Q3 2019 Earnings Call
Greetings and welcome to the Atmos energy.
Third quarter earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference Press Star Zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host Jennifer Hills.
Vice President of Investor Relations. Thank you you may begin.
Thank you Diego Good morning, everyone. This is Jennifer Hill, Vice President Investor Relations and thank you for joining us.
This morning, I'm joined by Mike, Hey, nerve President and CEO , Kevin acres Executive Vice President, Chris Foresight, Senior Vice President CFO , and Kim Cocklin Executive Chairman. This call is being webcast live on the Internet and our earnings release and conference call Slide presentation are available on our website at Atlas energy Dotcom under company and Investor Relations.
As we review these financial results and discuss future expectations. Please keep in mind that some of our discussions 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 27 and are more fully described in our SEC filings.
Our first speaker is making are president and CEO of Atlas energy like.
Thank you Jennifer and good morning, everyone.
And happy birthday, Jennifer.
And in the Investor Relations nothing says happy birthday more than hosting an earnings call. So congratulations.
Yesterday, we reported our fiscal 2019 third quarter results and I'm pleased to report that we're on track to meet our fiscal 2019 earnings per share guidance of $4.25 to $4.35 an increase earnings per share for the 17th consecutive year.
Capital spending increased 10% during the first nine months of the fiscal year, which demonstrates our commitment to modernizing our system approximately 87% of this spending was focused on safety and reliability investments as we continue to execute our risk based capital spending program to modernize our distribution and transmission systems.
Through June 32019, we completed $2.1 billion of financing, which has supported our fiscal 2019 capital spending further strengthened our balance sheet lowered the cost of financing for our customers and leaves us very well positioned to maintain our credit ratings for the long term.
We continue to invest in technology, our people and processes to achieve operating excellence and scale or capabilities to sustain or safety driven strategy with the team. We have in place we're extremely well positioned for continued success into the future.
Yesterday, we announced that I'll step down from my role as President and Chief Executive Officer effective September Thirtyth to focus on my health.
I will remain with the company through the end of the calendar year to support the transition and I'll retire from the company and plan to step down for the board effective January one 2020.
Also announced yesterday is the cabin acres currently executive Vice President has been appointed by the board to succeed me as President and CEO and become a member of the board effective October one of this year.
Kim Cocklin will continue as executive chairman.
This was a very difficult decision for me, but it's the right decision for the company for me and from a family.
I've been facing a recent health issue that to this point is alluded a definitive diagnosis.
I'm extremely optimistic this will resolve itself favorably in the long run however, it's requiring an increasing amount of my time and it necessitates be pulling back on my commitment.
This decision.
We've made much much easier for me by the fact that Kevin acres is ready to assume the role of President and Chief Executive Officer.
Kevin is a proven leader with broad company and industry experience.
The majority of the nearly 29 years with the company had been senior leadership position.
He has deep operating experience having previously served over over nine years as president of our Kentucky mistakes Division.
Five years as president of our Mississippi Division and more recently took on responsibility for the Companys pipeline and storage operations.
For the past several years, Kevin also oversaw our pipeline safety supply chain and customer service functions and he's been instrumental in driving the process improvement and technology initiatives that have enabled the company to scale its operations to sustain our success.
Many of you already know Kevin from our Analyst day is the past two years as well as the AJ Finance reform and other investor conferences this year.
Kevin is surrounded by a very seasoned senior leadership team, Chris and the rest of our management Committee will continue in their current roles.
They've worked closely together for many many years.
And.
Even prior to being on the management Committee.
Not only are they respected colleagues, but you're also friends and Kevin has the full support of our 4700 employees.
One of our boards, most important responsibilities of succession planning and they've done that masterfully over our 36 years as an independent public company.
The succession plan has been in place for several years and just as with prior transitions from our founder Charlie bonds, the Bob Best Kim Cocklin to me.
The transition to Kevin will be completely seamless.
As I mentioned earlier, Kim will continue in the role of executive Chairman.
I'll be forever grateful to him as a great leader as a matter in a friend.
The continued involvement in the company as chairman as well as advisor to Kevin and the rest of the management Committee will provide further assurance of the company's continued success.
And lastly, before I turn the call over to Chris for the financial update I'd like to thank the investors and analysts I've had the distinct pleasure to get to know over the past four years.
Your support and investment of time and capital.
It has been so critical to the success of our safety investment strategy. Your insights and challenging question that made us a better company and it may be a better leader.
