Q3 2022 Atmos Energy Corp Earnings Call
Greetings and welcome to Atmos Energy's third quarter 'twenty to 'twenty two conference 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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I would now like to turn the conference over to your host Dan <unk>, Vice President of Investor Relations and Treasurer. Please go ahead.
Thank you Brock good morning, everyone and thank you for joining our fiscal 2022 third 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.
Our forward looking statements and projections could differ materially from actual results. The factors 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 <unk>, Our senior VP and CFO Chris.
Thanks, Dan and good morning, everyone. We appreciate you joining us and your interest in Atmos energy.
Fiscal 'twenty, two third quarter, net income increased $129 million or <unk> <unk> per diluted share.
Two $9 78 per diluted share in the prior year quarter.
Fiscal year to date net income was $703 million or $5 12 per diluted share compared with net income of $617 million or $4 77 per diluted per diluted share in the prior year period.
Slides five and six provide operating income highlights for each of our segments with three and nine months ended June 30th.
Focus in some of the more significant drivers underlying our fiscal year to date performance.
Rate increases in both of our operating segments totaled $172 million.
Primarily driven by increased safety and reliability spending and expansion.
Approximately 71% of these rate adjustments were recognized in our distribution segment we.
We continue to see robust customer growth in our distribution segment, which increased operating income by an additional $13 million. This growth offset a $13 million decrease in consumption most of which occurred during the second fiscal quarter.
We cannot see the same trend continuing into the third fiscal quarter as consumption increased about $3 million quarter over quarter.
Additionally, we experienced a $25 million increase consolidated O&M expense, primarily driven by increased pipeline maintenance activities and employee related costs compared with the prior year, partially offset by lower bad debt expense.
Finally reductions in fiscal 'twenty, two revenue associated with the refund of excess deferred tax liabilities reduced operating income by $103 million.
This reduction was substantially offset by lower income tax expense.
Consolidated capital spending increased 27% or $368 million to $1 7 billion with 87% dedicated to improving the safety and reliability of our system.
This increase primarily reflects increased system modernization system integrity and systems system extension spending to meet the growing natural gas demand in our service territories.
And on track to spend $2 four to $2 $5 billion in capital expenditures this fiscal year.
On the regulatory front, we have completed approximately $216 million annualized regulatory outcomes, including refunds of excess deferred tax liabilities.
This amount of two.
$202 million.
And then remainder on September one.
Additionally, we have about $127 million in progress slide $15 32 to provide additional detail around our regulatory activities are.
Our fiscal third quarter financing activities were focused on pricing a fiscal 'twenty three equity needs during the quarter, we executed four sales agreements under our ATM program for approximately $2 9 million shares for $337 million and we settled agreements on 731000 shares for approximately $81 million in net proceeds.
As of June 30, we have approximately $700 million in net proceeds available under existing forward celebrate them.
Satisfy substantially all of our anticipated equity needs through fiscal 'twenty three.
We finished the third quarter with an equity capitalization of 61, 7%, excluding the $2 $2 billion of interim interim winter storm financing and with total liquidity of approximately $3 5 billion.
Additional details of our financing activities, including our equity forward arrangements as well as our financial profile on slides eight through 11.
Turning now to securitization during the third quarter, we continue to make progress on that front in Texas, The Texas Public financing authority continues its work on the statewide securitization program and we believe it is on track to be completed within the next few months as a reminder, once we receive the securitization funds, we will fully retire the $2 2 billion.
Winter storm financing.
In Kansas during the third quarter, we saw our application for a financing order based on the approved procedural schedule, we anticipate receiving the financing order during our fiscal 'twenty three first quarter.
In closing our fiscal year to date performance was in line with our expectations and supports the reaffirmation of our fiscal 'twenty two earnings per share guidance in the range of $5 50 to $5 60 per diluted share.
Slides 13, and 14 provide additional details around our guidance ranges included in those pages have not changed since the last quarter. However, we do anticipate our O&M and interest expense to be at the higher end of the ranges provided.
Thank you for your time today I'll now turn the call over to Kevin <unk> update and some closing remarks Kevin.
Thank you Chris Good morning, everyone and thank you for joining us today for fiscal year to date results. Chris just should reflect the continued focus on our vision of being the safest provider of natural gas services.
And supporting that vision, our 4700 dedicated employees executing our safety and reliability investment strategy, and our prudent regulatory and financing strategies.
These strategies combined with a strong portfolio of assets will continue to support our ability to grow earnings per share and dividends, 6% to 8% annually through fiscal 2026.
We continue to see robust growth in demand for natural gas in our service territories. During the 12 months period ended June 32022.
Added nearly 59000, new residential customers, which represents a one 8% increase.
During the third quarter of this year, we added 13, new industrial customers didn't have an expected annual natural gas usage at five Bcf.
We're fully operational.
