Atmos Energy Q1 2023 Earnings Report

Atmos Energy EPS Results

• Actual EPS: $1.91
• Consensus EPS: $1.93
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $1.86

Atmos Energy Revenue Results

• Actual Revenue: $1.48 billion
• Expected Revenue: $1.14 billion
• Beat/Miss: Beat by +$345.01 million
• YoY Revenue Growth: +46.50%

Atmos Energy Announcement Details

• Quarter: Q1 2023
• Date: 2/8/2023
• Time: After Market Closes
• Conference Call Date: Wednesday, February 8, 2023
• Conference Call Time: 9:00AM ET

Atmos Energy (NYSE:ATO) (NYSE:ATO) is a regulated natural gas distribution and pipeline company headquartered in Dallas, Texas. Through its utility operations, the company delivers natural gas to residential, commercial, industrial and agricultural customers, with services focused on safe and reliable energy delivery.

Atmos Energy serves customers across eight states: Colorado, Kansas, Kentucky, Louisiana, Mississippi, Tennessee, Texas and Virginia. Its operations include local natural gas distribution as well as pipeline transportation and storage activities, primarily through its Atmos Pipeline-Texas business.

The company traces its roots to 1906 and has expanded over time through growth and acquisitions in the natural gas industry. Atmos Energy is led by John A. Sells, who serves as president and chief executive officer.

Atmos Energy Q1 2023 Earnings Call Transcript

Key Takeaways

• Q1 net income of $272 million, or $1.91 per diluted share, with full-year EPS guidance reaffirmed at $5.90–$6.10.
• Infrastructure milestones reached as Atmos completed Cushing cavern fill adding 6 Bcf of capacity and finalized key pipeline integrity projects on Line X and Phase 2 of Line S2.
• Strong customer growth with nearly 64,000 new residential additions and 12 new industrial customers expected to consume about 9 Bcf annually once operational.
• Operating & maintenance expenses rose by $26 million and capital spending increased 16% to $796 million, driven by higher inspection, damage prevention, and modernization work.
• Robust liquidity with approximately $3.4 billion available, over $1 billion of long-term financing completed, and $1.35 billion in forward starting interest rate swaps securing future costs.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the Atmos Energy Corporation Fiscal 2023.

[Dan Meziere, VP of Investor Relations and Treasurer at Atmos Energy]

Kevin?

[Kevin Akers, President and CEO at Atmos Energy]

Thank you, Dan. Good morning, everyone. We appreciate you joining us and your interest in Atmos Energy today. I want to begin today's call by thanking every one of our 4,800 Atmos Energy employees across all of our eight states for their exceptional effort and dedication to serving our customers under very challenging weather conditions during Winter Storm Elliott and Mara. Thank you for all that you do for our customers and our communities every day. You are truly the heart and soul of Atmos Energy. Our first quarter results reflect that effort, dedication, and focus as we continue modernizing our natural gas distribution, transmission, and storage systems on our journey to be the safest provider of natural gas services. Yesterday, we reported fiscal 2023 first quarter net income of $272 million or $1.91 per diluted share.

[Kevin Akers, President and CEO at Atmos Energy]

We reaffirmed our fiscal 2023 earnings per share guidance in the range of $5.90-$6.10. Our Atmos Pipeline-Texas division achieved several project milestones during the first quarter. Our APT team completed filling the cushion gas requirements at the Bethel 1B cavern, and working gas is currently being injected and debrining operations continue with a targeted completion date of April of this year. This third cavern provides additional support to APT's operations as well as the local distribution companies behind APT system and adds over 6 Bcf of new working gas capacity. Additionally, we completed the final portion of our 137 mi, 36-inch Line X integrity replacement project, as well as completed phase II of our three-phase Line S-2 project.

