Q3 2021 Atmos Energy Corp Earnings Call

As a party to the investigation, we cannot provide any additional comments on this matter and we're not going to comment on any pending litigation.

Finally, and most importantly.

I wanted to say that our hearts.

Our thoughts.

And our prayers have been and will continue to be with those that were injured.

And the families of the deceased.

I will now turn the call over to Chris and rejoin you shortly for some closing comments Chris.

Thank you, Kevin and good morning, everybody.

Last night, we reported fiscal 2021 third quarter net income of $102 million or 78 cents per diluted share.

Paired to adjusted earnings of $97 million for 79 cents per diluted share in the prior year quarter year to date earnings were $617 million or $4.77 per diluted share compared with adjusted earnings of $515 million or $4.20 per diluted share in the prior year period.

Adjusted earnings in both prior year periods exclude a $21 million or 17 cent noncash income tax benefit recognized in the third quarter of fiscal 2020 relate to the enactment of new tax legislation in Kansas.

Our third quarter and year to day performance reflects the continued execution of our strategy and was in line with our expectations outlined at our last quarterly call.

Actually our results for the 9 months ended June 30th contained to reflect the impact of brief day refunding excess deferred tax liabilities to our customers.

As a reminder, last quarter, we received authorization to refund excess deferred tax liabilities to apt's customers and distribution customers in Tennessee over 3 year period.

During the third quarter and in July we received authorization to begin refunding excess deferred tax liabilities to distribution customers in Louisiana, Virginia and for certain of our customers and our West Texas Division over a 3 year period.

The refund of excess deferred taxes is recognized as a reduction in revenue and a reduction of income tax expense.

Wherever there is a timing difference between the recognition of the income tax benefit which is recognized in our annual effective tax rate when the regulatory orders are approved and the corresponding reduction in revenue, which is recognized over time as it is billed to customers.

This timing difference resulted in a 6 cents benefit during the 9 months ended June 30th.

His right that most of this timing difference will reverse during the fourth quarter.

Taking a closer look at our performance consolidated operating income increased about 13% to $814 million during the 9 months ending June 30th.

<unk> 4 and 5 summarize the key performance drivers for each of our operating segments.

Rate increases in both of our operating segments totaled $170 million.

Customer growth in our distribution segment contributed an incremental $15 million as we've continued to benefit from strong population growth virtually all of our service territories.

New customer connections increased 168% over the last 12 months and net customer growth over the same period was $1.8 2%.

Sales volumes for commercial customers continued to trend in a favorable direction.

Third quarter sales volumes increased 25% over the prior year quarter and were consistent with what we experienced before the pandemic year.

Year over year commercial sales volumes from 6% higher.

We experienced an 8 and a half million dollars decline in service or the revenues in our distribution segment, primarily due to the temporary suspension of collection activities and waiver of our customer service fees for Disconnections that rig connections.

Additionally, our bad debt expense has increased about $22 million year over year.

We've been focused on keeping our customers connected to our system.

Operating more flexible payment arrangements and helping our customers find financial assistance to help with their bills.

During the third quarter, we resumed collection activities focusing first on the largest past due balances which are typically the oldest.

Additionally, we continue to remain in close contact with our regulators about our customer outreach efforts and we believe this bad debt expense will be recovered over time.

Consolidated O&M expense, excluding bad debt increased $8 million year over year, and $22 million quarter over quarter, as we increased pipeline maintenance maintenance activities in each of our segments and inline inspection work at a P T.

<unk>, we experienced a 12, 5% quarter over quarter increase in line locate requests as a result in increased economic activity and the effects of our third party damage prevention efforts the.

The O&M spending we experienced during the third quarter was in line with our expectations. We outlined during the second quarter call and is expected to continue into the fourth quarter.

Consolidated capital spending decreased 3% to $1.36 billion 87 per cent of our spending directed towards safety and reliability to modernize our system. The slight year over year decrease primarily reflects timing of spending in our distribution segment. We remain on track to spend 2 to $2.2 billion in capital expenditures.

This fiscal year to modernize our distribution and transmission network to further enhance safety and reliability, while reducing methane emissions.

From a regulatory perspective.

We have completed all of the filings that will impact fiscal 2021. We are now focused on filings will impact fiscal 'twenty 2 to date, we've completed $186 million in annualized regulatory outcomes and as a reminder, many of these regulatory outcomes reflect the lower revenues due to the refund of excess deferred tax liabilities. However.

