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.

Christopher Turnure - JP Morgan Chase & Co, Research Division Spencer E. Joyce - Hilliard Lyons, Research Division.

Greetings, and welcome to the Atmos Energy Fiscal 2014 Year End Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Susan Giles, Vice President of Investor Relations. Thank you. Ms. Giles. You may begin..

Thank you, Jenna. Good morning, everyone, and thank you for joining us this morning. Our speakers are Kim Cocklin, President and CEO; and Bret Eckert, Senior Vice President and CFO. There are also other members of our leadership team here to assist with questions as needed.

Our earnings release and conference call slide presentation are available on our website. To access these materials, please visit our website at atmosenergy.com. We will refer to just a few of the slides during this live call, but we'll take questions on any of them at the end of our prepared remarks. Also, we expect to file our Form 10-K later today.

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 27 for more information regarding risks 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?.

Thank you very much, Susan, and good morning to everyone. We certainly appreciate you joining us and your continued interest in Atmos Energy. Yesterday, as you know, we were pleased to report earnings of $2.96 per diluted share for fiscal '14.

These results reflect the third year since we initiated our growth strategy to invest in our regulated assets as we strive to be the nation's safest utility.

Our success was attributable again to the exceptional dedication and outstanding performance of all of our employees, who met the challenges presented by the unusually cold weather to ensure safe, reliable and competitively priced customer service.

Additionally, these operational and financial results are impacted significantly by the important relationships that we have with our regulators, agency staff, city officials and customers, who understand the critical importance of making safety the top priority.

Our regulated operations continued to contribute stable and predictable earnings driven by a very focused rates and regulatory strategy. Rate relief for our regulated distribution and pipeline operations combined generated about $74 million of incremental margin in fiscal '14.

Our nonregulated operations took advantage of the volatility in the natural gas markets that occurred earlier in the year.

Although the delivered gas business remains its core focus, our marketing group was able to seize opportunities associated with weather and generated incremental gross profit by accelerating physical withdrawals in a very volatile natural gas price environment. Our liquidity, financial position and balance sheet remain very strong.

During fiscal '14 and early fiscal '15, we carried out several initiatives to enhance our financial profile. In mid-February, you'll recall, we strengthened our equity ratio with the sale of 9.2 million shares of common stock, our first public offering since 2006.

Equally impressive was the fact that we absorbed the dilution from these additional shares as a result of the colder-than-normal weather and constructive rate outcomes. Our revolving $950 million credit facility was increased to $1.25 billion with the term extended through August 2019.

This increase, coupled with the accordion feature, expands our borrowing capacity to $1.5 billion. We also replaced $500 million of long-term debt, which carried an interest rate of 4.95%, with $500 million of 30-year unsecured notes carrying an interest rate of 4.125%, reducing our interest expense by $8 million per year.

Our debt-to-capital ratio at year-end '14, September 30, '14, was 46.2% and our liquidity remains strong with over $1 billion of capacity available from our short-term facilities. Last, but not least, our Board of Directors authorized an increase to our dividend for the 31st consecutive year.

The fiscal 2015 indicated rate is now $1.56, an increase of $0.08 per share or 5.4%. The dividend hike sustains last year's increase and delivers a commitment that we identified at that time.

We will continue our philosophy of providing sustained annual increases and believe the increase in the dividend reflects our goal to provide both an attractive return while executing on our growth strategy. Our strategy to grow by infrastructure investment was first implemented in fiscal 2010 -- 2012.

Since then, for the fiscal 3-year period, our total return to shareholders has been 63.8%. We haven't swayed from this plan. These capital investments continue to improve the safety and reliability of our utilities. And when the colder-than-normal weather occurred, our systems' operational performance was exceptional.

Fiscal 2014 was a remarkable year and the financial performance followed suit as Bret Eckert, our CFO will now discuss.

Bret?.

Thank you, Kim, and good morning, everyone. Our remarks will primarily focus on the full year results. If you follow me on Slide 3, reported earnings were $290 million or $2.96 per diluted share this year compared with $243 million or $2.64 per share last year.

After excluding the net unrealized margins in both periods and the prior year gain on the sale of our Georgia operations, earnings were $284 million or $2.90 per diluted share in fiscal '14 compared with $233 million or $2.53 per share last year.

Consolidated results for the year were favorably impacted by weather that was 20% colder than normal, which drove higher throughput across all of our segments and created natural gas price volatility for our nonregulated segment.

Customers in our regulated distribution operations benefited from weather normalization riders, which returned approximately $35 million to customers in fiscal '14.

After giving consideration to this adjustment and adjusting for other weather-driven operating expenses, the impact of colder-than-normal weather contributed $17.1 million or $0.17 per diluted share on a consolidated basis in fiscal 2014.

