Atmos Energy Corporation

Greetings and welcome to the Atmos Energy fourth 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, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Dan Mazur, Vice President of IR and Treasurer. Thank you, sir.

You may begin. Thank you, Diego. Good morning, everyone, and thank you for joining us today. With me this morning 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. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of the non-GAAP measures to the closest GAAP financial measure. 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 43 and are more fully described in our SEC filings. I will now turn the call over to Chris Forsyth.

Thank you, Dan, and good morning, everyone. We appreciate your interest in Atmos Energy and are happy that you could join us this morning. Yesterday, we reported fiscal 2020 diluted earnings per share of $4.89, compared to diluted earnings per share of $4.35 reported in the prior year. As a reminder, our fiscal 2020 results included a one-time non-cash income tax benefit of $21 million or 17 cents per diluted share that we recognized during the third fiscal quarter related to a legislative change in Kansas that reduced our state deferred tax rate. Excluding this non-recurring benefit, diluted earnings per share for fiscal 2020 was $4.72. This represents the 18th consecutive year of rising earnings per share. In summarizing the year, the pandemic began to impact the economies of the states we serve at the end of our winter heating season. By that time, we had earned 70% of our distribution revenue for fiscal 20. Given the economic uncertainty at that time, we were conservative about the anticipated non-residential load loss for the third and fourth quarter. And we planned to reduce O&M activities during the third and fourth quarters to keep our employees healthy and to align spending with anticipated revenues. Our residential load loss during the last six months of the fiscal year was less severe than we had originally anticipated. And we maintained our O&M spending in the back half of the fiscal year in line with the revised guidance we issued after our second fiscal quarter. As a result, our fiscal 2020 EPS came in at the higher end of our earnings guidance range of $4.58 to $4.73. Taking a closer look, Consolidated operating income rose over 10% to $824 million. Slides 5 and 6 provide details of the year-over-year changes to operating income for each of our segments. I will touch on a few of the fiscal year highlights. Rate increases in both of our operating segments, driven by increased safety and reliability capital spending, totaled $140 million. We also experienced a $14 million increase in distribution operating income, primarily due to customer growth in our mid-tech divisions. During the 12 months ended September 30, our mid-techs division experienced net customer growth of 1.5%. On a consolidated basis, we experienced net customer growth of 1.2% over the same period. We did experience a $6 million reduction in operating income, primarily due to a 13% decline in commercial consumption in our distribution segment during the last six months of the year. We also experienced a $6 million decline in service order revenue, primarily due to the suspension of collection activities since March of this year. In our pipeline and storage segment, we experienced a net $14 million decrease through system revenue. Volumes declined 17% and prices declined 13% due to reduced associated gas reduction in the Permian Basin. Consolidated O&M expense for fiscal 2020 was flat compared to 2019, in line with our expectations. O&M in our distribution segment was about $8 million lower than the prior year, reflecting lower employee, travel and training costs, partially offset by an increase in bad debt expense. Lower spending in our distribution segment was offset by higher spending for system maintenance activities in our pipeline and storage segment, most of which was completed during the first half of the fiscal year. Consolidated capital spending increased 14% to $1.94 billion, with 88% of our spending directed towards investments to modernize the safety, reliability, and environmental performance of our system. With this spending, Our team replaced approximately 845 miles of distribution and transmission pipe and 55,000 service lines across the eight states in which we operate. In fiscal 2020, over 90% of our capital spending began to earn a return within six months of the test period end. We accomplished this by implementing $160 million in annualized operating income increases. And since the end of the fiscal year, We've reached agreement with our regulators to implement an additional $106 million in annualized operating income during our fiscal 2021 first quarter. As of today, we have three filings pending, seeking about $12.5 million. Slides 30 to 42 summarize our regulatory activities. During fiscal 2020, we successfully executed a long-term financing strategy while maintaining the strength of our balance sheet and further enhancing our liquidity positions. we completed over $1.6 billion of long-term debt and equity financing. We fully satisfied our fiscal 20 equity needs through our ATM equity sales program. Under the program, we issued 4.8 million shares under forward agreements for $523 million and settled 6.1 million shares for net proceeds of $624 million. As of September 30th, we had about $345 million remaining under equity forward arrangements. This equity financing complemented the $800 million in long-term debt financing we issued last fall and the $200 million term loan we executed in April. As a result of these financing activities, our equity capitalization was 60% as of September 30th. Additionally, due in part to the addition of $700 million of new credit facility capacity, we finished the fiscal year with approximately $2.6 billion in liquidity, including cash held in escrow under equity foreign arrangements. The strength of our balance sheet and liquidity leaves us well positioned as we move into fiscal 2021. Details of our financing activities, including our equity foreign arrangements, as well as our financial profile can be found in slides 9 through 12. Looking forward, fiscal 21 will represent the 10th year of executing our operating plan to modernize our distribution, transmission, and storage systems. The fundamentals of our operating plan remain the same. Yesterday, we initiated our fiscal 21 earnings per share guidance in the range of $4.90 to $5.10. Consistent with prior