[Kevin Akers, President and CEO at Atmos Energy]

Line S2 brings supply from the Haynesville and Cotton Valley Shale plays to the east side of the growing Dallas-Fort Worth metroplex. This second phase replaced 17 mi of 14-inch pipeline with 36-inch pipeline. The final phase of this project is anticipated to be in service late calendar 2024. These projects enhance the safety, reliability, versatility, and supply diversification of our system and support the continued growth we are seeing in the local distribution companies behind APT system. According to the Texas Workforce Commission, the state continued a 14-month streak of record employment in December and added 650,000 jobs for the 12 months ending December. This strong employment trend continues to drive the growth in our Mid-Tex and West Texas divisions, where approximately 47,000 of our nearly 64,000 new customers were added for the same 12 months ending December period.

[Kevin Akers, President and CEO at Atmos Energy]

Additionally, industrial demand for natural gas in our service territory remains strong. During the first quarter, we added 12 new industrial customers with an anticipated annual load of approximately 9 Bcf once they are fully operational. The largest of these new industrial customers is anticipated to use nearly 6 Bcf annually. Our procurement team continues to do an excellent job sourcing the materials needed to support our capital investment as we continue modernizing our natural gas distribution, transmission, and storage systems. We also maintain about six months of inventory for our distribution and transmission needs. As we said before, we have ordered all of our anticipated steel pipe needs for FY 2023. Our customer advocacy team and customer support agents continued their outreach efforts to energy assistant agencies and to our customers during the first quarter.

[Kevin Akers, President and CEO at Atmos Energy]

Through their work, the team helped nearly 17,000 customers receive over $6 million in funding assistance. As a reminder, during fiscal 2022, our energy assistance teams helped nearly 67,000 customers receive approximately $34 million of funding to help with their monthly bill. As you'll hear from Chris today, our fiscal 2023 financing costs are known. We have hedged a significant portion of our financing needs beyond fiscal year 2023, and our liquidity and balance sheet remain strong. Atmos Energy is well-positioned to continue delivering safe, reliable, efficient, and abundant natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. I will now turn the call over to Chris for his update. Chris?

[Chris Forsythe, CFO at Atmos Energy]

Thank you, Kevin. Thank you everyone for joining us this morning. As Kevin mentioned, our fiscal 2023 first quarter net income was $262 million or $1.91 per diluted share. Consolidated operating income increased to $321 million or 16% in the first quarter. Our first quarter performance largely reflects positive rate outcomes driven by system modernization spending, continued customer growth in our distribution segment, partially offset by higher O&M spending in both of our segments. Slide five summarizes the key performance drivers for each of our operating segments. Rate increases in both of our operating segments, driven by increased safety and reliability spending, totaled $79 million.

[Chris Forsythe, CFO at Atmos Energy]

Residential customer growth and increased industrial load increased operating income by an additional $5.5 million. We saw a $5 million increase in APT's through-system business due to wider spreads driven by maintenance in some of the key takeaway pipelines in the Permian during the quarter. Consolidated O&M expense increased $26 million, driven by planned higher in-line inspection spending in APT, higher spending for third party damage prevention activities on our distribution system, and increased employee and other administrative costs. Consolidated capital spending increased 16% or $111 million-$796 million, with 88% dedicated to improving the safety and reliability of our system. This increase primarily reflects higher spending at APT for projects that Kevin discussed just a few minutes ago. We continue to execute our annual regulatory filing strategy.

[Chris Forsythe, CFO at Atmos Energy]

To date, we have implemented $115 million in annualized regulatory outcomes, and we currently have about $36 million in progress. Slides 19 through 23 summarize those outcomes, and Slide 16 outlines our planned filings for the remainder of the fiscal year. During the quarter, we completed over $1 billion of long-term debt and equity financing, highlighted by the $800 million long-term debt financing we completed in October 2022, and $200 million in settled equity forward agreements. As of December 31st, we have approximately $755 million in net proceeds available under existing forward sales arrangements that will fully satisfy our anticipated fiscal 2023 equity needs and a significant portion of our anticipated fiscal 2024 needs.

