Q2 2022 Atmos Energy Corp Earnings Call
Greetings and welcome to the Atmos Energy second quarter earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note that this conference is being recorded I will now turn the conference over to our host Dan <unk>, Vice President of Investor Relations and Treasurer. Thank you you may begin.
Thank you Diego and good morning, everyone and thank you for joining our fiscal 2022 second quarter earnings call with me today are Kevin Akers, President and Chief Executive Officer, and Chris Forsythe, Senior Vice President and Chief Financial Officer.
Our earnings release and conference call Slide presentation, which we will reference in our prepared remarks are available at Atmos energy Dot com under the Investor Relations tab.
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.
Forward looking statements and projections could differ materially from actual results.
<unk> that could cause such material differences are outlined on slide 33 and are more fully described in our SEC filings with that I will turn the call over to Chris Forsythe Senior VP and CFO Chris. Thank.
Thank you Dan and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy last night, we reported fiscal 'twenty, two second quarter net income of $325 million or $2 37 per diluted share compared to $297 million or $2.30 per diluted share in the prior year quarter.
Year to date earnings were $574 million or $4 24 per diluted share compared with earnings of $514 million or $4 <unk> per diluted share in the prior year period.
Consolidated operating income decreased to $661 million for six months ended March 31.
As a reminder, beginning in the second quarter of fiscal 'twenty, one and through the end of last fiscal year, we reached agreement with regulators in various states begin refunding excess deferred tax liabilities.
Over a three to five year period.
These refunds reduced revenues throughout the fiscal year, when those revenues or Phil.
A corresponding reduction in our interim annual effective income tax rate was recognized in the prior year when those agreements were completed.
Fiscal 'twenty two with a corresponding reduction in the effective tax rate was recognized at the beginning of the fiscal year.
Therefore, carryover crew changes in revenues and income tax expense may not offset within even periods. However, they will substantially offset by the end of the fiscal year.
Excluding the impact of these refunds operating income for the six months ended March 31 increased $62 million or 9% to $743 million.
Slides four and five summarize the key performance drivers for each of our operating segments. The three and six months ended March 31.
I will focus on some of the key drivers underlying our year to date performance.
Rate increases in both of our operating segments, driven by increased safety and reliability capital spending.
$120 million was approximately 77% coming from our distribution segment.
Continued robust customer growth in our distribution segment increased operating income by an additional $11 million. These.
These increases were partially offset by $17 million decrease in consumption.
Most of this decrease occurred in the second quarter, what we observe that residential consumption on a per heating degree day basis was approximately 6% lower than the prior year quarter.
We attribute this decrease primarily to customer conservation in response to the current inflationary environment, including the increased cost of natural gas included in customer bills.
As a reminder, our weather normalization mechanisms substantially offset changes in weather as measured on a on a heating degree day basis. However, they do not adjust for changes in customer behavior.
Additionally, we experienced a $27 million increase in consolidated O&M expense <unk>.
$20 million of this increase occurred during the first fiscal quarter as we performed more pipeline remains activities in this year's first fiscal quarter compared to prior year.
Consolidated capital spending increased 41% or $344 million.
The $1 2 billion with 87% dedicated to improving the safety and reliability of our system, while reducing methane emissions. This increase primarily reflects increased system monetization system integrity consistent expansion spending to meet the growing natural gas demand in our service territories.
On track to spend two four to $2 $5 billion in capital expenditures this fiscal year.
We are also on track with our regulatory filings.
We have completed $74 million in annualized regulatory outcomes, excluding refunds of excess deferred tax liabilities.
And we currently have about $270 million in progress.
Slides 20 to 30 to summarize those outcomes and slide 17 outlines our planned filings for remainder of the fiscal year.
During the second quarter, we completed our planned financing activities for fiscal 'twenty two and.
In January we issued $200 million of long term debt through a tap of our existing 10 year, 265% notes due September 2029.
Net proceeds were used to pay off our $200 million term loan that was scheduled to mature in April .
Additionally, we fully priced our remaining equity needs for fiscal 'twenty two.
<unk> portion of our fiscal 'twenty three equity needs during the second quarter, we executed forward sales agreements under our ATM program for approximately $4 7 million shares for $500 million and.
And we sell forward agreements on $3 5 million shares for approximately $300 million to $322 million in net proceeds.
