Earnings Call Transcript - ATO Q3 2024

Operator, Operator

Thank you for joining us. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to the Atmos Energy Corporation Fiscal 2024 Third Quarter Earnings Conference Call. I will now hand the conference over to Dan Meziere, Vice President of Investor Relations and Treasurer. Dan, you may begin.

Dan Meziere, Vice President of Investor Relations and Treasurer

All right. Thank you, Krista. Good morning, everyone, and thank you for joining our fiscal 2024 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 atmosenergy.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 forward-looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on slide 32 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsythe, our Senior Vice President and CFO. Chris?

Chris Forsythe, Senior Vice President and CFO

Thank you, Dan, and good morning, everyone. We appreciate your joining us and your interest in Atmos Energy. Yesterday, we announced fiscal year to date diluted earnings per share of $6 compared to $5.33 per diluted share in the prior year period. Our third quarter and fiscal year to date results continued to be driven by two things: regulatory outcomes reflecting increased safety and reliability spending and customer growth. Additionally, strong throughput revenues from APT, particularly during the third fiscal quarter, contributed to our performance. Regulatory outcomes in both of our segments increased operating income by $238 million and residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $18 million. Our pipeline and storage segment increased $19 million period over period. $11 million of this amount resulted from the technical mechanism realized during our third fiscal quarter. Several pipelines coming out of the Permian experienced planned and unplanned maintenance, which reduced takeaway capacity of robust associated natural gas production, while the spreads between the water heater on the western end of the APT system and deliver points to the eastern and southern ends of the system. We expect credit spreads to remain elevated through the end of our fiscal year. Excluding the $14 million of one-time bad debt adjustment we reported in Mississippi in the first quarter, consolidated O&M expenses increased by $16 million or about 3%. This increase is primarily due to higher employee-related costs, insurance premiums, and IT software maintenance costs, partially offset by a $15 million decrease in O&M in our pipeline and storage segment, primarily due to the timing of in-line inspection work. As expected, O&M in the third fiscal quarter trended higher than the prior-year quarter, and we anticipate O&M spending in the fourth fiscal quarter will trend higher as well, as we continue to focus our spending on compliance, maintenance, and system monitoring. We still expect fiscal '24 O&M to be in the range of $800 million to $820 million. Consolidated capital spending increased to $2.1 billion, up 8%, dedicated to improving the safety and reliability of our system. Our distribution segment has seen increased spending due to higher safety and reliability spending to support customer growth. Spending in our pipeline and storage segment is lower than the prior year due to timing. We remain on track to spend approximately $3.1 billion this fiscal year. Since the end of our second fiscal quarter, we implemented about $213 million in annualized regulatory outcomes, including all of this year's Texas GRIP filings and annual filings with the City of Dallas, Louisiana, and Tennessee. Year to date, we have completed $380 million in annualized regulatory outcomes. Currently, we have an additional $182 million in annualized outcomes in progress. Additionally, we made our first filing under APT's new system safety and integrity mechanism, seeking a $19 million increase in revenues. This new mechanism was approved in APT's last general rate case as a floating mechanism for costs incurred to address new federal and state safety-related regulations, meaning we will recognize the revenue and related O&M costs after review and approval by the Texas Railroad Commission, resulting in no impact to operating income. Our financial position continues to remain strong. We finished our third fiscal quarter with an equity capitalization of 61% and approximately $4.3 billion in liquidity. This amount includes $551 million in net proceeds available from our existing forward sale agreements that will fully satisfy our anticipated fiscal '24 equity needs and most of our anticipated fiscal '25 needs. In June, we completed a $325 million senior unsecured debt offering, tapping our existing 10-year 5.9% senior notes. As a result, our overall weighted average cost of debt as of June 30 stands at 4.1%, and our debt profile remains very manageable with a weighted average maturity of approximately 17 years. As we head into the fourth quarter of the fiscal year, we now believe our fiscal '24 earnings per share guidance will be at the higher end of our reaffirmed earnings per share guidance range of $6.70 to $6.80. Our anticipated financing plan for fiscal 2024 is complete. All regulatory outcomes that can impact fiscal '24 have been implemented. As I mentioned earlier, we anticipate spreads for APT's throughput business will remain elevated, which will modestly contribute to our Q4 results. We have a reasonably clear line of sight regarding consistent compliance, maintenance, and monitoring we will be performing in the fourth quarter. As a reminder, our guidance range includes two items totaling $0.17 that we will exclude when we initiate our '25 guidance in November. The first item is the Texas property tax benefit that we have been discussing all fiscal year, which should favorably impact fiscal '24 results by $0.10. Additionally, the one-time Mississippi bad debt adjustment represented $0.07. We continue to anticipate 6% to 8% earnings per share growth in adjusted EPS through fiscal '28. Thank you for your time today, and I will turn the call over to Kevin for his update and some closing remarks. Kevin?

