Susan Giles - Vice President of Investor Relations
Kim R. Cocklin - Chief Executive Officer, President and Director
Bret J. Eckert - Chief Financial Officer and Senior Vice President
Atmos Energy (ATO) Q2 2013 Earnings Call May 2, 2013 9:00 AM ET
Greetings, and welcome to the Atmos Energy Fiscal 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Susan Giles, VP, Investor Relations for Atmos Energy Corporation.
Thank you. Mrs. Giles, you may begin.
Thank you, Brenda. And good morning, everyone. Thank you, all, for joining us. This call is open to the general public and media but designed for financial analysts. It is being webcast live over the Internet. We have placed slides on our website that summarize our financial results. We will refer to a few of the slides during this live call, and we'll be happy to take questions on any of them at the end of our prepared remarks. If you would like to access the webcast and slides, please visit our website at atmosenergy.com and click on the conference call link. Additionally, we plan to file the company's Form 10-Q later today.
Joining me in this morning are Kim Cocklin, President and CEO; and Bret Eckert, Senior Vice President and CFO. There are other members of our leadership team here to assist with questions, if needed.
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. Please see Slide 2 for more information regarding the risks and uncertainties we consider in making these forward-looking statements and where to go to get more information on such risks and uncertainties.
And with that, I'd like to turn the call over now to Kim Cocklin. Kim?
Kim R. Cocklin
Thank you, Susan. And good morning, everyone. We certainly appreciate you joining us and your interest in Atmos Energy.
Yesterday, we reported second quarter consolidated net income of $116 million or $1.27 per diluted share compared to $109 million or $1.20 per diluted share a year ago. And for the 6 months, reported earnings were $2.15 per share compared with $1.94 last year.
On April 1, we closed the sale of about 64,000 meters in our distribution assets in Georgia for approximately $155 million. We will record an after-tax gain next quarter of approximately $6 million or $0.07 per diluted share, subject to final purchase price adjustments. The net proceeds are being reinvested in our regulated capital investment opportunities. This disposition, along with that of Missouri, Illinois and Iowa last year, delivers our commitment to become more geographically efficient and continues our focus on growing our remaining regulated rate base by 8% to 8.5% by the end of fiscal 2016.
In February, we began publicizing the impact of the Mid-Tex rate case and the expectation for gas margins to shift from the first half of our fiscal year into the back half of this year. As we anticipated and communicated to you, the shift reduced results in the current quarter but will be more than offset with increased natural gas distribution margin in our third and fourth fiscal quarters. With 6 months of actual experience and the early arrival of returns from our growth through investment strategy, we have confidence that we can achieve the higher earnings range of $2.45 to $2.55 per diluted share, up from our original guidance of $2.40 to $2.50, excluding the mark and the gain on the Georgia sale. Bret is going to provide more details on this development.
Yesterday, our Board of Directors declared our 118th consecutive quarterly cash dividend. The indicated annual dividend rate for fiscal '13 is $1.40 per share. For the 12 months ended March 31, our total return to shareholders stood at 41%. We stand committed to all stakeholders, providing growth in earnings while delivering an essential and safe service to our customers.
Our CFO, Bret Eckert, will review our financial results in greater detail, and then I'll return with closing comments. And we'll address any questions you have. Bret?
Bret J. Eckert
Thanks, Kim, and good morning, everyone.
If you follow me on Slide 3. As Kim mentioned, reported earnings for the second quarter of fiscal 2013 were $116 million or $1.27 per share compared with $109 million or $1.20 per share 1 year ago. Excluding unrealized margins, net income in the current quarter was $1.25 per diluted share versus $1.28 per diluted share last year, a decrease of $0.03 quarter-over-quarter.
Turning now to Slide 4. For the 6 months ended March 31, reported earnings were $2.15 per share compared with $1.94 last year. After eliminating the unrealized gains in both years, earnings were $1.99 this year compared to $1.88 1 year ago, an increase of $0.11 per share or about 6%.
We successfully completed the sale of our distribution assets in Georgia on April 1. However, the financial results for those assets on the income statement will continue to be reported as discontinued operations in the current quarter. Prior year results also include the discontinued operations of the Illinois, Iowa and Missouri service areas, which were sold in August 2012.