Slide 5 outlines gross profit in our regulated distribution business and Slide 6 details gross profit for our regulated pipeline segment for the 3- and 12-month period. The execution of our regulatory strategy continues to drive our financial performance.

Rate increases had a positive effect during the year, lifting distribution gross profit by $35.3 million and regulated pipeline gross profit by another $38.5 million. For the year, we implemented $134 million in operating income increases on an annual basis. Slides 8 through 16 provide more details on our rate filings for fiscal 2014.

As I previously mentioned, fiscal 2014 was benefited from colder-than-normal weather. Increased customer consumption in our LDCs and higher throughput in related margins at APT contributed about $19 million of the gross profit increase this year. Slide 17 provides the details for our nonregulated segment.

Gross profit in our nonregulated operations increased $24.6 million in fiscal 2014.

Although the delivered gas business remains AEM's core focus, AEM was opportunistic during the significantly colder weather earlier the year by accelerating physical withdrawals into the second quarter from the future periods to capture gross profit during the volatile natural gas price environment that was associated with the colder weather.

We don't anticipate this will be repeated in fiscal 2015 as nonregulated earnings are expected to return to normal levels driven by its core delivered gas business in fiscal 2015. Shifting now to the income -- the expense side of the income statement.

The rise in O&M expenses for the year was primarily due to increased levels of pipeline maintenance activities; employee wage increases and higher weather-related costs, including higher variable incentive compensation expense, increased standby and overtime cost during the cold months and higher bad debt expense as a result of higher customer bills during the much colder winter.

These increases were partially offset by lower legal and administrative expenses due to the resolution of 2 legal matters in the nonregulated segment during 2014.

Fourth quarter O&M expense was down $10 million, primarily from the timing of variable incentive compensation that was recorded in the second quarter in the current year compared to the fourth quarter last year. Capital expenditures were $835 million for the year compared with $845 million last year.

The decrease primarily reflects the $64 million decrease in capital in our regulated pipeline segment that was associated with the completion of Line WX expansion project, partially offset by a $55 million increase in capital spending in our regulated distribution segment due to increased spending under our infrastructure replacement programs.

Over 75% of 2014 CapEx was invested to enhance the safety and the reliability of our systems, and approximately 91% of 2014 capital expenditures was incurred under mechanisms that reduced lag to 6 months or less. Moving now to our earnings guidance for fiscal 2015.

We have announced our fiscal 2015 earnings per share guidance of $2.90 to $3.05 per diluted share, excluding unrealized margin. Slides 21 and 22 detail our net income and expense projections for fiscal 2015. As I previously stated, the impact of colder-than-normal weather contributed $17.1 million or $0.17 per diluted share in fiscal '14.

After excluding the impact of colder-than-normal weather, 2014 weather adjusted net income was $267 million or $2.73 per diluted share as shown on Slide 21. The midpoint of fiscal 2015 guidance would represent an 8.8% earnings per share growth rate from the weather adjusted 2014 earnings of $2.73, excluding unrealized margins.

All of our growth in fiscal '15 is expected to be driven by our regulated operation as nonregulated earnings are expected to return to normal level driven by its core delivery gas business. We project regulated operations to generate net income in the range of $285 million to $300 million.

We continue to expect constructive rate outcomes to be the primary driver of next year's results and anticipate annual operating income increases of between $105 million and $125 million from implemented rate outcomes in fiscal '15.

Our nonregulated business is expected to generate net income in the $10 million to $12 million range, with an assumption of non-regulated delivered gas volumes of between 390 and 410 Bcf at a per unit margin of $0.10 to $0.11.

Consolidated net income for fiscal 2015 is expected to range from $295 million to $312 million and average diluted shares are expected to range from 102 million to 104 million shares. O&M expense is projected to range between $495 million and $515 million.

We're assuming a return to normal weather with variable compensation, overtime and standby pay and bad debt expense reverting to more normal levels. However, we do expect normal employee-based compensation increases, along with employee benefits inflation, primarily medical and dental costs.

Depreciation and amortization is expected to range between $265 million and $285 million due to increased capital investment in fiscal 2014. Interest expense is expected to decrease for fiscal '14 due to the replacement of the $500 million 4.95% senior notes with $500 million 4 1/8% senior notes in October 15 of this year.

Income tax expense is expected to decrease and range between $175 million and $185 million. Our effective income tax rate is expected to be in the 37% to 38% range. Our capital budget is expected to range between $900 million and $1 billion in fiscal 2015 and will allow us to further enhance and upgrade our natural gas delivery system.