[Chris Forsythe, CFO at Atmos Energy]

Finally, to mitigate interest rate risk associated with our anticipated long-term debt finance needs beyond fiscal 2023, we currently have about $1.35 billion in forward starting interest rate swaps to effectively fix a portion of treasury component of our total cost of financing at rates ranging from 1.8%-2.2%. All of this gives us a clear line of sight into our anticipated financing costs for fiscal 2023 and a portion of our costs beyond fiscal 2023. Our equity capitalization as of December 31st, excluding the $2.2 billion of Winter Storm financing, was 60%. Additionally, we finished the quarter with approximately $3.4 billion of liquidity. Additional details for our financing activities as well as our financial profile can be found on Slides seven through 10. Turning now to securitization.

[Chris Forsythe, CFO at Atmos Energy]

In Texas, the Texas Public Finance Authority and the Bond Review Board continue to work diligently to determine the best outcome for customers with respect to securitization. In January, the Texas Legislature signaled its intent to provide funding for the gas and other costs incurred during Winter Storm Uri that were deemed prudently incurred by the Texas Railroad Commission in November 2021. We are encouraged with these developments and continue to support their efforts. We do not anticipate receiving securitization funds before our interim Winter Storm financing matures on March 9. We currently anticipate refinancing this debt through a combination of the syndicated bank term loan and utilization of our existing credit facilities in cash to minimize the cost to the customer while providing maximum flexibility to repay this debt once the securitization process is completed.

[Chris Forsythe, CFO at Atmos Energy]

Additionally, pursuant to an order issued by the Railroad Commission, we have deferred all carrying costs associated with the interim refinancing effective September 1st and currently intend to defer carrying a cost associated with.

[Analyst]

I just wanted to ask on just the recent move in gas prices. Can you kind of just talk about how that's affecting your financial plan, or your hedging strategies at all here? Clearly, it should help with bill headroom as well, but maybe you can just give us some more color on what the recent move means. Thanks.

[Kevin Akers, President and CEO at Atmos Energy]

I'll start a little bit on the supply side and then let Chris pick up on the hedging side, Nick. We continue to see still good, strong, rig numbers.

[Analyst]

Sorry, hello?

[Kevin Akers, President and CEO at Atmos Energy]

$2 range in Waha and below $2 at Katy. The forward look, particularly even out of the Waha area and the 9x area being in the $2-$3 handle certainly look good on a go forward basis. As you've heard us say before, our storage positions helped us with some of that hedge. Early on, I think we were all in storage at an average weight cost of $5.48. I think we're well positioned for the remainder of this year. The forward curves continue to look good at this point as we move into the summer and fall of next year. The supply continues to look good out there from the major producing basins. Chris, anything else to add?

[Chris Forsythe, CFO at Atmos Energy]

Yeah. Yeah. Thanks, Kevin. Just a couple of things, Nick. You know, first, from the financing perspective, you know, the $800 million long-term debt that we issued in October, satisfies our anticipated long-term debt financing needs. As I've also already mentioned equity, that we got that priced for the remainder of the fiscal year. You understand the math on the equity given where we are and in terms of what our financing needs over the next five years. You know, additionally, we do have full access to our credit facilities today. The operating credit facility, which supports our commercial paper program, is a $1.5 billion program. We have the ample liquidity there to support operations as well as gas supply.

[Chris Forsythe, CFO at Atmos Energy]

Finally, just commenting on hedging to kind of follow from Kevin's point, our gas supply team kind of sets that hedging program in advance of the winter heating season. Between the combination of storage that Kevin alluded to and the hedging programs, you know, we had just under 50% of the cost locked in for this winter heating season. To the extent that gas prices moderate for the other say 50% or so, that should have a positive impact on the customer bill.

[Analyst]

Appreciate that. Chris, I know that you're already fully priced on 2023 kind of equity needs here. How should we kind about 2024 and being opportunistic about further de-risking the financial plan? Thanks.

[Chris Forsythe, CFO at Atmos Energy]

Of the $755 million, as I mentioned, Nick, you know, that satisfies all of our needs and a substantial portion of our needs, all of our needs for 2023 and a substantial portion of our needs for fiscal 2024. The ATM program continues to work very well for us. We'll continue to utilize that to kind of just layer in additional pricing, if you will, on the equity needs for 2024, with an eye towards just being opportunistic on the pricing.

[Analyst]

Thanks a lot. Appreciate the time today.

