with our system and so we can’t move gas freely to and from it and charge the fees we would like to move gas to and from it. And so by installing compression at the interconnect between our pipe and their heater system, we are now able to freely move gas to and from and we are seeing incremental revenue that’s being derived from that, but it also makes that a useful point of supply in winter conditions. So this is already in service; this investment of about $6.8 million will be in our 2012 GRIP filing that will be made February of this next year.

This is one that it kind of looks like a rounding here, all it is a meter connection, a meter connection between two pipelines. $2 million, that’s a lot from my personnel portfolio, in fact that maybe my personal portfolio, but the opportunity here is significant because within the Barnett Shale many different gathering systems were constructed. One of those gathering systems, this is the DFW Midstream and Interconnect; it was not tied our system, it was tied to two other pipelines and so the gas that was on it was moving away from our system, it was right under our market area but we were not accessing it.

The producers on that gathering system wanted another market outlet, because we not only have the ability to move gas to hubs, but we have this native marketplace with LDC industrial electric generation demand, producers want to access our pipeline system. And so in this case we just simply negotiated to put in a meter, we paid for the cost of it in exchange we’re accessing 200 million a day incremental supply just south of Dallas and the producers on that system have contracted with us to move their gas off this system in non-winter months paying as incremental fees. And so it was a win, win; they have a better net back, we have a source of supply and an incremental source of revenue and so it just all three of those elements of what were all about went into just this kind of an investment.

This chart is pretty busy, and it has a certain simplicity to it, all it does is represent on tied in well head receipts; 1.5 Bcf a day, you can see that by 2009, our tied in well had receipts on our pipeline system had reached about that level mainly because of the Barnett Shale was just going crazy, and there were no other pipelines that were in place like we were to take it off. And then what happened in 2009, two or three other pipelines were finally constructed and we watched a lot of that gas depart our system. And so we saw our third-party revenue associated with moving gas off the system take a dip.

When we are successful at building up our connected well hedged supply of gas that serves our customers but we can exceed our customers’ demand, it creates the value opportunity for transporting that off the system. Now what we are seeing is after this dip has occurred, we are now beginning watching a rebirth and that's based upon the associated gas with oil but its also interestingly enough we are seeing producers that made commitments to those other pipelines to get them constructed, those producers are now winding down their first contractual obligations and they are coming back to a more favorable market area, and they are willing to access us from our markets but also the fees we charged to move them to liquid hubs and so we are again a win-win situation.

We believe this trend as long as somebody doesn't outlaw fracking and we have the ability to continue to explore for oil and natural gas in this country. This trend should continue which sets the basis for us to continue to undertake capital projects to continue to access that gas.

The last slide I will show is just a representation of the future based upon what we are seeing now. This is a piece of Atmos that is worthy of investment and has a very favorable rate of return and you can see as we project out over the next five years, we are looking at building the rate base from about $1 billion up to about $1.5 billion, a little more than $200 million a year of investment each year and those are going to be going toward fortifying, replacing, repairing, replenishing existing infrastructure. It will be toward growth projects, it will bring incremental value in gas supply and it will be again just creating value for our customers and so we serve all of those masters in accessing gas supply for our major customers and the one question I will probably ask in advance that maybe you might have on your minds is why don't you get into other areas. Why don't you break out of this paradigm and what you say this, what you are but what are you not and in the couple of things that I would end with is saying we are not in production, we are not in gathering, we are not in processing, we are not a liquids pipeline.

We are a regulated Texas intrastate pipeline that knows what its target market is, it knows its paradigm for investing. Atmos has a certain risk profile and risk tolerance of what we are after and APT fits within that and to break out of that paradigm puts us in a competitive terrain of people with much higher risk profiles, have a whole different financial paradigm that they are operating within and we like our niche, we are good at our niche and we are going to continue to excel at what we do.

So with that I will turn it over to Bret for the financials.

Kim Cocklin

Thank you. That was very good. I hope you found that insightful, you can see that there is a great future within a lot of projects on the board. They are real and if you want more detail we would certainly encourage you to contact Susan and Rose and we will get you any and all that you need but there is a $1 billion over next five years for R.A. and we trust him. He is an excellent leader and his experience and performance has been stellar when we have given him money and he has invested.

I will want you to take it back, I know that many of you have questions what is the production capability or deliverability of the Barnett Shale, is it declining, we get that question frequently, we specifically put that slide 28 in the book to address and answer that question. This obviously 29 helps summarize and capitalize all of the future success that’s going to be there but connected supply at the Barnett shale is not going away. In fact, we continue to see it on an uptick and that experience we think we will continue the asset, as Dick said, 11.8% return on equity and the opportunity to make GRIP filings every year adds up to a very positive successful story which is provides a lot of foundation and support for our growth story that we've been talking about.

