Atmos Energy 2005 Annual Report Download - page 11

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O & M ฀ E x p e n s e s
Operation฀and฀maintenance฀expense฀per฀customer
฀ Our฀consolidated฀operation฀and฀maintenance฀
expense฀for฀fiscal฀2005฀totaled฀$427.7฀million,฀nearly฀
double฀our฀O&M฀expense฀for฀fiscal฀2004฀of฀$214.5฀
million.฀The฀increase฀was฀largely฀due฀to฀$206.6฀million฀
in฀added฀O&M฀expense฀for฀the฀Mid-Tex฀and฀Atmos฀
Pipeline–Texas฀Divisions.
฀ The฀provision฀for฀doubtful฀accounts฀also฀increased฀
by฀$14.9฀million฀over฀the฀previous฀year’s฀amount฀to฀
$20.3฀million฀in฀fiscal฀2005.฀The฀large฀increase฀was฀due฀
to฀the฀added฀operations฀of฀the฀Mid-Tex฀Division฀and฀฀
to฀our฀decision฀to฀raise฀our฀provision฀to฀cover฀collection฀
risks฀caused฀by฀higher฀natural฀gas฀costs.฀Our฀utility฀
collection฀efforts฀have฀produced฀exceptional฀results,฀
keeping฀our฀actual฀bad-debt฀write-offs฀below฀our฀
target฀rate฀of฀0.75฀percent฀of฀utility฀revenues.฀Our฀
actual฀rate฀in฀fiscal฀2005฀was฀0.58฀percent.
฀ Excluding฀increases฀in฀O&M฀expense฀due฀to฀the฀
acquired฀TXU฀Gas฀operations฀and฀the฀provision฀for฀
doubtful฀accounts,฀our฀O&M฀expense฀went฀up฀about฀
$2.0฀million฀over฀the฀same฀period฀in฀fiscal฀2004.฀The฀
increase฀resulted฀mainly฀from฀$2.3฀million฀of฀expenses฀
from฀Hurricanes฀Katrina฀and฀Rita,฀partially฀offset฀฀
by฀cost-control฀efforts฀in฀our฀utility฀operations.
฀ Hurricanes฀Katrina฀and฀Rita฀affected฀about฀230,000฀
of฀our฀customers฀in฀Louisiana฀and฀Mississippi.฀Service฀
in฀Mississippi฀was฀restored฀promptly,฀but฀restoration฀has฀
been฀delayed฀in฀areas฀of฀Louisiana฀that฀were฀under฀
water฀or฀that฀sustained฀severe฀damage.฀We฀estimate฀that฀
the฀damages฀to฀our฀system฀are฀between฀$13฀million฀
and฀$15฀million.฀After฀discussions฀with฀the฀Louisiana฀
Public฀Service฀Commission฀and฀our฀insurance฀carriers,฀
we฀expect฀that฀we฀will฀recoup฀most฀of฀our฀losses฀although฀
the฀timing฀is฀uncertain.
฀ The฀financial฀effect฀of฀the฀hurricanes฀in฀fiscal฀฀
2005฀was฀about฀$3.9฀million฀in฀lost฀margin.฀We฀estimate฀
a฀semi-permanent฀loss฀of฀some฀40,000฀customers฀in฀฀
four฀Louisiana฀parishes฀that฀suffered฀the฀worst฀damages.฀
We฀expect฀our฀lost฀margin฀in฀fiscal฀2006฀will฀be฀
approximately฀$10฀million฀to฀$12฀million,฀or฀about฀฀
8฀cents฀to฀10฀cents฀per฀diluted฀share.
R A T E ฀ A D J U S T M E N T S
Our฀utility฀rate฀strategy฀is฀to฀minimize฀regulatory฀lag฀
and฀to฀provide฀stable,฀predictable฀margins฀by฀eliminating฀
the฀effects฀of฀weather฀and฀consumption฀on฀the฀recovery฀
of฀our฀margins.฀We฀also฀are฀seeking฀to฀recover฀the฀gas-
cost฀portion฀of฀our฀bad฀debt฀expense.
