Q1 2020 Earnings Call

[music].

Greetings and welcome to the Atmos Energy first quarter 2020 earnings conference call. At this time off just can certainly there's probably mode. A question answer session will follow the formal presentation.

What's your require operator assistance during the conference. Please press Star Zero Wonder telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Jennifer Hills, Vice President Investor Relations Privates Energy Jennifer. Please go ahead.

Thank you, Kevin and good morning, everyone and thank you for joining US this call is being webcast live on the Internet our earnings release in conference call Slide presentation, which we will reference in our prepared remarks are available at Atlas energy Dotcom under the Investor Relations tab three.

To review these financial results and discuss future expectations. Please keep in mind that some of our discussion may contain forward looking statements within the meaning of the Securities Act and the Securities Exchange Act a forward looking statements and projections could differ materially from actual results the factors that could cause such material.

Real differences are outlined on slide 22 and are more fully described in our SEC filings. Our first speaker, it's Chris Foresight Senior Vice President and CFO of Atmos Energy Chris.

Thanks, and good morning, everyone. We appreciate you joining us and your interest in Atmos energy, our 2020 fiscal years off to a solid start yesterday, we reported first quarter net income of $179 million, a $1.47 cents per diluted share inline with our expectations.

Order growth in both or distribution and pipeline and storage businesses driven by continued customer growth in distribution and rate recovery in both segments.

Consolidated operating income rose, 7% to $253 million into first quarter slide four summarizes the key performance drivers for each of our operating segments.

Operating income for our distribution business rose, 6.4% to $180 million.

Rate increases driven by increased safety reliability capital spending right, an incremental $27 million, primarily north, Texas, Louisiana, Mississippi jurisdictions.

Customers go contribute an incremental $4 million as we've continued to benefit from the strong population growth and sell the first service areas, most notably in the DFW metroplex.

For the 12 months ended December 31st we experienced 1.4% net customer growth in North, Texas distribution business, and 1.2% net customer growth across or eight state footprint.

Consumption decline modestly due to colder weather last year before weather normalization mechanisms went into effect and then expenses increased $8.6 million associated with distribution integrity management work and higher employee related costs.

Operating income for the pipeline storage business grew 8% to $73 million, partly driven by $13.7 million increase due the implementation of new rates from our 2019 grip filing partially offset by $5 million increase in on them range to the timing of well integrity work.

Consolidated capital spending or 27% back on or $29 million with 86% of are spending directed towards safety and reliability spending to modernize our system. We may on track to invest between 1.85 billion and 1.95 billion this fiscal year.

We have a well established regulatory strategy focused on reducing lag.

Fiscal 2020, we expected began earning a return on 90% of our spending within six months to test period end.

Year to date, we had then men at $59 million, an annualized regulatory outcomes and currently we have about $21 million in progress.

Slide 13 to to 18 provide details for all of these filings slide 19 outlines our planned activities for the fiscal year [noise].

Our ability to attract unnecessary long term financing to Thunder Catholics enterprise expenditure program, well maintained a strike or balance sheet is critical to discuss actual execution of our strategic plan. During the first quarter received $1.1 billion in net proceeds from long term financing activities.

October we issued $300 million of 10 year notes in $500 million 30 or notes at an all in effective rate of 3.15%.

As a result, we were able to reduce our weighted average cost of debt to 4.32%.

Our customers continue to benefit from these historically low rates. Additionally, we increased our weighted average maturities to 22 years and do not have a material maturity until 2027.

From an equity perspective, we settled forward agreements on 2.7 million shares for approximately $259 million in net proceeds.

And we executed new forward sales arrangements under our ATM for approximately 340000 shares with an anticipated net proceeds of approximately $37 million.

As of December 31st we had about $240 million remaining under equity board arrangements that must be utilized by the end of our fiscal year. We continue to believe that we can satisfy our fiscal 2020 needs through our ATM program.

As a result to this financing activity or equity capitalization was 58.6% as at December 31st and we finished the quarter with approximately $2 billion liquidity under a credit facilities and equity forward agreements.

The strength of our balance sheet and our five year financial plan continues to be recognized by the credit rating agencies in December Moodys upgraded our long term debt rating to anyone with a stable outlook and S&P reaffirmed or a credit rating.

Details refinancing activities in our financial profile can be found on slide seven through Chen.

Our first quarter performance leaves us well positioned to meet or 6% to 8% earnings per share growth target.

As a result yesterday, we reaffirmed our fiscal 2020 earnings per share guidance in the range of $4.58 to $4.73 per diluted share.

Thank you for your time this morning, I'll now turn the call over to Kevin acres for his closing remarks.

Thank you Chris as you can see from our fiscal first quarter results. We are off to a good start to the year as we remain on track to meet our capital spending goals and earnings growth targets.

