Atmos Energy Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2021

There are 9 speakers on the call.

Operator

Welcome to the Atmos Energy 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Mezzier, Vice President of Investor Relations and Treasurer.

Operator

Thank you, sir. Please go ahead.

Speaker 1

Thank you, Donna. Good morning, everyone, and thank you for joining us. With me today are Kevin Akers, President, Chief Executive Officer And Chris Forsyth, Senior Vice President and Chief Financial Officer. Our earnings release and conference call slide presentation, which we will reference in our You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of non GAAP measures to the closest GAAP financial measure. As we review these financial results and discuss future expectations.

Speaker 1

Please keep in mind that some of our discussions might contain forward looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 37 and more fully described in our SEC filings. I'll now turn the call over to Kevin.

Speaker 2

Thank you, Dan, and good morning, everyone. We appreciate your interest in Atmos Energy and are glad you could join us this morning. On this Veterans Day, I would like to take just a moment to say thank you to those who have served our own forces. Nearly 300 of our Atmos Energy teammates are part of the more than 20,000,000 Americans who bravely serve our country So that we may live freely. Thank you for your service.

Speaker 2

Yesterday, we reported earnings Per share of $5.12 which represents the 19th consecutive year of earnings per share growth. Chris will provide some additional color around our financial results later in this call. I will begin today's call with a Review of our fiscal 2021 accomplishments, provide an update on key pipeline projects, and we'll close with some thoughts about fiscal 2022. Our success in fiscal 2021 once again reflects the commitment and ongoing effort of all 4,700 employees at Atmos Energy. I have said it before and I will say it again, they are the heart and soul of Atmos Energy And provide the foundation for the sustained long term success of our company.

Speaker 2

I'm extremely proud of their commitment to keep our 3,200,000 customers Our 1400 communities themselves and their families healthy and safe. As you've heard us say, fiscal 2021 was our 10th We are executing our proven investment strategy of operating safely and reliably, while we modernize our natural gas distribution, Transmission and Storage Systems. And over that 10 year period, we invested nearly $13,000,000,000 In modernizing and expanding our natural gas systems, replacing approximately 5,500 miles of distribution pipeline, 394,000 steel service lines and 1100 miles of transmission pipeline. And over that same 10 year period, we added nearly 350,000 customers. As I said during our Q2 earnings call, those investments provided our natural gas systems the reliability And resiliency necessary to meet the gas demand of our human needs customers during winter storm Yuri.

Speaker 2

Our fiscal 2021 capital investment of $2,000,000,000 supported the modernization of our distribution and transmission systems Through the replacement of over 9 30 miles of distribution pipe, the replacement of more than 38,000 steel service lines And over 175 miles of transmission pipeline, all to further and enhance System Safety and Reliability. Additionally, we installed approximately 230,000 wireless meter reading devices And now I have nearly 1,900,000 wireless devices on our system. The above mentioned capital investments also helped us make progress Towards reducing methane emissions 50% by 2,035 for EPA reported distribution main and services. Through the end of fiscal 2021, we have achieved an approximate 20% reduction.

Speaker 3

I want

Speaker 2

to take this opportunity to highlight and thank our Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone.

Speaker 2

Thank you, everyone. And resources are available for our distribution, transmission and storage projects. Just as they did throughout the past decade, their strategic planning efforts have us well positioned for continued execution upon our strategy in fiscal 2022. For example, throughout the pandemic, we have increased our inventory levels and coordinated with vendors As well as pipe mills to have our steel pipe requirements ready and available at job site for the upcoming fiscal year's projects. Now I want to provide you an update on a few of our larger Atmos Pipeline Texas projects and highlight their value in safety, Reliability, versatility and supply diversification that those projects bring to APT and its customers.

Speaker 2

We are nearly 60% complete with the development of APT's 3rd Salt Dome Storage cavern project at Bethel. This project will be placed in service in late 2022 and will provide an additional 5 Bcf to 6 Bcf We are also nearing completion of 63 miles of 36 inches pipeline As part of our Line X Phase 1 Integrity Replacement Project and we've already begun Phase 2, which includes an additional 63 miles of 36 inches pipeline, which we anticipate being completed sometime in late 2022. As a reminder, Line X runs from Waha to Dallas and is key to providing reliable service To the local distribution companies behind APT system as well as transportation customers that move gas from Waha to Katy. Also nearing completion is the 1st phase of 3 phases of our Line S-two project. Line S2 brings supply from the Haynesville and Cotton Valley shale place to the east side of the growing DFW Metroplex.

