Q1 2023 Atmos Energy Corp Earnings Call

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This call is being recorded on Wednesday February eight 2023, and I would now like to turn the conference over to Dan <unk>, Vice President of Investor Relations and Treasurer. Please go ahead Sir.

Thank you Michele good morning, everyone and thank you for joining our fiscal 2023 first 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 were referenced in our prepared remarks are available at Atmos energy Dot com under the Investor Relations tab.

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 or.

Our forward looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on slide 24, and more fully described in our SEC filings with that I will now turn the call over to Kevin Akers, our president and CEO Kevin.

Thank you Dan and good morning, everyone. We appreciate you joining us and your interest in Atmos energy today.

I want to begin today's call by thanking everyone about 4800, Atmos energy employees across all of our eight states for their exceptional effort and dedication to serving our customers under very challenging weather conditions during winter storms Elliot MRO.

Thank you for all that you do for our customers and our communities every day.

Truly the heart and soul of Atmos energy.

Our first quarter results reflect that effort dedication and focus as we continue modernizing our natural gas distribution.

<unk> and storage systems on our journey to be the safest provider of natural gas services.

Yesterday, we reported physical 2023 first quarter net income of $272 million or $1 91 per diluted share.

We reaffirmed our fiscal 2023 earnings per share guidance in the range of $5 90.

To $6 10.

Alright, Ms pipeline, Texas Division achieved several project milestones during the first quarter.

Our AP.

<unk> completed filling the cushion gas requirements at the battle, one be cavern and working gas is currently being injected and D. Brining operations continue with a targeted completion date of April of this year.

Third Catherine provides additional support to Apt's operations as well as the local distribution companies behind ADT system.

It adds over six Bcf of new working gas capacity.

We completed the final portion of our 137 mile 36 inch line ex integrity replacement project.

As well as completed phase two of our three phase line S. II project.

Well as to bring supply from the Haynesville and Cotton Valley shale plays to the east of.

The growing Dallas Fort worth Metroplex.

Second phase.

<unk> 17 miles of 14 inch pipeline with 36 inch pipeline. The final phase of this project is anticipated to be in service late calendar 2024.

These projects enhance the safety reliability versatility and supply diversification of our system and support the continued growth we are seeing in the local distribution companies behind Apt's system.

According to the Texas workforce Commission the <unk>.

They continue to 14 months streak of record employment in December and added 650000 jobs for the 12 months ending December .

This strong employment shrink continues to drive the growth in our mid Tex and West Texas divisions were approximately 47000 of our nearly 64000 new customers were added for the same 12 months ending December period.

Additionally, industrial demand for natural gas in our service territory remains strong.

During the first quarter, we added 12, new industrial customers with an anticipated annual load of approximately nine bcf once they are fully operational.

Larger of these new industrial customers is anticipated to used nearly six bcf annually.

Our procurement team continues to do an excellent job sourcing the materials needed to support our capital investment as we continue modernizing our natural gas distribution transmission and storage systems. We also maintained about six months of inventory for our distribution and transmission needs.

And as we've said before we have ordered all of our anticipated steel pipe needs for FY 'twenty two 'twenty three.

Our customer advocacy team and customer support agents continue their outreach efforts to energy assistant agencies and to our customers during the first quarter.

Through their work the team helped nearly 17000 customers receive over $6 million in funding assistance.

As a reminder, during fiscal 2022, our energy assistance teams helped nearly 67000 customers receive approximately $34 million of funding to help with their monthly bill.

As you will hear from Chris today, our fiscal 2023 financing costs are now we have hedged a significant portion of our financing needs beyond fiscal year, 2023, and our liquidity and balance sheet remains strong.

Atmos energy is well positioned to continue delivering safe reliable efficient and abundant natural gas to homes businesses and industries to fuel our energy needs now and in the future.

I will now turn the call over to Chris for his update Chris.

Thank you Kevin and thank you everyone for joining us this morning, as Kevin mentioned, our fiscal 'twenty three first quarter net income was $272 million or $1 91 per diluted share.

Consolidated operating income increased to $321 million or 16% in the first quarter.