As of March 31, we have approximately $450 million of net proceeds available under existing forward sales agreements.
Our second quarter activities exhausted, a $1 billion ATM program, we established in June 2021, and we establish a new $1 billion ATM program at the end of March.
We finished the second quarter with an equity capitalization ratio of 61%, excluding the $2 $2 billion of interim winter storm financing and total liquidity of approximately $3 5 billion.
Additional details of our financing activities, including our equity forward arrangements.
As our financial profile can found on slides eight through 11.
During the second quarter, we continued to make progress in securitization.
In March the Kansas Corporation Commission approved our gas and other related costs incurred during winter storm Uri.
No disallowances.
And to file our application for a financing order during our third fiscal quarter.
And in Texas, The Texas Public financing authority continues its work on the statewide securitization program and we still anticipate the securitization transaction will be completed by the end of our fiscal year.
I'll close my portion of our prepared remarks with a few comments on our fiscal 'twenty two earnings per share guidance, which we tightened to a range of $5 50.
The $5 60 per diluted share.
Earnings for the first half of the fiscal year were in line with our expectations with.
With approximately 70% of our distribution revenues earned for the fiscal year and the fact that we're heading into the summer months, we believe any potential change in customer behavior in the second half of the fiscal year not have a material impact on revenue.
Additionally, customer growth the first six months of the fiscal year was stronger than we had planned and we expect that trend to continue into the second half of this fiscal year.
And our pipeline and storage segment, our straight fixed variable rate design for substantially all of the segment's revenues, perhaps clarity into the second half of the fiscal year.
Additionally were seeing spreads widen which is expected to provide a modest increase in apt's through system revenue.
Finally, we have completed our fiscal 'twenty, two financial financing program, including pricing all of our equity needs for the remainder of the fiscal year, which removes one more variable.
Slides 13, and 14 provide additional details around our guidance.
Thank you for your time today I will now turn the call over to Kevin Akers for his update and some closing remarks Kevin.
Thank you, Chris and good morning, everyone.
You heard the first six months of the fiscal year were in line with our expectations, which leaves us well positioned for another successful fiscal year.
This performance reflects a commitment dedication focus and effort of all 4700 Atmos energy employees as.
As we continued to successfully modernize our natural gas distribution transmission and storage systems, while safely providing reliable natural gas service to our three 4 million customers.
<unk> 1400 communities in eight states.
During the first half of the fiscal year, we continued to experience strong customer growth as you just heard from Chris for example for the 12 months ended March 30, <unk> 2022.
We added over 57000, new customers, which represents a one 8% increase.
We added nearly 1800 commercial customers during the first six months of this fiscal year.
And we added 15, new industrial customers that we anticipate using nearly five bcf of natural gas annually when at full capacity.
On a volumetric basis.
That five Bcf of annual industrial customer usage is equivalent to adding nearly 85000 residential customers to our system.
We're very proud of our efforts for these new customers coming on our system.
As Chris mentioned, our capital spending has increased about $344 million over the prior year period, and we remain on track to achieve our capital spending target of two four to $2 5 billion.
So our system modernization efforts, we are on track to replace 800 to 1000 miles of pipe.
And 20000 to 30000 steel service lines.
All of which supports our got reducing methane emissions 50%.
2035 from 2017 levels for EPA reported distribution mains and services.
That also includes a P. Ts integrity work on projects like our line ex phase two replacement, which is under construction.
And includes 63 miles of 36 inch pipeline anticipated to be completed later this calendar year.
As a reminder, we placed phase one into service in Q1 of this fiscal year.
That saves replaced 64 miles of 36 inch pipeline.
Additionally, construction has begun on phase two of our line as to replacement project.
This 18 mile 36 inch project is expected to be completed late this calendar year.
Again as a reminder, we placed the 22 miles of 36 inch completed and phase one into service in Q1 of this fiscal year.
This modernization work is a significant component of our comprehensive environmental strategy that focuses on reducing our scope one two and three emissions and environmental impact from operations and the five key areas of operations fleet facilities gas supply and customers.
During the second quarter, we added another RMG facility that will provide renewable natural gas for transportation across our system.
That facility has the potential to flow up to a half a bcf a year.
As you know we are currently transporting approximately eight bcf a year.
And we are evaluating nearly 30 opportunities that could further expand these transportation opportunities.