Fiscal year to date, we have added 28, new industrial customers.
Have an expected annual natural gas usage at 10 Bcf when they are fully operational.
As you heard me say before on a volumetric basis that 10 Bcf of annual industrial customer usage is equivalent to adding 170000 residential customers.
Last month, we released our most recent corporate responsibility and sustainability report, which illustrates our environmental social and governance strategy focused on reducing our scope, one two and three emissions and environmental impact from operations and the five key areas of operation.
Yeah.
Pete.
Facilities.
Gas supply and customers.
The report also summarizes the commitments as well as the progress made towards executing that strategy during fiscal 2021 in early fiscal 2022.
I wanted to comment on one of the exciting highlights and corporate responsibility report.
That is our zero net energy home initiative.
By partnering with local habitat for humanity organizations in each of our eight states, we're providing families with zero net energy homes that use high efficiency natural gas appliances rooftop solar panels and.
In insulation to produce more energy than they consume over the course of the year all in a cost effective manner.
And as you've heard US mentioned before we've completed our firstly on energy home and Evans, Colorado in September of 2021, and during the third quarter of this year, we completed a second zero energy homes in Tyler, Texas, located just north of Boston.
Construction is underway on three additional zero net energy homes in Dallas.
One in Jackson, Mississippi.
One in <unk>, Kentucky, and all of these are scheduled for completion by November of this year.
Additionally, groundbreaking is scheduled later this calendar year for an additional five zero net energy homes, one in Dublin, Virginia, one in Colombia, Tennessee, and three in Lubbock, Texas.
These homes provide families with a comfortable natural gas home that demonstrates the value and vital role natural gas plays in helping customers reduce their carbon footprint in a cost effective manner.
Our fiscal year performance and participation in community projects such as these as our zero net energy homes reflect the commitment dedication focus and effort of our 4700 Atmos energy employees as they see a vital role.
Our 1400 communities by safely delivering.
Liable efficient and abundant natural gas to homes businesses and industries to feel our energy needs now and in the future.
We appreciate your time this morning, and now we'll open the call for questions.
Thank you.
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Our first question today is from Julien Dumoulin Smith of Bank of America. Please proceed with your question.
Hey, good morning, Kevin and Chris Clark on for Julian Thanks for the time.
Good morning.
So first wondering if you can walk us through the main drivers for the remainder of the year. It seems like you're well ahead based on year to date results rate increases for the remainder of the year in your updated expectations on O&M and interest I guess I'm, just trying to get a better understanding of your expectations within that $5 50 to $5 60 range.
Okay, you're muted there a little bit, but if I'm understanding correctly youre looking for the main drivers for the remainder of the fiscal year to try to give you some color around where we might call it within the guidance range.
That's right sorry about that hopefully you can hear me better now.
Much better now thank you.
You've touched on a couple of them.
Main drivers you're going on the O&M front, we have some compliance work they are doing some additional system integrity work.
Timing may shift between September or October just based on when the work is performed we're also monitoring our <unk>.
That expense level. This is our kind of our big collection season, although the bad debt expense is down year over year typically the fourth quarter.
Fourth fiscal quarter is the time when we have increased collection activities that we're kind of monitoring that as well and then finally on the interest expense front. We do have the floating rate note is a component of the interim winter storm financing rates have increased somewhat over the last fiscal year, which is driving our interest expenses a little bit higher.
That could potentially tick up once the rates that reset later here in the fourth fiscal quarter. So and so those are some of the things that we're monitoring in terms of.
The guidance range I would say at this point.
Yes.
We ended the fiscal quarter or the.
Year to date basis, we were in line with our expectations.
We stand behind the guidance that we put out today.
Understood. Okay. Thanks for that and as we look toward FY 'twenty. Three curious if you can opine on how you see inflation cascading through your O&M budget and capital plan.
Sort of trends are you expecting in the next year and any mitigating measures that youre thinking about.
Yes, Cody I'll start off and then Chris can jump in there.
So we've talked about before a lot of our contracts that we have in place have been refreshed recently.
With our contractors and our vendors a lot of our large projects, we do whether they are on the med tech side or the <unk> side, our bid projects. There we feel good about how those have been coming in as Chris said, we continue to work on our integrity management.
And compliance projects, we think those are all in good standing and on the procurement front, we as we've talked about before Brian tried to run well ahead to make sure we have enough inventory on hand.
Can you complete and stay ahead of our compliance in pipeline replacement work.
<unk> tried to keep about six months of inventory on hand, and may even be looking to push that out toward the nine months' level, we need to have all of the pipe either in the ground or on the ground to complete our 2022 projects.
We have the pipe in the works right now for 'twenty, three and are looking for material out into the 2004 period. So as you can see we're taking advantage when we can to make sure we've got the best pricing.
That our materials are available and we can continue to move forward.
At the best and most efficient manner.