[Chris Forsythe, CFO at Atmos Energy]

Thank you, Nick.

[Operator]

Your next question comes from David Arcaro of Morgan Stanley. Please go ahead.

[David Arcaro, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Oh, hey, good morning. Thanks for taking my question.

[Chris Forsythe, CFO at Atmos Energy]

Good morning.

[Kevin Akers, President and CEO at Atmos Energy]

Good morning.

[David Arcaro, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Wondering if you could comment on the investigation by the Railroad Commission into the some of the service challenges that your system experienced during the winter weather in December, and just any initiatives or actions that you're pursuing on the back of that experience?

[Kevin Akers, President and CEO at Atmos Energy]

As you know, our team had worked very hard going into this winter storm, had prepared themselves, had prepared the system. As the storm moved in, we did have approximately 2,300 customers in a limited area of our service territory that experienced some service interruptions out of the 2.1 million, 2.2 million residential and commercial customers that we serve here in Texas. We have been working with the commission to provide them additional information and work with them as they wrap up their investigation, which we hope will occur here very soon.

[David Arcaro, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Okay. Got it. Thanks. That's helpful. Then I was wondering, could you elaborate a bit just on the plans for refinancing some of the floating rate notes that are coming due, related to Winter Storm Uri costs? Just, is there an EPS impact that you might anticipate from having to refinance those just as we're waiting for the securitization process to get completed here?

[Chris Forsythe, CFO at Atmos Energy]

Well, Dave, this is Chris. Yeah, the short answer is no. As I mentioned on our prepared remarks, we've got, you know, planned, you know, hybrid or securitization, a term loan, a syndicated term loan that we anticipate executing here in the next few weeks, as well as utilizing some of our credit facilities in cash. With the regulatory asset order that the Railroad Commission has granted, we are deferring all of those financing costs right now into that regulatory asset until securitization.

[David Arcaro, Executive Director and Senior Equity Research Analyst at Morgan Stanley]

Perfect. Thanks so much.

[Chris Forsythe, CFO at Atmos Energy]

Thank you.

[Operator]

Your next question comes from Gabe Moreen of Mizuho Securities. Please go ahead.

[Gabe Moreen, Managing Director and Senior Equity Research Analyst at Mizuho Securities]

Good morning, guys. Maybe you can just talk to us about, broadly speaking, how O&M is tracking relative to your expectations so far this year. Are you seeing any letup in pressures? Just curious on that, your thoughts there?

[Kevin Akers, President and CEO at Atmos Energy]

Yeah, I'll start, and then Chris can jump in. As you heard in Chris's remarks, most of the O&M that we've experienced in the first quarter is what we thought we would see. It's in the range that we've already laid out there. What I mean by that is that, well, with the growth that we talked about, we certainly, both on our side and in our jurisdictions, has driven increased O&M from a line locating perspective. That economic growth certainly drives, you know, new roofs, new commercial businesses, new roads, new infrastructure, which drives up locating expenses. As a matter of fact, our Texas number of locates is up almost 10% this quarter-over-quarter last year.

[Kevin Akers, President and CEO at Atmos Energy]

In addition, as you heard on some of the projects that I mentioned, we had some additional in-line inspection work that we needed to pull forward on the APT side and some additional pigging activity that we slowed during the COVID period but wanted to pick that work back up. All things we anticipated kind of occurring during the quarter but saw a lot more line locating expense just given the growth that we're experiencing. Chris, anything additional?

[Chris Forsythe, CFO at Atmos Energy]

I think that's spot on, Kevin. I would just add that, you know, from an inflation perspective, that the inflation we're experiencing, that we're seeing is still well within the planning parameters that we outlined in our fiscal 2023 guidance and our five-year plan on an overall basis.

[Gabe Moreen, Managing Director and Senior Equity Research Analyst at Mizuho Securities]

Thanks, Kevin. Thanks, Chris. Maybe if I could just follow up with sort of an. Apologies if I missed it, but you got a couple large projects that have either wrapped up or are nearing completion. Can you maybe just talk about kind of what's next in the queue from a larger project standpoint as you look across your system?