As I mentioned on previous calls we completed our first zero net energy home in partnership with the Greeley Weld habitat for humanity and Evans, Colorado.
Zero net energy homes use high efficiency natural gas appliances, rooftop solar panels and installation to produce more energy than it consumes at a very affordable cost approximately $50 per month for the combined gas and electric Bill for the Evans, Colorado home.
We are now partnering with local habitat for humanity organizations in each of our eight states to construct additional zero net energy house.
Currently our home in Dallas is under construction and on April 27, we have the dedications for a zero net energy home in Tyler, Texas.
Additionally, in Jackson, Mississippi on April 28, Atmos energy and habitat for humanity capital area.
Groundbreaking ceremony for Mississippis first zero net energy home.
And then Lubbock three homes are scheduled to begin construction in early September of this year.
These zero net energy homes demonstrates the value and vital role natural gas plays.
And helping customers reduce their carbon footprint in an affordable manner.
Providing these families with a natural gas home that is environmentally friendly and cost efficient. It's just one way atmos energy fuels safe and thriving communities.
Our customer support organization and technology support teams continue to innovate and look for ways to improve our customer service and offer convenient channels for our customers to communicate with us as well as to make payments for example.
31% of our customers are enrolled in recurring auto draft, which is about 8% higher than industry average.
We also see continuous growth in our electronic bill delivery channels with nearly 50% of our customers enrolled in E. Bill.
We continue our outreach to customers to make them aware of our flexible payment plans as well as provide contact information for local state and federal energy assistance programs.
For the first six months of this fiscal year, our customer support associates.
Our energy assistance specialist and coordinator through our customer advocacy team helped nearly 44000 customers received $15 million in energy assistance.
It is through heartfelt caring efforts like that and exceptional customer service.
That provide the satisfaction ratings. So these employees that exceed 97%.
These activities and initiatives reflect how we are focused on the long term sustainability of Atmos energy.
As we serve a very vital role in every community by delivering reliable efficient and abundant natural gas to homes.
<unk> and industries to fuel our energy needs now and into the future.
We believe our focus on long term sustainability.
Combined with executing our proven investment regulatory and financial strategies continues to support our ability to grow earnings per share.
And dividend, 6% to 8% annually through fiscal 2026.
We appreciate your time and interest in Atmos energy. This morning, and we'll now open the call for questions.
Thank you.
And at this time, we'll conduct a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press. The star key followed by the number two if you would like to remove your question from the queue.
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Our first question comes from Nicholas Campanella with Credit Suisse. Please state your question.
Hey, everyone. Good morning, Thanks for taking the question.
Good morning, good morning, Nick.
Hey, so a lot of detail. Thanks, thanks for the update.
Just on the financing side of things are you know your cost of equity has it has improved since the start of your fiscal year.
And you know I know I know you're largely sat on on 22 equity needs now and you gave us a lot of detail around.
The forward program, but just any thoughts on you know why not do more now and take this off the table for kind of future years and is it just that you guys are being just fairly formulaic in and how you how you execute here and just any thoughts on an out your equity. Thank you.
Yeah, a couple of things there.
First.
We are under our ATM program for number of quarters now have been executing forward arrangements. So we may very well take advantage of the current pricing environment to establish pricing for our fiscal 'twenty three and beyond as I indicated fiscal 'twenty two is fully priced for.
For the remainder of our fiscal year. So that's an opportunity that will take a look at here in the third and the fourth quarter to take advantage of the pricing the current pricing environment.
To build on what we've already established with our fiscal 'twenty three work.
We executed through the end of March.
Alright, great No. That's helpful. And then I guess, just you know broader question on inflation, you know everyone's dealing with it.
On the gas side I just you know every every day, we look at the strip it's up it's up and you know how is that kind of translate into broader customer bills do you kind of feel comfortable you know if we remain at these levels.
If we're at a structurally higher kind of commodity environment through your five year plan just confidence level on executing on this rate base trajectory.
Yeah. Nick this is Kevin there's a there's a couple of things in that in.
And your question there, let me first start with as you heard in.
In my opening comments there our team has and continues to stay very attuned to and keep affordability at the top of the mind and and focused on how we can help you you heard the things that our customer service organization, our customer advocacy team are doing without reach to energy assistance organization.
<unk> trying to find funds get customers connected to that find ways. We can communicate proactively with customers. For example, during the last last winter period, we sent out I think about $1 5 million notices whether those were.
