Earnings Call Transcript - ATO Q2 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Atmos Energy Corporation Fiscal 2025 Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. I will now hand today's call over to Dan Meziere, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Dan Meziere, Vice President of Investor Relations

Thank you, Tamika. Good morning, everyone, and thank you for joining our fiscal 2025 second 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 29 and are more fully described in our SEC filings. With that, I will turn the call over to Kevin Akers, our President and CEO. Kevin?

Kevin Akers, President and CEO

Thank you, Dan, and good morning, everyone. We appreciate your interest in Atmos Energy. Yesterday, we reported year-to-date fiscal '25 net income of $837 million or $5.26 per diluted share. We updated our fiscal '25 earnings per share guidance to a range of $7.20 to $7.30. This performance continues to reflect the commitment, dedication, focus, and effort of all Atmos Energy employees to successfully modernize our natural gas distribution, transmission, and storage systems, while safely providing reliable natural gas service to 3.4 million customers across 1,400 communities in 8 states. For the quarter, we continued to experience robust growth driven by continually favorable employment trends in Texas. For the 12 months ended March 31, 2025, we added nearly 59,000 new customers, with almost 46,000 of those new customers located in Texas. The Texas Workforce Commission reported in April that the seasonally adjusted number of employees reached a new record high at over 14.3 million. Texas again added jobs at a faster rate than the nation over the last 12 months, adding nearly 192,000 jobs, representing a 1.4% annual growth rate. Commercial customer growth remained solid as well, with approximately 850 customers connecting to the system during the second quarter and nearly 2,000 customers connecting to the system fiscal year-to-date. Industrial demand for natural gas in our service territories also remained strong. During the second quarter, we added 9 new industrial customers with an anticipated annual load of approximately 8 Bcf once they are fully operational. Fiscal year-to-date, we've added 20 new industrial customers with an anticipated annual load of approximately 11 Bcf once they're fully operational. On a volumetric basis, that is equivalent to adding approximately 204,000 residential customers. This growth continues to highlight the value and vital role natural gas plays in economic development across our service territories. In APT, we continue our work on several projects that will enhance the safety, reliability, versatility, and supply diversification of our system, as well as support the continued growth we are seeing in the local distribution companies behind APT system. During the quarter, work started on Phase 2 of APT's Line WA Loop. This project will install approximately 44 miles of 36-inch pipe to the west of Fort Worth to support growth in the northwestern portion of the DFW Metroplex. This phase is expected to be completed by the end of the calendar year. Work continues on APT's Bethel to Groesbeck project as well. As a reminder, this project will install approximately 55 miles of 36-inch pipe from our Bethel storage facility to our Groesbeck compressor station to provide additional pipeline capacity to the growing DFW Metroplex and to the Interstate 35 corridor. This project is scheduled to be placed in service in late calendar year 2025. APT completed 2 more interconnect projects during the quarter. Fiscal year-to-date, APT has added over 1 Bcf of additional gas supplies that will enhance supply reliability and versatility to support APT LDC customers. During the second quarter, our customer support associates and service technicians once again received a 98% satisfaction rating from our customers, reflecting the exceptional customer service they provide each and every day. Our customer advocacy team and customer support agents continue their outreach efforts to energy assistance agencies and customers during the first 6 months of the fiscal year. Through those efforts, the team helped nearly 32,000 customers receive over $10 million in funding assistance. Our results for the first half of fiscal '25 reflect the hard work and dedication of all Atmos Energy employees as we continue to safely deliver reliable and efficient 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 Forsythe, Senior Vice President and CFO