Bret Eckert, I am going to call and introduce him. He joined us in May. He was elected Chief Financial Officer on October 1, 2012, when Fred Meisenheimer retired. Bret brings 22 years of experience in Public Accounting and much of that time was dedicated to the regulated business. He has been in Dallas at that period of time. So he is not a stranger to Atmos. He understands the utility business exceptionally well, understands rate regulation, financial reporting and financial engineering.

We're very fortunate to have his leadership, his experience, his knowledge, and his integrity on our senior leadership team and right now he is the perfect fit to ensure that we successfully execute our very important financing strategy which is associated with this CapEx appetite that we have over the next five years and certainly we will continue our commitment to be fiscally efficient and responsible and grow shareholder value. So, Bret?

Bret Eckert

Thank you, Kim and hopefully you got a sense in hearing from Dick what a gem of an asset the pipeline is, great growth engine, you will see this in some of the slides that I talk about. Now I did warn Dick about using the pointers, I will not be using the pointer because I won’t do that this entire presentation. So, now that you have heard an overview of our business strategy, our segments I am going to talk more about kind of how we are going to execute that strategy what the 2013 budget would then translate into and then some of our financing strategy in that process.

Let’s begin with our earnings guidance for fiscal ’13, last week we released our earnings per share guidance of $2.40 to $2.50 per diluted share that excludes unrealized gains and losses and also excludes any gain on the sale of the Georgia assets. So I think both of those things are important.

Other assumptions as we go through and put together the budget, we have assumed a full year of contribution from our Georgia distribution asset for fiscal ‘13 as the sale for budgeting purposes was assumed to close at the end of fiscal ‘13. Therefore, the regulated business assumes discontinued operations from our Georgia Division between $0.09 and $0.11 that would impact 2013 earnings.

We do anticipate as Kim had mentioned receiving approvals for operating income increases in the $90 million to $110 million range for approved rate outcomes of fiscal ’13. So this represents assumed rate case approvals that we will receive during 2013. Now there is timing aspects of one of those approvals commence, so the growth impact from the rate outcomes is expected to contribute operating income somewhere in the $65 million to $70 million range to 2013 earnings. So that’s what will translate into our earnings next year.

Keep in mind, each $1.5 million change in rate outcome has impacted us about a penny a share. Our average gas cost purchases and $4 to $6 per Mcf range, weighted average gas cost $4.88 per Mcf that includes delivery cost, weighted average cost to gas storage hedging programs as well as market purchases. And then now regulated business, we expect gross margin contribution somewhere in the $60 million to $67 million range again that excludes unrealized gains and losses.

Delivered gas margins are clearly the largest component with buying budgeted at somewhere in the 425 to 435 Bcf range. Per unit margins of $0.10 or $0.11, expectations asset optimization margins are breakeven to $2 million. So we do expect the asset optimization activity to resolve that contracted storage and demand fees again in 2013, but I think, you can really see this business are now regulated business was 3% of our earnings in 2012 approximately 5% of our earnings in 2013 with the asset optimization assumed breakeven to regulated gas much called predictable business from that standpoint and real growth engine continues to be the regulated utility.

We did assume average short-term rates of 60 basis points give you a sense each 100 basis points changes about penny, penny and a half per share. This slide provides a history of the net income contribution by segment. This excludes again unrealized gains and losses in one-time items if you will and it compares with the fiscal 2013 projections and one-time items to remind everyone we are $3 million $0.03 per share in 2011 and they were $10 million or $0.11 per share in 2012.

So assuming this we reach the midpoint of our EPS guidance of $2.45 will be the midpoint. In fiscal ‘13, compound annual growth rate would equate to about 6.5% since 2008 when you strip out the one time items. Again you will also see that 95% plus of our net income comes from regulated operations and that was only 5% coming from non-regulated.

In the regulated distribution segment, net income is projected as you can see to reach $143 million to $148 million in fiscal ’13. On the surface that's a 4% to 7% increase, but keep in mind that has about $7 million in the 2012 numbers related to Missouri, Illinois and Iowa. So if you strip that out because its not going to repeat itself from 2013, you are looking at somewhere in 9% to 13% increase. You are starting to see the traction already from the investments that we are making.