I'd also like to thank our 4700 employees for their continued outstanding efforts to improve every day to deliver safe reliable affordable and exceptional natural gas service to the 3.3 million customers, we serve and over 1400 communities and our eight state footprint.
They come to work every single day focused on safety, while providing excellent customer service and executing our capital spending program focused on modernizing our system.
It's been my greatest honor to serve alongside them for the past 11 years. They are the reason that Atmos energy will continue to be successful for the long term.
Chris over to you.
Thank you, Mike and good morning, everyone yesterday, we reported 2019 third quarter net income of $80 million or 68 cents per diluted share compared with $71 million or 64 cents per diluted share in the prior year third quarter.
Year to date, net income was $453 million or $3.88 per diluted share compared with $564 million or $5.09 per diluted share in the prior year period.
Fiscal 2018 year to date results included $166 million or $1.49 cents per diluted share nonrecurring income tax benefit from tax reform.
Excluding the tax benefit adjusted net income was $398 million or $3.60 per diluted share.
Our third quarter results were in line with our with our expectations with many of the drivers underlying our performance during the first half of the year and tuning into the third quarter.
Slides five and six provide details for our quarter and year to date results.
I will touch on few of the highlights in our distribution segment operating income increased $14.4 million to $48.7 million in the third quarter as a modest increase in contribution margin was offset by higher operating expenses.
Contribution margin increased about $1 million quarter over quarter.
We experienced a $7 million increase from new rates in a nearly $3 million increase from customer growth.
For the 12 months ended June 32019, we added a net 35000 customers, which represents 1.1% net customer growth. We are on track to exceed 1% net customer growth for the third consecutive year.
These increases were offset by $4 million decrease in customer consumption, primarily due to warmer weather in the third quarter compared the prior year.
As a reminder, most of our weather normalization mechanisms and in April So contribution margin does not cover for most of the quarter.
Operating expenses rose approximately 6% quarter over quarter, reflecting higher depreciation expense associate with increased capital spending and planned 10% increase in on an expense.
As we discussed last quarter, we increased service related head count or mid Tex division to support the growth or DFW market.
Additionally, we experienced a 7% quarter over quarter increase in line locates as many of our communities in which we operate continue to experience strong growth.
We continue to rollout new leak survey technology into our operations.
This technology is 1000 times more expensive than traditional leak survey technology. Therefore, we are finding more potentially indications, which drives the need to hire can track for people to evaluate and assess these indications.
While the deployment of this technology will increase on an expense in the near term that plays an important role in our ability to identify and mitigate risk.
For example, during the quarter were ever use this technology in several of our jurisdictions.
They are hit by heavy storms to assessors system for damage.
The performance our pipeline and storage segment substantially offset the operating income decrease in our distribution segment.
Operating income increased $12 million driven by strong growth in contribution margin, partially offset by higher operating expenses.
Contribution margin increased $22 million as a result of ABTS grip filings in 2018, and 2019 combined with the four and a half million dollars quarter over quarter rise and ABTS through system revenue as a result of the ongoing supply and demand dynamics that in the Permian basin.
The activity, we experienced in the quarter was higher than anticipated due to unexpected force majeure events on other pipelines, which drove higher than expected volumes into our system.
However, as new production as a new merchant pipeline comes online starting late this summer.
We expect the Waha Katy spread to narrow.
Offsetting the growth in contribution margin was a $10 million increase in operating expenses as a result of higher depreciation related to increased capital expenditures and a planned increase in pipeline integrity work.
Year to date consolidated capital spending was 10% our increased 10% to $1.2 billion, which is in line with our plan.
We continue to focus our spending and improving the safety and reliability of our spending of a system or drive assistance, many with 87% focused on safety and reliability.
Based on work completed year to date and planned spending for the remainder of the fiscal year. We continue to expect our fiscal 2019 capital spending to be between $1.65 billion and $1.75 billion.
From a regulatory perspective to date, we have completed 21 filings, we should add approximately $110 million in annualized operating income over fiscal 2017 fiscal 2020.
And we have six filings pending about.
Seeking about $87 million in annualized operating income.
We are on track to complete several of these filings during the fourth quarter with rates taking effect in the first quarter of fiscal 2020.
Assuming these proceedings resolved in line with our expectations.
We remain on track to meet our target of completing 160 million to $180 million annualized operating outcomes.
