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Atmos Energy Corporation (NYSE:ATO)

F4Q 2012 Earnings Conference Call

November 08, 2012 10:00 a.m. ET

Executives

Susan Giles – VP and Investor Relations

Kim Cocklin – President & CEO

Analysts

Ted Durbin – Goldman Sachs

Amit Marwaha – Citigroup

Operator

Greetings and welcome to the Atmos Energy Fiscal 2012 Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answers session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan Giles, VP and Investor Relations for Atmos Energy Corporation. Thank you. Mr. Giles, you may begin.

Susan Giles

Thank you, Brendon. 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 just a few of the slides during the live call, but we will 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-K next week. Our speakers today are Kim Cocklin, President and CEO and Bret Eckert, Senior Vice President and CFO. There are other members of our leadership team here to assist with questions as needed.

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 two for more affirmation regarding the risk and uncertainties we consider in making these forward-looking statements and where to go to get more information on such risks and uncertainties.

Now, I’d like to turn the call over to Kim Cocklin. Kim?

Kim Cocklin

Thank you very much, Susan and good morning, everyone. We certainly appreciate you joining us and your interest in Atmos Energy. Our thoughts do continue for all of those impacted by Sandy. We remain in contact with the affected utilities up in the northeast and stand ready when called to send people, equipment and supplies and anybody that was personally impacted, we certainly spend our continued thoughts and prayers for you during the recovery process.

Yesterday, we were very pleased to report consolidated results, excluding the mark of $221.7 million or $2.42 per diluted share compared to results last year of $214.2 million or $2.34 per diluted share. When you add back the negative mark of $5 million or a negative nickel per share, reported consolidated net income was $217 million or $2.37 per diluted share for fiscal ‘12 compared to net income of $208 million or $2.27 per share a year ago.

This represents the 10th consecutive year we’ve increased earnings per share and compares very favorably to our guidance range of $2.30 to $2.40, which also excluded unrealized gains and losses. Regulated operations have continued to increase its contribution of stable, predictable and reliable earnings for the enterprise, driven by a very focused and well executed rates and regulatory strategy. Rate relief for the distribution in Atmos Pipeline Texas combined generated about $47 million of incremental margin in fiscal ‘12.

We did take advantage of the warmer than normal heating season and accelerated the start of many capital projects to fortify strengthen and/or replace our infrastructure to make our system even more safe and reliable. Also during the year, we closed on the sale of our distribution assets in Missouri, Illinois and Iowa to Liberty Energy and recorded an after-tax gain of about $6 million or $0.07 per diluted share.

Additionally, during the year, we announced an agreement to sell our distribution assets in Georgia also to Liberty Energy for about $141 million. We estimate a $6 million after-tax gain on that sale and expect the transaction to close in late fiscal ‘13. Net proceeds from the sale will be redeployed to find beneficial capital projects in the remaining jurisdictions we serve. With these divestitures, we have become much more geographically efficient and do not anticipate any additional asset sales.

Our non-regulated operations successfully executed their strategy of injecting gas in to storage in to the first half of fiscal year ‘12 and rolling financial positions to the third and fourth quarters and delivered overall positive results for the year. Our Board of Directors declared the 116th consecutive quarterly dividend and also raised the annual dividend by $0.02. The indicated annual dividend rate for fiscal ‘13 is $1.40 per share. The increase in the dividend reflects our continued support of providing an attractive return to our investors, while continuing to execute our growth strategy by re-investing capital in our system. Our shareholders experienced a 15% total return on their investment for the fiscal ‘12 year.

Our liquidity, financial position and balance sheet remain very strong. Our debt-to-capital ratio of 51.7% at September 30 was unchanged from last year. On August 28, 2012, we redeemed all of our outstanding 5.125% senior notes due January ‘13 and on September 27 of ‘12, we entered into a $260 million term loan credit agreement to paydown the commercial paper sold in August from this early redemption. We plan to issue 350 million of new unsecured 30-year notes in January ‘13 and use those proceeds to repay the borrowings on this short-term facility. As a result of the sale of distribution assets in Missouri, Illinois and Iowa, as well as the future sales of Georgia assets, we updated our tax rate used to determine our deferred tax obligations and recorded a non-cash deferred tax benefit of $13.6 million in the fourth quarter.