Also the regulated pipeline, net income in fiscal ’13 expected to reach between $68 million and $71 million, as it remains the strong appetite from producers and marketers as Dick spent some time just reporting. That's 11.5% to 16% increase over 2012. So again all those projects are really adding to our growth opportunities. Non-regulated segment; net income is projected to be between $9 million and $11 million, primarily as I said from our delivery gas business.

This slide gives a historical comparison to fiscal 2013 projections for several expense categories. This comparison includes the discontinued operations. Slide 72 in the appendix has the same presentation which excludes the contribution from discontinued operations. We are projecting that total fiscal ’13 consolidated O&M is going to fall in line with 2012 levels for the most part. There's a few moving parts in that to give you a little bit of color around it and that decrease of about $6.5 million to $7 million of O&M related to the Missouri, Illinois and Iowa sale. That's direct O&M that's eliminated and offset by retained allocated costs, that's down about $6.5 million to $7 million

We do expect a slight reduction in legal expense in 2013, increased labor expense of about $6.5 million to $7 million mainly due to wage increases in the current year. Some increase in medical dental and other benefits of about $6 million and then slight increase in pension and OPEB costs net of deferral of about $2.5 million.

Depreciation expense, honestly is fairly flat year-over-year. We do have obviously increased capital investments, so you would expect to see that expense number start to go up, but this is offset by lower depreciation rates or the depreciation study that was enacted. So that lowered some of the rates and then we have Rule 8209 deferral.

I will remind everyone Rule 8209 pipeline infrastructure replacement program in Texas allows us to defer interest, allows us to defer depreciation expense as well as deferred taxes during the investment period. So it does compound those investments that's great program in Texas. We do expect interest expense to decline slightly in 2013 as a result of greater interest expense deferrals related to Rule 8209 offset by slight increase in interest expense because of the upsizing of the January issuance by $100 million, January of 2013 issuance.

Income tax expense is expected to increase slightly year-over-year, mainly due to higher pretax income. 2013 as well as the absence of the $13.6 million tax benefit that was one of our one-time items that would recognize in 2012. This slide highlights our capital expenditure spending mix for fiscal 2012 as well as an estimate for fiscal 2013. 2013 capital budget is projected to be between $770 million to $790 million as we continue to focus on the safety, the integrity and the reliability of our infrastructure, while following the various state approved programs that we have.

Regulated CapEx is all but $1 million and this total is largely driven by expenditures for enhanced infrastructure replacement, again Rule 8209 in Texas, PRP in Kentucky, Georgia and Kansas. Additionally, we expect to decide to spend about $90 million to $100 million on Texas inter-state pipeline APT to complete two large infrastructure program Line W and Line WX.

Over 70% of our capital spending is on safety and compliance, that’s shown in the dark blue, the 450 and 458 and improvement which is shown in the grey. Another 24% spend on expansion which is in the dark green; and these really are the investments that are going to fuel our earnings growth as we go forward. So safety and compliance, that’s the 450 million to 458 million. That’s comprised again spending on Texas rule 8209 pipeline integrity management, PRP, cast iron, bear steel replacement program, improvement to 95 million and 97 million, that’s in the grey. It's comprised of spending such as automated metering, storage enhancement, relocation and finally the expansion. That’s comprised of Line W, Line WX, compression projects, new service meters, regulated stations, main expansion things of that nature to give you a sense of what goes in those categories.

You know, fortunately we have rate provisions and timely rate filings. We expect will result in approximately 90% of regulated capital being included in rate base and providing a return within 12 month, and that’s really what because of the rate structures that we have is so strong. If you look specifically at ‘13 capital of 79%, 80% of it is in rate base within six months. You get almost 95 of the eight month of spending. So pretty good return on the dollars that we spent.

Here you are going to see our long-term debt maturity schedule, as well as our liquidity profiles of September 30, 2012, both of which are very favorably positioned. Additionally we do benefit from very solid investment grade credit ratings, you will see those in a few more slides. Talk a little bit about our early redemption that was disclosed in our 2012 financials, August 28, we did early redeem all of the outstanding (inaudible) senior notes that were due January 2013 that was principal amount of 250 million. We initially financed the early redemption by issuing commercial paper.

Just before the end of September we entered into $260 million term loan credit agreement, pay down the commercial paper. We do plan to issue 350 million of senior notes, new unsecured long-term notes in January ’13. We use those proceeds to pay down the short-term credit facilities and short-term debt and that is an upsize of about 100 million in that facility.