Our balance sheet continues remains strong and supports our capital spending program as of June Thirtyth equity total capitalization was 60% and we had approximately $2 billion liquidity under our credit facilities and through our equity forward agreements slide nine summarizes our fiscal 2019 financing activities.
Year to date, we have completed $2.1 billion of financing, including the issuance of $1.1 billion long term debt and $1 billion of equity.
During the quarter, we continue to utilize forward agreements under ATM to help meet our fiscal 2020 needs. We issued 1.1 million shares at an average price of one to one dollar for one.
Additionally, we settled the forward agreements were 1.1 million shares for net proceeds of approximately $100 million as of June Thirtyth, we had about $410 million remaining under our board agreements.
Details or equity forward activities, but also be found on slide nine.
As Mike mentioned in his opening remarks, we are well positioned to meet our fiscal 2019 earnings guidance range for dollars and 25 cents to 4035 cents per diluted share.
However, given the higher than expected Permian basin activity, we saw during the third quarter. We now expect to be at the higher end of this range slides 12, and 13 provides selected information underlying our fiscal 2019 guidance.
And we are well positioned to meet our five year annual EPS growth target of 6% to 8% through fiscal 2023, we'll be rolling forward. Our five year plan through fiscal 2020 for our fiscal year end earnings call in November .
Thank you for your time. This morning, I will now turn the call ill the call over to Kevin for some closing remarks Evan.
Thank you, Chris and good morning, everyone. Mike. Thank you for those kind remarks, we are deeply indebted to you for your leadership your vision and unwavering dedication and support for Atmos energy and every one of our 4700 employees.
I'm very excited about the future of Atmos energy and I look forward to continuing the execution of the successful strategy that came in Mike It put in place as we maintain our focus on our vision of being the nations safest provider of natural gas services.
A key to achieving that vision is to continue the evolution and refinement of our strategy by making investments in safety and reliability, while modernizing our business to sustain our company for the long term.
This straightforward focused improvement strategy benefits all stakeholders.
As we strive to safely provide excellent customer service in an environmentally responsible manner.
As we've discussed before increasing our spending 9% to 10% per year through fiscal 2023 requires that we also invest in our people and technology.
Im proud to report that during the third quarter, we crossed over the $1 million our mark for total cumulative hours of training provided at our state of the art Charles K volume Center, which opened in 2010.
This training is essential for our employees to become highly qualified gas professionals.
We continue to rollout our locus map digital asset data collection solution.
Through the first nine months of this fiscal year.
We've had approximately 35% of our company a contract construction crews trained on using this important technology.
And we continue to systematically rollout our advanced mobile leak detection technology.
That will enhance our ability to safely operate our system as Chris mentioned earlier.
Implementing a safety management system is another strategic focus.
While we have had components of a safety management system, including procedures policies and practices for many years the safety management system Formalizes, what we are doing and is an integral part supporting our vision of being the safest provider natural gas services.
We have completed our pipeline safety management system assessment and plan to have our high level roadmap developed for addressing gaps later this fall.
These are just a few of the examples of how our investments in training and technology position us for sustained success in the future.
In closing I would like to thank our 47 employees.
Their dedication to safely operating our system, while providing excellent customer service and getting back to the communities, where they work and live.
That is the biggest reason atmos energy will be successful for the long term.
We appreciate your time this morning, and now we'll take any questions you may have.
Thanks, operator.
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Our first question comes from Christopher Turnure with JP Morgan. Please state your question.
Good morning, everyone.
Very sorry to hear the news, Mike Best wishes to you and your family.
Thank you Chris.
As we look forward to fourth quarter earnings and potentially.
An analyst day again this year.
How can we think about the outlook for beyond the current plan kind of 2024.
And beyond.
Anything potentially changing there, especially given the acceleration of Capex that we saw out of you guys last year.
Chris This is Chris for size and good morning.
Our intent for this fall was to not have an analyst day, but we'll have an extended.
Fiscal year end earnings call will cover off the remainder of fiscal 19, and it really focused on where we are going to be going into fiscal 2020, and really the story and the strategy remains the same as we've talked about with with you and others on the call we have a long.
Backlog of work to do if you will just a lot of work to get done in terms of pipe replacement. So we will be you are just rolling it forward another year, you'll expect to see just a.
An increase in line with the the increase in capital spending that you've seen from us over the last several years.
Financing strategies can be pretty consistent with what you've seen as well that we'll update refreshing those numbers on that call that I think the key takeaway today is that the strategy is the same it would just be a roll forward of what we've demonstrated to us in 2023 at this point.