We contributed cash of $10 million to a charitable donate, donor advised fund. This is our 501(c)3 not for profit fund in the custody of Vanguard. Our investment proceeds will be used by the company for future charitable giving, with respect to our defined benefit plans, we contributed $46.5 million to our defined benefit pension plans to achieve at 18% funding level.

We contributed an additional $22 million to other post retirement benefit plans during fiscal 2012. The increase in funding is primarily due to a decrease in the discount rate year-over-year. Coupled with lower plan asset valuations, when we established the funding requirement last January, and as a reminder, these expenses are typically recovered in general rate cases. We had a very busy and successful year financially and important leadership change transpired with the retirement Fred Meisenheimer Bret Eckert assumes the role of CFO at the beginning of fiscal 2013.

Bret brings over 22 years of utility experience from his career in public accounting. We will certainly miss Fred, but are very fortunate to have Bret. Bret is going to review our consolidated financial results in greater detail. And I will return for closing comments, and then we’ll open up the call for questions. Bret?

Bret Eckert

Thanks, Kim. And good morning everyone. Since the quarter is really shoulder period for us. Our remarks will focus on a fiscal year and earnings guidance for fiscal 2013. As Kim mentioned, consolidated results for fiscal 2012, excluding realized margins with $221.7 million or $2.42 per diluted share. When you add that the negative market of $5 million or $0.05 per diluted share. Reported consolidated net income was $217 million or $2.37 per diluted share for fiscal 2012, compared to net income of $208 million of $2.27 per share one year ago.

As expected, in our fiscal 2012 results was net gain on the sale of Missouri, Illinois and Iowa assets of $6.3 million or $0.07 per diluted share. Additionally, current year net income includes another $4 million or $0.04 per diluted share from the net positive impact of several one-time items. When comparing this year to last year, slide 3 shows that after eliminating the one-time items and the unrealized gains and losses in both years. Adjusted earnings per share were $2.30 for both periods.

Drilling down into our regulated businesses and our distribution business, rate increases drove margin by about 18 million, with minimal impact on average customer bill. Consolidated distribution throughput decreased 8% this year, mainly due to lower consumption, primarily from warmer weather. With WNA mechanisms protecting about 94% of utility margins this past winter, we have largely mitigated the negative effect of a warm winter and in fact, we received over 15 million of WNA released to improve loss throughput. The Texas Intrastate Pipeline, Atmos Pipeline Texas experienced over a 28 million increase, primarily associated with the last GRIP program as well as an additional 18 million increase from the rate case effective in May of 2011. APT continued to experience an increase in its consolidated throughput, which was 7% higher in fiscal 2012. This increase is largely from incremental through system demand, resulting from the execution of new transportation agreements with local producers for deliveries to Fort Worth basin, Howard and Katy, albeit at lower transportation rights. Much of this increased throughput is gas being produced in association with crude oil wells.

Turning now to our now regulated operations, you may want to turn to slide eight. Macroeconomic conditions continue to adversely affect results for companies in our industry with non-regulated gas marketing and trading operations. Additionally, we continued to experience compressed spot to forward spread values and basis differentials. That said, our realized non-regulated asset optimization margins increased 19.6 million in the current quarter and 2.8 million for the year from the trading strategy Kim mentioned.

Realized delivered gas margins for the year decrease 12.4 million year-over-year due to a 9% decrease year-over-year in consolidated sales volumes, mainly due to less consumption by weather sensitive customers due to warmer weather and gas delivery per unit margins decreased $0.02 per Mcf, primarily due to lower basis differentials, resulting from increased natural gas supply and increased transportation costs. Realized asset optimization margins increased almost 3 million compared to the prior period, despite gas price volatility and compressed spot to forward spread value.

Turning now to the expense side of the income statement. As we stated previously, the mild weather allowed our crews to focus on capital projects. We did not encounter an adverse weather event like last year, which drives incremental O&M, the overtime and general expenses associated with such a weather event. This held true for both the distribution and regulated pipeline customers.

Also, we implemented the regulatory asset treatment in Texas for our pension and post retirement liability, which allows us to defer the difference between our actual cost and what we currently recover in rates. These costs will become eligible for recovery and next way proceed. For the year we deferred about $4.3 million of pension and post-retirement expense. Partially offsetting these positives with an increase in depreciation and amortization of 6% or about $14 million for the current year due to an increase in sales and increase in net plan as a result of our ramped up capital spending.