Turning to our liquidity profile September 30, total liquidity of 1 billion approximately was about 669 million available September 30. It’s made up of four committed facilities currently and that includes the two predominant ones; a corporate facilities 750 million, the five year facility has a $250 million accordion feature associated with it, it’s used the backstop our commercial paper program and it expires in summer of 2016. And then we have a 200 million committed facility at Atmos Energy marketing in Huston that used the back stopping non-regulated letters of credit and then we have approximately 311 million of commercial paper outstanding as of our fiscal year end.

We continue to have ample liquidity with further changes we are going to make into our credit facilities during our first fiscal quarter. As I discussed in the previous slide, Atmos Energy marketing has 200 million committed facility which does service backups for the letters of credit. During the current quarter, we will be closing a facility, really due to lower letter of credit needs in Houston, and we are going to replace with the $15 million 364 day bilateral facility.

To maintain the overall commensurate level of liquidity, we will concurrently upsize the $750 million corporate facility by $200 million. So it’s going to go to $950 million and we are going to maintain obviously the $250 million accordion feature.

So therefore total liquidity increases by about $50 million as a result to these changes, and this is going to simplify our credit facility, it also allow us to better manage our cash balances. So look for that to come. Now turning to our projected long term debt planned issuances. We do expect as we have said to issue $350 million of 30 year senior notes, January 2013 upside of that facility is planned by $100 million from the 250 we early redeemed.

Projected affective interest is somewhere in the 5% to 5.5% range this is related to treasury lots that we executed in August 2011 and which fixes the component at an all end cost of 4.07%, and this will go into cost to debt that we do recover through rates. Slide 10, this shows the impact of the 2013 senior note issuances on a weighted average interest cost and average maturity.

Our weighted average cost for debt goes for about 6.3% to 6.2%, about $2.5 million impact, while our average maturities is extended from 12 to 14.5 year that is related to the 2013 issuance. So as I stated previously, and I think as shown here on this slide we benefit from the solid investment grade credit rating.

Let's talk about our financing plans. We talked a lot about all this investment, all this increased capital spending that we are going to do. How are we going to fund this capital spending? Depicted here is a bar chart showing our capital spending estimates by year. It starts with our actual capital expenditures in 2012 with $733 million, $723 of that was at the regulated entity, estimated capital expenditures of between $770 million and $790 million in fiscal ’13 and along with our estimated capital spending through fiscal year 2016. We will continue to finance these expenditures. It will be a blend of cash flow, debt and to a lesser extent equity.

As we discussed previously we've upsized, we are upsizing the January ’13 issuance by $100 million and you can see that in the second bar here on the chart. We do plan to issue a new $250 million senior notes tranche in fiscal 2014. We are also planning to upsize the fiscal year 2015, $500 million 4.95% senior notes, but somewhere in the $75 million range. So just to remind the group the 2015 issuance was recently hedged with a forward starting swap effectively fixes the treasury component at about 3.129%.

So the overall plan assumes a net increase in the $425 million to $450 million range in long-term debt due 2016. Now based on these assumed issuances, our weighted average cost of debt day goes from again 6.3% currently to about 5.7% in 2016, while our weighted average maturities is extended from 12 years to almost 19 years by 2016. In addition, we have shown a potential equity issuance in the out years as the fund growth project is also to rebalance our debt and equity structure for our rate filing.

Finally, this slide detects our annual dividend growth over the years showing a solid track record of increasing dividends over the period, as announced last week the Board of Directors did declare our 116th consecutive quarterly dividend, raising annual dividend by $0.02. The indicated annual dividend for fiscal 2013 is $1.40 per share. The increase in the dividend reflects our continued support of providing attractive returns to investors while continuing to execute our growth strategy by reinvesting the capital in our system. Dividends are paid from regulated earnings; our current dividend yield is about 4% compares very favorably to our peer group. Finally, our shareholders experienced a 15% total return on their investment in 2012.

Those are my prepared remarks. Thank you for your time and I will hand the podium back over to Kim.

Kim Cocklin

Thank you Bret, very much, that was an excellent report, I must say so myself. We are going to open it up for questions, but before that I just want to summarize very briefly. I think what we believe is a value proposition that's offered now in the utility space and specifically by Atmos Energy. First of all, there's never been a better time to be in the natural gas business. We've been in it over 30 years, Dick’s 39, I mean we've never seen better times. These are the best of times for natural gas and particularly for being a regulated natural gas utility.

Why natural gas? As you all know, it is extremely abundant; we have now over 100 year reserve life index; its environmentally superior to all other fossil fuels that are available. It is extremely affordable and has been that way for a couple of years and will continue; the prices are low, they are stable and finally it's an American domestic product. And because of the price for natural gas, a regulated utility like Atmos has been able to significantly increase our capital investment as we’ve talked about, the four to five we have an extent our regulated infrastructure to make our system more safe and more reliable and most importantly, we've been able to have that investment reflected in rates that we charge and collect, but not have our customers experience higher utility bills because of the cost of the gas.

