Q1 2021 Atmos Energy Corp Earnings Call
Okay.
Greetings and welcome to the Atmos Energy's first quarter 'twenty 'twenty one earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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And as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Dan, Missouri, Vice President of Investor Relations and Treasurer.
Thank you Brock.
Good morning, everyone and thank you for joining us this morning.
With me. This morning 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 referenced and our prepared remarks are available at at energy Dot Com under the Investor Relations tab.
Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the slides accompanying today's presentation for definitions and information and reconciliations of non-GAAP measures to the closest GAAP financial measure.
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 and factor.
And that could cause such material differences are outlined on slide 25 and are more fully described in our SEC filings.
Our first speaker today, Chris Forsythe, Senior Vice President and CFO of Atmos Energy Chris.
Thank you Dan and good morning, everyone. We appreciate you joining us and your interest and Atmos energy.
We were off to a solid start to the fiscal year yesterday, we reported fiscal 'twenty 'twenty, one first quarter net income of $218 million or $1.31 per diluted share.
Our first quarter performance largely reflects positive rate count outcomes, driven by system modernization spending customer growth and our distributions segment and lower O&M spending largely due to the timing of such spending and both of our segments Consol.
Consolidated operating income increased by 18% to $299 million and the first quarter.
Slide four summarizes the key performance drivers for each of our each of our operating segments.
Rate outcomes, and provide an incremental $50 million and operating income.
Customer growth and our distribution segment contributed an incremental $6 million as we continued to benefit from strong population growth and several of our service areas, most notably and our North Texas distribution business.
For the 12 months ended December 31st we experienced one 7% net customer growth and our north, Texas distribution business and <unk>.
And 1.4% net growth across our eight state footprint.
The ongoing effects of the opinion and it reduced consolidated operating income by approximately $9 million this quarter, primarily and our distribution segment.
Quarter over quarter operating income fell approximately two and a half million due to lower commercial demand attributable to the effect of the pandemic on the economy.
Additionally, we experienced a four and a half million dollar decline and service order revenues, primarily due to the temporary suspension of collection activities.
And bad debt expense increased about $2 million quarter over quarter.
Consolidated O&M expense, excluding bad debt.
Decreased $16 million.
During the quarter, we deferred noncompliance spending into later in the fiscal year as we evaluated our customer low.
O&M and our distribution segment was about $8 million lower than the prior year, reflecting lower employee travel and training costs O&M and our pipeline and storage segment was approximately $8 million lower and the prior year, primarily due to nonrecurring well integrity costs incurred and the prior year combined with the O&M management during the first quarter of this year.
Consolidated capital spending decreased approximately 14% to $457 million with 87 per cent of our spending directed towards safety and reliability spending to modernize our system.
This decrease largely reflects the timing of project spending and our distribution segment.
We remain on track to spend between two and $2 $2 billion and capital expenditures. This fiscal year like more than 80 per cent of spending focused on modernizing our distribution and transmission network, while reducing methane emissions.
We continue to execute a well established regulatory strategy focused on annual filing mechanisms, which mitigate the incremental impact to customer bills, while reducing lag.
To date, we have implemented $110 million and annualized regulatory outcomes and.
And currently we have about $32 million and progress.
Slides 18 through 24 summarize these outcomes and slide 17 outlines our plan filings for the remainder of the fiscal year.
During the first quarter, we completed over $700 million long term financing remain focused on balancing the need to finance, our capital expenditure program and a cost effective manner with maintaining the strength of our balance sheet.
Following the completion of our $600 million 10 year note issuance in October we reduced our weighted average cost of debt to 399% and achieved a weighted average maturity of approximately 19 years.
We also executed forward sales arrangements under our ATM for approximately $1 2 million shares for $122 million.
And we settled and forward agreements on $2 1 million shares for approximately $216 million and net proceeds during the quarter.
And as of December 31, we have approximately $247 million and net proceeds available under existing forward sales agreements that we will utilize by the end of the fiscal year.