Speaker 2

Our Phase 1 project replaces 21 miles of 14 inches pipeline with 36 inches pipeline. We anticipate this phase to be in service by this calendar year end. In Phase 2 of Line S-two, Which is approximately 17 miles of 36 inches pipeline is now underway with completion expected in late 2022 And the final phase of this 36 inches 90 mile total project is expected to be completed in late 'twenty three. Again, this project will provide additional supply from the shale plays east of the growing Dallas Fort Worth Metroplex. To support the forecasted growth and increased supply diversity to the north of Austin in Williamson County, Texas, We have begun work on a 22 mile, 36 inches line that will connect the southern end of APT system With the 42 inches Permian Highway line that runs from Waha to Katy.

Speaker 2

This line is currently expected to be in service by December As you've heard in my previous updates, our customer service agents and service technicians Continue providing exceptional customer service during these challenging times. During fiscal year 2021, our agents And technicians received a 98% satisfaction rating from customers. Thank you, team, for taking Our strategic focus on digital bill delivery And payment options is yielding benefits as over 48% of our customers are receiving electronic bills, While the utility industry average is around 28%. And 79% of the total payments we received As of September 30, for electronic methods of payment such as bank drafts, credit cards and online banking. During fiscal 2021, we provided approximately 217,000 hours of training And we onboarded nearly 400 new employees through our Atmos Essentials classes.

Speaker 2

All of this activity was completed virtually. I'm very proud of our technical training and operations teams. In fiscal 2021, we integrated our various safety And business process improvement initiatives into a comprehensive environmental strategy focused on reducing our Scope 1, 2 and 3 emissions and environmental impact from our operations in the following five key areas: Operations, Fleet, Facilities, Gas Supply and Customers. Our efforts in fiscal 2021 to reduce emissions and our environmental impact included such things as our ongoing distribution, transmission and underground storage system modernization programs mentioned earlier. It also included the installation of gas cloud imaging capabilities at APT's Tri City storage field, and we will complete the remaining installation of that equipment at APT Fields in fiscal 2022.

Speaker 2

We will also deploy additional wellhead fixed based or gas cloud imaging detection technologies at our distribution storage field in fiscal 2022. We developed a plan to replace our pneumatic devices with no bleed or low bleed devices. We expanded advanced leak detection technology And developed a strategy to capture methane emissions from pipeline maintenance activities. We've continued our RNG strategy of identifying Customers who wish to use our system to transport the RNG they produce. We increased the amount of RNG transported across our system So approximately 8 Bcf a year, and we are evaluating nearly 30 opportunities at this time that could further In fiscal 'twenty two, we will begin transitioning our light duty vehicle fleet To gasoline hybrid vehicles and to CNG for our heavy duty vehicles.

Speaker 2

In September, we completed our 1st 0 net energy home in partnership with the Greeley Weld Habitat for Humanity in Evans, Colorado. This home uses high efficiency natural gas appliances, rooftop solar panels And insulation to produce more energy than it consumes at a very affordable cost of approximately $50 a month For a combined gas and electric bill, we are currently developing 2 more of these type homes in Texas. Projects like these demonstrate the value of using all energy sources to reduce carbon emissions. And this summer, we joined the Low Carbon Resources Initiative. As a reminder, this joint research and development effort between the Gas Technology Institute And the Electric Power Research Institute is working to accelerate commercial deployment of low and 0 carbon technologies.

Speaker 2

Finally, we are nearing the completion of a fuel cell at one of our data facilities to generate low carbon electricity. This fuel cell Will be powered with natural gas and is anticipated to substantially reduce the carbon footprint from that facility. To wrap up fiscal 'twenty one, our 4,700 employees through our Feeling Safe and Thriving Communities initiative Made a difference in the lives of others this year, all by supporting schools and students with books, meals and snacks. We honored our community heroes and healthcare workers by providing them with meals as they were working. We planted trees, worked in community gardens.

Speaker 2

We hosted utility fairs, energy assistance blitzes to share the warmth for over 9,000 customers As we donated $3,000,000 of financial support. And for nearly 300 local food banks and shelters, The financial and volunteer resources of our team provided translated into nearly 8,000,000 meals For our neighbors in need across 1400 communities. I'm very proud of our team because of their investment of time, Talent and resources, we are making a difference in our community. A successful fiscal 2021 has us Well positioned as we move into the 2nd decade of our strategy. I will now turn the call over to Chris, who will provide some additional color around our fiscal 'twenty one Financial results and discuss our fiscal 'twenty two guidance as well as our updated 5 year plan through fiscal 'twenty six.