Our cost of gas for our customers is going down three consecutive years and we are able to do that by taking a head position which is approved by state regulators that at least on 20% of our expected requirements each winter. So we will continue to invest sufficient capital to grow our rate base as we said at an average rate of 8% to 8.5%, grow earnings 6% to 8% deliver a total shareholder return of between 10% and 14%.

We have met our commitments that we made. We will continue to make commitments that we have made today. We've increased earnings for the last 10 years. We've increased dividends for the last 29 years. We’ve strengthened our balance sheet. We have improved our geographic efficiency. I think that this slide makes an extremely compelling case for the value of Atmos Energy in the space today. We trade at a pitiful 13% discount to our peers, but we have a projected five year total shareholder return that’s 9% better than our peers.

I don't know what's your models are telling you. This is not smoke and mirrors. We do expect to continue and we will continue our relentless pursuit of improving our metrics, our PE ratio and delivering value at the end of the day to our shareholders and it’s a good time to get into this space.

So with that we will open it up to questions and we again thank you, we don’t have the time, we want to thank you all of you for taking time for being with us today; I know it’s a tough time in a lot of parts of the city. This is a busy time for all of you and we do appreciate you allocating very valuable time with us and we hope that we have made it worthwhile and we will take questions.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Bret Eckert

The question had to do with the sharing mechanism, the market based revenue and how that was establishes at base, what happens when it goes above or below to that, is that correct representation?

Unidentified Analyst

Yes.

Bret Eckert

In the last case, our market based revenue during the test period was established at $84 million and so that established that benchmark for revenue crediting back against our overall cost of service. As that is our actual experience on a year-by-year basis occurs, we have, what was approved and known as writer rev; it becomes a mechanism when the actual goes above or below that, 75% of that is borne by or benefited to the rate payers 25% of it is borne by or benefited to the company.

Unidentified Analyst

Okay, so if I look at the table to the left. It’s a market say margin 72 to 78, so that means that, in ‘13 it’s going to be the below the 84 net of the sharing?

Bret Eckert

Yes, we would estimate right now, it would be slightly below to $84 million and so there you built into our plans would be that adjustment where we would have 25% liability of that difference.

Dick Erskine

I think the 75% of the difference.

Unidentified Analyst

Correct, yeah.

Kim Cocklin

When you model you see our estimated assumption, if its below $84 million and then you put 75% of that amount in your model, if its above it, then you’ve got to take a discount to the amount that is above $84 million.

Unidentified Analyst

Got it, so and then I was trying to get, it was too late, so I guess that means it will be less than to eliminate in 13, but as these other pieces get attached and more volumes and optimism brought on, you could then over the next few years get above that?

Kim Cocklin

No, you can see what we earn every year, but by our filing we make with the Railroad Commission our Earnings Monitor Report and we have not earned above the 11.8%.

Unidentified Analyst

And then in the last category here it says margin expansion grew ancillary services. Are those included in the types that you (inaudible) with the 84 or those are other types of revenue that don't fall into that category?

Bret Eckert

All of those market based revenues, the ancillary services compression, parking lending and things of that nature are included as part of the overall amount that's compared to the $84 million.

Unidentified Analyst

And then I have question on the ‘13 number where you talked about the amount you expect from rate cases?

Kim Cocklin

$90 million to $110 million.

Unidentified Analyst

Yeah, is any of that number from rate cases that have already been decided that are then flowing into ’13 or was that all from rate cases yet to be decided?

Bret Eckert

The $90 million to $110 million are what we expect to get approved rate case outcomes in fiscal ’13. Okay, now the contribution of that is it always trying to get to during the time is to ones those get contributed. So of that you are going to have a contribution increase in operating income of $65 million to $70 million range but the $90 million to $110 million do relate to approved rate outcomes in fiscal ’13, just at the mid, that's the 12 month effect of the rate outcomes.

Unidentified Analyst

Got it. That's an effect of rate outcomes that have yet to be decided and then based on your estimate of when you are going to get decided the net effect was the number that you said?

Bret Eckert

That's right. I was trying to give some perspective as to how that would translate for you all into 2013 earnings.

Kim Cocklin

In ’14 that's the number.

Operator

Chad Burner is the first caller.