Yes, and Kevin I'll add to that I mean, you're spot on with the just the keeping up annually, but the increases on the O&M front, but I'll also comment on the treasury side as well I mean, our team has done an excellent job and I'm trying to get ahead of rising interest rates.
With the exception of the interim windstorm financing, which we will take out once the.
The securitization funds are received that we have no floating rate debt, we had executed nearly $2 billion.
A forward starting interest rate swaps on future planned debt issuances beyond fiscal 2022 at very attractive rates and we've done that here over the last year or so.
And we're really well positioned and you look at our overall weighted average cost of debt today is at three 8%, which is very beneficial for our customers.
We don't have any significant near term refinancing needs are most.
Thats the most current one thats out there right now is about $500 million due in 2027, so from a balance sheet and financing perspective are also have taken advantage of those over the last year or so trying to lock in some of the lower rates for the benefit of customers, which also helps mitigate the impact on the customer bill.
Yeah, Kelly just to finish that office and again some of the same things tools that we had in our tool kit if you will.
As we were entering in coming through the pandemic are still there for us.
We haven't started back a lot of travel.
Going too.
The most sense of urgency meetings, those sort of things still taking advantage of teams.
Everything that we had in our tool kit during the pandemic, we continue to have to do.
As well as I'll, just again mentioned our ability.
To move projects forward and back because we're not a just in time compliance company, we try and run ahead of that so that gives us some flexibility as well.
Excellent that's very helpful. I'll pass it up there thanks again for the time.
Thank you Cody.
The next question is from ensue Kim of Goldman Sachs. Please proceed with your question.
Yes. Thank you.
First question, Kevin you were talking about the industrial customers and the.
Additions this quarter on for the year first can you just give a little bit more color on the mix of the types of the industrial customers and from a pace perspective of these additions or is this a little bit faster than what you had.
Baked in just trying to get a sense of which industries are you seeing most growth what type of potential capital opportunities may exist in the future for you guys.
Yes, sure just before I get into that again, our service territory is extremely blessed that we have exceptional leadership at the CIT able state level, they're great Chambers of Commerce, great economic development partners in each of our states and so we have a well diversified industrial footprint out there for it.
Sample.
A couple of our divisions. We've seen the addition of hydroponic greenhouse facilities, which are large consumers of natural gas we.
We've seen the location.
The distilling industry bulk new facilities and expansion of.
Distilling facilities out there we've seen a EV battery manufacturing plant located on our facilities, we've seen concrete and asphalt facilities expansions of colleges and universities.
As well as some metals aluminum steel smaller plants and an expansion of some existing ones as well so.
As you can see there it's a variety of everything across the board.
Which is good for our local economy.
Thing that comes along with these expansions or new additions.
As you know is the jobs the amount of jobs that disappoints and brings in the community, which means rooftops and commercial load as well.
Got it.
Definitely a good color.
One theme.
The inflation reduction that obviously for the electric industry a lot of.
Initial thoughts there just for you guys.
As it relates to that Bill just curious on your overall thoughts on what potential opportunities or challenges could exist.
For example, I'm thinking of the R&D side. Obviously, you are now on the upstream side of things, but how does that if it takes place how does that change your thinking there and then just from a.
Curious on the methane tax perspective does that impact your pipeline business at all.
Okay, Yeah, there's a lot packed into that question. So let me.
Start with we're still reviewing going through all the detail that's laid out in the bill and and as you know the Bill still got a long way to go through the legislative process them.
Would be altered one way or the other as it makes its way through but.
But we're going to stay very close to the process and stay close to the details to see what potential.
Outside exists for us out there. However, I will say it is good to see centered imagines comments that this bill is not arbitrarily.
Shut off abundant fossil fuels I think gives us quote.
And then in a recent article I saw some time from last year.
Senator Manchin indicated that natural gas must be included in any clean energy programs. So for me, it's good to see and hear that because it's going to take all forms of energy right now.
<unk> energy portfolio as we've been saying for a long time, including natural gas are nearly 3 million miles of pipeline infrastructure nurse underground storage fields, which we have about 120 Bcf here at Atmos energy all of that's going to be required to meet the growing demand going forward and again, it's good to see.
That realization that conversation at that level being taken place.
Because of a one size energy solution I don't think provides the security reliability and affordability.
This country needs to meet the growing energy demand that's out there so.
We look forward to continuing to see how the bill evolves, we think we're a good operator, a prudent operator.
As you've seen through our pipeline replacement projects and tightened up our system, we've got a good environmental strategy out there.
So I think we can operate in this legislation, but we're going to continue to monitor it and see what the details show is the same as cohort.
Got it thank you so much.
There are no additional questions at this time I'd like to turn the call back to Dan <unk> for closing remarks.
We appreciate your interest in Atmos energy and thank you again for joining US a recording of this call is available for replay on our website through September 30 have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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