We have now price a substantial portion of our fiscal 'twenty 'twenty, one and equity needs and anticipate satisfying our remaining fiscal 'twenty, one equity needs through our ATM program.
As a result, and this financing activity our equity capitalization was 58, 5% as of December 31.
And we finished the quarter with approximately $2 $9 billion liquidity under our credit facilities equity forward agreements.
And the strength of our balance sheet and our five year plan continues to be recognized by the credit rating agencies.
During the first quarter, Moodys, and S&P maintained and ratings with stable outlook.
Sales of our financing activities and our financial profile and they found on slides six through nine.
So to summarize our first quarter performance, our financing activities and regular regulatory activities were in line with our expectations.
As we continue through the winter heating season, we continue to remain cautious given the unpredictable nature of the pandemic, however, with yesterday's reaffirmation.
And then competent in our fiscal 'twenty 'twenty, one earnings per share guidance of $4 90 to $5.10.
Thank you for your time this morning, I'll now turn the call over to Kevin for his remarks, Kevin.
Thank you Chris as you can see from our first quarter results. We are off to a good start we remain focus on executing our proven investment strategy of operating safely and reliably while we modernize our natural gas distribution transmission and storage systems.
We are continuing our investments in people processes and technologies that will enable atmos energy to scale and efficiently and safely invest.
$11 billion to $12 billion over the next five years.
Working to achieve our vision to be the safest provider and natural gas services, we provide safety messaging to our customers and our communities.
Innovate and advance employee training and invest and the modernization of our system.
Over the last 10 years, we've invested more than $11 billion companywide.
Modernize our pipeline infrastructure.
Over 80% of which was allocated to safety.
And over the next five years, we anticipate spending 11 billion to $12 billion as we replace approximately 5000 to 6000 miles of our distribution and transmission pipe.
Including the replacement of the remaining cast iron and by the end of 'twenty 'twenty one.
To build upon our continuous improvement efforts and 2016, we started the process of implementing a pipeline safety management system.
Knowing the American Petroleum Institutes 2015 publication of the voluntary recommended practice.
This voluntary measure encourage us continuous improvement by reviewing practices policies and procedures as we learn from our experiences and from those of others and the industry.
This quarter the National Transportation Safety Board held a public meeting on January 12th relate.
Related to the incident that occurred at a Dallas, Texas residents and February 2018.
The field and get investigation and lab reports confirmed yet unreported third party excavation damage and mechanical equipment and caused the main to crack and lake.
We are currently reviewing the complete findings and recommendations released after the meeting and expect to receive the final report soon.
The cost third party damage remains one of the greatest threats and natural gas distribution systems.
We have been and will continue to be a champion for damage prevention.
Through such efforts is auditing, our third party line locating services to.
And empowering our employees to proactively stop by excavation sites to.
To provide damage prevention materials.
And ensure proper eight one notification.
We have seen our third party damage rate continued to outperform the industry average.
We continued to undertake numerous safety and other continuous improvement actions.
Such as updating our leak survey and leak investigation procedures to include mandatory non one one notification when a probable or existing hazardous condition.
Is discovered if first responders are not already on site.
As I've discussed before we've enhanced our technical training program to provide a virtual format.
Coupled with hands on experience for our employees.
And it's virtual training environment, we have been able to reduce class sizes and duration to improve the training experience all without sacrificing quality.
These are only a few of the improvements with Atmos energy has been making towards achieving our vision to be the safest provider of natural gas services.
You may recall on our FY 'twenty and 'twenty fourth quarter earnings call, we announced five focus areas and our environmental strategy, all designed to reduce our carbon footprint and combination with our pipe replacement efforts.
These five focus areas our gas supply.
Operations.
<unk> facilities and customers.
I also discussed the progress made and minimizing our carbon footprint as well as our water and land impact and some of our offices and service centers.
The day I want to highlight another focus area for your gas supply.
We are working to increase the amount of our N. G that we have on our system to help customers reduce their carbon emissions.