From an operational perspective, we remain focused on executing our proven investment strategy of operating safely reliably while we modernize our natural gas distribution transmission storage systems as well.

We're continuing our investments in people process and technologies that will enable atmos energy to scale safely and efficiently, while investing 10 billion to $11 billion over the next five years.

I would like to highlight one of our larger investments the battle Salt Dome project, which we began in fiscal 2019 and is estimated to be completed in 2025.

As we've discussed previously we plan to invest between 100 million and 120 million to develop a third salt down cavern and our baffle storage facility.

This project will enable us to safely performed regulatory compliance work on our two existing caverns and meet the growing demand in the North Texas market.

The construction of the power and league facilities have been completed and we began the leaching process in mid December.

The leaching process is estimated to take between 25 and 30 months and we anticipate finishing our required compliance work on all three caverns and have them in service by late 2025.

Natural gas it is important driver of economic growth in this country and we have seen our industrial business growing our Kentucky, Midstates and Mississippi divisions, particularly in the automotive manufacturing sector and in the spirits industry.

Over the last few quarters clean efficient and affordable natural gas, we transport have supported the expansion of existing facilities and field, New industrial project development.

Once these expansion projects fully come online over the next few years, we expect to deliver an additional two bcf annually to these customers [noise].

Additionally, we continue to expand deliveries to CNG customers with the addition of a new customer in Colorado.

As a result, our customer expects to replace nearly 90000 gallons of diesel fuel annually.

During the first quarter, we continue to enhance our sustainability reporting capabilities.

In December we launched a corporate responsibility section on our website to provide greater disclosure of our focus on safety and long term sustainability and to highlight how we're working to meet the needs of our various stakeholders.

We also published our second corporate responsibility and sustainability report.

As well as an update of methane emissions report both of which can be found in the corporate responsibility section under reports.

The continued modernization of our natural gas distribution transmission and storage systems will help ensure all residential commercial public authority and industrial customers continue to have access to reliable affordable abundant and efficient natural gas.

To support this effort last week, we were pleased to announce that we joined the one future coalition a voluntary alliance of leading companies across the natural gas supply chain focused on technology and policy to drive continual improvement in reduction of methane emissions.

We look forward to working with one future as we move toward achieving our target of a 50% reduction in methane emissions by 2035.

In closing I want to thank our 4800 employees, who are dedicated everyday to safely operating our system, providing exceptional customer service and getting back to the communities, where we live and work.

We appreciate your time this morning, and now we will take any questions you may have.

Thank you will now become ducking. Your question answer session. If you let you placed in the question Q. Please press star one under telephone keypad, a confirmation Tony will indicate your line is in the question Q you May press star to if you'd like to move your question from the Q.

For participants using speaker equipment, they may be necessary to pick up or handset before pressing star one.

One moment, please what we pull for questions.

Our first question is coming from what you're sick really from Bank of America. Your line is now alive.

Hey, Good morning can you guys have me okay.

Yeah, Good morning, Richie how you doing.

Doing well I just a question on the Oh on M. profile.

It seems like it was a sizable uptick this year I. Appreciate some of that was for like the increased employees is at a faster growth, but just curious like how you intend to shape, though and I'm curve through the outlet.

Unlike the 2% to 3% growth they are managing towards.

Yeah. Some of that a couple of things we get the two to three shouldn't have to 3.5% that's baked into our five year plan through 2024, we had already and that's OK, that's an as a CAGR over that that five year period. So we were had already anticipated as you noted an uptick in knowing them. This year as a result.

Out of a is there any additional hires that we had obviously in the first quarter as you try to trend that out over four quarters that can be a little bit difficult. We did have some timing.

Particularly in our pipeline and storage segment around some well integrity work that was kind of accelerated more into the first quarter. So when we look at a you know the on M. guidance that we published for fiscal 2020, we feel like we're still on track to achieve that.

At this point in time.

All right I thought a sense that's I'll add thank you.

Thank you. My next question is coming from Insoo Kim from Goldman Sachs. Your line is not life.

Thank you. My first question is is that fair pipeline segment. When you look at the year over year decrease in transportation volumes, how does that magnet to compare versus your expectations. I know you fix but some of that given the online of the Gulf Coast Express pipeline and whatnot, but.

How does that magnitude fair versus your expectation and how does that place you on in terms of expected growth other segments. The for this year.

Yeah, it's pretty much in line with their expectations and honestly, we saw volumes pick up just a little bit versus what we expected that pricing was a little bit down. So net net we were inline with expectations.

And as we look forward that we'll continue to mark the market conditions, you worked very well aware of the supply demand supply demand dynamics are ongoing in the Permian basin, and we'll just keep an eye on that but at this point.