Speaker 2

I will then return with some closing remarks.

Speaker 3

Chris, over to you. Thank you, Kevin, and good morning, everybody. Our fiscal 'twenty one diluted earnings per share of 5 point diluted earnings per share of $4.72 reported in the prior year. As a reminder, our fiscal 2020 GAAP results included a one time Non cash income tax benefit of $21,000,000 or $0.17 per diluted share relates to the enactment of new tax legislation in Kansas. As we entered fiscal 'twenty one, we conservatively planned for lower nonresidential revenues, while planning to execute our normal O and M program.

Speaker 3

While non residential sales volumes declined 10% period over period during the Q1 and early into the Q2, we carefully manage our O and M spending, Focusing on compliance related activities. Non residential sales volumes rebounded sooner than we anticipated, which created the opportunity to This deferred taxes on our revenues and deferred income tax expense contributed about $0.01 to fiscal 'twenty one's results. As a result, actual earnings per share slightly exceeded the higher end of our guidance range. Taking a closer look, Consolidated operating income rose approximately 10% to $905,000,000 Slides 56 provide details of the year over year changes to operating income For each of our segments, I will touch on a few of the fiscal year highlights. Rate increases in both of our operating segments, Driven by increased safety and reliability capital spending totaled $207,000,000 We continue to benefit from strong customer growth in most of our jurisdictions, Resulting in a $19,000,000 increase in distribution operating income.

Speaker 3

During fiscal 2021, we added 51,000 new customers, which represents a 1.6% increase over the last 12 months. Sales volumes for our commercial customers recovered in fiscal 2021, Rising almost 6% over last year. Service order revenue in our Distribution segment declined about $8,500,000 Primarily due to the waiver of our customer service fees for disconnections and reconnections. Additionally, our bad debt expense increased by $18,000,000 year over year. All collection activities resumed in the Q3 and we continue to offer flexible payment arrangements, help customers find financial assistance We remain in close contact with our regulators.

Speaker 3

We continue to believe this bad debt will be recovered over time. Consolidated O and M expense, excluding bad debt increased $31,000,000 with a focus on system safety, including enhanced leak surveys, Pipeline integrity work and continued records establishment and retention. Additionally, line locate requests increased over 9% As a result of increased economic activity and the effects of our 3rd party damage awareness efforts, capital spending increased to $2,000,000,000 With 88% of our spending directed towards investments to modernize the safety, reliability and environmental performance of our system. In fiscal 2021, over 90% of our capital spending began to earn a return within 6 months of the test period end. We accomplished this by implementing $226,000,000 in annualized operating income increases, excluding the amortization of excess deferred tax liabilities.

Speaker 3

Since the end of fiscal year, we have reached agreement for the regulators to implement an additional $69,000,000 in annualized operating income During our fiscal 2022 Q1. As of today, we have 4 filings pending seeking about $22,000,000 Slides 27 to 36 summarize our regulatory activities. During fiscal 2021, we completed over $1,200,000,000 of long term debt financing to support our ongoing operations. We fully satisfied our fiscal 2021 equity needs through our ATM equity sales program. Under that program, we issued approximately 6,000,000 shares under forward agreements for $578,000,000 And we settled approximately 6,000,000 shares for net proceeds of $607,000,000 As of September 30, we had approximately $300,000,000 remaining under existing equity arrangements that will satisfy a significant portion of our fiscal 2022 equity needs.

Speaker 3

This equity financing complemented the $600,000,000 of long term debt financing We issued last fall. Additionally, we improved our fiscal financial flexibility during fiscal 2021. During the Q2, we renewed, extended and increased in liquidity under our credit facilities. Our primary 5 year $1,500,000,000 facility was March of 2026 and retains the $250,000,000 accordion feature and we replaced or expiring 3.64 day $100,000,000 credit facility with a new $900,000,000 3 year credit facility with a $100,000,000 accordion feature. We now have $2,500,000,000 available under 4 credit facilities.

Speaker 3

The financial flexibility these facilities provide Improves our ability to respond to unforeseen events such as winter storm hearing. Additionally, we issued a new $5,000,000,000 shelf registration statement And a new $1,000,000,000 ATM program to support our financing plans for fiscal 2022 and beyond. Additionally, during the 4th We mitigated future interest rate risk by executing $875,000,000 of forward starting interest rate swaps. Currently, we have $1,850,000,000 in swaps to support our future long term debt financing needs. Finally, our treasury team did an Outstanding job and outstanding for $2,200,000,000 cost effective interim financing to pay for the gas costs incurred during Winter Storm Yuri, All of which preserved our ability to continue supporting our operational needs.