Kevin Akers, President and CEO

Thank you, Chris. Good morning, everyone, and thank you for joining us today. We continue to benefit from solid economic growth in our service territory. For the 12 months ended June 30, we added 57,000 new customers, with nearly 45,000 of those new customers located in Texas. The Texas Workforce Commission reported in July that the seasonally adjusted number of employed individuals reached 14.2 million. Texas added jobs at a faster rate than the nation over the last 12 months ending June; adding over 267,000 jobs, representing a 1.9% annual growth rate. Industrial demand for natural gas in our service territories also remains strong. During the third quarter, we added 10 new industrial customers with an anticipated annual load of approximately 2 Bcf, once they are fully operational. Fiscal year to date, we have added 32 new industrial customers with an anticipated annual load of approximately 6 Bcf once they are fully operational. On a volumetric basis, 6 Bcf of anticipated industrial load is equal to adding approximately 110,000 residential customers. During the first nine months of the fiscal year, our customer support agents and customer advocacy team continued their outreach efforts to energy assistance agencies and customers, helping over 47,000 customers receive nearly $19 million in funding assistance. Our consistent performance reflects the vital role we play in every community: safely delivering reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. We appreciate your time this morning, and we will now open the call to questions.

Operator, Operator

Your first question comes from the line of Nicholas Campanella with Barclays.

Nicholas Campanella, Analyst

I just wanted to first quickly touch on financing. Could you just further discuss the equity needs for '25? And definitely, given '25 largely done with all our instruments and the recent renewal of ATM, just how does that better facilitate the equity needs in 2025? Thanks.

Chris Forsythe, Senior Vice President and CFO

Yeah. Well, this is Chris. Good morning and thanks for joining us. We typically issue between $600 million and $800 million a year in equity through the ATM program that we have seen. As I mentioned a few minutes ago, we had $551 million on hand at the end of June, which will mostly satisfy our fiscal 2025 needs. I think that should provide you enough information to update your models.

Nicholas Campanella, Analyst

That's great. Thanks for the details. Very helpful. Maybe just quickly turning to O&M execution for '25, you raised the midpoint guidance by $20 million last quarter. And I guess things are on track for this year. Could you talk about going forward, what are some of the key items you're focusing on for O&M execution? And how are you benchmarking with a 3.5% annual increase guidance? Thanks.

Kevin Akers, President and CEO

Yeah, this is Kevin. Good morning. Glad to have you join us today. Again, we're working through the remainder of fiscal '24 right now, and we anticipate it will be the same items as we move into '25. We'll have additional detail and color as we get to our November call on '25. The drivers around O&M continue to be hydrostatic testing, line locating, integrity regulations, and markable placements on difficult, hard-to-locate lines. We are looking for opportunities to enhance those or pull things forward when we have the ability to do that. So again, we anticipate seeing the same items that we're focused on this year in '25.

Chris Forsythe, Senior Vice President and CFO

I'll add to that as well. As I said at the end of my prepared remarks, we're still anticipating 6% to 8% EPS growth off of the adjusted EPS targets for fiscal '24. So that's the overall theme to take away. We will have some variations in the O&M spending. As Kevin mentioned, we're still guiding to that 6% to 8% growth target.