We continue our focus on strategic infrastructure spend by utilizing rate mechanisms and timely rate filings. About 91% of our 2015 CapEx will begin earning a return within 6 months of test year end. Thank you for your time. And now, I'll hand the call back over to Kim..

Thank you, Bret. Exceptional report. We do continue to have an exceptional portfolio of assets, and this year, we did increase earnings for the 12th consecutive year. And we will continue to emphasize the sustainability and reliability of meeting our commitments to the shareholder or earnings per share growth and total shareholder return.

We are achieving desired regulatory outcomes in most jurisdictions where we operate. Most recently, the rate stabilization clause in Louisiana was modified to include an infrastructure mechanism that authorizes deferral treatment very similar to Rule 8209 that exists in Texas.

Going forward, we would expect to increase capital expenditures in Louisiana as a result of this change. In Kansas, the regulatory environment continues to be challenging. We, along with other utilities that operate there, are pursuing all remedies to enhance the opportunity for more reasonable rate outcomes.

Our latest rate filing resulted in a 9.1% return on equity component in Kansas. We will continue to strengthen our relationships in Kansas with the regulators and the customers and maintain our steadfast desire to be the safest provider of natural gas utility services.

In fiscal '15, we're projecting between $105 million and $125 million in operating income increases on an annual basis from rate outcomes. Lastly, our $33 million Mid-Tex Rate Review Mechanism filing is still pending before the Railroad Commission. We did begin collecting these rates June 1 subject to refund.

That -- the issue in that case is whether the filing conforms to the terms of the rate review mechanism tariff that was established with our city customers in Texas. We're hopeful for a decision to be rendered by calendar year end. We're continuing to take our commitments to the shareholder's in TheStreet very seriously.

Our $900 million to $1 billion of annual capital investment remains focused on enhancing the safety and reliability of our infrastructure, investing in our own system assets versus taking on an acquisition to grow the business. Our story is very simple.

In fact, we are one of the just -- one of the few in the utility space with the level of confidence to put out a long-range plan. In fiscal '18, we're projecting $3.50 to $3.75 of earnings per share. And although we've narrowed the P/E gap, our multiple is still below the average of our peers.

We continue to project 9% to 10% annual rate base growth and 6% to 8% annual earnings growth through fiscal '18. Coupled with the dividend yield, total annual return is expected to be in the 9% to 11% range through fiscal '18. We've had another solid year, and we remain committed to delivering dependable, consistent and long-term shareholder value.

We do appreciate your time this morning, and we're ready to take any questions you have.

Jenna?.

[Operator Instructions] Our first question today comes from the line of Chris Turnure with JP Morgan..

I wanted to touch on your increased CapEx guidance. You briefly mentioned it. And obviously, part of it's going to be due to the Louisiana rider that was just implemented there.

But could give you us a little bit more granularity on both the 2015 outlook and then beyond that as well?.

Yes. We do plan to get into a bit more granularity on the CapEx at our Analyst Conference on the 19th, Chris. But you really hit it.

You see increased capital spending -- continue to increase capital spending in connection with our deferral mechanisms in Texas with the new infrastructure wording that's part of the rate stabilization clause in Louisiana. You'll see increased capital spending in that jurisdiction as well.

You also going to have a bit of an increase in capital spending at the pipeline this year. And those are the main drivers of the increase year-over-year..

Okay, great.

And then you don’t anticipate any incremental financing needs outside of your current plan in terms of equity?.

No, we'll roll out an update of our financing plan through 2018 on the 19th. We just -- as we talked about, replaced the expiring tranche of $500 million senior notes that came due on the 15th of October this year. We did not upsize that facility, we announced that it will not grow, and we're able to tighten the pricing into a lower interest cost.

And with -- we have about $197 million in short-term debt outstanding with about $1.2 billion of liquidity at September 30. So our plans, as we've previously presented them, have not changed from that..

Okay, great. And then just I would love to hear your thoughts on some of the changes at the Texas Railroad Commission. Recently, you had a relatively new chairperson that has been seated, and then I guess the elections the other day resulted in the appointment of a new commissioner as well.

Were there any kind of major surprises there? Is there anything we should be thinking about for the long-term of your regulatory relationships there?.

No. Chris, this is Kim. That's a good question. The election results were -- they came out as we expected. There's a new commissioner, Ryan Sitton, who is -- has an engineering-based energy firm, consulting firm in Houston, Texas with about 300 plus employees. He has -- we have visited with him. He's visited our training center here.

He's very familiar with the industry. He will continue to strike a very appropriate balance between the needs of us to continue invest in our infrastructure to be the safest utility in the country against the interest of the consumer.

Christi Craddick will be appointed the chairperson and she will continue to do a very good job, along with Commissioner Porter. So no, I mean, the Texas economy continues to be significantly pushed along by the energy, and in particular, natural gas.