Unidentified Analyst

I usually am. I'm sorry if I missed this in your opening comments. I haven't had a chance to look at the PSDI but what's the, what would be the operating income number versus the 46.5 that you asked for and just a couple of things are you going to get the, sort of RRM where you will have the constant refresh every year, or do you have a stay out clause, maybe just give us a little bit more on what the PSD actually said.

Kim Cocklin

I won the bet. I knew that you would ask that question. But we are not prepared to talk about any granularity around operating income right yet because it is a proposed decision by the hearing examiner. We can say that his approach was extremely fair and balanced and followed all the regulatory precedents that exist in by the Railroad Commission, its consistent with our filing because we filed consistent with all of the policy of precedent that existed.

The staff took a position of recommending a return of 10.1%. We filed for a 10.9%. The hearing examiner recommended a 10.4% return, there's a positive impact from the movement upward of the base charge for customers which the examiner recommended at $17.70 but the commission will act on or before December 20, probably they have got a meeting on December 4 and I forgot the other date, I'm sorry but they will meet and take it up at that point. We will get you all the granularities, so you can have it in your model by Christmas day.

Unidentified Analyst

I do will.

Kim Cocklin

Good. Well, it will be good for you.

Unidentified Analyst

Another question, do you have any, was there language around whether this is going to be (inaudible) kind of thing year-over-year, we will have to do both…

Kim Cocklin

We definitely want to recommence discussions with our customers about continuing or extending or obtaining a new rate review mechanism to avoid having to file additional cases in the future. And those discussions, I am sure, will occur once the Commission acts on the hearing examiner’s decision and then that; we hopefully will provide a springboard and basis for the establishment RRM on to Mid Texas going forward. Of course we have one with Dallas; we have one with West Texas. So that’s the only remaining group of customers we have in Texas is that group. It has been under RRM for five years and you know, we thought they like it quite a bit and we hopefully will recontract in that same capacity.

Unidentified Analyst

A little more on the pipeline business, what's the process for sort of looking at the prudency around the spending I think that you always have a line of lot of interesting projects, I am just wondering how you go about proving that all these projects are used and useful and things like that? Are there any tests around utilization of the capacity and things like that? How do you go through that process?

Dick Erskine

Question has to do are there any particular criteria upon which our projects are judged, when they are reviewed by the Railroad Commission. The Commission looks purely and simply, are they used and useful, are they in the service of our customers and that’s why we are very particular about the projects we undertake. We haven’t constructed Greenfield projects to take gas out of state, what we have done is or undertake projects that enhance and supplement the existing system that improve service to our customers and so by our very own internal evaluation process we do not undertake capital expenditures that could or would be judged not in the interest or usefulness for our customers, but there are no what I would call established criteria point-by-point, it’s just a very simple black and white criteria is used and useful for your customers and then answer is yes then it’s being reasonable.

Kim Cocklin

Some of that is done with the experience we had in February of ‘11 when it was demonstrated that were there were low spots significant under pressured parts of the system and inability to get sufficient supplies of gas to a particular area that serves by Mid-Tex or co-served so enhancing and increasing the reliability, safety and stability of service is at the end of the day the focus and direction of a lot of this stuff and all of them are included in GRIP filings.

Unidentified Analyst

Just had a question you show on slide 32, the non-regulated business and net income it’s a $10 million net income for 2013 and then when we think about your EPS range in 2016 and the growth rate of 6% to 8% between that point, how do you want us to think about the non-regulated piece between now and then?

Bret Eckert

I would look at the non-regulated piece until that the dynamics within the natural gas market that they operate and compressed by the forward spreads, the margins what they are, be conservative our model is fairly flat in the $9 million to $11 million range as you go out as, we will look any growth that we will have with the focus we have in municipals and other parts of that strategy. We are only looking at one increasing volumes and two increasing margins, okay and that would be where the growth in that business would come as we see it deliver gas margins.

Unidentified Analyst

And just like a more split the way of assumptions in the 3 to 320 or the six to eight I mean is a $10 million net income (inaudible) kind of midpoint or bottom end that you would get that back to ‘09 and ‘10 levels it will be at 8% kind of the range or?

Bret Eckert

10 to 12, I think when you look at the 10 to 12, what's driving that six to eight over the remaining four years because this period is really driven by the regulated utility, that's where the growth model is and so the non-regulated piece is not going to be the piece that moves the needle on that.

Unidentified Analyst

And just last question is there a targeted percentage of the business that you want to be non-regulated at this point or?

Bret Eckert

It’s the 3% 2012, less then 5%, 2013 I expected based on those projections, if the regulated utility is growing at the rate we are talking about and the non-regulated piece is only going to become a smaller percentage of it.