Speaker 3

As a result of these financing activities, our equity capitalization, Excluding the $2,200,000,000 of winter storm financing was 60.6% as of September 30. Additionally, we finished fiscal year, we have approximately $2,900,000,000 of total liquidity. The strength of our balance sheet and liquidity leaves us well positioned as we move into fiscal 2022. Details of our financing activities and financial profile can be found on Slides 9 through 12. We've also prepared our winter operations for the next fiscal year.

Speaker 3

You heard Kevin discuss that our procurement team has mitigated supply chain and inflation risk in our operations. Our gas supply team has also done an excellent job preparing our gas My strategy for the upcoming winter heating season. Our proprietary contracted storage is over 95% full At an away, the average cost of gas is approximately $3 Additionally, we have fiscally and financially hedged about onethree of our expected purchase requirements And approximately $4 Through the use of storage and hedge purchases, we have stabilized prices for approximately half of our normal winter usage In the mid-three dollar range. The remainder of our anticipated gas supply needs will be satisfied through a combination of base load purchases at 1st month prices, Peaking contracts and spot purchases when needed. Today, we have transportation capacity on 37 pipelines across our H State footprint, It provides our gas supply team access to a wide variety of producing basins to ensure supply reliability and competitive natural gas prices for our customers.

Speaker 3

As a reminder, all the gas costs we incur are recovered through purchase gas cost mechanisms generally over 12 months and the process generally involves a weighted average approach, This helps us move the impact on customer bills. Finally, we've been actively communicating with our customers about how they can mitigate potential impact of higher gas prices through energy conservation As well as the various ways we can help them with their bills through installment plans, budget billing and locating energy assistance agencies. Looking forward, fiscal 'twenty two will begin the 2nd decade of pursuing our safety focused organic growth strategy. Yesterday, we initiated our fiscal 'twenty two earnings per share guidance in the range of $5.40 to $5.60 Consistent with prior years, we expect about 2 thirds of our earnings will come from our Distribution segment. Details surrounding our fiscal 'twenty two guidance can be found on Slides 2020 Also yesterday, Atmos Energy's Board of Directors approved a 150 second consecutive quarterly cash dividend.

Speaker 3

The indicated annual dividend for fiscal 2022 is 2.72%, an 8.8% increase over fiscal 2021. Finally, fiscal 2022 capital spending is expected to rise about 25% and is expected to be in the range of $2,400,000,000 to $2,500,000,000 Most of this increase will be incurred at APT, which represent approximately 1 third of our capital spending in fiscal 'twenty two As a result of the project work that Kevin described a few minutes ago, over 90% of our fiscal 'twenty two capital spending is expected to begin earning return within 6 months of the test period end. Slide 19 summarizes the key themes underlying our fiscal 2022 5 year plan. Over the next 5 years, we anticipate earnings per share will grow 6% to 8% per year. By fiscal 'twenty six, we anticipate earnings per share to be in the range of $7 to We also anticipate dividends per share to increase annually in line with earnings per share.

Speaker 3

Continued spending for system replacement and modernization and by loan improvements and system expansion will be the primary driver for the anticipated increase in capital spending, Net income and earnings per share through fiscal 'twenty six. Over the next 5 years, we anticipate total spending of approximately $13,000,000,000 to $14,000,000,000 This level of spend is expected to support rate base growth of about 11% to 13% per year. This translates into an estimated rate base of From an O and M perspective, we continue to focus on compliance based activities that address system safety. For fiscal 'twenty two, we anticipate O and M to range from 690,000,000 $710,000,000 and we have assumed O and M inflation of 3% to 3.5% annually through fiscal 'twenty six. In addition to the spending plans I outlined, we have assumed approximately $600,000,000 in excess deferred tax refunds Over the next 5 years, we'll flow back to customers.

Speaker 3

As a result, we expect our effective tax rate in fiscal 2022 to be between 9% and 11%. This rate assumes no tax changes that are currently being considered at the federal level. From the financing perspective, we will continue to follow the financing strategy that we've been executing the last Few years to preserve the strength of our balance sheet. Excluding securitization, we anticipate the need to raise between $7,000,000,000 $8,000,000,000 incremental long term financing over the next 5 years. The strength of our balance sheet enables us to use a prudent mix of long term debt and equity financing We target a 50% to 60% equity capitalization ratio inclusive of short term debt.