However, this amount does not include the corresponding reduction in income tax expense.

We currently have about $53 million in progress most of which is expected to be implemented during the first quarter of fiscal 2022 slides.

Slides 13 through 28 provide additional details.

From a financing perspective, the third quarter was relatively quiet during the quarter. We executed forward sales arrangements under our ATM program for approximately 1 million shares from $100 million as of June 30th we had approximately $213 million in net proceeds available under existing forward sales agreements.

We have now priced all of our fiscal 2021 equity needs as well as a portion of our fiscal 2022 equity needs as.

As we've said before using our ATM equity sales program is our preferred method to meet our planned equity needs. During the third quarter, we issued a new $5 billion shelf registration statement and a new $1 billion ATM equity sales program.

New shelf and ATM program positions us well to meet our future financing needs, while maintaining the strength of our balance sheet.

Securitization is also another tool that will help preserve the strength of our balance sheet on June 16th Governor Abbott signed House, Bill 15, 20, Texas statewide securitization program to address the extraordinary cash costs are incurred by natural gas utilities during winter storm hearing last week, we filed our application to participate in the program.

Seeking to recover $2 billion. We are currently awaiting a formal procedural schedule from the Texas Railroad Commission.

We're also making progress with our securitization application in Kansas anticipate making a filing before the end of the fiscal year.

As of June 30th our equity capitalization was 62%, excluding the $2.2 billion of storm related financing issued during the second quarter.

And we finished the quarter with approximately $3.2 billion of liquidity.

Details of our financing activities and our financial profile can be found on slides 7 through 10.

Yesterday, we reaffirmed our fiscal 2021 net earnings per share guidance in the range of $4.90 to $5.10 per diluted share base.

Based on our third quarter performance and what we were anticipating for the fourth quarter. We continued to believe earnings per share will be at the upper end of this range. We anticipate the fourth quarter's activities will mirror, what we experienced during the third quarter with sales volumes consistent with seasonal norms and O&M spending that will be continuing to focus on system maintenance and compliance.

Slides 11 through 12 provide additional details around our guidance.

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

Thank you, Chris appreciate that financial update for everybody.

Last year, we have highlighted the progress we're making in our 5 key areas of our environmental strategy, which is focused on reducing our carbon footprint and environmental impact in the areas of gas supply operations.

<unk> facilities and customers.

1 element of the strategy has been to evaluate opportunities to expand the amount of R&D.

Transport across our system to help customers reduce their carbon emissions.

During the third quarter, our largest R&D suppliers announced plans to expand and modernize their facilities beginning in early calendar 2022. Once completed their R&D production is expected to grow by approximately 1 bcf a year.

Additionally, an orange yellow cage location here in the Dallas Fort Worth area recently indicated they will soon have the ability to add approximately 1 bcf a year in R&D transport to our system.

So currently we have almost 7 bcf of Orange G on our system.

And once these new projects are fully online we anticipate this to increase to approximately 9 bcf or 3% of our distribution sales volumes.

I am extremely proud of our gas supply and marketing teams for their continued effort and work to grow opportunities for Atmos energy customers to utilize our LNG.

In support of our environmental strategy.

He recently joined the low carbon resource initiative in June.

This initiative currently has over 45 member companies participating in.

In their 5 year initiative to bring industry stakeholders together to accelerate the development and demonstration of low and zero carbon energy technologies through clean energy research and development.

We are proud to be a sponsor of the low carbon research initiative and its work to identify cost effective reliable and diverse solutions on the path to a clean energy future.

Alongside our goal of reducing methane emissions by 50% from 2017 of 2035.

And our demonstrated investment in technologies like renewable natural gas and combined heat and power.

Supporting the low carbon a research initiative further reinforces our commitment to the environment through our global platform of collaboration and innovation.

And as you just heard the continued successful execution of our strategy and our strong balance sheet.

Physician have us well positioned to continue safely delivering reliable affordable.

And abundant natural gas to homes businesses and industries to feel our energy needs now and in the future.

We'll take this closing opportunity to thank all 4700, Atmos energy employees for their exceptional dedication and commitment.

Body safe reliable natural gas service to a 1400 communities and $3.2 million customers.

Their efforts continue to be recognized by our customers.

With an outstanding satisfaction rating for our agents as well as our service technicians in excess of 98%.

Job well done.

I will now turn the call back over to Dan and open it up for questions.

Okay.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is in the question. Kim you May Press star 2 if he would like to remove your question from Kim.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

1 moment, please while we poll for questions.