Kim Cocklin

You would be extremely comfortable and very happy if the contribution from the non-regulated group stay at 5% or less? They ramp up you know given any kind of spike in the gas market volatility because they will advantage of that but we are anticipating and assuming that a 5% or less contribution would be very, very good given the metrics around that business and they given the market they serve and they again they are good unique value added asset in our portfolio because they all require a lot O&M, they require hardly any capital and their case requirements are limited as well given where gas prices are.

Unidentified Analyst

Its for Kim or R.A what sort of growth, you are getting in household formation in your customer areas and maybe just specifically Texas and if you have the data for outside or basically new customer adds, new customer growth?

Dick Erskine

Zero, probably zero to 0.5%. I mean our real growth is in the rate base side of the business and you don't have to grow customers anymore to grow earnings in this business fortunately because there's a lot of effort to conserve and obviously the more customers even if we have a net positive growth factor for customers, you are probably not going to increase consumption primarily because of the efficiency associated with new appliances and housing starts that are so tightly wrapped you know nothing gets out. So that's it Jeff. I thought you would ask on the dividend but thank you.

Unidentified Analyst

Quick question for Bret on depreciation, I think you said that in 2013, it would be fairly flat despite the increased spending because of the change in the depreciation rate and I am just wondering if you can quantify?

Bret Eckert

We have gone through the depreciation studies and do depreciation studies that our filings have extended out the lines a little bit. So the offset of that extension okay and the deferrals that you get was 8.209 and then offsetting that just increase in our capital expenditures or increase in our plant balance they roughly offset each other as you look at 2013 budget.

Unidentified Analyst

So it’s a one off so you would expect depreciation to keep growing 2014?

Bret Eckert

We will continue to make investments you see there (inaudible) we are going to continue to ramp up.

Unidentified Analyst

But (inaudible) useful life of everything as a whole.

Bret Eckert

That's right.

Unidentified Analyst

Thanks for having me. I have a question during the CapEx period for growth going out in the next few years, do you have an explicit forecast for targeted credit metrics, FFO to debt or debt to EBITDA? You do have a chart in there about your credit ratings which is nice but I'm curious what your targets might be for either maintaining that or (inaudible)

Bret Eckert

From a debt, maintaining our debt to equity ratios?

Unidentified Analyst

Well, whatever your credit metrics are that you target just before your credit ratings, I am curious if you do have explicit targets.

Kim Cocklin

Well, yes we do those and we do them primarily to pacify the rating agencies and we have that information but we don't have it with us. But we are in good stead with the agencies. We give that information to them and we are having, we are going to go visit them in December as we do every year and we can make them available I assume. We can make them available to you Ken.

Unidentified Analyst

Yeah, as a fixed income investor knowing that you will be issuing long term debt it’s interesting. It would be very interesting to understand what your targets would be with you. I guess if I had another question I would ask something at a different level. I understand that you are looking for organic growth or that's in the plans now, do you see any potential M&A opportunities and what might you find interesting if something were to come up.

Kim Cocklin

We are not looking for organic growth. We are looking for pure investment in our current rate base assets. We are out of the acquisition business, and it would have to be a very, very unusual, attractive, low multiple operation that came on those aren't out there and ones that are for sale are in jurisdictions that we are exiting and they are for sale probably for good reasons, and the multiples are pretty high.

We get a much better value and quicker return and better results for our shareholders by taking any capital and cash that we have and pouring it in to the capital expansion program that we have. The assets that we're working on right now, as I said, the 10 acquisitions for 86 to 2004 provided us a wonderful suite of assets and with a healthy appetite right now because of the focus on safety and reliability as a result of some of the instance that have occurred country. So we have sufficient asset in our portfolio right now that will provide us the opportunity to fortify rehab replacement restructure that infrastructure. Thank you JPMorgan. We appreciate your business.

Unidentified Analyst

What do you see some of your sort of key [business] challenges over the next 10 months? What are you guys thinking about? What keeps you up at night?

Kim Cocklin

Well, obviously these things that are way beyond our control that impact our share price and our stock performance. Everything that we have within our control, we're extremely comfortable about, and that is our peer focus. We've been to manage our O&M with a laser like focus. On our capital expenditures, we're going to determine when we spend it, how we spend it, where we spend it and when it happens, we are going to become as geographically efficient after we divest Georgia. We're in the jurisdictions where we want to be.

The things that keep us every night are the same things that keep you up every night, the fiscal cliff what in the world can get into Washington because we have no control over them, I will say in Washington we thrived under this not existent situation that existed for four years. You had just a lock jaw situation up there nothing got done and we continue to increase earnings, money is extremely cheap, our customer bills have gone down, our value is going up.