We go on administrative costs rose about $7 million year-over-year and employee related costs rolled over $3 million. After the impairment this year included $5.3 million non-cash charge to the period of the remaining investment in the gathering assets in Kentucky. The initial impairment of $11 million on these assets was recognized in fiscal 2011. Along with the $19.3 million impairment affords necessity.

Miscellaneous expense in fiscal 2012 include the one-time $10 million cash donation to file the company’s charitable donor by fund, which can discuss the resulting in operating remarks. Fiscal 2011 included a $27.8 million pre-tax cash gain associated with unwinding two treasury loss agreements. Interest charges were about $10 million lower, primarily due to a maturing long-term debt being replaced at lower interest rates in fiscal 2011. Cover with reducing commitment fees in fiscal 2011 by decreasing the number of credit facilities and expanding the length of their term.

And at the early reduction in the fourth quarter of fiscal 2012 of the company filed in a $250 million senior note to January of 2013. Income tax expense decreased $8.6 million from last year. After recognizing a tax benefit of $13.6 million associated with producing a deferred tax rate used the calculated deferred tax obligation triggered by. the sale of Missouri, Illinois and Iowa distribution assets in August.

Moving now to our earnings guidance for fiscal 2013, we’ve announced our fiscal 2013 earnings per share guidance of $2.40 to $2.50 per diluted share and have updated and expect the contribution by business segment. This range excludes unrealized margin and the gain on the sale of Georgia operations.

Let me draw your attention to slide 33 to 38, where we have outlined our budget assumptions and net income by segment for fiscal 2013. These include continued success to our execution of our rate strategy and collection effort, with projected operating income increases of about $90 to $110 million from approved rate outcomes in fiscal 2013.

Guidance assumes a full-year contribution from the Georgia discontinued operation of $0.10 to $0.12 per share of fiscal 2013. The Georgia asset sales assume to close in late fiscal 2013. Expected gross margin contribution from the non-regualted segment in the range of 60 million to 67 million, excluding any unrealized gains and losses. Normal weather, weighted average gas costs ranging from $4 to $6 per Mcf. Average annual short-term interest rate of approximately 60 basis points and no material acquisition. We expect the regulated businesses to generate over 90% of total net income for fiscal 2013.

The distribution segment is expected to achieve net income in the range of 143 million ot 148 million and the regulated pipeline in Texas should earn between 68 million and 71 million. Then non-regulated business is expected to generate net income in the 9 million to 11 million range in fiscal 2013.

We anticipate delivered gas volumes of 425 to 435 Bcf at a per unit margin of $0.10 to $0.11. Our expectations for asset optimization margins continue to remain in the range of breakeven to 2 million. We expect asset optimization activities to at least offset the contract distorts demand sees again in fiscal 2013.

We continue to shorten the overall lease terms for the contracted storage by entering into one-year terms for all renewals, for new contracts to better manage our storage costs. Our capital budget is projected to range between 770 million and 790 million for fiscal 2013, as we continue to focus on the safety, integrity and reliability of our infrastructure, while following various state approved programs.

Thank you for your time and now, I’ll hand the call back over to Kim.

Kim Cocklin

Thank you very much for that report, Bret. We had an extremely solid year in ‘12 and increased earnings per share for the 10th consecutive year. And during fiscal ‘12, we did communicate our plans to invest significant capital in our regulated operations over a 5-year timeframe, ending fiscal 2016 to fortify, strengthen and/or replace our infrastructure to make our systems even more safe and reliable. Fiscal ‘12 was the first year of that 5-year plan and we invested approximately $723 million in our regulated operations. We’ll continue to finance this growth from internally generated cash flow and a combination of debt and equity. Our current plan assumes a net increase of 425 million in debt over that 5-year period.

As a result of the various policies, encouraging investments by our regulators, we expect to increase our rate base from about 3.9 million – billion excuse me, at the beginning of fiscal ‘12 to between 5.7 billion and 5.9 billion by the end of fiscal ‘16, which equates to a compounded annual growth rate in rate base of 8% to 8.5% over that timeframe. The spending is significant because the enhanced value of the rate base is expected to generate earnings growth in the range of 6% to 8% on a compound annual basis through 2016.

Overall, we have an exceptional portfolio of assets in very constructive business regulatory environments and have posted excellent relationships with regulators, who are tax but balancing the needs of consumers and businesses like Atmos provide essential utility services. Our rate treatment has improved steadily in all jurisdictions.

