Q3 2023 Atmos Energy Corporation Earnings Call

Third quarter earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star followed by one.

Again, thank you.

I would now like to turn our call over to Dan <unk> Dan. Please go ahead.

Thank you Aaron good morning, everyone and thank you for joining our fiscal 2023 third quarter earnings call.

With me today are Kevin Akers, President and Chief Executive Officer and <unk>.

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.

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.

Our forward looking statements and projections could differ materially from actual results.

The factors that could cause such material differences are outlined on slide 34.

And are more fully described in our SEC filings.

With that I will turn the call over to Chris <unk>, Our senior Vice President and CFO, Chris. Thank you Dan and good morning, everyone. We appreciate you joining us and your interest in Atmos energy yesterday, we announced fiscal year to date diluted earnings per share of $5 33.

Paired to $5 12 per diluted share in the prior year period.

Third quarter fiscal year to date financial results were in line with our current expectations and continue to be driven by three key themes regulatory outcomes reflect the increased safety and reliability spending continued strong customer growth and higher O&M spending.

Fiscal 'twenty, two and 'twenty three regulatory outcomes in both of our segments increased operating income by approximately $204 million.

And higher consumption residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $27 million.

These increases were partially offset by $70 million increase in consolidated O&M.

Year to date distribution, O&M increased $48 million or 12, 6%. However.

However, during the third fiscal quarter the rate of the O&M increase in this segment moderated somewhat with O&M increasingly increasing approximately three 5% quarter over quarter.

The higher level of O&M spending continues to be largely driven by higher levels of service orders to support our growing service territory, primarily in Texas.

Fiscal year to date, we experienced an 8% increase in the number of line locates in Texas and we can use the higher labor cost for these third party services <unk>.

Additionally, service orders increased 10% largely driven by customer growth and increased collection activities.

The remaining $22 million fiscal year to date increase in consolidated O&M incurred in our pipeline and storage segment, primarily driven by the timing of inline inspection work for this segment.

In the prior fiscal year most of that work was concentrated in the fourth quarter and this fiscal year. This work was incurred more ratably throughout the fiscal year.

Consolidated capital spending increased 21% or $358 million to $2 1 billion.

With 86% dedicated to improving the safety and reliability of our system.

This increase primarily reflects higher spending at HPT for align us to inline PC projects designed to enhance the safety reliability versatility and supply diversification of our system.

Spending in our distribution segment has increased due to higher safety and.

Reliability spending and higher spending to support customer growth.

During our third fiscal quarter, we implemented $100 million to $122 million in annualized regulatory outcomes year to date, we have now completed $263 million in annualized regulatory outcomes and we currently have an additional $263 million annualized outcomes and progress, including $107 million related to our <unk>.

Each of our rate case that we filed in may of this year.

Currently expect to finalize the case in December of 2023.

Our financial position continues to remain strong we finished our third fiscal quarter with an equity capitalization of 61, 8% and approximately $3 1 billion of liquidity. This.

This amount includes $590 million net proceeds available under existing forward sale agreements that will fully satisfy our anticipated fiscal 'twenty three equity needs and a significant portion of our anticipated fiscal 2004 needs.

Additionally, during our third fiscal quarter, we completed our $95 million securitization process in Kansas, and then began including securitization charge on customer Bill effective July one.

As I previously mentioned, our third quarter and fiscal year to date results were in line with our expectations, which gives us the confidence to reaffirm our fiscal 'twenty three guidance in the range of $6 $6 10.

Additionally, we now expect capital spending to approximately $2 8 billion.

Largely reflecting higher spending persistent expansion of our distribution segments.

Thank you for your time today, and I will turn the call over to Kevin for his update and some closing remarks Kevin.

Thank you Chris Good morning, everyone and thank you for joining us today, our fiscal year performance reflects the continued dedication of our 4800 Atmos energy employees in executing our proven safety and reliability investments strategy.