years, we expect about two-thirds of our earnings will come from our distribution segment. Over the next five years, we anticipate earnings per share will grow 6% to 8% per year. By fiscal 25, we anticipate earnings per share to be in the range of $6.30 to $6.70. From a revenue perspective, we have assumed no material changes to our residential revenue as a result of COVID-19. However, we continue to remain cautious about our non-residential revenue due to the continued economic uncertainty and the fact that we are now heading into the winter heating season. Although it is difficult to precisely estimate the potential load loss that we might experience, we perform multiple sensitivity scenarios as we consider the fiscal 21 earnings for share guidance. Slide 18 summarizes our key distribution segment revenue attributes. and provides EPS sensitivities for the full fiscal year for each 1% change in sales volumes by customer class. And as you're aware, the performance of our pipeline storage segment is predominantly driven by APT. As a reminder, over 80% of APT's revenues are earned from delivery services to LDCs, including our mid-tech division, under a straight fixed variable rate design. The remainder of APT's revenues relates to a through-system business and other ancillary pipeline services. APT only keeps 25% of the difference between actual revenues earned from these activities and the approved $69 million benchmark in its rate design. Our Fiscal 21 guidance reflects current market conditions for the small portion of APT's business. From an O&M perspective, we have assumed that we will execute our normal O&M program as we continue to focus on compliance-based activities that address system safety. These activities include enhanced league surveys, pipeline integrity work, work to address FIMS' new integrity management rules that became effective July 1, 2020, and continue records establishment and retention. Similar to fiscal 20, we do have some flexibility around the timing of this O&M spending, which could help us align spending with potential changes to revenue. As we continue to focus on safely operating our system, we continue to assume O&M deflation of 3% to 3.5% annually through fiscal 25. Additional details can be found on slides 16 and 17. Fiscal 21 capital spending is expected to rise about 7.5% and is expected to range from $2 to $2.2 billion. Approximately 85% of the spending will be dedicated to safety and reliability spending, which will also reduce methane emissions from our system. Approximately 73% of the spending will be allocated to our distribution segment. Over 90% of our consolidated capital spending is expected to begin earning a return within six months of the test period end. Continued spending, persistent replacement, and modernization will be the primary driver for the anticipated increase in capital spending, net income, and earnings per share through fiscal 25. As you can see on slide 21, we anticipate capital spending to increase about 7 to 8 percent per year off of fiscal 2020 spend levels for a total of $11 to $12 billion over the next five years. This should support rate-based growth in about 12 to 14 percent per year. This translates into an estimated rate base of $19 to $20 billion in fiscal 25, up from about $11 billion at the end of fiscal 2020, as you can see on slide 22. Annual filing mechanisms will be the primary means to which we recover our capital spending. These mechanisms enable us to more efficiently deploy capital and generate the returns necessary to attract the capital we need to finance our investments. And these mechanisms produce a smaller impact to customer bills, while providing the regular rate adjustments that support our ongoing system modernization efforts. We have assumed no material changes to these mechanisms through fiscal 25. In fiscal 2021, we anticipate completing filings for $195 million to $215 million in annualized regulatory outcomes that will impact fiscal years 2021 and 2022. Moving to slide 24, the library of financial performance in fiscal 2020, Yesterday, Atmos Energy's board of directors approved a 148th consecutive quarterly cash dividend. The indicated dividend for fiscal 2021 is $2.50, an 8.7% increase over fiscal 2020. We continue to expect dividends per share to grow in line with earnings per share over the next five years, and we will continue to target a payout ratio of approximately 50% as it strikes the right balance between using funds to invest in the modernization of our system and providing a reasonable return to our shareholders who support our operating plans with their investments. This five-year plan also continues the financing strategy we've been executing over the last few years. It balances the interest of our customers and our investors while preserving strong credit metrics that minimize the cost of financing. Based upon our spending assumptions, we anticipate the need to raise between $6.5 and $7.5 billion in incremental long-term financing over the next five years. The strength of our balance sheet enables us to continue to use a prudent mix of long-term debt and equity in order to maintain a balanced capital structure with a targeted equity to total capitalization ratio ranging from 50% to 60% inclusive of short-term debt. This strategy is summarized in slide 25, and consistent with prior year plans, our financing plan has fully reflected in our earnings per share guidance through fiscal 2055. In October, we complete a $600 million 10-year senior note issuance with a coupon of 1.5%. As a result, our overall weighted average cost of debt as of October 1, 2020, stands at 3.94%. And our debt profile remains very manageable with a weighted average maturity of 19 years. From an equity perspective, the equity forwards we executed during fiscal 20 will satisfy a significant portion of our expected equity needs for fiscal 21. We expect to raise the remaining equity needs for Fiscal 21 through our ATM program. To recap, the execution of this plan to modernize our system through disciplined capital spending, timely recovery of those investments through our various regulatory mechanisms, and balanced long-term financing all support our ability to grow earnings per share in dividends at 6% to 8% annually through Fiscal 2025. And as you can see on slide 26, The execution of this plan will also keep customer bills affordable, which will help us sustain this plan for the long term. Thank you for your time this morning. I will now turn the call over to Kevin for his remarks. Kevin?