Our first quarter performance largely reflects positive rate outcomes driven by system modernization spending continued customer growth in our distribution segment, partially offset by higher O&M spending in both of our segments slide five summarizes the key performance drivers for each of our operating segments.

Rate increases in both of our operating segments, driven by increased safety and reliability spending.

The $79 million.

Residential customer growth and increased industrial load increase operating income by an additional $5 5 million and.

And we saw a $5 million increased apt's through system business due to wider spreads driven by maintenance and some of the key takeaway pipelines in the Permian during the quarter.

<unk> O&M expense increased $26 million driven by planned higher in London spectrum spending in HPT.

Higher spending for third party damage you mentioned activities on our distribution system and increased employee and other administrative costs.

Capital spending increased 16% or $111 million to $796 million, 88% dedicated to improving the safety and reliability of our system.

This increase primary reflects higher spending at ICT projects that Kevin discussed just a few minutes ago.

We continue to execute our annual regulatory filing strategy to date, we have implemented $115 million in annualized regulatory outcomes and we currently have about $36 million in progress.

Slides 19 through 23 summarize those outcomes and slide 16 outlines our claim filings for remainder of the fiscal year.

During the quarter, we completed over $1 billion of long term debt and equity financings highlighted by the $800 million long term debt financing, we completed in October 2022, and $200 million settled equity forward agreements.

As of December 31, we have approximately $755 million in net proceeds available under existing forward sales arrangements that will fully satisfy our anticipated fiscal 'twenty three equity needs and a significant portion of our anticipated fiscal 'twenty four needs.

Finally to mitigate interest rate risk associated with our anticipated long term debt financing needs beyond fiscal 'twenty three.

Currently have about $135 billion forward, starting interest rate swaps to effectively fix a portion of.

Treasury component of our total cost of financing at rates ranging from one 8% to 2%.

All of this gives us a clear line of sight into our anticipated financing costs for fiscal 'twenty, three and a portion of our cost beyond fiscal 'twenty three.

Our equity capitalization as of December 31, excluding the $2 $2 billion of winter storm financing was 60%. Additionally.

Additionally, we finished the quarter with approximately $3 $4 billion of liquidity.

Additional details of our financing activities as.

As well as our financial profile can be found on slides seven through 10.

Turning now to securitization in Texas.

Texas Public financing authority, the Bombardier Board continue to work diligently to determine the best outcome for customers with respect to securitization.

Additionally in January the Texas legislature signaled its intent to provide funding for the gas and other costs incurred during winter storm Yuri that redeemed prudently incurred by the Texas Railroad Commission in November 2021.

We are encouraged with these developments and continue to support their efforts. However, we do not anticipate receiving the securitization bonds report interim intra winter storm financing matures on March nine.

We currently anticipate refinancing this debt through a combination of the syndicated bank term loan and utilization of our existing credit facilities and cash to minimize the cost to the customer while providing maximum flexibility to repay this debt once the securitization process is completed.

Additionally, pursuant to an order issued by the Railroad Commission, we have deferred all carrying costs associated with the interim financing effective September one.

And currently intend to defer carrying costs associated with the existing financing and do interim financing until the securitization process is complete.

In Kansas, We've received our financing order from the Kansas Corporation Commission in October 2022, and we are progressing well to securitize, the approximately $90 million and gas and other costs incurred during winter storm here.

We anticipate completing the securitization process this fiscal year.

In closing we are off to a good start to the fiscal year.

The execution of our operational financial and regulatory plans for the first fiscal quarter positions us well to achieve our fiscal 'twenty three earnings per share guidance in the range of $5 90.

$6 10.

Details surrounding our fiscal 'twenty three guidance can be found on slides 12 and 13.

Thank you for your time this morning, I will now open up the call for questions Michelle.

Thank you Sir.

Ladies and gentlemen, we will now begin the question and answer session.

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Please standby for your first question.

Your first question comes from Nick Campanella of Credit Suisse. Please go ahead.

Hey, good morning, everyone. Thanks for taking my question I hope everyone's doing well.

I just wanted to I just wanted to ask on.

Just the recent move in gas prices can you just talk about how that's affecting your financial plan.