Okay and Chris Thanks.
Kind of all sounds great, obviously, and you feel like there's no customer bill pressures or even kind of balance sheet constraints. Despite the strength of your balance sheet right now that would come into play in that timeframe that would perhaps slow the rate base growth trend.
We're not seeing anything from a customer goal perspective, you can go back to our charts that we've shown that our bill is by far the lowest mill in the household from a utility perspective.
And you know the strength of our balance sheet and we're committed to to maintain the strike that balance sheet going forward.
Okay, Great and then my my second question is around.
Near term financing as you mentioned in the remarks, and I think the Q as well you priced around a million shares this quarter and then you also pulled down.
Around a million shares as well from I guess, one of the earlier ATM.
So.
Given your prior commentary on not I think it was not meeting any more equity this year from the ATM programs was there something that that change there or cause you to.
Tap that said equity during the quarter.
No no I think what we are indicating is that we were we didnt have any discrete equity needs in our last quarter call. We said we had no discrete equity issuance is planned for the end of fiscal 2020.
We do we did have the the proceeds available to us on the forward arrangements, which as you know expire.
As some of the most of the proceeds right now expire at the end of March was about a little over $100 million expiring at the end of September . So we're meeting to utilize those proceeds so we had intended all along.
To to draw down on those proceeds as capital needs.
Riser or cash needs arise in that period so.
All of that again is baked into our fiscal 19 guidance is baked into our five year plan the $5.40 a $5.80 and as we look forward.
We stated in the end the current five year plan, we have published by $5 billion to $6 billion incremental financing need and we intend to finance that in a balanced fashion using both long term debt and equity. So again, we will.
It will that that strategy is going to look very similar when we roll that forward in November but again be the financing that we did in the third quarter.
It's not to satisfy a flight 19 equity needs that will satisfy our flight 2020 needs beyond.
Okay Thats clear thank you Chris.
Thank you.
Our next question comes from Dennis Coleman with Bank of America. Please state your question.
Yes, good morning.
Let me add my my thoughts Mike never news that.
No one likes to get so certainly best wishes as you pursue your your your health and.
Thoughts with you your family as well.
Thanks, So much Dennis site, Alright, Alright, certainly, we'll miss all the opportunities Weve.
Add the talk in the past and I'll Miss seeing all you guys in the future, but again.
No as I mentioned in my comments I'm very optimistic that.
But by gear down on a year to have the opportunity to find a good solution for this.
Great.
I hope that that's the case congratulations also to you Kevin.
Best of luck with the new role and responsibilities.
Big shoes to fill but.
Great Great company to work with so.
Question Melissa Thank you.
A couple of questions for me.
I guess first on the expense side.
<unk> expenses did run up certainly little more than than we thought can you talk about sort of I guess the roll forward on the expense side some of it seems.
A bit.
A bit transient, but any any help you can give there Chris but would certainly be appreciated.
Yes, sure Dennis I mean, like I mentioned in the prepared remarks is really a continuation of what we've been experiencing.
And what we've been trying to accomplish from a risk based perspective.
And when we talk about the second quarter rolling into the third quarter. So that was.
Continuing to rollout the MLB technology that Kevin commented on we are it because it's new to us the indications that came in and just require a little bit more assessment a lot of that work is going on but over time, we expect that as we gain proficiency that that should come back into into line with the the two and half to 3.5% guidelines that we established for the five year plan last fall. Additionally, you know we talked about low pressure assessments.
And when you get an opportunity with some increases in margins, we're always looking to take risk off the table from an oil and have expected. So we've been increasing our.
I guess risk based on M. Worksites thats.
Inline inspection thats right of way maintenance that low pressure system assessments.
Anything we can do to to reduce risk.
In the current period that will benefit future periods. So that's the type of work that you're seeing.
In the OEM line item and we'll just continue to manage that going forward as needs to rise and as opportunities arise as well.
Okay. Okay. Thanks, thanks for that.
And then I guess.
On the leak detection technology.
Obviously, a fair amount set there.
I guess I thought I heard you say you've rolled it out to additional markets.
I think last quarter. It was just mostly Texas based but.
Can you talk about has has it have you rolled it out in all markets now.
Not at this Kevin not in all of our markets. We currently have 11 units here. We wrote addition, one out here with plans for the next fiscal year to row. Some additional units out to our West Texas area, we have an existing unit in Louisiana.