Speaker 3

This financing In October, we completed a $600,000,000 30 year senior note issuance with a coupon of 2.85%. After factoring in a favorable settlement of forward starting interest rate swaps, The effective rate on this issuance is 2.58 percent and our debt profile remains very manageable with a weighted average maturity of 19 years, Excluding the $2,200,000,000 of incremental winter storm financing. Finally, as I previously mentioned, we have hedged a substantial portion of our anticipated long term debt needs to mitigate From an equity perspective, utilizing our ATM program continues to be our preferred method for raising equity. As I mentioned earlier, the equity forwards we executed during fiscal 2021 will satisfy a significant portion of our expected equity needs for fiscal 2022, And we expect to raise our remaining fiscal 'twenty two equity needs through our ATM program. Regarding securitization, we have made substantial progress in the last few months.

Speaker 3

Yesterday, the Federal Commission of Texas unanimously issued a final determination of a regulatory asset that will be securitized under the statewide program. The final order stipulated that all of our gas and storage costs were prudently incurred and are fully recoverable. Next step is for the Railroad Commission to issue a financing order. Following the issuance of the financing order, the Texas Public Financing Authority has up to 180 days to complete the securitization transaction. Upon receipt of the securitization funds, We will repay the $2,200,000,000 of winter storm financing we issued last March.

Speaker 3

In Kansas, we filed a securitization application in mid September. We're currently responding to various questions and the procedural schedule has been set with full proceedings expected to begin in January. Finally, annual filing mechanisms be the primary means to which we recover capital spending. These mechanisms enable us to more efficiently deploy our capital spend and generate the returns necessary to attract the capital we need to finance our investments. And these mechanisms produce a smaller impact to customer bills We're providing the regular rate adjustments that support our system modernization efforts.

Speaker 3

We have assumed no material changes to these mechanisms through fiscal 'twenty six. In fiscal 2022, we anticipate completing filings for $215,000,000 to $225,000,000 in annualized regulatory outcomes That will impact fiscal years 202223. The execution of this plan to modernize our system through disciplined capital spending, Timely recovery of those investments through our various regulatory mechanisms and balanced long term financing all supports our ability to grow earnings per share And dividends in the 6% to 8% range annually through the fiscal 2026. And as you can see on Slide 25, The execution of this plan will also keep customer bills affordable, which will help us sustain this plan for the long term. Thank you for your time this morning.

Speaker 3

I will now turn the call back to Kevin for his closing remarks. Kevin?

Speaker 2

Thank you, Chris. Looking forward, I'm very excited about the direction and long term sustainability of our company. The foundation has been set with a proven safety driven strategy Compagnied with organic growth at yields, as Chris said, 6% to 8% fully regulated earnings per share, commensurate dividend per share growth, Supported by a strong financial profile. We operate in a diversified and growing jurisdictional footprint That is supportive of the investment in natural gas infrastructure. 97% of our rate base is situated in 6 of our 8 states that have Pass legislation in support of Energy Choice.

Speaker 2

The constructive regulatory mechanisms in our jurisdictions Support the necessary capital investment to modernize our natural gas distribution, transmission and storage systems. We have a long runway of work to support the planned $13,000,000,000 to $14,000,000,000 in capital spending over the next 5 years, As you can see on Slide 16 and 17, that spending will support the replacement of 5,000 6,000 miles of distribution and transmission pipe or about 6% to 8% of our total system. We also plan to replace between 100,000 to 150,000 steel service lines, which is expected to reduce our This level of replacement work is expected to reduce methane emissions from our system by 15% to 20% over that 5 year period. Additionally, you have heard us discuss the growth in our jurisdiction. 8 of the 11 fastest growing counties we serve are in the DFW Metroplex and to the north of Austin.

Speaker 2

Additionally, our Middle Tennessee service territory ranks among the fastest growing areas in the U. S. As well. We continue to see industrial customers in our footprint choose natural gas. In fiscal 2021, we added approximately 45 new industrial customers With an estimated annual load of between 10 Bcf to 12 Bcf per year once they are fully online.

Speaker 2

And these customers are from various industries, manufacturing, food processing, hospitals and distilleries. Focusing on the long term sustainability has always been a part of our strategy as reflected in the vital role we play Every day in our communities, delivering safe, reliable and efficient natural gas to homes, businesses And industries to fuel our energy needs now and into the future. We appreciate your time this morning. We'll now open the call for questions.

Operator

Thank you. The floor is now open for questions. Our first question is coming from Julien Dumoulin Smith of Bank of America. Please go ahead.