So that keeps us up at night Bush tax cuts keep us up. All that stuff is - eventually we have plans, but there is just a lot of paralysis in corporate America right now trying to figure out what kind of costs are coming down as a result of tax changes, Obamacare. The other things keep me up night is we are the future of the country. I’ve got kids your age unfortunately, so I worry about them I got grand kids.

I worry about where in the heck all this debt has gone and how you are all going to retire and how you are going to enjoy really it’s a serious issue, but it’s all bigger than all of us but at the same time I talk to people like you that I have. I am recharged, my faith is restored in the younger people in America because you are extremely intelligent, you are extremely driven, you work hard, but at the end of the day you need to be rewarded for that and I just don’t see it with those bozos in Washington right now and that’s a problem, it’s a big problem. So that’s what concerns me more than business issues because we are going to be gone and we only got 17 more years and not another day, so we are, but we probably got 5, 7 years and we do have a good retirement but Lord, it’s sad, and it’s tough that's what that.

Unidentified Analyst

And just back to M&A as well, just wondering is there anything after you are looking exiting any more, anything else favorable done?

Kim Cocklin

No, I think our capture you know what we know who we are and what we are and what we are not. We are not going to do production, we are not going to do gathering, not going to do electricity, we are not doing the midstream stuff, we are not going to be a liquid transporter. We are a natural gas utility and we are very comfortable a non-regulated gas marketing company. We are situated in eight states, we love being 75% to 80% of our markets in states that are growing Louisiana, Texas and Mississippi and we have extremely good relationships with piece take over in those states, and the other state that we do business with we are very, very comfortable and we are proud to be one best companies to work for in those states as well.

Unidentified Analyst

Just a couple of quick things, I came in a bit late, I just want to get to some clarity on page 40, if you broke out in 2016 the equity and the debt come out there because in the ‘13 to ‘15 you have outlines the exact amounts for the debt, did you break that out?

Bret Eckert

And for which period?

Unidentified Analyst

Sorry, 2016?

Bret Eckert

We did not. We don't have any maturing issuance in 2016, the maturing issuance is in ’15 and ’17 and so that's what, set bars representing the capital spending alright that would be occurring in 2016 and we are just trying to highlight in the out years, we may consider an equity issuance just to fund the growth projects as well as rebound our debt to equity structure.

Unidentified Analyst

So how should we think about it.

Kim Cocklin

50-50. The commitment is to maintain that 50-50 capture, it may float between 45 and 55. But our target’s 50-50 and that's really where we want to feather this and because that's really what you get compensated for by the regulators when you go in for rate reviews.

Unidentified Analyst

And could you just remind us the target payout ratio and what the dividend would look like going forward.

Kim Cocklin

Well, again for a multiple moved up our share price got any better than. We got, with probably the dividend might move but the dividend’s 4% and I think that's what we are getting rewarded with right now. I don't think there's going to be, its not going to be a needle mover if we increase it dramatically but the best and highest use for our funds right now is in our CapEx expansion opportunities.

Unidentified Analyst

I guess just to your last point reflecting on page 43 given where the stock trades and your comments on the stock trading so cheap. How do you think about potentially buying back shares given where it trades at versus being got cheap?

Kim Cocklin

We are pretty comfortable with our share count. We have either stayed flat or decreased a little bit. We are buying back enough shares to fund any of the benefit programs but still the highest and best use for shareholders is to put it into the ground and let it return, get paid for it that way and as Bret said we are starting to see some traction because it’s the regulated utility, you got to have a little bit of patience. So you are going to see some pretty good experience from the investment next year or so. But you won't stop talking about the dividend I know that.

Unidentified Analyst

Yeah, I just have some of the things in the questions about what you would or would that do. Would you consider any green filed pipeline projects either on your own or in partnership with others that traverse any of the other jurisdictions that you are operating outside of Texas or (inaudible) consider the pipeline business to be a Texas centric business.

Kim Cocklin

Right now and probably for the foreseeable five year period it would be a Texas centric business because we are going to put $1 billion in the ground in that pipeline which is about the money that we'd probably spend or focus on a partnership in another pipeline. We know the Texas market, we know where, what we are doing there, we have exceptional relationships with third parties that need their supplies moved. So that's where the money would be going.

Are there any other questions? We really do appreciate all of you being here. It’s great to see you and we hope that you have a very, very good restful holiday period if you get any time off of the holidays. But enjoy it and we continue to send our thoughts and prayers in the people to New York to help with the restoration effort.

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