Through their commitment focus and effort, we are modernizing our natural gas distribution transmission and storage systems, while safely providing reliable natural gas service to our $3 4 million customers in 2000 1400 communities across our eight states.

We continue to experience strong customer growth driven by robust employment trend, particularly in Texas.

For the 12 months ended June 30, we added nearly 64000, new customers with just over 48000 of those new customers located here in Texas.

And according to the Texas Workforce Commission. The stay continued its streak of record employment for the 12 months ended May 31, the number of employed reached a new record high at nearly 14 4 million, leading the country in number and percentage of jobs added.

Additionally, according to a study by site selection group the Dallas Fort Worth Metroplex is projected to add 1 million people.

2028 to reach nearly $8 5 million people here in the metroplex.

Industrial demand for natural gas in our service territory also remained strong during the third quarter. We added 10, new industrial customers with an anticipated annual load of approximately eight bcf once they are fully operational.

Fiscal year to date, we've added 41, new industrial customers with an anticipated annual load of approximately 16 Bcf once they are fully operational.

On a volumetric basis that 16 Bcf of anticipated load is equivalent to adding nearly 294000 residential customers.

Finally, we continued our outreach efforts to energy assistance agencies and customers.

During the first nine months of the fiscal year, our customer advocacy team and customer support agents helped over 55000 customers receive about $23 million and funding assistance.

Our continued focus on long term sustainability.

Bind with executing our proven investment regulatory and financing strategy.

Has us positioned well for another successful year in fiscal 2023 and reflects the vital role we play in every community, providing safe reliable and efficient natural gas service to homes businesses and industries to feel our energy needs now and in the future we.

We appreciate your time this morning, and we'll now open the call to questions.

Okay.

Okay.

At this time I would like to remind everyone that in order to ask a question Press Star and then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.

Okay.

And our first question is going to come from the line of Richard Sunderland with Jpmorgan. Richard Please go ahead.

Hi, Good morning can you hear me.

Yes. Good morning, Good morning go ahead.

Great. Thank you.

Starting with the O&M trends can you speak to the year to date trends relative to the implied <unk> outlook here and Theres, certainly a pretty stark reversal kind of embedded in the numbers I know you referenced inspection work, but just curious if there are other timing factors at play also if you've done work to de risk 24, and that's part of the hour.

And look for the balance of the year as well.

Yes. Thank you Richard will start with 23 again, a lot of the timing is related to the ADT in line inspection work that I referenced just a couple of minutes ago and.

Again more of that was more of that work was ratable. This year in the first half of the year primary this fiscal year, primarily compared to last year. It was more concentrated in the fourth quarter as we look forward into fiscal 'twenty four we're still pulling together that five year plan, but we're looking for opportunities to derisk that a little bit in terms of <unk>.

<unk> side looking at how we might approach line locates the strategy there as well as just trying to lock in some longer.

Longer term contracts and some of our service contracts that are third party by design and so those are some things that we're looking at to try to mitigate some increases going forward.

Got it very helpful color, there and then shifting to the Atg rig case curious on any early thoughts on stakeholder engagement and what Youre hearing locally.

What is the timing for settlement discussions just procedurally in that case.

Expectations around your ability to reach a settlement.

Yes, Richard this is Kevin I'll start out we're right on pace with a procedural schedule as its outlined there we're still continuing to get data requests we're responding to those so at this point if you look at the procedural schedule, we feel like we're on track to get an order sometime towards the end of the calendar year.

And that December timeframe.

Okay, and then just high level thoughts on ability to reach a settlement here or is that something that's embedded in the plan. So you could say on that front would be helpful.

Now again, we're still continuing to answer questions. At this point, we will see how we progress over the next few weeks or so but at this point again I think we are on track with the outlined procedural schedule.

Great I'll leave it there. Thank you for the time today.

Thank you.

Yeah.

Once again, ladies and gentlemen, if you would like to ask a question go ahead and press Star and then one on your telephone keypad.

We'll pause for another moment to see if we have other questions.

Yeah.

Okay.