Operator, Operator

Your next question comes from the line of Richard Sunderland with JPMorgan.

Richard Sunderland, Analyst

Considering the 2024 results, you've mentioned the $0.17 of one-time items. I'm interested in how we should assess the remainder of the business looking into 2025, excluding the APT spread benefit. This means we should evaluate your top line while subtracting the $0.17 and potentially another approximately $0.10 for the spread gain.

Chris Forsythe, Senior Vice President and CFO

I agree with your assessment, Richard. If we exclude the $0.17 from your expected outcome for fiscal '24 APT, we anticipate some spread activity next year, although it’s hard to predict exactly. Therefore, I wouldn’t want you to overlook the impact of the two one-time items when considering your growth targets of 7%, 8%, or 9% for fiscal 2025, as we will have some activity. This year, particularly in the third quarter, we experienced elevated spreads, and as you've noted, it is expected that these will return to the mean, indicating that some activity will still occur.

Richard Sunderland, Analyst

Okay, great. That's really helpful. And I guess one quick follow-up on that spread opportunity. I know you referenced in the script kind of a continuation into 4Q. Is that already contemplated in the higher-end guidance language, or is that potential upside depending on how that materializes?

Chris Forsythe, Senior Vice President and CFO

No, that's all contemplated in the guidance that we've updated here this morning.

Operator, Operator

Your next question comes from the line of Ryan Levine with Citi.

Ryan Levine, Analyst

To follow up on the APT spread dynamics. What are you assuming for the Matterhorn in-service date with the current '24 guidance? Are you assuming that the spread means right for the remaining portion of your fiscal year?

Kevin Akers, President and CEO

Yeah. As Chris said, again, we don't anticipate any further maintenance this year on the upstream segments of APT that would impact the spreads right now. They've mitigated from the highs we've seen over the last quarter somewhat. Going forward, definitely Matterhorn will be coming on. I think, if you read some of the documentation from the upstream folks, it should be coming on sometime in September, October, or early fall. We just have to watch and see what that does for the dynamics out there. As we typically get into the winter period, demand will drive it further from there on the spread impact. But again, I’d like to remind everyone that APT adjusts to serve the customers behind it, the LDCs behind it, and when we have an opportunity, we will move that gas across our system. So right now, again, we don't anticipate any further maintenance upstream that would impact the spreads any further than what we're currently seeing today.

Ryan Levine, Analyst

Okay. And then a follow-up on that. Given the strong performance this fiscal year on APT, does that have any implications for resetting the threshold at which you get the sharing mechanism in future time periods?

Kevin Akers, President and CEO

No, that's set in the rate case itself going forward, so the next time that potential could be looked at would be in the next required filing in five years.

Chris Forsythe, Senior Vice President and CFO

As a reminder, that threshold was set at $106.9 million. That's the benchmark we need to achieve to begin sharing above that amount. Of course, it works the other way too if we fall short, but $106.9 million is the target we're looking at.

Ryan Levine, Analyst

Okay. And last question for me. To the extent that there is new gas generation or infrastructure built in your service territory, do you see any opportunities on the LDC side to maybe build some infrastructure to support the movement of gas associated with some of the gas generation that may be coming?

Kevin Akers, President and CEO

Yeah. As we discussed on previous calls, there's always that opportunity out there. But let's remember the power generators that we currently supply behind the APT system; we're one of several suppliers for them, so they can flex between suppliers at their discretion. We'll just continue to keep an eye on that over the next few years and see how that develops. But again, we would be one of several suppliers to those facilities.

Operator, Operator

And that concludes our question and answer session. I will now turn the conference back over to Dan for closing remarks.

Dan Meziere, Vice President of Investor Relations and Treasurer

Thanks. We appreciate your interest in Atmos Energy, and thank you again for joining us today. A reminder, a recording of this call is available for replay on our website. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.