Our first question is from <unk> Kim with Goldman Sachs. Please proceed with your question.

Thank you My first question, maybe for Chris just on the financials, great year to date results.

Brian the guidance reiterated I think that's great I think when we think about the timing of the average refunds that'll get screwed up in the fourth quarter, even excluding that it seems like.

You know the way that your run rate as you know you could.

Could potentially have a a result in 2021 that's better than the high end I'm just trying to think about as you prepare for 2022 are there.

Certain things like pulling forward more O&M into 'twenty, 'twenty, 1 or other items that youre doing to increase the flexibility I should try to achieve another record year in 'twenty 'twenty 2.

Yeah, so into so really 'twenty 'twenty 2 we're still working through that right now so I'm not really going to comment on that today, but we'll we'll update everybody on that come November but.

Again, what we're trying to accomplish right now for 2021 is to focus.

Focus on the system maintenance some of which we were able to safely defer a over the last the first 6 months of the fiscal year as he waited to see what our customer accounts, we're gonna do commercial sales volumes and so on so forth. So.

The focus right now is to kind of get back to a more normalized O&M run rate as we as we see now that the pandemic at least at this moment are isn't impacting our.

Topline revenues in a material way and remain focused on that that system maintenance. That's in the inline inspection work again. We're also saying you know a lot of economic activity, which is try and driving the line locates as I mentioned, we had a 12, 5% your quarter over quarter increase were up 10% year over year. So it's a it's a.

It's a busy time right now certainly here in the Dallas Fort worth area, and our focus will be to continue to executing on the strategy as we get to the end of the fiscal year.

Got it that makes sense definitely appreciate all the the fluidity here.

Continue to move through this crazy environment.

Second question and.

And Kevin you mentioned on you know the the growth in the debt.

The flow through of Orange in your system.

We were just talking with another company, where in Minnesota. They passed legislation there that could potentially I guess it seems like you've got utilities.

The way to increase investments in R&D, while getting from type of regulated rate of return of although I think there's still some negotiations, but it needs to be had or in.

In fact, they got process.

I think our comp our conversations from our past you know pointed to in your jurisdictions, you're continuing to have conversations with the various stakeholders on advancing something like that.

Are there any updates that or any progress that you've made on that preferred your states.

But it's pretty much the same story and so I. Appreciate the question. We continue to talk to all key stakeholders about these opportunities as you're sitting here, we talked about the increases.

That we just recently observed on our system, we continue to share with them the opportunities we're seeing out there.

You know and we continue to work with our legislators and regulators in Colorado as Theyre, probably the closest to most on putting legislation on the books right now so I think for US. This this fits nicely into our as I said earlier on our overall environmental strategy and the focus areas that will have well we'll keep.

Keep an eye on these projects as they come to fruition, we'll certainly share those with our regulators and legislators and keep them abreast of the opportunities but for now.

That's been our focus and making sure we get those opportunities available to customers across our system.

Understood. That's all I had thank you so much.

Thank you.

Our next question is with the Ryan Levine with Citi. Please proceed with your question.

Good morning.

I was hoping that you'd be able to speak to if you're seeing any disruption in your suppliers around high density polyethylene and how that may impact your business.

Ryan short answer is no at this point, our procurement team does an exceptional job of working with multiple suppliers and vendors.

As well as our operations units to make sure. We stay ahead of projects that that's part of it.

Our risk management profiles to lay these projects out in front early so we know what our materials needs are going to be.

And then our procurement team goes to work in laying those out having them stay till we can have access to that material when it's needed and we also try to keep a significant.

Amount of supply on hand, and ready as well so I think at this point, we're in really good shape I just checked with our procurement. That's a timely question checked with our procurement team last week.

And I feel like we are in pretty good shape, I know there're some issues around the semi conductor and technology side across the world right now, but we are not seeing any constraints or issues on our supply.

If the disruption in the industry were to persist is there a point in time when it could be more back book or your outlook.

I don't I'm not going to speculate Ryan on what could be out there as I said, we're not seeing or having any supply issues on any material at this point, so where we continue to be in really good shape and as far as an <unk> perspective.

Our team there said they they have all the equipment that they need at this point and we're in good shape going forward.

Okay I appreciate it thanks for taking my questions.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Dan for closing remarks.

Thank you. We appreciate your interest in Atmos energy and thank you again for joining US recording of this call will be available for replay on our website through September 30th for 2020.1.

Good day.

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