In fiscal 2012, we receive great approvals to increased operating income by about $31 million. We will also allow to create asset deferrals of almost $10 million. This compares to range of between $90 to $110 million that’s expected to be approved in fiscal 2013, and an additional $20 to $25 million from assets deferrals in fiscal 2013. We currently have over $50 million of rate filings pending regulatory approval, the majority of this amount includes our $46.5 million Mid-Tex rate case pending in Texas.

We anticipate of a proposed decision from the hearing next week with final commission action by December 20. We expect to seek over another $100 million and additional late filings in fiscal 2013 on behalf of our regulated distribution Atmos pipeline Texas operations. On a regulated Texas intrastate 8 pipeline, we continue to invest capital for increased capacity to secure new long-term gas supply on a firm reliable basis and also to enhance the reliability of our service and certain critical locations during peak periods along the Mid-Tex system, but aligned of a looping project and the line ex-project.

In fiscal 2012, we spent $65 million on capital on these projects and we anticipate an additional $115 to $120 million of capital being spent to complete these projects. These capital expenses are GRIP eligible with an 11.8% return on equity. Looking forward our non-regulated business strategy will focus on growing margins and a challenging market and continue to provide value-added customer service. With the impairment of the remaining investment in the Part city and Shrewsbury gathering assets located in Kentucky.

And a focus on managing business risks. We believe our non-regulated businesses will be successful in fiscal 2013 and beyond. Going forward, we will not expect or assume more than 10% of the consolidated earnings to be generated from this business. As we previously communicated, we have departed from our growth through acquisition strategy. We believe our internal capital investment opportunities will facilitate growth faster and with best risk than an acquisition. Therefore, we’re focused on the earnings growth potential from our accelerated rate base investment over the next four years and we’re shrewdly managing this level of spending. We recognize that growth along with consistency and predictability are important as we move into fiscal ‘13. We remain committed to delivering dependable long-term financial success.

We certainly thank you for your time this morning and now, I’ll open it up for the questions. Brendon?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Ted Durbin of Goldman Sachs. Please proceed with your question.

Ted Durbin – Goldman Sachs

Hi, guys. How are you doing?

Kim Cocklin

Good morning, Ted. Pretty good. How are you doing?

Ted Durbin – Goldman Sachs

Surviving.

Kim Cocklin

Oh, you’re affected.

Ted Durbin – Goldman Sachs

I personally was not, but certainly everyone in the area was, so it’s been a little bit of a recovery. So we’re getting out of it though.

Kim Cocklin

Looks terrible from where we are seeing, Ted for sure.

Ted Durbin – Goldman Sachs

Thank you. If we can just dwell a little bit more into the assumptions for the guidance in 2013 and really a certain broken record, but on the Mid-Tex stuff, is there anything you can give us in terms of you’ve asked for 46.5 million, kind of where are you coming out there, how are you reading the way this proposal for decision might come on next week? Kind of just any more color you can give us on the Mid-Tex side?

Kim Cocklin

We haven’t gotten any more information or color or anything on it, but it will be coming out, the hearing examiners first issue is decision and then we’re expecting by Christmas to have the commission action on it. So –

Ted Durbin – Goldman Sachs

Okay. But you’ve got obviously a substance there on the 90 to 111, you’ve got your best guess on in terms of kind of where you’re going to come out on Mid-Tex and I guess the implementation then would be – would it be – if at all or would it be sort of if you get the final decision December 20, is that when you start to recognize the revenues?

Kim Cocklin

Any decision is only prospecting, so we’ll be communicating that information as soon as it’s available.

Ted Durbin – Goldman Sachs

Okay. Fair enough. And then just on the divestitures quickly, you’ve obviously closed the sales previous and you’ve got the Georgia, I’m wondering if there’s any significant overhead savings we should be thinking about from those and I heard your comments around feeling like you have the right footprint now, so we should presume that there is probably not other sales of smaller utilities coming.

Kim Cocklin

No. No more sales were done in the eight remaining jurisdictions that we’re situated in. We think we’ve got a good footprint, we’ve got a excellent relations and we have very good economic conditions compared to the rest of the country and very good regulatory constructs in terms of significant overhead savings now.