And.
One in Mississippi as well so thats those are the markets that we're talking about there.
Okay, all right that's it for me thank you.
Thank you Dennis.
Our next question comes from Ryan Levine with Citi. Please state your question.
Good morning.
I wanted to also echo some of the previous comments to that Mike sorry to hear about this development, but best of luck.
To you and your family.
And then I guess.
And then I guess in light of the question is can you just speak to the transition process and if this sort of setting.
And what are the steps over the next few quarters as.
As Kevin takes the C suite.
Sure This is Mike.
Right and then it's up as I mentioned in my comments. The succession plan has been in place for quite a while.
And even prior to that the way we operate.
Worked very closely with Kevin and the entire leadership team worked very closely together over the last two and a half years.
Our management Committee it.
Meets for a half a day and then informally several days a week. So we're completely in lock step.
Kevin and I work side by side and.
All of the initiatives that he'd been driving for scale and scope. So.
In a nutshell the transition is going to be extremely smooth.
And on eventful internally since we've been working so closely together all along as was mentioned that he and I are working more closely now, but as I mentioned earlier Hill still assume the president and CEO position on October one I will be still around and available to him and meet with them on a regular basis through the end of the calendar year and also as I mentioned Chem is well continue as executive chairman and.
He's he's always been tremendous really helpful to all of us as as an adviser so I know it.
Not similar to many other companies but.
At Atmos everybody's in the same.
We're we're in the same bullpen and dug out every single day of the week so its.
And then strategy as Chris said is not going to change its a matter of scaling sustaining our success and just executing well.
Taking care of our employees in the process, making sure they've got development opportunities the training they need we remain in compliance and.
All the things that we talk about regularly Kevin to add the responsibility for for the last couple of years, obviously executed by our division leadership and shared services leadership, but.
He's got a firm hand on the on the pillar right now so it will be a non event.
Okay. Thanks for the color and then a couple more specific questions.
In terms of the OEM cost inflation is over what period of time did you think there will be some type of elevated level as more sensitive.
Centres detect.
Additional opportunity for safety improvement.
By I think you know we were already seeing some.
Improvements in EMEA and the productivity of the crews and I would just say that we're going to be back in line with the 2.5% to 3.5% on him.
Target on an increase over the five year plan through 2023, and then we'll roll that forward in November of between 24.
Okay, and what was the impact of the basis differentials to your business. This past quarter I think you disclosed some numbers in previous quarters. So curious what the updated it was the impact quarter over quarter is about $4.5 million.
In in net income in the third quarter quarter over quarter driven.
Revenue at that contribution margin, which is effectively revenue for us so.
Okay.
And okay. That's helpful. I appreciate it thank you.
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Our next question comes from Stephen Byrd with Morgan Stanley . Please state your question.
Good morning.
Good morning, good morning.
Mark I, just want to say you'll be.
Dearly missed your great executive and a great person is just great to interact with.
So we're all written for you to address health issues successfully and we really wish you and your family all the best.
I can't thank you not for all your help over the years.
You will be missed.
Well. Thank you so much for everything you've done as well Steven appreciate it.
I can kind of look forward to working with your new role most of my questions have been addressed I thought I just.
Check really on the financing plan I think your your financing plan is very clear, but just given the.
Just a very low interest rate environment that we're in I, just thought I double check in terms of just additional opportunistic.
Ways to kind of lock in.
A lower cost of debt over a long period of time I think your average duration is already pretty long or 22 years, but I just thought I check if there yeah, just anything else that might be possible.
Yes.
Good question, Steve and that's something that we're we're evaluating right now we're mindful of where the markets have gone started here in the last week or so ago Youve pointed out our maturity average duration about 22 years for all in average our weighted average cost of debt right. Now is about 4.55%. After we effectuated. The two debt offerings that we've done this in this fiscal year. So as we look forward, we're certainly evaluating opportunities.
To further drive that the overall cost of debt down.
Nothing specific that I can comment on at this point.
Understood Thats all I have thank you.
Okay. Thank you.
Thank you there are no further questions at this time I'll turn it back to Jennifer Hill for closing remarks. Thanks.
Hey, Thank you for joining us today as a reminder, a recording of this call is available for replay on our website through November six 2019, we appreciate your interest.
In Atmos energy and thank you for joining us goodbye.
Thank you. This concludes today's conference all parties may disconnect have a great.