Phone calls, where those where tax whether those were.
Emails those sort of things trying to alert customers to pending colder than normal situations moving into your area. We're also sending them through those various channels, including social media as well information on whether tips energy efficiency conservation.
Gas cost pricing all of those sort of thing. So we're trying to stay very active with our customers very up today with our customers on the costs, but also find ways.
Where we can help.
Helped through our energy assistance Lahim programs point them to the locations where they can receive assistance, but also as you know we're very efficient operator, we work very hard at that you've seen the things we've done over the last couple of years two years.
Those sort of things, we'll continue those efforts as we monitor the gas price over the next few months and will continue to communicate with our customers where we can.
And so the second part of your question there I think where you were heading regarding our capital investment program over the five year horizon.
I think as you can see in our slide deck right now.
We run somewhere between 85% to 90% of our capital investments focused on safety and reliability.
That needs to continue and will continue.
As we as we continue our strategy to modernize our system for safe delivery of natural gas as well as as you've just heard me mentioned that growth out there to support that high growth rate you know, particularly when we're adding.
12 months ending March 57.
<unk> thousand new customers out there in 15, new 15, new industrials. So we've got to continue to meet that growing positive and strong demand for natural gas across our service territory.
That we anticipate will continue going forward as we talk to builders and developers out there.
Even with interest rates at 5% right now they are continuing to see strong demand as well so.
Now that that's what we're going to focus on how we help the customer how we can connect customers to provide assistance organizations maintain our focus on O&M, where we can and then continue to invest in our system.
Hey, Thanks, a lot for that alone will see at Agi. Thank you.
Thank you David.
Yeah.
Our next question comes from in Soo, Kim with Goldman Sachs. Please state your question.
Okay. Thank you.
First just more on detail for the quarter I saw on the pipeline side. The O&M year over year was up a decent bit on the distribution side down year over year is this just more.
Timing between the quarters and I know from a guidance perspective for the year. It doesn't seem like much has changed but.
Just curious on some clarity there.
I think I answered the script certainly.
Certainly its timing on some of the just the timing of the work on the pipeline those are longer a longer lead time projects that need to be planned further out in advance. So I was just.
And timing around that and on the distribution side is down a little bit we had some slightly lower bad debt expense in our current year's fiscal second quarter compared to the prior year. So that's those are really kind of like the two key drivers for those variances that you described.
Okay got it.
Second question just more.
Curious on your observations you know we've talked in probably over the past couple of years just about that.
Changing narratives on future of gas and it seems like the latest there.
<unk> has changed maybe more to the positive for the sector just on.
Energy security and all that stuff.
Have you seen that play out.
At all on the ground, whether it's customer growth or just demand for gas in your various jurisdictions. If there was ever really an impact from this narrative on.
Negative side over the past couple of years shifting.
You had mentioned customer growth or demand being stronger than expected. So didn't know if that was tied to any of that and your thoughts.
Yeah. Thank you Anna for your question and.
As you know we've we've continued to have strong growth, where we're very proud of our service territories. We believe they are the best in the country. We're fortunate.
What the states and support politically economic development chambers and their hard work that bring these sort of customers into the communities we serve today.
But we've seen strong support for natural gas.
For a long time throughout our history and I think you can also see that through.
The customer advocacy customer choice bills that we have in six of our eight states out there we get very good support from the regulatory perspective, the political perspective, the community perspective, So I think we've always been and strong supporting natural gas environment.
I think the thing that to get to the crux of your question. That's probably changed here lately is the conversation that the general public is now seeing them wanting to feel around energy security natural gas in our industry has always been there behind the scenes delivering transporting storing natural gas.
To meet those winter demands, especially as you go back a year ago.
And how well some of our distribution and transmission systems performed during that piece of it we've always kind of been out of sight out of mind, but with the unfortunate GOP politics are going on now the war in Ukraine energy has been thrust to the forefront and I think those are the things. We're hearing is people people are wanting to know that natural gas has gone.
To be there, it's a viable choice for them.
It's abundant and they're talking to us about national energy security and how they can have that in the community. So those are the sort of things, we're hearing now and as I've said.
We're very fortunate and blessed and appreciative of our jurisdictions and their support for natural gas.
That makes a lot of sense, especially given the territories you.
Thank you for that color.
