Atmos Energy Q3 2024 Earnings Call Transcript

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August 8, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmos Energy Corporation Fiscal 2024 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the conference over to Dan Mazier, Vice President of Investor Relations and Treasurer. Dan, you may begin.

Speaker 1

Great. Thank you, Christa. Good morning, everyone, and thank you for joining our fiscal 2024 Q3 earnings call. With me today are Kevin Akers, President and Chief Executive Officer and Chris Forsythe, Senior Vice President and Chief Financial Officer. Our earnings release and conference call slide presentation, which we will reference in our prepared remarks, are available at atmosenergy.com under the Investor Relations tab.

Speaker 1

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. Our forward looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 32 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsyth, our Senior Vice President and CFO. Chris?

Speaker 1

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we announced fiscal year to date diluted earnings per share of $6 compared to $5.33 per diluted share in the prior year period. Our Q3 and fiscal year to date results continue to be driven by 2 themes: regulatory outcomes reflecting increased safety and reliability spending and customer growth. Additionally, strong food system revenues at APT, particularly during the 3rd fiscal quarter contributed to our performance.

Speaker 1

Regulatory outcomes in both of our segments increased operating income by $238,000,000 And residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $18,000,000 Values in our pipeline storage segment increased $19,000,000 period over period. Dollars 11,000,000 of this amount net of a rider rent mechanism was realized during our 3rd fiscal quarter. Several of the pipelines coming out of the Permian experienced planned and unplanned maintenance. This reduction takeaway capacity, up with robust associated natural gas production, widen the spreads between the Wahawk header on the western end of APT system and deliver points in the eastern and southern ends of the system. We expect spreads to remain elevated through the end of our fiscal year.

Speaker 1

Excluding the $14,000,000 one time bad debt adjustment we reported in Mississippi in the Q1, consolidated O and M increased a net $16,000,000 or about 3%. This increase is primarily due to higher employee related costs, insurance premiums, IT software maintenance costs, partially offset by a $15,000,000 decrease in O and M in our pipeline and storage segment, primarily due to the timing of in line inspection work. As expected, O and M in the 3rd fiscal quarter trended higher than the prior year quarter and we anticipate O and M spending in the 4th fiscal quarter to trend higher as well as we continue to focus our spending on compliance, maintenance and system monitoring. We still expect fiscal 2024 O and M to be in the range of $800,000,000 to $820,000,000 Consolidated capital spending increased to $2,100,000,000 80% plus dedicated to improving the safety and reliability of our system. Spending our distribution segment has increased due to higher safety and liability spending and higher spending to support customer growth.

Speaker 1

Same in our pipeline and storage segment is lower than the prior year due to timing. We remain on track spend approximately $3,100,000,000 this fiscal year. Since the end of our 2nd fiscal quarter, we implemented about $213,000,000,000 annualized regulatory outcomes, including all of this year's Texas script filings and our annual filings for the City of Dallas, Louisiana and Tennessee. Year to date, we have completed $380,000,000 in annualized regulatory outcomes. Currently, we have an additional $182,000,000 in annualized outcomes in progress.

Speaker 1

Additionally, we made our first filing under APT's new system safety and integrity mechanism seeking a $19,000,000 increase in revenues. This new mechanism was approved in APT's last general rate case as a floating mechanism for costs incurred to address new federal and state safety related regulations, meaning we will recognize the revenue and related O and M costs after review and approval by the Texas Federal Commission, resulting in no impact to operating income. Our financial position continues to remain strong. We finished our 3rd fiscal quarter with an equity capitalization of 61% and approximately $4,300,000,000 liquidity. This amount includes $551,000,000 net proceeds available under existing forward sale agreements that will fully satisfy our anticipated fiscal 2024 equity needs and most of our anticipated fiscal 2025 needs.

Speaker 1

In June, we completed a $325,000,000 senior unscrewed debt offering, tapping our existing 10 year 5.9 percent senior notes. As a result, our overall weighted average cost of debt as of June 30 stands at 4.1% and our debt profile remains very manageable with a weighted average maturity of approximately 17 years. As we head into the Q4 of the fiscal year, we now believe our fiscal 2024 earnings per share guidance will be at the higher end of our reaffirmed earnings per share guidance range of $6.70 to $6.80 Our anticipated financing plan for fiscal 2024 is complete. All regulatory outcomes that can impact fiscal 2024 have been implemented. As I mentioned ago, we anticipate spreads for APT's through system business will remain elevated, which will modestly contribute to our Q4 results and we have a reasonably clear line of sight in the system compliance, maintenance and monitoring we will be performing in the 4th quarter.