Thank you, Kevin, and good morning, everyone. Thank you for joining us today. As Kevin mentioned, diluted earnings per share for the first 6 months of the fiscal year was $5.26, which is a 6.7% increase compared to the previous year. Operating income rose to $1.1 million, a 14.6% increase for the first half of the fiscal year. I'd like to highlight the main factors contributing to our financial performance. Rate increases in both of our operating segments totaled $185 million. Growth in residential and commercial customers in our distribution segment, along with higher industrial load, boosted operating income by an additional $14.4 million. Revenues in our Pipeline and Storage segment jumped by $11.4 million, thanks to a 10% increase in volumes transported across our system, combined with wider spreads between the Waha Header and the western end of the APT system and delivered points on the eastern end and southern end of its system. APT also saw an $8 million increase due to higher capacity contracted by tariff-based customers driven by their rising peak day demand. Consolidated operating and maintenance expenses rose by $74 million, influenced by several factors. Employee-related costs increased by around $27 million mainly due to a larger workforce and overtime to support company growth. Additionally, bad debt expenses went up by $15 million. We previously recognized a $14 million one-time reduction in bad debt expenses last fiscal year due to a regulatory change regarding our bad debt expense recovery. We also incurred a $14 million increase in operating and maintenance costs related to greater line locating, pipeline inspections, and system monitoring activities. Lastly, there was a $9.4 million increase in APT system safety and integrity expenses, balanced by a corresponding increase in revenue, resulting in no change to operating income. From a regulatory standpoint, we have initiated approximately $153 million in annualized regulatory outcomes and have over $389 million in progress. We expect to implement between $175 million and $180 million in annualized operating income increases in fiscal '25, with the remainder anticipated to be implemented in the first quarter of fiscal '26. This includes $39.2 million requested in our West Texas general rate case. On April 25, the administrative law judge issued a proposal with key recommendations including a 9.8% return on equity and acceptance of our actual capital structure, which consists of a 60.97% equity layer approved over a rate base of $1.2 billion. It also authorized the capitalized cloud computing costs to be treated as fixed assets amortized over a 15-year period instead of as operational maintenance line items, and allowed two regulatory asset trackers. The first tracker covers system safety integrity, letting us defer operational maintenance costs exceeding $3.5 million incurred after June 30, 2024, due to the new safety and integrity regulations. These costs will be considered for recovery in a future rate filing. The segment provides regulatory asset or liability treatment that accounts for changes in federal and state income taxes, including the corporate alternative minimum tax. The proposed decision is set to be reviewed by the Railroad Commission on May 13. If approved, the settlement will lead to a $30.6 million boost in annual operating income. In our Mid-Tex division, the two general rate cases we filed last fall for the ATM Cities Coalition and our environmental customers were merged into a single general rate case during the second fiscal quarter. This consolidated case represents about 15% of the Mid-Tex division's customer base. On April 30, we presented a proposed settlement for this consolidated case to the administrative law judge. The main terms of the proposed settlement, including return on equity, capital structure, and accounting treatments, are consistent with the West Texas proposal. It also includes approval of a rate base attributed to these customers, amounting to around $1.1 billion. If the administrative law judge endorses the settlement, we expect it to be reviewed by the Rail Commission on June 10. If approved, this will increase annual operating income by $6.7 million. Furthermore, we expect the Rail Commission to assess APT's 2024 GRIP line for $77.2 million during its meeting on June 10. Lastly, in Kentucky, we completed our general rate case hearings this week before the Public Service Commission and anticipate a final order in our fiscal fourth quarter. Our balance sheet and financial position are solid. Our equity capitalization was 61% as of March 31, and we do not have any short-term debt outstanding. In the second quarter, we extended our four credit facilities totaling $3.1 billion. By the end of the quarter, we had $5.3 billion in available liquidity for operations. This includes $1.7 billion of net proceeds from our ATM activities, expected to meet the remaining equity needs for fiscal '25 and all anticipated equity requirements for fiscal '26. Our year-to-date performance enables us to raise our fiscal '25 earnings per share guidance from a range of $7.05 to $7.25 to a new range of $7.20 to $7.30. We expect the remaining contribution to fiscal 2025 earnings per share to be recognized relatively evenly across the latter half of the fiscal year. The increase in our guidance mainly derives from the robust performance of APT's through-system business in the first half of the fiscal year and our outlook for this segment for the remainder of the year. Following a strong fiscal '24 performance, we began fiscal '25 expecting a return to more normalized through-system marketing conditions due to increased takeaway capacity in the Permian Basin. However, we now foresee APT's through-system business performing slightly below last year's figures, with the revenue timing expected to differ from fiscal '24. By March 31, about half of the projected contributions for fiscal 2025 from this aspect of APT's business have already been recognized. Last year, nearly 80% of APT's through-system business was acknowledged in the second half. Additionally, we expect ad valorem taxes to be lower than anticipated and have ramped up our operational maintenance spending to ensure we stay ahead of compliance work to enhance the safety and reliability of our system. We also plan to conduct additional maintenance over the summer in preparation for the coming winter heating season. We now estimate our operational maintenance expenses, excluding bad debt, to be between $860 million and $880 million. A significant portion of the year-over-year increase has already been accounted for, and we project operational maintenance in the latter half of fiscal '25 to be only slightly higher than in the same period last year. Finally, our capital spending guidance remains aligned with expectations, targeting approximately $3.7 billion. We appreciate your time this morning and your interest in Atmos Energy. I will now open the call for questions.

Operator, Operator

Your first question comes from Richard Sunderland with JPMorgan.

Richard Sunderland, Analyst

Appreciate all the commentary here. I wanted to start with guidance. It sounds like APT through-system activity is certainly contributing to some of the upside here. Is the higher guidance for 2025 a fair base to think about growth going forward? Or does some of that normalization that you had originally anticipated for '25 need to be factored in for growth for '26 and beyond?