Our next question is from Ryan Levine with Citi. Ryan. Please go ahead.

Hi, everybody just a couple on O&M.

Appreciate the comments already made.

On a go forward basis should we be expecting the seasonality of operating cost.

Be more late this year or prior years and kind of what's driving some of the <unk>.

And cadence.

Yeah, Ryan I.

I think as you think about on a go forward, we certainly anticipated going into 2000 and <unk>. Some of the inflationary costs. We knew we were going to have some growth, which if you look at the O&M was driven on our line locating as Chris mentioned before.

I would certainly anticipate that to continue but I think we've got a good outlook on that now on where we stand on number of locates type of other O&M expenses.

As Chris said as we move to finalize our 24 plan and look forward from there and the other thing too Ron I'll add is that a lot of it is timing just based upon the availability of the contractors to do the works have kind of talked about a little bit with the ADT work last year, we did a lot of work in the fourth quarter because the contractors on site they are worth.

King with US we decided to go ahead and move into the first and second quarter.

They are already engaged with us rather than releasing them and have them come back six months. Later. So we also have to just walk around the needs of the system the timing of the system. It depends on what we might be doing.

Construction work on certain segments of the assistant which can influence timing I've also referenced that service orders allow those are difficult to forecast, but service orders generally related to particularly this last year more calling into the customer contact center because of high bills given the higher prices, we experienced that back in the winter heating season.

Difficult to predict if that will reoccur in the first or second quarter.

As well as some of our disconnection activities, but yes.

That's why we manage to a full fiscal year in terms of guidance because some of those.

Operating conditions are difficult to predict and we're just responding to the needs of the business with an eye towards.

Accomplishing our fiscal year earnings per share targets.

Yes, I think that's the other point Ryan here as our communities as you've heard us say, our growing expanding out where we are.

We're working with them on timing of their projects, whether they are infrastructure projects are occurring water sewer fiber.

Fiber optic projects out there you've got road relocations, New road construction that sort of thing going on so some of this does cycle throughout the full fiscal year period.

And how much is this change in seasonality of courses.

It was embedded in that response is really related to the spike in gas prices. During this most recent winter.

As opposed to some of the other drivers that you highlighted.

Yes, I don't know that I would make that kind of direct correlation I think what Chris was alluding to is some orders for <unk> that sort of thing based on bills, but I don't think it is.

<unk>.

Meaningful percentage of the rest of the overall operational O&M per se.

Okay.

And then one I noticed in your <unk>.

You bet.

Your guidance for the year Youre approaching year end or at least your fiscal year end and the effective tax rate. This year. So it will be higher than last year.

Is that.

From a longer term planning perspective.

Supporting that.

Current effective tax rate is appropriate.

Or for future time periods or any color you could share on how youre thinking about your tax position yes.

Yeah, Ryan the effective tax rate that you see is roughly 11% that's heavily influenced by the excess of the refund of excess deferred tax liabilities from the Tc JA.

We're amortizing those over a three to five year period.

That's why we've included in our in our deck kind of the marginal effective tax rate of roughly 22, 5% to 23, 5%. So that you have an idea of what.

Really what true tax impacts or if youre modeling your O&M or other types of expenses and revenues, but we do anticipate the GAAP.

GAAP effective tax rate to increase as the excess deferred taxes wind down here over the next couple of years and revert back to that more traditional 22% to 23, 5%.

Okay, great. Thank you.

Yeah.

Okay.

Once again, ladies and gentlemen, if you would like to ask a question press star followed by the number one on your keypad telephone.

We'll pause for just a moment to see if we have other questions come in.

Okay.

Okay.

Yes.

And at this point it does look like we are good on the questions.

Dan would you like me to turn it back over to you for closing remarks sure.

We appreciate your interest in Atmos energy and thank you for joining us a recording of this call is available for replay on our website through September 30th.

Great day. Thanks.

Thank you, Dan and ladies and gentlemen that does conclude today's call. Thank you all for joining you may now disconnect.