We still think that are our net income.

And as well as our guidance that range that we have out there is still a is still good.

Understood.

And second Doug Kevin I know you touched upon this on your prepared remarks, but you know with U.S.G. I know it take electrification of the great story haven't taken hold recently in our markets could you share your thoughts so little bit more on.

Your view of the gas you plays a role in the future the U.S. energy grid and also how do you see that potential shift creating.

Maybe a secular declining existing or new gas usage and the customer base.

Yeah I. Appreciate your question first of all let me say that yeah, I'm proud to be in the natural gas business, particularly this morning, because we sit here in Dallas differentials in the low 20 so.

Our customers are receiving safe reliable heating for their home and have a hot showers as well. So you know I've been very very proud of our product and what we're able to do from a reliability and efficiency standpoint, but the way we see it as you look at the population in the U.S. today about 335 million or so added two.

360 million about 2030, Yep, that's like adding a texas to the to the population in about a 10 year period with the growth at about two and a half million people or so a year. There that's going to require a diversified energy portfolio and we see natural gas is a very.

Idle part of that energy solution as we move forward.

As we said before it is sufficient it's affordable to bonded its reliable and its flexible there's not another feel that flexible likely to meet this growing demand of energy that that's going to be required you know about 2030, you can compress. It you can decompress. It you can transport. It you can liquefy. It you can stored below ground.

There's nothing like it that's reliable and abundant today that's out there.

And as a natural gas distribution utility, having having interstate transmission assets, we embrace our well.

Operating responsibly and being good stewards of our environment as you've heard me say before we're working to tighten up our system with our modernization of our and infrastructure and we continue to deploy technology across our system, both monitoring capability and equipment capability to make sure we are operating as responsibly.

As efficiently as possible and well continue to work with our partners. Both upstream as you saw with our joining of one future can make sure that we're getting the best available practices that are going on in the industry today to look at and maybe incorporate into our business as well as partner with groups like.

Mike AG a G T I to not only tell our story, but to also look at what technology available from a burner tip perspective, or technology perspective, whether that's carbon capture a carbon storage. So you know as we see a we see a continued growth of natural gas it plays a viable.

Below in the energy future now in the energy portfolio, now and well into the future trying to meet that energy demand by a 2030 again, there's nothing like it that's is flexible reliable and efficient so as we talked about in my script with industrial demand out there, we're continuing to see good expansion of industry.

Hello, Good news growth on the industrial and commercial side as well and then in addition, you heard Chris mentioned, the 1.2 to 1.4 net growth on the residential side as well in our market area. So both residential through the industrial markets. We continue to see good growth area.

Got it thank you very much.

Thank you. My next question is coming from Charles Fishman from Morningstar Research. Your line is now live.

Good morning, I, just want to make sure I understand this on the pipeline and storage you talked last quarter about the new pipeline coming on competitor pipeline.

Impacting operating income and obviously, we didn't see that and that last quarter. It was pretty darn. Good. But then you made the statement that it's on track I mean do you do you anticipate pipeline and storage being roughly flattish this year versus last year or.

When you, saying on track if you could provide a little more color what that my sure. Yeah. Good morning. Charles This is Chris a couple of comments around that last quarter. You know gcs came online in the middle of the quarter. So we had some strong pricing opportunities. If you will in the first half of the fourth quarter last year, which contributed.

Do I have that quarter's results as we move forward you know as we reiterated this morning, we're on track with our our earnings per share targets. I also say that our contribution of our business between distribution pipeline storage is going to be roughly the same as well so thats roughly two thirds distribution one third.

On the pipeline storage side, so as we continue to grow in that 6% to 8% range certainly for 2020 and as we look out through 2024, we expect the business mix between our two segments to be in that roughly that two third one third.

Allocation, if you will so the ebb and flow a little bit, but yeah. We'd still is we still see a lot of act and continued growth and when you think about pipeline storage. Most of the earnings drivers in that segment. A is be continued a safety and reliability work that we're doing on our ABTS system, Kevin talked about.

The baffle storage facilities. So it's driven by fundamental rate base growth as result of the supply or they were trying to accomplish that affect your perspective as well as meeting to growing needs of the Dallas Fort worth Metroplex.

Okay. So the I mean, Chris would take away from your answer is that since the mix of business is staying the same and we know distribution is growing pretty well.

That means pipeline and storage is really growing even though you're seeing this competitor pipeline.

That's correct I mean remember two honest competitor pipeline and we've been talking about this for a couple of years.

The the non tariff businesses that run through the pipeline that represents a relatively small piece.

The overall puzzle for a P.T., primarily due to the existence of a rider Rev mechanism. So whatever we tend to pick up.