Speaker 1

As a reminder, our guidance range includes 2 items totaling $0.17 that we will exclude when we initiate our fiscal 2025 guidance in November. The first item is the Texas property tax benefit that we've been discussing all fiscal year, which would favorably impact fiscal 2024 results by $0.10 Additionally, the one time Mississippi bad debt adjustment represented $0.07 We continue to anticipate 6% to 8% earnings per share growth from the suggested EPS amount through fiscal 'twenty eight. Thank you for your time today. And I will turn the call over to Kevin for his update and some closing remarks. Kevin?

Speaker 2

Thank you, Chris. Good morning, everyone, and thank you for joining us today. We continue to benefit from solid economic growth in our service territory. For the 12 months ended June 30, we added 57,000 new customers with nearly 45,000 of those new customers located in Texas. The Texas Workforce Commission reported in July that the seasonally adjusted number of employees reached 14 point 2,000,000.

Speaker 2

Texas again added jobs at a faster rate than the nation over the last 12 months ending June, adding over 267,000 jobs, representing a 1.9% annual growth rate. Industrial demand for natural gas in our service territories also remained strong. During the Q3, we added 10 new industrial customers with an anticipated annual load of approximately 2 Bcf once they are fully operational. Fiscal year to date, we have added 32 new industrial customers with an anticipated annual load of approximately 6 Bcf once they are fully operational. On a volumetric basis, the 6 Bcf of anticipated industrial load is equal to adding approximately 110,000 residential customers.

Speaker 2

And during the 1st 9 months of the fiscal year, our customer support agents and customer advocacy team continued their outreach efforts to energy assistance agencies and customers, helping over 47,000 customers receive nearly $19,000,000 in funding assistance. Our consistent performance reflects the vital role we play in every community, safely delivering reliable and efficient natural gas to homes, businesses and industries to fuel our energy needs now and in the future. We appreciate your time this morning and we will now open the call to questions.

Operator

Your first question comes from the line of Fei Shi with Barclays. Please go ahead.

Speaker 3

Hi, good morning team. Thanks for taking my questions. I just want to first quickly touch on financing. Could you just further discuss the equity needs for 2025? And definitely given 2025 largely done with Forward Instruments and the recent renewal on ATM, just how does that better facilitate the equity needs in 2025?

Speaker 3

Thanks.

Speaker 1

Yes. Well, this is Chris. Good morning and thanks for joining us. We typically issue between $600,000,000 $800,000,000 a year in equity through the ATM program that we have. And as I mentioned a few minutes ago, we have $551,000,000 priced at the end of June, of which that amount will basically mostly satisfy our fiscal 2025 needs.

Speaker 1

So I think that hopefully that will give you enough color to update your models.

Speaker 3

That's great. That's great. Thanks for the colors. Very helpful. Maybe just quickly turning to O and M execution for 25, You raised the midpoint guidance by $20,000,000 last quarter.

Speaker 3

And I guess things are on track for this year. Could you talk about going forward what are some of the key items you're focusing on O and M execution? And how are you benchmarking with the 3 0.5% annual increase guidance? Thanks.

Speaker 2

Yes. This is Kevin. Good morning. Glad to have you join us today. Again, we're working through the remainder of fiscal 'twenty four right now and anticipate it will be the same items as we move into 'twenty five.

Speaker 2

And we'll have additional detail and color as we get to our November call on 2025. But again, the drivers around O and M continue to be hydrostatic testing, line locating, integrity regulations, marker ball placement on difficult or hard to locate lines, those sort of things. And then looking for opportunities as we move forward to enhance those or pull things forward when we have the ability to do that. So again, the same items that we're focused on this year, we anticipate seeing again in 2025. Yes.

Speaker 1

And Faye, I'll add to that too. As I said at the end of my prepared remarks, we're still anticipating 6% to 8% EPS growth off of the adjusted EPS amount for fiscal 2024. So that's the overall theme to take away from. We'll have some puts and takes on the O and M, as Kevin mentioned, but they were still guiding to that 6% to 8% growth target.