Or are your hedging strategies at all here.

Clearly it should help with bill headroom as well, but maybe you can just give us some more color on what the recent movements. Thanks.

Yeah, I'll start a little bit on the supply side, and then let Chris picked up on the hedging side.

Nick Yes, we continue to see still good strong rate number.

Alright.

$2 range and Wall Hall and.

Below two at Katy So the forward look, particularly then out of the wall area in the Nymex area being in the two to $3 handle certainly look good on a go forward basis as you've heard us say before our storage positions.

Helped us with some of that hedge early on I think we were all in storage at an average wait cause of $5 48. So.

We are well positioned for the remainder of this year. The forward curves continue to look good at this point as we move into the summer and fall of next year and the supply continues to look good out there from the major producing basins, so Chris anything else to add.

Yes, Thanks, Kevin just a couple of things that first half from a financing perspective, the $800 million in long term debt that we you should not tober satisfies our anticipated long term debt financing needs.

I'll also already mentioned the equity that we got that price for the remainder of the fiscal year and you understand the math on the equity given where we are and in terms of what our financing needs over the next five years.

Additionally, we do have full access to our credit facilities today, the operating credit facility, which supports our commercial paper programs of $1 $5 billion program. We had no short term debt as of December 31, So we had the ample liquidity there to support operations as well as gas supply and then <unk>.

I'll make this comment commenting on hedging to kind of follow up on Kevin's point.

Supply chain kind of sets that hedging program in advance of the winter heating season and between the combination of storage at that Kevin alluded to in the hedging programs, we had just under 50%.

Of the of the cost locked in for this winter heating season, so to the extent that gas prices moderate.

Other say, 50% or so that should have a positive impact on the customer bill.

Okay.

Appreciate that.

And Chris I know that you are already fully priced on 23.

Equity needs here, how should we kind of think about 'twenty, four and being opportunistic about further derisking the financial plan.

Yes, the $755 million as I mentioned, Nick that satisfies all of our needs and a substantial portion of our needs all of our needs for 'twenty three and a substantial.

A portion of our needs for fiscal 'twenty four so the ATM program continues to work very well for us.

We will continue to utilize that to Canada just layer in additional pricing. If you will on the equity needs for 24 with an eye towards just being opportunistic on the pricing.

Thanks, a lot I appreciate the time today.

Thanks, Nick.

Your next question comes from David Arcaro of Morgan Stanley . Please go ahead.

Oh, Hey, good morning, Thanks for taking my question.

Good morning.

Morning, I'm wondering if you could.

Could you comment on the investigation by the Railroad commission into the some of the service challenges.

Your system experienced during the winter weather in December and just any initiatives or actions that youre pursuing on the back of that experience.

Yes, as you know our.

Our team has worked very hard going into this winter storm have prepared themselves have prepared the system.

But as as the storm moved in we did have approximately 2300 customers in a limited area of our service territory.

<unk> experienced some service interruptions out of the $2, one $2 2 million residential and commercial customers that we serve here in Texas.

I've been working with the commission to provide them additional information and work with them as they wrap up their investigation, which we hope will occur here.

Soon.

Okay got it. Thanks, that's helpful and then I was wondering.

Could you elaborate a bit just on the plans for refinancing some of the floating rate notes that are coming due but related to.

Winter storm costs, and just is there an EPS impact that you might anticipate from having to refinance those just sort of waiting for the securitization process to get completed here.

David This is Chris the short answer is no and as I mentioned on our prepared remarks, we've got.

Planned hybrid securitization that will be Oh, sorry, sorry, a term loan a syndicated term than that.

Despite executing here in the next few weeks as well as using utilizing some of our credit facilities and cash.

With the regulatory asset or that the Royal Commission has granted we are deferring all of those are financing costs right now into that regulatory asset until securitization is complete and then we will address that with the commission be appropriate recovery of those costs.

Okay got it perfect. Thanks, so much.

Thank you.

Your next question comes from Gabe Moreen of Mizuho Securities. Please go ahead.

Good morning, guys. Maybe if you can just talk to us about broadly speaking how O&M is tracking relative to euro expectations. So far this year are you seeing any.