Speaker 4

Hey, it's actually Cody Clark on for Julien. Good morning.

Speaker 3

Hey, good morning, Cody. How are you? Good morning, Cody.

Speaker 4

Good. So first, on the delta between the 11% to 13% rate base growth and the 6% to 8% EPS growth. I know there's a good deal of equity contemplated in the plan, definitely cognizant of the dilution there, but low like regulatory lag given the recovery mechanisms that you have across your jurisdiction. So I'm wondering If there are any other drivers of that delta that you would call out?

Speaker 3

At this time, it really is just the Financing plan that we've assumed over the next 5 years, as you pointed out, it's the equity component. But again, that's factored into the 6% to 8% earnings per share growth that we highlighted on the call this morning.

Speaker 4

Got it. Okay. And then building off that question a little bit, I'm wondering how you characterize where you see yourself in that 6% to 8% long term EPS growth range. Is it more towards the midpoint or top end? I'm asking because the past couple of year end updates, we've seen you perform well during the year, rebase off that strong number and then reiterate the 6% to 8% Growth after that.

Speaker 4

So are you being a little bit conservative? Or how would you think about that?

Speaker 3

When you look at the ranges that we put out this morning, the $540,000,000 to $560,000,000 for fiscal 'twenty two and then the $7,000,000 to $7,400,000 in fiscal 2026, If you take the midpoint of both of those ranges and kind of do the math, that implies about a 7% annual growth rate per year.

Speaker 4

Okay. And then last one, if I can just sneak it in there. Yes, we've seen the market multiple for gas utilities decline relative to the electric peers throughout the year. And at the same time, I've seen some healthy transaction multiples for some of the gas utilities. So how are you thinking about potentially monetizing an asset or assets to offset the ATM equity needs.

Speaker 4

I know you stated in the past that you'd like your business mix, but wondering if that has changed at all?

Speaker 2

I'll start on that, Cody, and then Chris can certainly jump in if he wants to. Again, as you said, We've been very proud of our assets. We continue to be very proud of them. You look at the results here, you talk about the diversified growth that we just mentioned On our call here, the mechanisms, the regulatory relationships that we have out there, our involvement in Communities, we're very proud of the asset mix we have today. So we're not contemplating at this point anything but continuing the excellent operation of those assets.

Operator

Thank you. Our next question is coming from Richard Sunderland of JPMorgan. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my questions here. Just wanted to start with this Permian Highway project. Does it create incremental basin takeaway or just better connectivity to the Permian Highway pipeline?

Speaker 2

Well, that project you're talking about where we're connecting up with the Permian Highway project, that's just meet the growing demand of that Austin corridor down there To feel that diversification of load as well for us. So that's what we're looking to do. We're connecting to that Permian Highway project and bringing that supply up from the south instead of moving gas around from the north or bringing it over From Katy at this point. So for us, again, it's another supply optionality to meet the growing corridor that we have down there And some supply diversification.

Speaker 5

Understood. And then I realize the entire 5 year capital plan is Up year over year, but is there anything notable in the 2022 CapEx step up or just any color there?

Speaker 2

Well, I think nothing that steps up again. We go through a very rigorous and robust planning process each year That looks at the 1, 3 5 year project levels that are out there. As you've heard us say before, we take a long look at the projects to not only meet Integrity management goals, compliance goals, but we also look at it from that growth perspective. What is the demand going to be out in the future and how do we meet that demand? So I think that's all contemplated within this.

Speaker 2

That's why we spiked out those projects. So I think this is just a further iteration Of meeting the supply needs, the demand and diversification that we continue to talk about.

Speaker 5

Great. Thank you for the color.

Operator

Thank you. Our next question is coming from Insoo Kim of Goldman Sachs. Please go ahead.

Speaker 6

Thank you. My first question is on just general gas hedging. I know as a vessel Salt film is coming on and that's going to help just the storage capacity. But whether it's in Texas or other regions, you're following what the hedging Rules are that the commissions of those states put on limited to that, but just whether it's a result of Yuri or Some of the spikes we're seeing in the current winter season, any dialogue with any of the commissions on potentially changing the hedging strategy?

Speaker 2

Yes, I'll start out and then see if Chris wants to add any color. We have dialogue every year with our Commissioned, as you know, laying out what our anticipated gas supply plan is for that year, how we perform the following year. We're open to that feedback. But right now, both our commissions, our gas supply teams are very comfortable with the plans we've been able to put together. And you heard That combined with our storage opportunity, our base load purchases, those sort of things, how well they have us positioned going into To this winter heating season.