So we continue to see them as probably leading the country in terms of proactive and visionary regulation for motivating investment while the shale gas prices continue to provide that opportunity. Louisiana following suit. I mean -- we're just -- we're very, very happy to be in the jurisdictions where we're situated.

And Texas obviously leads the charge. And the rest of the elections, I think you're going to support that as well, from the governor and the lieutenant governor. I mean, it's going to continue to be a very pro-business, healthy economy driven situation..

Our next question comes from the line of Spencer Joyce with Hilliard Lyons..

I want to dive in here. Just a couple of nuance questions. Maybe, perhaps, Bret, you on the guidance side.

What's kind of the weighted average cost on the commercial paper program? Is that right around 1%?.

No. I mean, you're getting commercial paper somewhere in the 25 to 30 basis point range right now..

Okay. Got you. And then on the O&M side. Looks like the midpoint of guidance is roughly flattish from this year. And I know we'll have some upside probably from hiring and health care cost and normal inflationary type pressures.

But I guess my question is, what's the offset or the give-back that we'll see next year that was perhaps driven by the weather in fiscal '14 and just, in general, increased activity there?.

Yes, it really, it goes back. We did with the cold, cold weather, we had that overtime and standby cost that you wouldn't expect to repeat as we made sure that we maintained our service level. When you have those higher customer bills, when the weather surprises folks, bad debt expenses was higher, and we do expect that to return to normal levels.

And of course, fiscal '15, we're budgeting that we would achieve target from a variable incentive compensation standpoint. And so what weather had done, really drove variable incentive comp higher. And we'd expect that to be removed. Those really are the main drivers of it with the few offsets that you had mentioned..

Okay.

So I guess, the sort of inordinary upside in '14 may have been $15-ish million or so?.

I think if you look year-over-year, it's up about $17 million, if you look actual '14 versus actual '13..

Are you talking about weather? What's he....

Are you talking about the O&M impact of those? Yes, as far as the O&M impact from those items that were incremental, that's -- you're in the range..

Okay, great, great. And then, Kim, maybe from a broader standpoint. The first caller touched on it a little bit.

But it really has been a great few years for the ATO stakeholders here, and I was just wondering if perhaps, even anecdotally, if you'd seen any kind of populist uprisings? Or any kind of unrest maybe among either politicians or regulators, that says, "Hey, how is the utility performing so well there?" Or maybe contrary to that, are we really in sort of the same sweet spot that maybe we were in a few years ago? Kind of, off which we've seen this growth?.

No. There's been no uprising. And our story and justification for the performance is really driven by our desire to be the safest utility.

And the $900 million of $1 billion that we're putting in our assets is not really stuff that we're dreaming up or that we're -- it's really driven by the regulations that are coming out at the federal level, and more importantly, at the state level. And the regulators, I mean our regulators, we're taking every opportunity that we have.

And because of the way we're organized, we have business units with -- populated with presidents and officers who have responsibility and accountably out there that are very close to the regulators and the agencies themselves. And they take every opportunity to visit with those folks and make sure that they understand.

So our customers, we meet with them very frequently, and they understand what we're spending from a capital standpoint, from an O&M standpoint, what's driving it.

And if you look at the management of our gas supply side of our business, we actually -- because of our hedging strategies and the storage capabilities, I mean, our weighted average cost for the upcoming winter is expected to be a little bit lower than what we experienced actually this year.

So we continue to be able to make this investment, which really is necessary. And a lot of it's compliance-driven. We're not a compliance-driven operation, we certainly are going to do all we can to exceed the compliance standards that are out there, to be the safest person and utility in the United States.

But the gas prices continue to provide us the opportunity to reflect these bite-size increases. And the results that you're seeing operationally and from a safety standpoint can't be denied.

So we're utilizing all that as a good story to discuss with anybody that ask, "Why are you having such a great run financially?" But you got to look at the operational side of the business which is really driving that. And it's going to continue.

We've got an extensive line of appetite to continue to address all of the infrastructure that we have plans to do. So we don't see any end to the investment in our infrastructure.

And we don't certainly see any -- we're not expecting to ever back away or not meet the commitments that we've made to TheStreet to grow the rate base at the level we're talking about and the earnings at the 6% to 8% level. And then where we're at with the dividend, very comfortable payout ratio of 52.5%.

We still got some running room on that if we need it..

There are no other questions in the question queue. I'd like to turn the program over back to Ms. Giles. Go ahead, please..

Thanks, Jenna. A recording of this call is available for replay on our website through February 3. I am here all day if anyone has specific questions. Other than that, we appreciate your interest, and thank you for joining..