Thank you and just a reminder to ask a question press Star One. Our next question comes from Julien Dumoulin Smith with Bank of America. Please state your question.
Hey, good morning team. Thanks for the opportunity maybe just staying with this inflationary focus I mean, what's your view on inflation impact on your Capex budgets. How are you thinking about that just vis vis some of the latest pressures we're seeing across the industry. You know what percentage of your Capex is exposed to the material labor for.
You know, obviously that are perhaps disproportionately inflationary.
And what's locked in contracted labor.
Where we're perhaps you may not see that but on balance is there an upward bias in your capex budget on that alone effectively.
Yes, Julian let me start and Chris certainly can add some color if he wants to get into percentages or not but.
You know as we've talked about this before.
Be any prouder of our procurement team our operations team our engineering teams all working collectively.
As we were coming coming through the last year or so of the pandemic.
Inflationary discussions we're picking up and we were seeing some of the signs out there. They were very active you heard us talk about going from a three months or six months inventory of materials and Pi.
You've also heard US continue to talk about that we have 95% to 100% of our pipe on the ground for the remainder of this fiscal years.
Steel needs.
And that we are already beginning.
Identification and getting steel pipe to the mills.
For 2003, and advanced buying cost as far out as 24 in those project needs. So all to say for us.
Our team has been very proactive about identifying the types of materials, whether its pipe valves fittings, those sort of things plastic steel increasing our inventory increasing our lead time on that so we're not just in time and yes, we've seen some increases and pipe steel pipe, especially.
From a couple of years ago or three years ago.
But we think we're doing everything we can to take advantage of current pricing now to lock that in as I said as we buy out into the future for those sort of things.
Really the only pressures we've seen right now from a supply chain perspective, we've seen a little bit on the technology side and occasionally on some meters, but it corrects itself over time as our team continues to work through our vendors and suppliers.
To get additional supplies into our warehouses.
I hope that helps answer your question, Chris anything additional you'd like that yeah. I think the same just really Kevin the other Julian the other point to make is there.
Their contract labors.
<unk> on the capital projects, we've got contracts with them. We're currently we are constant communication with them. Many of these contractors go back many many years, but this so over over the years, we have worked with them to the man.
There are cost pressures and needs and so we've been able to do this at a in a bite size uncommitted, if you will rather than having to your holding costs really low for a long period of time and having to rush now to catch up to market. So there's those are long term relationships with those contractors.
It's given us the ability to add to it.
Bleed in any higher costs, so over an extended period of time so as to.
Terry pressure our capital spending.
Got it but not ready to quantify in aggregate, but maybe you do see somebody's inflationary pressures.
That could follow through on it and maybe to clarify that further even to the extent to which you do would you perhaps defer some of these investments in order to keep your budget Flatterers is there an argument to be made you move forward with the projects. Despite some modest inflation.
We haven't seen anything right now Julian.
Hadn't already been contemplated in the numbers that we've discussed here today.
Alright excellent.
What other Oh, please go for it.
That's all I had.
Okay excellent and then just on the transportation and Orangey front you made some comments here you talked about 30 projects here it seems like or 30 opportunities to use your verbiage.
Can you expand a little bit more about what that.
That look that could amount to just from a sort of a capital opportunity perspective, if you will.
Yeah, Julien as you've heard us say before we are not in the upstream side of that we're not totally right.
Alright capital upstream of the Nadir right now so truly all of our investment would be the sales nadir.
Whether they're digesters their landfills biomass.
Sooner gas capture those sort of things, we're really receiving the processed gas and transporting on behalf of our customers and right now those evaluations are truly what is near system what is close to system. So.
Any any capital investment at this time would be modest and it would be to maybe extend a short short distance to a facility, but really we're not investing upstream at this point, we're really transporting that R&D on behalf of others.
Got it lots of projects lingering there, but largely sales element.
Correct, helping our customers, where we can reduce their carbon footprint and.
B B the conduit that that's why we have you know the 72000 miles of pipeline system. We have today is to move that gas around it and be part of that environmental equation to get that gas to the burner tip.
Excellent guys. Thank you so much thank.
Thank you I appreciate it.
Yeah.
Thank you and there are no further questions at this time I'll turn the floor back to Dan <unk> for closing remarks.
We appreciate your interest in Atmos energy and thank you all for joining us are Rick.
<unk> of this call is available for replay on our website through June 30th have a good day.