[Kevin Akers, President and CEO at Atmos Energy]

Those projects that I mentioned, Line X was an integrity project which fortifies that line that comes out of Waha and runs west to east into Dallas. The S-2 is another integrity and capacity project to bring in additional supply from the east. We'll continue to monitor our system, continue to monitor that growth. We still have, as I mentioned, complete that Bethel Cavern 1B project. That'll take us probably into 2026 to get all three caverns back in service at the same time. Just as a reminder, that's not only a capacity and need for the growth behind our systems. It's also an integrity project per rules at the Commission, where we have to do our integrity work on those caverns every 15 years.

[Kevin Akers, President and CEO at Atmos Energy]

We'll continue to look at our storage. We'll continue to look at the larger pipe infrastructure and see where that may need increasing or fortification as we move forward.

[Gabe Moreen, Managing Director and Senior Equity Research Analyst at Mizuho Securities]

Thanks, Kevin.

[Kevin Akers, President and CEO at Atmos Energy]

Mm-hmm.

[Operator]

Your next question comes from Richard Sunderland of JPMorgan. Please go ahead.

[Richard Sunderland, Senior Analyst at JPMorgan]

Hi, good morning. Thanks for the time today. I just wanted to follow up on the earlier discussion around the gas price dynamics. Could you just give your thoughts on the duration of Waha weakness? You know, we see a probability that Waha gas prices remain depressed until Matterhorn enters service in mid-2024. Any thoughts around the duration here and, you know, impact to customer bills relative to your outlook last quarter?

[Kevin Akers, President and CEO at Atmos Energy]

Yeah. Again, our team continues to stay close with the producers out there, midstream processors to keep a handle on, as you said, as well as new projects that are coming online. I think the other thing that we'll continue to work on is the tie in to some of those lines. That's the other opportunity, I think, for us as those projects continue to build coming out of Waha and head east. It gives us an opportunity to get additional taps or to bring in additional supply into our areas as well. All good signs, as you say, on the forward look. Right now we believe these prices and the conversations we're holding, numbers look really good as you head into Novi March upcoming.

[Kevin Akers, President and CEO at Atmos Energy]

Right now don't see things changing in the short run, at least the information we're getting out there. As we continue through this winter period, pulling on storage and get ready to inject for next season, the pricing looks really good there. As I said before, it's somewhere in the $2 range or so. That should have a very positive impact for our bills for next year.

[Richard Sunderland, Senior Analyst at JPMorgan]

Great. That's all I have today. Thank you.

[Operator]

Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Ryan Levine at Citigroup. Please go ahead.

[Ryan Levine, Senior Equity Analyst at Citigroup]

Good morning. Most of my questions were asked already. I just wanna follow up on one. In terms of the Mid-Tex, DARR proceeding, can you provide an update on around that regulatory activity?

[Chris Forsythe, CFO at Atmos Energy]

Ryan, this is Chris. We made that filing, the DARR filing, in mid-January. We're just now beginning to work through the early discovery process, and we anticipate implementing new rates under the DARR filing by the end of the fiscal year.

[Ryan Levine, Senior Equity Analyst at Citigroup]

Okay, great. That's all for me. Thank you.

[Chris Forsythe, CFO at Atmos Energy]

Okay, thanks, Ryan.

[Operator]

There are no further questions at this time, so I will turn the conference back to Dan Meziere for any closing remarks.

[Dan Meziere, VP of Investor Relations and Treasurer at Atmos Energy]

Thank you. We appreciate your interest in Atmos Energy. Thank you again for joining us. A recording of this call is available for replay on our website through March 31st, 2023. Have a great day.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.

Participants

Executives

• Chris Forsythe, CFO
• Dan Meziere, VP of Investor Relations and Treasurer
• Kevin Akers, President and CEO

Analysts

• David Arcaro, Executive Director and Senior Equity Research Analyst at Morgan Stanley
• Gabe Moreen, Managing Director and Senior Equity Research Analyst at Mizuho Securities
• Richard Sunderland, Senior Analyst at JPMorgan
• Ryan Levine, Senior Equity Analyst at Citigroup
• Analyst