Let up and pressures and just curious on your thoughts there.

Yeah, I'll start and then Chris can jump in as you heard in Chris's remarks.

Most of the O&M that we've experienced in the first quarter is what we thought we would see it's in the range that we've already laid out there and what I mean by that is that well with the growth that we talked about we certainly are.

Both on our side and in jurisdictions has driven increased O&M from our line locating perspective that economic growth certainly drives.

New roofs.

Commercial businesses, new roads, new infrastructure, which drives up locating expenses as a matter of fact, our Texas number of locate is up almost 10% this quarter over quarter last year and then in addition, as you heard on some of the projects that I mentioned, we had some additional.

In line inspection work.

That we needed to pull forward on the Apt's.

And some additional pigging activity that we slow during the Covid period, but wanted to pick that work back up so all things we anticipated.

Kind of occurring during the quarter.

I saw a lot more line locating expansion just given the growth that we're experiencing Chris anything additional.

I think thats spot on Kevin and Rich I would just add that from an inflation perspective.

The inflation, we're experiencing that we're seeing it's still well within the.

The planning parameters that we outlined in our fiscal 'twenty three guidance and our five year plan on an overall basis.

Thanks, Kevin Thanks, Chris So maybe if I could just follow up with sort of apologies if I missed it but you've got a couple of large projects that have either wrapped up or nearing completion.

Maybe just talk about kind of what's next in the queue from a larger project standpoint, as you look across your system.

Well that those projects that I mentioned <unk> was an integrity project, which fortifies that line. It comes out of wall Horn runs west to east in the Dallas and then S too.

Integrity and capacity project to bring in additional supply from the east.

We will continue to monitor our system continue to monitor that grow.

We still have as I mentioned complete that <unk> are the best.

Aw cavern.

<unk> project that will take us probably.

Into 2026 to get all three caverns back in service at the same time.

And just as a reminder, that's not only a.

Our capacity and need for the growth behind our systems. It's also an integrity project per rules at the commission, where we have to do our integrity work on those caverns every 15 years. So we will continue to look at our storage will continue to look at the larger pipe infrastructure and see where that may need it.

Increasing or fortification as we move forward.

Thanks, Kevin.

Yes.

Your next question comes from Richard Sunderland of J P. Morgan. Please go ahead.

Hi, good morning, and thanks for the time today, just wanted to follow up on the earlier discussion around the gas price dynamics curious for your thoughts on the duration of why weakness and we see a probability that well how gas prices remain depressed until matterhorn, Andrew servicing through 'twenty four.

Any thoughts around the duration here and impact to customer bills relative to your outlook last quarter.

Yeah.

Yeah again our.

Team continues to stay close with the producers out there.

Midstream processors to keep a handle on as you said as well as new projects that are coming online.

But I think the other thing.

That.

We will continue to work on is the tie into some of those lines. So that's the other opportunity I think for us as those projects continue to built coming out of wall Horn had.

Head East it gives us an opportunity to get additional taps or to bring in additional supply into our areas as well. So all good signs as you say on the forward look right now we believe these prices and the conversations we're holding.

Numbers look really good as you head into novae March upcoming so.

Right now don't see things changing in the short run at least the information we're getting out there and then as we continue through this winter period pulling on storage and getting ready to inject four for next season the pricing looks.

Really good there as I said before has come in the $2 range or so so that should have a very positive impact for our bills for next year.

Great. That's all I had today thank you.

Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.

Your next question will come from Ryan Levine Citigroup. Please go ahead.

Good morning, most of my questions were asked already but I just wanted to follow up on one in terms of the mid Tex are proceeding could you provide an update on the round that regulatory activity.

Yes, Brian This is Chris So we made that filing the <unk> filing in mid January .

We're just now beginning to work through.

The early discovery process and we anticipate it.

New rates under the dark filing by the end of the fiscal year.

Okay, Great. That's all from me. Thank you.

Okay. Thanks, Brian .

There are no further questions at this time, so I will turn the conference back to Dan <unk> for any 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 March 31 2023.

Great day.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.

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