Annually, we moved nearly five and a half bcf of Orangey across our system, which represents approximately 2% of our distribution sales volumes.
We're currently assessing over 'twenty RMG opportunities and <unk>.
Jason to our system and several state for additional supplies.
During the first quarter, we initiated a project in Colorado.
With a dairy to connect orange apron and their facility to our system.
Although its too soon to commit to how much RMG, we can ultimately transport across our system.
Please note, we will be working with regulators and all stakeholders to help develop the frameworks for commercially viable RMG solutions.
To support our customers and improve the environment.
And finally during the first quarter, we continued to enhance our sustainability reporting as we published our third corporate responsibility and sustainability report as well as our methane emissions report.
Both of these can be found in the corporate responsibility section of our website.
These reports paired with our corporate responsibility section of our website and.
Low us to tell our story and keep stakeholders informed about what we are doing to support the communities, where we live and work.
As you can see from the highlight a continuous improvement efforts, we remain focused on the long term sustainability of Atmos energy and the foundation of that long term sustainability is the 4700 men and women who are dedicated to safely operating our system.
Providing exceptional customer service and giving back to the communities, where we live and work every day.
They are successfully executing our proven strategy that is focused on modernizing our system.
Safely deliver reliable and affordable natural gas and and environmentally responsible manner.
Long term fundamentals of this strategy remain the same.
They're supported by the fact that we operate and constructive jurisdictions, where several of our markets continue to have strong long term growth potential.
Most notably the DFW Metroplex, which is the fourth largest metropolitan area and the country.
Additionally.
And these jurisdictions recognize the value that natural gas provides to their economies and and environmentally responsible manner.
The successful execution of our strategy the strength of our balance sheet and our strong liquidity leaves us well positioned to continue to safely deliver reliable affordable and efficient and abundant natural gas.
<unk> businesses and industries to fuel our industry and the energy needs now and in the future.
I appreciate your time this morning, and thank you for your interest and Atmos energy.
And we'll take any questions that you may have and I'll turn it back over to the operator.
Thank you Sir at this time, we will be conducting a question and answer session.
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Our first question today is from Jeremy tenant of J P. Morgan. Please proceed with your question.
Yeah.
Hi, good morning.
Good morning, Jeremy Hey, good morning, Jeremy.
Thanks for taking my questions. Just wanted to start off you know there was a lot of concerns and the market. Obviously last March when Covid hit and this was the first.
Hitting season, where you guys got to see the full impact there and just wondering if you could expand a bit on can you speak to the COVID-19 impacts on the quarter versus your expectations and are you seeing an impact.
And a consistent going forward into 'twenty and 'twenty, one with your expectations overall.
Sure Jeremy I'll start here, and Kevin and feel free to jump in as well as I mentioned earlier, we had about $9 million.
Over quarter impact.
Tribute to Covid between.
Commercial loan loss, the decline and service order revenues and a little bit of bad debt expense on the commercial load loss.
Certainly well within the planning scenarios that we get developed over.
Over the summer and into the fall as we established our earnings per share guidance. So so from that perspective, but we're pleased to see that that the the commercial low loss is in line with those expectations will.
We will continue to monitor that as we move through the second quarter, we got a still another two to three months left and our winter heating season, which by the end of the winter heating season, we will have about 70% of our distribution revenues.
Booked for the fiscal year, and well and we'll have some more clarity around what the impact and the margin lined out and will be.
Same thing with the service order revenue so a lot of it will be contingent upon when we resume full AR collection activities and.
And we're working with our regulators all of that's keeping you abreast of what we're doing there and but again that is completely in line with our expectation.
Yeah, Jeremy day, the only thing I'll add to that is as you've heard us say many times before our team our risk management compliance team our operations team. Our shared service group continue to adhere and follow to our practices and protocols are in place again, allowing us to continue to execute at the highest level and all.