Looking now on Slide 5 for the current quarter and 6-month periods. Distribution gross profit decreased by about $25 million in the quarter and about $29 million for the 6 months compared to the same periods 1 year ago. The decrease is a direct result to the shift in margins from the rate design changes in Texas. As expected and publicized, margin is down this quarter because of that shift, but higher margins will be achieved in the third and fourth quarters of our fiscal year.
As noted on Slide 11, we expect margins from our Mid-Tex operations to be approximately $25 million to $30 million higher than historical results in each of the last 2 fiscal quarters of 2013, during periods of lower gas consumption. Additionally, as a result of the increase to the customer's monthly base charge and a decrease to the customer's consumption charge, 84% of our cost of service is recouped through the customer base charge compared to only 41% under the previous rate design, as shown on Slide 10. At the end of the day, the result is a more ratable distribution margins throughout the year while providing a more stabilized earnings stream going forward. Any seasonal impact from the weather is further diminished.
Also in our distribution business, as detailed on Slide 12, we completed 11 regulatory proceedings fiscal year-to-date, which should result in about a $69 million increase in annual operating income.
Turning to Slide 6. Our regulated intrastate pipeline and storage operations, Atmos Pipeline - Texas, generated almost $4 million of incremental margin quarter-over-quarter and $8 million in the current 6-month period. GRIP filings approved in fiscal 2012 accounted for virtually all of those increases. APT's consolidated throughput declined about 4% on the quarter and was about flat for the 6 months compared to the same periods 1 year ago, primarily from a producer's slower drilling program, which resulted in reduced production volumes of 130k MMBtu a day, down from originally planned volumes of 170k MMBtu a day.
Turning now to our nonregulated operations, and you may want to turn to Slide 14. Realized margins increased $13 million quarter-over-quarter and almost $19 million for the 6-month period primarily due to increased asset optimization margins in both comparable periods. In the prior year periods, AEH took advantage of falling natural gas prices by injecting gas into storage to capture incremental physical to forward spread values that were subsequently realized during the third and fourth quarters of fiscal 2012. As a result, AEH realized significant losses on the settlement of those financial positions. In the current year period, AEH experienced significantly smaller realized losses from its asset optimization activities due to more favorable financial trading as market prices declined less in the current year period, against the execution strategy compared to the prior year period.
Realized margins for gas delivery and related services increased about $1 million quarter-over-quarter and were flat for the 6-month comparison.
Our nonregulated business has experienced a slight decline in consolidated sales volumes due to increased competition for the industrial customer. However, this impact was mitigated by higher per-unit gas delivery margins, reflecting colder weather in March that produced enhanced trading opportunities in the cash markets from price volatility.
Turning now to the expense side of the income statement. O&M is tracking as expected. For the quarter, it increased about $2 million but decreased by over $6 million in the current 6-month period. For the current 6 months, we experienced a decrease in legal and other administrative expenses, offset in part by an increase in contract labor from increased demand for locating gas lines in the DFW Metroplex and higher pipeline maintenance activities at APT.
Interest charges were about $3 million lower this quarter and about $8 million lower for the current 6 months as a result of interest deferrals related to Texas infrastructure Rule 8.209 spending in both periods. Additionally, in the 6-month comparison, the early redemption of our 5 1/8% $250 million senior notes, with lower long-term debt, during the fourth quarter of fiscal 2012 drove lower interest expense year-over-year.
Moving now to our earnings guidance for fiscal 2013. Based on continued strong earnings through our second fiscal quarter of 2013 from constructive rate outcomes, we are raising fiscal 2013 earnings guidance to $2.45 to $2.55 per diluted share from $2.40 to $2.50 per diluted share, excluding unrealized margins and the gain on the sale of the company's Georgia operations. Let me draw your attention to Slide 16 and 17 where we have updated our budget assumptions and provided net income projections by segment.
We are increasing natural gas distribution net income to a new range of $147 million to $152 million. The regulated transmission and storage net income range remains at $68 million to $71 million, and the nonregulated business net income range remains at $9 million to $11 million for fiscal 2013. As a result, consolidated net income increases to a new range of $224 million to $234 million.
Additional assumptions include the continued successful execution of our rate strategy. We continue to project operating income increases at the higher end of the previously announced range of $90 million to $110 million from approved rate outcomes in fiscal 2013, weighted average gas costs ranging from $4 to $6 per Mcf.