Chris Forsythe, Senior Vice President and CFO

Yes. It's a good question, Rich. So we're still looking at what will happen for the rest of the summer. As you know, conditions are very volatile in the market right now. And as we set our fiscal '26 plans, we'll take a snapshot of market conditions, probably late summer, early fall, prior to us releasing our fiscal '26 guidance and updated 5-year plan, to really reflect what we think will be truly reflective of that business for the next fiscal year.

Richard Sunderland, Analyst

Okay. Got it. Sounds like more to come. Again, similarly on the O&M, it seemed like some of the higher O&M for '25 is a pull forward from '26. Is that a fair characterization? How are you thinking about the higher O&M this year and any efforts that de-risk '26 on that front?

Chris Forsythe, Senior Vice President and CFO

Yes. A couple of things. There's certainly an opportunity to pull forward, as I described with the lower-than-planned expense versus our expectations. Also, we've talked many, many times; we are not a just-in-time company from an O&M spending perspective. So if we have opportunities to further stay ahead of our compliance deadlines, or if we see opportunities coming out of the winter heating season, this last 6 months, you need to get right for the next 6 months, we'll perform some additional maintenance in the summer months when our crews and folks are available. So it's a little bit of both. It's just kind of opportunistic based on the operating conditions of the system at this point in time, as well as taking advantage of opportunities to pull forward a little bit from future periods.

Kevin Akers, President and CEO

Yes. The only thing I'll add to that is that, again, with the lesson we have of being in growth properties right now, we had an increase in the number of line locating from the previous year. And we'll continue to see that probably going forward, just given the economic conditions that I discussed earlier in my remarks. So that's the other part of that O&M, if you will; sometimes with growth, people don't see that you'll have the increased line locating expense as well.

Richard Sunderland, Analyst

Got it. That's very helpful. Just a quick follow-up on the O&M discussion there. It sounded like in the Texas GRCs that there is some retroactive component to the reg asset tracker you were referencing. I may not be understanding all the puts and takes there. But just wanted to clarify, if you get the final orders in line with settlement, is that upside from that retroactive component, and I mean, upside versus '25 guidance, to be clear.

Chris Forsythe, Senior Vice President and CFO

At this point, we reflected in our guidance our expectations for O&M and both the cloud computing treatments as well as the SSI current guidance.

Operator, Operator

Your next question comes from the line of Nick Campanella with Barclays.

Fei She, Analyst

This is actually Fei for Nick today. I just want to quickly follow up on financing. It seems like year-to-date equity issuance is slightly higher than year-to-date 2024. Again, I think with a higher capital plan, higher rate base growth, can you update us on the equity financing for the rest of the year, if there are any changes from the messaging from last quarter? And also kind of seeing the interest rate swap to be in a similar spot as last quarter. Just generally, can you speak to the strategy of managing the costs over there as well?

Chris Forsythe, Senior Vice President and CFO

Sure. This is Chris. Our financing strategy remains consistent with what we've outlined in previous quarters and over the last several years. We will continue to finance the corporation in a balanced manner, using a mix of equity and long-term debt. Equity will come through the ATM, which currently reflects a $1.7 billion amount priced to meet our anticipated equity needs for fiscal '25 and 2026. We'll draw from this as the corporation's cash needs arise. Regarding long-term debt, our existing swap is aligned with our expected debt issuance in the fall, as we plan for a 30-year issue. At this time, we do not foresee any changes in executing that transaction or in leveraging that swap to benefit our customers.

Fei She, Analyst

Got it. That's very helpful. And I just want to follow up on economic development, and seeing the tremendous growth in Texas driven by C&I customers. Could you talk about, first of all, definitely generally the gas need in the region? And obviously, you're adding a large quantity of new gas demand each quarter. I guess at this point, is there any pipeline of projects you're working on, or if there's any quantifiable backlog that you can discuss? I'll leave it there.

Kevin Akers, President and CEO

Yes. I'm not sure about your question on backlog. We don't have a backlog per se. I talked about the 2 high-priority projects for APT, the WA Loop and Bethel to Groesbeck project right now. Additionally, we're finishing up work on our third salt-dome cavern as part of our integrity maintenance program. We anticipate that to be ramping up sometime in the next 9 to 12-month period that's out there. Everything else is all scheduled work that we have lined out on a 1-, 3-, and 5-year basis according to the reliability, supply versatility and/or our risk model safety concerns or direction that way. Now, as we have in our slide deck, we point to 85% investment on capital for safety, reliability for the fiscal year-to-date period.

Operator, Operator

Your next question is from Julian Dumoulin at Jefferies.