All fronts, even though we've seen an increase in some parts of our territory and the number of cases, we are glad to see the vaccine and start to be rolling out across our service territory as well, but we believe with those practices protocols and things we've been able to have in place over the last 10 months, we will continue to execute on a go forward.
Basis had a very high level.
Yeah.
That's very helpful. Thanks, and maybe just kind of turning over to O&M.
Given the you know the O&M and tailwind you've realized already what are the main drivers and timing of your expected O&M growth over the course of the year.
Yeah, so and the O&M as we talked about last quarter, we've assumed a kind of a full O&M and budget. If you will our full compliance program. So.
Strategy going into the first quarter.
There are some some spending that we didn't need to do and the first quarter.
See how the customer load loss was was materializing like we've got a better handle on that now and as you saw and some of the details around the guidance, we're still reaffirming the O&M range.
We initially put out last fall. So again, a lot of that would be focused on compliance activities as well as other activities designed to mitigate risk and she her.
Kevin talked about.
Third party damage will continue to step up a reference site and that particular area as well as.
And just other system maintenance activities that are not necessary compliance oriented, but we certainly want to be performing to maintain the system.
The way that we like to maintain it and you've heard us talk before we.
We certainly are.
Soon and our O&M play out and not just what we need to meet compliance purposes, just to meet just in time, but we're also keeping an eye towards what our requirements are further down. The line later in the fiscal year or into next year. So that we are well ahead of those compliance requirements and that we can meet those dead zone deadlines.
Without having to wait till the last minute.
Got it that's that's helpful. Thanks, and Utah.
And you touched on this a bit and your commentary I was hoping you could expand a bit more it seems for the and the marketplace for the LDC space as a whole there's some concern with regards to our new laws that could impact our new.
New gas hookups effectively banning that just wondering I guess, you know how and how you guys see that risk for you and your service territories and how I guess the compares for Atmos versus other LTC peers and differences do you see there.
Yes, Jeremy I'll start with that.
And as again as I've said, we have very constructive rate jurisdictions, and and we continue to see growth as Chris talked about across our service territory.
We haven't seen any bands are whether they're on hook ups or usage or those sorts of things across our service territory.
Stay in close contact through our stakeholder engagement strategy, our local public affairs and operating teams with our jurist city jurisdictions, our state legislators as well.
Keeping keeping them informed of what value and natural gas Springs, what Atmos energy is doing and their communities.
So we are we stay in touch with them and keep them up to date on and on an ongoing basis and haven't really seen any you didn't come up at the legislative level or through discussions regarding gas bands or appliance hook ups at this point.
Got it and I think we might have seen some legislation and some states that would at the state level that would ban or stop. These types of bans have you guys seen anything like that and your service Tories are have any.
<unk> for that.
Yeah, well, we're working with associations and peer peer companies and all of our jurisdictions to keep an eye on bills that are being followed at the state level. These are called all fuels bills. If you will you may recall that last.
Last year, there was one approved and Tennessee, and one approved and Louisiana and.
And we're we're very encouraged by those bills and I think it highlights the value that natural gas continues to bring and the value of customer choice and choosing and affordable energy.
Opportunity across our footprint.
So we're well aware of those and we're working with the different associations and we're working with our peer companies as well to make sure that the customers have that choice of field going forward.
Yes.
Got it and I'll stop there. Thank you very much.
Thank you Jeremy.
The next question is from Richie Cirelli of Bank of America. Please proceed with your question.
Hey, good morning.
Good morning Rich.
Good morning, Hey, Thanks for taking my question just on the customer growth side, obviously pretty impressive this quarter.
Could you provide any more color on and what youre seeing from a customer classes and more on the residential side with new customer hookups, and how is that kind of progressed into fiscal <unk>.
Thus far with potentially more immigration into the state of Texas.
Yeah, well I'll start and Kevin you can certainly help out as well as I said you know we've got a one 4% across the.
Each day footprint, a 1.7% here in North, Texas, and a lot of that is new residential growth and as it's true.