Ted Durbin – Goldman Sachs

Okay. And then last one for me, there’s been commentary around the Barnett and maybe some volumes least stabilizing kind of feeling a little better about gas prices, some of the activity level, so I’m just wondering if you can comment on what you’re seeing in the Barnett, the producer interest and maybe if there is other more projects that would be GRIP eligible that you can see it on the path there?

Kim Cocklin

Yes, we can. The connected wellhead volumes are increasing and improving to our system and creating a lot of potential opportunities. Obviously, the ones that we have currently on the drawing board and are pursuing are as a result of increased deliveries that are coming on from associated gas plays and they continue to drill up that field and they’re moving out in the West Texas area towards the connection and we have opportunities out there. So it’s very, very good situation for Atmos Pipeline Texas and even a better situation for the Mid-Tex and West Texas divisions, who are going to continue to benefit from additional supply opportunities and diversity and competition to meet their needs, because we’re seeing continued growth in – on and around the metro area in DWF and certainly coast, where we serve the Austin area.

Ted Durbin – Goldman Sachs

Okay.

Kim Cocklin

Yeah. It’s – lot of sunshine ahead. Lot of hope and change for us.

Ted Durbin – Goldman Sachs

Okay. That’s it for me. Thanks, Kim.

Susan Giles

Thank you, Ted.

Operator

(Operator Instructions) Our next question comes from (inaudible) of Citigroup. Please proceed with your question.

Amit Marwaha – Citigroup

Hey, good morning, guys. It’s Amit Marwaha here. Let me –

Kim Cocklin

Amit, how are you?

Amit Marwaha – Citigroup

I am all right, Kim. How are you making out?

Kim Cocklin

Pretty good, pretty good. Good to hear from you. Are you okay, everything – were you affected?

Amit Marwaha – Citigroup

Yeah. I’m downtown.

Kim Cocklin

Oh gosh. I sort of figured.

Amit Marwaha – Citigroup

Yeah. But I got swimming in –

Kim Cocklin

Oh, boy, that brings you back to your Austin and Canada days, I guess.

Amit Marwaha – Citigroup

Oh, yeah, good memories, good memories. Just a quick question here on the non-regulated side continue just continued to see the volumes drifting off and the unit margins coming off, just wondering if there are any opportunity here some of smaller players, getting squeezed out of bit potentially pick up, I know this is non-core area for cross, is there potential here to pick up some incremental volumes from the smaller players and kind of how should we look at the run rate?

Kim Cocklin

Yeah.

Amit Marwaha – Citigroup

Is there further deterioration. How should we think about margin going forward given kind of where the picked?

Kim Cocklin

We had really, really good results in the last quarter, from the non-regulated group and it was principally driven by obviously some of the positions drilling off, but more importantly, we saw an uptick in the average margin that they were collecting out there, and overall net that did increase customers for 2013 and their focus and their new business strategy obviously, is identifying, which exactly what you’re talking about.

We need the quality in smaller customers and they were not chased in the bigger industrials, since the a lot of the producers are going after them and there’s a lot of energy managers that are involved in the middle of that, which cuts down on your margin. But their indicators particular last two months of our fiscal year. They succeeded and increasing the number of customers they have and increasing the average margin rate that they are collecting. So, yeah. I mean, you are exactly right and we do see a good opportunities for that group going forward, I think, we’ve got a positions exceptionally well.

They are focusing on delivered gas sales strategy, and have always done exceptionally well and in customer survey, so, they have over 90% retention rate with the customers, they do business with, meaning that most of those customers signed up for one year at a time, and they’ve got 90% of have returned year after year. So, let’s review now, there’s some of that relationship a lot of value, they’re doing well. Continuing to focus and take the opportunity, when can’t went storage and transmission long transportation contracts roll off.

They’re taking advantage of the market opportunities for lower prices and reducing so, and we again – we’re not. We do – we don’t have any more but not assuming any more than a 10% contribution, but we’re extremely comfortable and happy and we think that there are an important asset in our portfolio contributing at that level is very good.

Amit Marwaha – Citigroup

All right. Thanks for the color, Tim. Take it easy, guys.

Kim Cocklin

Thank you, Amit.

Operator

It seems there are no further questions at the time. I would like to turn the floor back over to you for closing comments.

Susan Giles

Thank you, all. And as a reminder, a recording of this call is available for replay on our website through February, the 6th. If you have any additional questions, please call me. We appreciate your interest in Atmos Energy and thank you for joining in it. Good bye.

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