Unidentified Analyst, Analyst

This is Park on for Julian. Just really quick, legislatively, just wondering what are some of the key bills you guys monitor and what potential benefits or implications do they carry for your business? Like, for example, we noticed there's HB-4384 regarding the standalone depreciation tracker for gas LDCs; do you see that as a potential benefit for your business? Just any color on that would be helpful.

Kevin Akers, President and CEO

Yes. We continue to monitor all the sessions across our 8 states. We have 2 that are currently closed or concluded their session, Mississippi and Kentucky. Don't want to get too far ahead of the work that's continued to go on across our legislative bodies right now. But we do see some bills out there that have our interest right now, but we think it needs to go through the final steps of the legislative process. And then if they're related to the utility side of the business, they have to go to that particular jurisdiction's commission to see how it falls into either tariffs or rules or action upon for that company. So I don't want to get too far out in front of what the legislature is going to do for the remaining session. But again, we're keeping an eye on everything that's out there.

Unidentified Analyst, Analyst

That's very clear. And maybe just another housekeeping question. So since you raised the FY '25 EPS guidance, so the new guidance midpoint is now $7.25, should we use the new EPS guidance midpoint as the new EPS base?

Chris Forsythe, Senior Vice President and CFO

When you say new EPS base, what do you mean there?

Unidentified Analyst, Analyst

Is it for calculating the 5-year CAGR?

Chris Forsythe, Senior Vice President and CFO

At this point, I think that's a pretty fair assumption.

Operator, Operator

Your next question is from the line of Paul Fremont with Landenberg Bauman.

Paul Fremont, Analyst

Congratulations on a strong quarter, and my question has been answered.

Operator, Operator

Your next question is from the line of Christopher Jeffrey with Mizuho Securities.

Christopher Jeffrey, Analyst

Congrats on a quarter...

Kevin Akers, President and CEO

We can't hear you on this end.

Christopher Jeffrey, Analyst

Sorry, is that better?

Kevin Akers, President and CEO

That's better.

Christopher Jeffrey, Analyst

Okay. So just a couple of quick ones from me. I just noticed the timing for the Colorado rate case expectation got pushed back a bit. Just any thoughts on timing there and expectations for when you get to that case?

Kevin Akers, President and CEO

No, that's something we're always looking at. What we have going on in the jurisdiction where we have things going on in other jurisdictions, and we're in ongoing conversations with our regulatory jurisdiction. So I wouldn't read a lot into that at this point.

Christopher Jeffrey, Analyst

Great. And then maybe just on the West Texas, the cloud computing costs that you mentioned, Kevin, in the opening remarks, just kind of expectations for that to be implemented more wholesale across Texas or any other states? Does that kind of change how you're approaching thinking about those types of costs within the rate base?

Chris Forsythe, Senior Vice President and CFO

I just kind of view this as a continuation of our ongoing regulatory strategy or seeking to reduce lag where we can. Oftentimes, we'll start with an individual jurisdiction, who will include something into the regulatory construct. We then try to seek to replicate that in other states to the best of our ability. So we'll see where the rail commissions vote comes down next week. And then after that, from the May 13 for West Texas and again from Mid-Tex on June 10. And then we'll see if it makes sense for us to bring that to other jurisdictions within the enterprise.

Operator, Operator

Your next question is from the line of Ryan Levine with Citigroup.

Ryan Levine, Analyst

Just a quick one. In terms of APT expansion projects, the business continues to grow pretty materially. What are the underlying growth assumptions that embed the expansion projects that you have underway? And what conditions would merit further expansion or upside to your existing plans?

Kevin Akers, President and CEO

It's all part of our planning process. Again, it's based on what the city models are and what they're seeing for growth population increases across the service territories, and what we're seeing for demand anticipated capacity requirements off of that growth. We put those in our models and then try and forecast out when we expect that demand to show up and make sure we have the pipe and the supply already there to meet those anticipated demands. That's something we go through several times a year and then reaffirm again with our customers what their NVQs are as we head into winter, then post winter on APT, we will review what actual NVQs they achieved and will reset the go-forward basis that drives our modeling for the next several years.

Ryan Levine, Analyst

So given the winter is largely behind us, has that refresh already occurred for this calendar year, so that we wouldn't expect any material changes until a review post-winter 2026 of expansion opportunities?

Kevin Akers, President and CEO

The review is ongoing at this point. We continue to have conversations with those LDCs behind our city gate there on APT, and we'll look to make sure those are reset prior to heading into the next heating season, if any adjustments at all are required.

Operator, Operator

At this time, there are no further questions. I will now hand today's call back over to the presenters for closing remarks.

Dan Meziere, Vice President of Investor Relations

We appreciate your interest in Atmos Energy, and thank you again for joining us today. A recording of this call is available for replay on our website through June 30. Have a good day.

Operator, Operator

This does conclude today's call. Thank you for joining. You may now disconnect your lines.