Trend that we started what we've really been seeing now for quite some time, but it has continued throughout this is Pat.
And then that I think are the stories are read and you see more and more folks that are interested and maybe moving into the suburbs.
Looking for a either a first home or a different type of homebase, they're accommodating their work from home protocols and strategy. So that's what's driving a lot of the growth certainly here in the North Texas area, we continue to see.
Robust economic underlying economic activity in terms of companies evaluating the Dallas Fort worth market in terms of relocating and this area and and we continue to see what we come to them and Dallas there there are cranes and construction everywhere, so and we're still seeing that underlying activity and again a lot.
And that's being driven by the residential class and that's consistent across our footprint and they are really and our first quarter. The number of hook ups that we had from a residential perspective was one among the highest that we've seen and in a number of years and they were and.
And we're grateful to see that not only in north, Texas, but across most of our service territories.
Yeah, Chris I'll, just quickly add to that in addition, and some of our other.
States, Mississippi, Kentucky, where we're seeing industrial expansion as well, which is a good sign and this economy as well as new industrial customers coming into those locations as well so.
We see it as Chris said with.
Residential and commercial starting to move and the metroplex, but again good opportunity on the industrial side and our other footprint as well.
Got it and that's that's very helpful. And then just on your your equity needs. Obviously, you mentioned you price a good portion of that forward and then the remaining is through the ATM. This year, but just as you think about kind of your long term plan.
Keeping in that and cap structure towards the 60% level gaming and earn an actual cap structure and Texas.
And and just given where your multiple is could you look at other forms you know, whether it's portfolio optimization to kind of and recycled capital or creating a holdco structure.
Just curious how you guys are thinking about that just given where your multiple is today.
Sure I mean, we certainly would go and put together our strategic plan every year refresh. It if you will and these are things that we're certainly thinking about I'll just remind everybody that when we put together our most recent five year plan and consistent with what we've done the last several years.
All of our equity financing is already assumed.
And in that five year plan and so when you look at the 6% to eight per cent earnings and dividends per share growth the projected share price that we put out.
Or sorry earrings per share out in the and the out years.
It has assumed a wide variety of potential stock prices and we put.
We put that guidance out.
After we've gone through that rigorous assessment, so we feel right now.
Current our financing strategy is one that is one and been successful for us and the past we continue to believe that it will be successful for us and the future.
And but we will continue to evaluate a certainly different structures and and we've talked about before in terms of the asset dispositions. Our eight state footprint, we're very very comfortable with we've got good jurisdictions.
Very constructive jurisdictions, and we're very familiar with these jurisdictions and Uh huh.
Again.
Always consider it but that's not a key part of our of our strategy and we don't need that.
And that type of activity.
Activity to achieve the 6% to 8% earnings per share growth over the next five years.
Got it that's that's helpful and just one more if I can slip and on the R&D front, you mentioned youre looking over and.
And I guess 20 different LNG opportunities are you seeing that's coming from new outlets or what's kind of driving this demand is and more on the dairy farm side or landfill just curious what kind of.
Customer base Youre looking at over there.
Yes, you you hit are you get the answer there with the last two and it's a the dairy industry itself and its landfill projects at this point probably.
The majority of those approximately 20 projects that we're looking at and it's scattered across our footprint as we mentioned in her opening remarks, we are.
Just closed out a supply project.
With a.
Firm, there and Colorado, and we'll continue to work on several others across our Kentucky and other parts of our jurisdiction as well, but they're there and that area there in the dairy side and the landfill side at this point.
Alright, great. That's all I had thanks for all the time.
Thank you Richie.
The next question is from and so Kim of Goldman Sachs. Please proceed with your question.
Thank you my first question is.
A follow up to that customer growth one when you look when we look at what's embedded in your five year growth plan, what's the range of customer growth across your jurisdictions that you're assuming.
Yeah, well, we've put together and the play and we're pretty conservative on that growth estimate because it's difficult to estimate when exactly it will materialize and so we are we basically just assume that the same customer count or you know.