In the nonregulated segment, we expect gross margin contribution to remain in the range of $56 million and $63 million, excluding any unrealized gains and losses. Projected delivered gas margins remain strong at $0.10 to $0.11 per Mcf, and delivered gas volumes remain in the 400 to 410 Bcf range.
Our capital budget range has not changed and remains between $770 million and $790 million for fiscal 2013. We are optimistic that we can achieve our increased earnings guidance range of $2.45 to $2.55 per diluted share and consolidated net income between $224 million and $234 million for fiscal 2013.
Thank you for your time, and now I'll hand the call back to Kim.
Kim R. Cocklin
Thank you, Bret. Very well done.
We've obviously had another very solid quarter and are very encouraged with the positive outlook for the remainder of fiscal '13.
I do want to briefly comment on the retirement of Bob Best. As you know, Bob retired as the Executive Chairman of Atmos Energy on April 1. The company experienced tremendous growth during Bob's 16-year tenure, which included 7 acquisitions and growing the company from 660,000 to over 3 million regulated customers, also adding one of the largest intrastate pipelines in Texas as well as a very successful nonregulated marketing unit. Bob provided valuable leadership to the industry, serving as chair of the American Gas Association, the Southern Gas Association and also as a member of the National Energy Council. Many in the industry and more here at Atmos Energy are deeply grateful to Bob for his leadership, his coaching, his mentoring and his friendship. While we'll miss Bob on a day-to-day basis, he will remain engaged and a very important part of our company by continuing to serve as Chairman of the Board.
We continue to successfully execute our rate strategy. As Bret said, we've completed 11 rate proceedings which, when combined with regulatory expense deferrals, result in an increase of about $87 million in annual operating income, which nearly reaches our commitment to deliver $90 million to $110 million of new revenue this year from rate outcomes. We currently have 4 cases pending with annual operating income request totaling more than $32 million. The largest of these is the 2012 APT GRIP filing in Texas requesting a $26.7 million increase. We expect the commission will act during its May 7 meeting and are hopeful that the rate adjustment will be reflected on the May 1 billing statements. We anticipate filing between another 8 to 10 more cases this fiscal year, requesting about $40 million of additional operating income increases.
We continue to enjoy very positive relationships with our city customers in Texas and all of our other state regulators. With an annual investment in our regulated assets of some $800 million through 2016, we continue to demonstrate to the regulators and customers our commitment to safety and reliability.
On our regulated Texas intrastate pipeline, we are investing capital to increase capacity, secure long-term gas supply and enhance the reliability of our service in certain critical locations on the Mid-Tex system. Capital expenses are GRIP-eligible and are provided the opportunity to earn a return on equity of 11.8%. The Line WX project is expected to be completed in December 2013 at a total cost of $113 million to $116 million and should improve service reliability to the areas west of the DFW Metroplex during peak service periods.
Additionally, construction is underway for the installation of 2 1,500-horsepower solar turbine compressors designed to move gas to multiple interstate and intrastate pipelines in West Texas. The project will connect new supply being produced from the prolific Permian Basin shale plays to the APT system. Capital investment will range between $18 million and $20 million for this project, with an anticipated start date of June 2013. We also have a signed contract with a producer for 50 million a day, which essentially pays for the project.
In our nonregulated operations, the focus remains on the delivered gas business to its approximate 1,000 customers. This has become a very lean and mean operation, and we continue to forecast the earnings contribution for this segment to be less than 5% of our annual consolidated income.
On a consolidated basis, we remain committed to executing our capital plan of strategically spending close to $800 million annually through fiscal 2016 and growing our rate base at a compounded annual rate of between 8% and 8.5%, and earnings growth in the range of 6% to 8% on a compounded annual basis through 2016.
Our commitment to increasing shareholder value will remain a top priority and will be pursued by continuing to focus on growing our earnings on a very consistent, predictable and reliable basis.
We thank you for your time. And now we we'll open it up for your questions. Brenda?
[Operator Instructions] Okay, it seems there are no questions over the phone line at this time. I'd like to turn the floor back over for closing comments.
Thank you, Brenda. Just one last thing: The -- a recording of this call is available for replay on our website through August 6. If you do have any additional questions, please call me or Rose all day long, we're here, or visit us at the upcoming AGA Financial Forum. We appreciate your interest in Atmos Energy, and thank you for joining us this morning. Goodbye.