฀ To฀reduce฀the฀sensitivity฀of฀our฀earnings฀to฀฀
weather,฀we฀have฀obtained฀weather-normalized฀rates฀฀
in฀nine฀jurisdictions,฀covering฀approximately฀one฀
million฀customers.฀Rates฀in฀our฀two฀largest฀jurisdictions,฀
the฀Mid-Tex฀and฀Louisiana฀Divisions,฀provide฀limited฀
protection฀from฀unseasonably฀warm฀winter฀weather,฀
which฀occurred฀in฀both฀jurisdictions฀in฀fiscal฀2005.฀฀
We฀are฀pursuing฀rate-design฀alternatives฀in฀both฀divisions฀
to฀better฀safeguard฀margins.
฀ During฀the฀2004–2005฀winter฀heating฀season,฀
approximately฀48฀percent฀of฀our฀margins฀were฀not฀sensitive฀
to฀weather฀or฀consumption฀fluctuations;฀35฀percent฀
were฀weather-normalized;฀and฀17฀percent฀were฀weather-
sensitive.฀We฀expect฀similar฀margin฀percentages฀during฀
the฀winter฀heating฀season฀of฀2005–2006.
฀ We฀benefited฀in฀fiscal฀2005฀from฀rate฀increases฀that฀
had฀been฀approved฀in฀West฀Texas฀and฀in฀Mississippi฀฀
in฀the฀latter฀half฀of฀2004.฀We฀also฀completed฀filings฀for฀
2003฀made฀under฀Texas’฀Gas฀Reliability฀Infrastructure฀฀
Program฀and฀initiated฀our฀2004฀GRIP฀filings.฀GRIP฀
reduces฀regulatory฀lag฀by฀allowing฀Texas฀natural฀gas฀
utilities฀to฀earn฀a฀timely฀return฀on,฀and฀return฀of,฀their฀
basic฀investments฀needed฀to฀serve฀utility฀customers.
฀ We฀forecast฀that฀rate฀requests฀will฀add,฀on฀average,฀
$15฀million฀to฀$25฀million฀annually฀to฀our฀utility฀
revenues.฀We฀project฀that฀most฀of฀our฀rate฀increases฀in฀
fiscal฀2006฀will฀result฀from฀our฀Texas฀GRIP฀filings.
N O N U T I L I T Y ฀ O P E R A T I O N S
Our฀natural฀gas฀marketing฀segment฀set฀a฀new฀company฀
record฀by฀contributing฀30฀cents฀per฀diluted฀share฀to฀
earnings.฀We฀benefited฀from฀additional฀storage฀capacity฀
and฀greater฀market฀volatility.฀We฀also฀added฀new฀
customers฀in฀a฀number฀of฀areas฀and฀expanded฀into฀four฀
new฀states—Michigan,฀North฀Carolina,฀Pennsylvania฀
and฀West฀Virginia—all฀states฀close฀to฀our฀existing฀
operations฀with฀good฀prospects฀for฀new฀business.฀In฀
addition,฀we฀expanded฀our฀gas฀marketing฀activities฀฀
in฀Texas฀as฀a฀result฀of฀the฀TXU฀Gas฀acquisition.
฀ Our฀new฀pipeline฀and฀storage฀segment฀combines฀
the฀regulated฀utility฀operations฀of฀our฀Atmos฀Pipeline–฀
Texas฀Division฀with฀those฀of฀our฀nonregulated฀pipeline฀
and฀storage฀operations.฀For฀fiscal฀2005,฀Atmos฀Pipeline–
Texas฀contributed฀$149.5฀million฀of฀the฀segment’s฀
gross฀profit฀of฀$157.9฀million.฀Our฀pipeline฀and฀storage฀
segment฀contributed฀39฀cents฀per฀diluted฀share฀to฀
earnings,฀due฀primarily฀to฀the฀operations฀of฀Atmos฀
Pipeline–Texas.