Customer base and we have at the time that we publish the plan.
And and just let that growth be a bit of and upside for us.
And as it materializes again primary because it's very difficult to forecast and in which period that growth may occur.
Got it so I guess, when we look at the capital spend and the rate base growth it's not.
The bulk of it and again it is just the infrastructure replacement and modernization as opposed to new customer might hookups.
And so I may say earlier liabilities.
Operating loss.
And as folks there.
Got it.
And my other question is to your comments on safety improvement initiatives and actions that you've taken already.
And following up on the NTSB recommendations.
When given the reports that have come out about a month ago do you what do you see from either an O&M perspective.
I guess, a capital perspective that.
Could you know the elevated versus your plan or is that already embedded and the growth that you've laid out.
Yeah, because we continually evaluate our practices and protocols and adopted several of the recommendations already and.
And our practices and you'll find that on our website. We don't believe that implementing the recommendations that have been laid forth will have a material impact on capital or O&M at this point.
Got it that's it for me thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on.
And your telephone handset.
Our next question is from Charles Fishman of Morningstar. Please proceed with your question.
Good morning, just and.
Another follow up on the NTSB report so at this point, we're just waiting on the final reported you're waiting on the final report is there anything else. That's triggered by that final report I mean is there any.
As the Railroad commission waiting on that report to issue some kind of final.
Their final report or any of your city.
Our regulatory bodies.
Any insurance claims any legal.
Issues I mean is there anything else thats out there besides <unk>.
And final NTSB you reported.
And there's a there's a lot packed in there let me see if I can cover all of those for you.
A final report itself from our understanding Charles is merely just corrections are and it's to the abstract and other information that you've seen out there already and again, we anticipate that coming out really soon.
And the Railroad Commission was a party to the investigation just as we work and they pause their investigation and until the NTSB was complete so we anticipate them to pick up their investigation sometime here soon.
As you saw and when the recommendations and there'll be partnering with them.
Samsung to do and audit of our integrity management program. So we anticipate them to pick their investigation backup and close it out relatively soon.
And then on your other question there is no open litigation related to the incident.
Okay, and and looking at the preliminary report.
On the virtual meeting.
And <unk>.
Well it appears.
And the Railroad Commission and.
The pipeline and hazardous materials and administration. They they have a to do list two so I guess.
And I mean their report will include the things they have to do.
Yes, well will all receive and in that and PSD report those recommendations as you pointed out were directed to several of the parties to the investigation will all have responses back to the NTSB.
And it's my understanding that our initial responses all have a timeframe of about 90 days or so to get an initial response back once we receive that final report.
Okay and then.
And just one other almost a housekeeping question and slide 13.
No.
And where you have no regulatory assets and liabilities related to COVID-19 at this point.
Yeah.
And yet it's my understanding you have received the approval.
Uh huh.
Who recorded regulatory assets and just about all your service territory. So the decision not to record.
Any regulatory asset at this point based on COVID-19, what is your.
Driven by the fact that you were able to control your expenses.
At this point that they were.
<unk> reduced enough that you didn't feel the need to record any reg assets is that a fair assessment of that.
Yeah, and it's pretty close I mean, as you mentioned Charles and we've got the orders that cover about 90% of our customer base right now.
We're evaluating.
The language and those orders are they were they were sufficiently broad and so we're interpreting how best to to evaluate that order vis V. Our filings are talking with our regulators and we anticipate.
And of the fiscal year that we will establish us some for regulatory asset, it's just Ah and matter of timing in this fiscal year and when we establish that day, but we are closely evaluating that right now and and.
And that's been factored into the guidance for the remainder of the fiscal year.
Got it okay. So it's more timing that you didn't have anything and the first quarter got it.
That's that's all I had thank you.
Thank you Charles.
There are no additional questions at this time.
We appreciate your interest and Atmos energy and thank you for joining us.
A recording of this call will be available for replay on our website through March 31, 2021 have a good day.
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