Speaker 2

So we'll continue those dialogues, continue those conversations. We'll continue to meet with our jurisdictions at the end of each winter season And we're collaborating with each of those jurisdictions as they see fit going forward.

Speaker 6

Got it. And my second question, the proposed methane fee that's in the reconciliation package, I think more on the Upstream and midstream side of things, but just curious on your thoughts, whether it's direct or indirect, any potential impact or ramifications you See for your utilities or just the gas LDC industry in general?

Speaker 2

There's still a lot of moving parts and pieces To that legislation, a lot of conversations still going on at the federal level with that. And, Clive, frankly, as they continue to do that, we'll monitor that. But I think the thing as you've heard us say before is that The United States, as we sit here today, is among the top 5 producers. In natural gas, we're among the top Five improving reserves in the world today and for us to continue to have the economic growth, economic stability and security That we need from an energy perspective and a national perspective, we're going to need to have a continued diversified energy portfolio. And we believe natural gas certainly brings that to the table with the flexibility, reliability and abundance it provides everybody.

Speaker 2

We just outlined through Today's update, how natural gas plays a key role in that. So we'll continue to monitor that, but We would look for a diversified energy portfolio to continue to meet the demands of the U. S.

Speaker 6

Got it. We'll leave it there. Thank you both.

Operator

Thank you. Our next question is coming from Stephen Byrd of Morgan Stanley, please go ahead.

Speaker 7

Hey, good morning.

Speaker 2

Good morning. Hey, Steve.

Speaker 7

Hey. So a lot of topics have been covered. I wanted to I'll touch on 2 things. Maybe first just back on the natural gas pricing impact. That's Slide 25, I think it's quite constructive.

Speaker 7

To your point, it doesn't we don't see big shocks. Are there dynamics though, whether it's in one jurisdiction where the Impact is greater or an assumption that could change, it could cause that sort of fairly Modest increase in 2022, for example, to be a little bit different or worse for any jurisdiction or just are I guess My bottom line question is just sort of, what kinds of shocks could cause that to be different? Or is it really hard to envision that?

Speaker 3

Yes,

Speaker 2

this is Chris.

Speaker 3

I can go ahead, Kevin.

Speaker 8

Go ahead. Sorry.

Speaker 2

Well, I don't foresee anything that could impact us at this point. Those are averages, as you know, that we put out there. We continue So look for diversification across our pipes, as you heard us mention earlier, we're across 37 pipelines, multiple basins. So we try to blend in as much diversification and flexibility as we can within our systems. We have these annual mechanisms that tend to level out increases over time.

Speaker 2

And I think we're conservative on those gold bars there on 25. As you've heard us say before, we're looking way out into the future on some of those prices. And as I look today, Waha at a cash basis is $3.98 Katy's at 4.40 And I believe the NYMEX is at 4.91 today. So I think again with the great work our gas supply team does, Where our assets are located on multiple pipes, availability of storage, that sort of thing, we're in a really good position. Chris, anything you want to add?

Speaker 3

Yes. I'd say too, as we thought about what could potentially move the needle In terms of pricing, again, it's weather patterns. It's obviously the pricing dynamics that Kevin just described. Also, just customer usage. And so all that's very, very difficult to predict and in trying to estimate or come up with A true impact and again with an 8 state footprint that covers a fairly significant geographical difference and you could have weather patterns that impact the eastern portion The U.

Speaker 3

S. That are completely different from Texas and what we might experience in Colorado. So really, it's I think pretty challenging for us to say across the 8 state footprint, if there is a True key driver to watch out for. I think it's going to be a combination of all of the items you just mentioned, pricing, The basins that we have access to, they're very highly liquid basins, so we were able to have a good keen eye on what that pricing situation, Customer usage, astrologists, general weather patterns.

Speaker 7

That's really helpful. And then shifting over Financing, I'm going to step back a little bit on this question. Atmos is in a really interesting situation. You have Perhaps the fastest growth rate in terms of your rate base among companies we cover. We love the growth outlook.

Speaker 7

What's interesting is that the amount of equity needed compared to your market cap is high. And The value of the stock, the PE multiple of the stock is dramatically lower than what we're seeing in sort of private asset sales, including not just Sales of 100% sort of just selling a minority stake, we've seen dramatically higher valuations. So I guess the math might suggest that Sort of a sale of a minority stake at the kinds of multiples we've been seeing on other situations would be dramatically less dilutive Then this kind of volume of equity issuance that we're looking at over the next 5 years, how do you all kind of think about the possibility of Selling non controlling minority stakes, potentially much higher valuations than just where your own stock is trading. How do you all think about that?