฀ In฀a฀50-50฀joint฀venture฀with฀Energy฀Transfer฀Partners,฀
L.P.,฀we฀began฀constructing฀a฀new฀pipeline฀to฀better฀
serve฀the฀northern฀counties฀of฀the฀Dallas-Fort฀Worth฀
Metroplex.฀We฀are฀building฀45฀miles฀of฀30-inch฀pipeline฀
that฀will฀improve฀utility฀distribution฀reliability฀and฀฀
will฀transport฀more฀natural฀gas฀from฀Texas฀gas฀fields฀฀
to฀market.฀Called฀the฀North฀Side฀Loop,฀the฀first฀phase฀฀
of฀this฀project฀should฀begin฀operations฀in฀December฀
2005,฀and฀the฀second฀phase฀should฀be฀completed฀by฀
March฀2006.
฀ We฀also฀entered฀into฀three฀other฀major฀pipeline฀
and฀storage฀projects฀in฀fiscal฀2005.฀They฀include
฀•฀฀an฀agreement฀to฀transport฀up฀to฀100,000฀million฀
British฀thermal฀units฀(Btu)฀per฀day฀of฀natural฀gas฀
from฀the฀Fort฀Worth฀Basin฀producing฀area฀to฀a฀
major฀interstate฀pipeline฀company’s฀system฀using฀
new฀compression฀equipment฀that฀Atmos฀Energy฀฀
is฀installing;
฀•฀฀an฀agreement฀leveraging฀this฀added฀compression฀฀
to฀transport฀an฀additional฀50,000฀million฀Btu฀per฀day฀
of฀natural฀gas฀under฀a฀contract฀with฀another฀third-
party฀shipper;
฀•฀฀an฀agreement฀with฀three฀other฀shippers฀to฀transport฀
an฀additional฀50,000฀million฀Btu฀per฀day฀to฀the฀Katy฀
hub฀near฀Houston.
F I S C A L ฀ 2 0 0 6 ฀ F O R E C A S T
We฀forecast฀that฀our฀earnings฀in฀fiscal฀2006฀will฀continue฀
to฀grow฀at฀our฀stated฀goal฀of฀4฀percent฀to฀6฀percent฀a฀฀
year,฀on฀average.฀We฀expect฀that฀earnings฀per฀diluted฀share฀
will฀be฀between฀$1.80฀and฀$1.90,฀assuming฀normal฀
weather฀and฀no฀material฀effect฀from฀marking฀to฀market฀
our฀storage฀and฀related฀financial฀hedges.
฀ We฀project฀that฀our฀capital฀expenditures฀in฀fiscal฀
2006฀will฀range฀between฀$400฀million฀and฀$415฀million,฀
compared฀with฀$333฀million฀expended฀in฀fiscal฀2005.฀
About฀60฀percent฀of฀our฀capital฀spending฀in฀fiscal฀2006฀
will฀be฀invested฀in฀our฀Mid-Tex฀and฀Atmos฀Pipeline–
Texas฀Divisions,฀reflecting฀our฀goal฀to฀invest฀in฀higher-
growth฀prospects.
฀ A฀key฀goal฀is฀to฀lower฀the฀proportion฀of฀debt฀in฀our฀
capital฀structure฀to฀between฀50฀percent฀and฀55฀percent฀
within฀three฀to฀five฀years.
฀ Atmos฀Energy’s฀Board฀of฀Directors฀approved฀an฀
increase฀in฀the฀annual฀dividend฀rate฀in฀November฀2005฀
for฀the฀18th฀consecutive฀year.฀The฀new฀indicated฀annual฀
rate฀is฀$1.26฀per฀share,฀providing฀shareholders฀a฀yield฀of฀
approximately฀5฀percent.฀Adjusted฀for฀mergers฀and฀
acquisitions,฀our฀dividend฀has฀increased฀every฀year฀since฀
Atmos฀Energy’s฀founding.
$140.00
130.00
120.00฀฀
110.00
100.00
90.00
฀ 2001฀ 2002฀ 2003฀ 2004฀ 2005
$110
$126
$122
$101
$130