Speaker 3

Great. That's very helpful. Thanks for the color. So I'll leave it there.

Operator

Your next question comes from the line of Richard Sanderson with JPMorgan. Please go ahead.

Speaker 4

Hi, good morning. Thank you for the time today.

Speaker 1

Good morning. Good morning.

Speaker 4

Looking at 'twenty four results, you've called out the $0.17 of 1 offs. I'm curious how we should think about the rest of the business into 20 25. Does everything else continue into 20 25 other than APT spread benefit, meaning take the $6.80 top end less $0.17 and maybe back out another roughly $0.10 for the spread pickup?

Speaker 2

Yes, I

Speaker 1

think you're on target there, Rich, backing up $0.17 off of whatever you want to assume for the outcome fiscal 2024 and APT, we will have some spread activity next year, but we just can't predict it. And so I wouldn't necessarily discount too far off of what you the 2 one time items when you're starting your 7% or 8% or 9% whatever we want to do on the growth target for fiscal 2025 because we will have some activity. It's just this time this year, particularly in the Q3, we saw some elevated spreads. And then as you commented, it's expected to revert back to the mean, which means we'll still have some activity there.

Speaker 4

Okay, great. That's really helpful. And I guess one quick follow-up on that spread opportunity. I know you referenced in the script kind of a continuation into 4Q. Is that already contemplated in the higher end guidance language or is that potential upside depending on how that materializes?

Speaker 1

No, that's all contemplated in the guidance that we've updated here this morning.

Speaker 4

Great. Very clear and very helpful. Thanks for the time.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Ryan Levine with Citi. Please go ahead.

Speaker 5

Good morning. Good morning. Hi, everybody. To follow-up on the APT spread dynamics, what are you assuming for the Matterhorn in service date with the current 2024 guidance? And are you assuming that the spread remains right for the remaining portion of your fiscal year?

Speaker 2

Yes. As Chris said, again, we don't anticipate any further maintenance this year on the upstream segments of APT there that would impact the spreads right now. They've mitigated from the highs we've seen over the last quarter somewhat. And look, going forward, definitely Matterhorn will be coming on, I think, if you read some of the documentation from the upstream folks sometime in September, October, early fall that will be coming on. We'll just have to watch and see what that does for the dynamics out there.

Speaker 2

Then as we normally get into the shoulder much and winter period, demand will drive it further from there on the spread impact. But again, I always like to remind here why APT exists and that's to serve the customers behind it, the LDCs behind it. And then when we have opportunity, we'll move that gas across our system. So right now, again, we don't anticipate any further maintenance upstream that would impact the spreads any further than what we're currently seeing today at this point.

Speaker 5

Okay. And then a follow-up on that. Given the strong performance this fiscal year on APT, does that have any implications for resetting the bar on which you get the sharing mechanism in future time

Speaker 2

No, that's set in the rate case itself on a go forward. So the next time that potential be looked at would be in the next About 5 years. About 5 years in the next required filing.

Speaker 1

Yes. So as a reminder, that bar was set at 106,900,000 dollars And so that's the benchmark we have to achieve to begin sharing over and above that amount. And of course, it works the other way too if we fall short. But 106.9 is the target we're looking

Speaker 2

at. Okay.

Speaker 5

And then last question for me. To the extent that there is new gas generation or infrastructure built in your service territory, do you see any opportunities on the LDC side to maybe build some infrastructure to support the movement of gas associated with some of the gas generation that may be coming?

Speaker 2

Yes. As we've talked about on previous calls, there's always that opportunity out there. But let's remember, the power generators that we currently have behind APT system, we're one of several suppliers to them, so they can move or flex between suppliers at their will out there, so we wouldn't be a sole supplier. And we'll just continue to keep an eye on that over the next few years and see how that develops. But again, we would be one of several suppliers or inputs into those facilities.

Speaker 5

Thank you for the time. Thank you.

Operator

And that concludes our question and answer session. And I will now turn the conference back over to Dan for closing remarks.

Speaker 1

Thanks. We appreciate your interest in Atmos Energy, and thank you again for joining us today. A reminder, a recording of this call is available for replay on our website. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Atmos Energy Q3 2024
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