In terms of our commercial business activity on that pipe, 75% of that benefit flows back into our regulated customers on the distribution side in our mid Tex Division in North, Texas, So you've heard us consistently say over the years when they picked up a little bit here and there, but we don't view that as a material driver of our performance like.

It could have a limiting factor in any given year given pricing dynamics, we sell certainly don't look to it as a source of fundamental growth for the long term.

Okay, if I could have smaller Oh go ahead.

Well I just got that'll just.

Just to add to that Chris is exactly right. We don't see that as a competitor pipeline again, where its direction is heading it it's mainly focused on take away out of the Permian down to the to the Gulf Coast area. There. So don't really see it as a competitor by major because our responsibility on the pipeline side itself is those core mark.

Cuts in serving those core markets.

Okay got it now if I can ask just one more question and then the new domed storage that's being developed how does that work from a regulatory standpoint, I mean, I I would assume a lot of that is for the benefit of your distribution system mid Tex et cetera.

Correct, it's for ours, making sure we have the reliability to continue to meet the contractual demands of those customers behind APTP. All those calls that our investments into that are gripped eligible.

Until the recovery that mechanism.

Okay. So it's under gripped got it okay. Okay. That's it thank you very much.

Thank you Charles.

Thank you. My next question is coming from Ryan Levine from Citi. Your line is alive.

Good morning, Hey, Ryan or at Hey, what's your appetite to invest in the build out of our energy infrastructure given your your footprint and stated objectives of both the AG and Atmel.

Well, you know again, where.

We want to operate responsibly, we want to take a look at opportunities that are out there, but we're going to take a look at it and the way that we've done everything else about our business. He went on me, but as you take a look at how we set up our rate structures overtime. Our annual mechanisms are pipe a pipe mechanisms those sort of things we have to.

Look at it from a regulatory perspective on investment and recovery of that investment and what those opportunities look like as well as what are the laws or regulations around that that exist today or may exist in the future. So all that to say, we're keeping an eye on it we're looking at it but we are working.

With other industry partners and seeing what other states are doing to see how the regulatory environment plays out on those and how the legislative environment plays out on those.

And when we see something that is of interest to it or are ready to move forward will likely said with the rest of a REIT structure made sure that is is timed up with our investment in the recovery and it benefits our customers are across the enterprise.

Okay.

And then another one in terms of the OEM costs increase I was wondering what impact the new friends. The regulations have in your your increase guidance for 2020 versus 18.

What you see the on M. guidance that we've put out there we have already kind of anticipated, though spends a rules coming into effect beginning in July of this calendar year. So it's going to be have a muted impact and 2020 analysts continue to grow and on a full fiscal year basis, and they're getting and 2021, but we.

Already contemplated that inner owing to a forecast for 2024.

Is there a way to quantify the magnitude of that impact versus the other items that were highlighted from an earlier question.

We don't have that information readily available.

Okay.

And then the last question for me curious what your your gas price assumption is in your 2020 guide and you know with the weakness in inspired.

Basis in Samir jurisdictions curious how much regulatory headroom you have various your your guidance.

In terms of customer bills.

Well I'm, we've got a ingo you see in our and our analyst day or deck that we put out last fall. We I think we're right at an all in price anywhere from 325, 25 to 550 inclusive of storage and transportation cost storage and Crane Transportation's usually between the dollar dollar 50, So we assumed Uh huh.

Hi, too low three range on the commodity pricing.

So to the extent that we have a lower pricing there were able to capture from various sources of gas and it's obviously a benefit that flows back to our customers and we've got a very good gas supply chain a in or shared services function that is working out to minimize the cost of gas and across the enterprise.

Okay, great. Thank you.

Thank you as a reminder, star one to be placed the question Q.

Our next question today is coming from Mark So sito from Barclays. Your line is allies.

Hi, good morning, I'm kind of following up.

Just following up on some of the earlier questions can you quantify the year over year impact from 100 basis differentials in fiscal Q.

If you look to our M.D.A., it's roughly down to about a 750000 2 million. It's in our line item net flows that centered on mid Tex line, plus our pipeline or three system line item. So it's it's out there in the 10-Q.

Got it Okay and then in terms of your you're halfway 20, EPS guidance or think Waha spreads were 12 million dollar you are tailwind in fiscal 19, just curious what the embedded assumption was in your fiscal 20 guidance or maybe said differently. If you captured any benefit in fiscal 2000 would that represent upside to your.

Budget.

We made a call a based upon market conditions at the time that we put the plan together last summer, but we haven't released those specific details.

Got it okay. Thank you.

Thank you we reach of our question and answer session I'd like to turn the floor back over to management pretty further closing comments.

Thank you have in 'em. We appreciate your interest in Atmos energy and thank you for joining us.

Looking at this call that's available for replay on our website through May seven 2020 Goodbye.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.