Speaker 3

Sure, Steve. I mean, it's a challenge for us because we don't have the holding company structure like many of our peers do. So when you look at each of our divisions or each of our states, That's all under one corporate umbrella. So we can't do a minority sale for a single jurisdiction the way we're structured today. It would have to be a partial Asset sale or a certain geographic region that we would have to exit.

Speaker 3

And as you heard Kevin talk earlier with Cody, we're very, very happy with the assets that we have, the jurisdictional footprints. We do see the Location between what the private market is willing to place evaluation on versus what we're seeing from a public and trade perspective. And we think, again, from a public and trade perspective, the fact that 97% of our asset base is located in jurisdictions They're supportive of natural gas, both from a policy perspective and a regulatory perspective. The fact that we have very strong customer growth It's currently being a little bit underappreciated, and that's where we just need to continue to remind those investors that we are very well positioned in the country to capture the growth that it's experienced in our jurisdictions and have jurisdictions that have strong support for natural gas.

Speaker 2

Yes, Chris, I would just add, you've got 19 years of consecutive EPS growth and 38 years of consecutive dividend increases all support our strong position as well as what Chris said about our regulatory jurisdiction. So We're going to continue to operate and do the things we do within our strategy we've outlined. We think it's solid. We think it fits our jurisdictions well. So Really believe we are in a good position going forward, not only for our customers, but our communities and all stakeholders.

Speaker 7

Understood. Thank you very much.

Operator

Thank you. Our next question is coming from Ryan Levine of Citi. Please go ahead.

Speaker 8

Good morning.

Speaker 3

Hey, Ryan.

Speaker 8

Hey. What are the drivers of where you would fall in the $0.22 range for EPS? Can you talk about some of the

Speaker 3

Key pluses and minuses obviously will be the execution of the regulatory strategy, Customer usage patterns, weather, although we are weather normalized in 97% of our jurisdictions, We can see a little bit of weather movement year over year and just timing of O and M spending as we continue our ongoing System safety and compliance work, but those are the key drivers that we generally point to when we're talking about where we could fall within the 6% to 8% range.

Speaker 8

On the O and M point, it looks like you're assuming 3% to 3.5% O and M cost inflation in your 2022 outlook. What underpins that and seeing some more robust inflation figures more recently, Can you kind of elaborate on what's driving that assumption?

Speaker 3

Sure. It's just the ongoing expansion of our Compliance work, you've heard us talk before that we're in a mode now of doing more compliance Work every year rather than holding back and waiting for another rate case to occur. So as we continue to look at the rule That's happening at the federal and the state level. We work to try to get ahead of that so that when it comes time for a compliance deadline to be met, We're getting there well in advance of when that deadline is. And we're also just looking at just the system needs and what we want to be doing from a safety So we talked about advanced leak detection technologies and further expanding that across our footprint, As well as just ongoing hydro testing and in line inspection work on our distribution on our large scale distributions of our Our transmission lines to make sure that our system is operating as safely as it possibly can.

Speaker 8

Okay. And then in the federal legislation, what do you view as the impact to Atmos more broadly?

Speaker 2

I mean, are you referring to the infrastructure bill there, Ryan?

Speaker 8

The infrastructure bill and potential Tax reform or tax changes?

Speaker 2

Yes. On the infrastructure bill itself, as you know, it's very comprehensive. We're still working our way through it. But Some of the things that we've seen that we are focusing in on are incentives in there for High efficiency, natural gas appliances, systems that regard hydrogen, hydrogen research and development, As well as there's some, I think, dollars 500,000,000 or so over the next 5 year increase for LIHEAP that's in there as well. The rest of it, at this point, we're still working our way through the detailed piece of that with our peer companies and with the American Gas Association.

Speaker 8

Okay. And then last question for me. Are you talking to any of your regulators in any of your jurisdictions about rate basing electrolyzers Within the LDCs?

Speaker 2

Short answer is no.

Speaker 8

Okay. Appreciate it. Thank you.

Operator

Thank you. At this time, I'd like to turn the floor back over to management for closing comments.

Speaker 1

Thank you. We appreciate your interest in Atmos Energy and thank you for Joining us today, a recording of this call is available for replay on our website through January 6, 2022. Have a good day.

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Earnings Conference Call
Atmos Energy Q4 2021
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