Atmos Energy Corporation

Greetings, and welcome to Atmos Energy's third quarter 2022 conference 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Mazur, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Brock. Good morning, everyone, and thank you for joining our fiscal 2022 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 33 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsyth, our Senior VP and CFO.

Chris? Thanks, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Fiscal 22 third quarter net income increased $129 million, or $0.92 per diluted share, to $102 million, or $0.78 per diluted share, in the prior year quarter. And fiscal year-to-date net income was $703 million, or $5.12 per diluted share, compared with net income of $617 million, or $4.77 per diluted share in the prior period. Slides 5 and 6 provide operating income highlights for each of our segments for the three and nine months ended June 30th. I will focus on some of the more significant drivers underlying our fiscal year-to-date performance. Rate increases in both of our operating segments totaled $172 million, primarily driven by increased safety and reliability spending in system expansion. Approximately 71% of these rate adjustments were recognized in our distribution segment. We continue to see robust customer growth in our distribution segment, which increased operating income by an additional $13 million. This growth offset a $13 million decrease in consumption, most of which occurred during the second fiscal quarter. We did not see the same trend continuing into the third fiscal quarter, as consumption increased at about $3 million quarter over quarter. Additionally, we experienced a $25 million increase in consolidated O&M expense, primarily driven by increased pipeline maintenance activities and employee-related costs compared with the prior year, all show set by lowered bad debt expense. Finally, reductions in fiscal 22 revenue associated with the refund of excess deferred tax liabilities reduced operating income by $103 million. This reduction was substantially offset by lower income tax expense. Consolidated capital spending increased 27%, or $368 million, to $1.7 billion, with 87% dedicated to improving the safety and reliability of our system. This increase primarily reflects increased system modernization, system integrity, and system extension spending to meet the growing natural gas demand in our service territories. remain on track to spend $2.4 to $2.5 billion in capital expenditures this fiscal year. On the regulatory front, we have completed approximately $216 million in annualized regulatory outcomes, including refunds of excess deferred tax liabilities. Of this amount, we have implemented $202 million, and we will implement the remainder on September 1st. Additionally, we have about $127 million in progress. Slides 15 through 32 provide additional detail around our regulatory activities. Our fiscal third quarter financing activities were focused on pricing our fiscal 23 equity needs. During the quarter, we executed four sales agreements under our ATM program for approximately 2.9 million shares for $337 million, and we settled agreements on 731,000 shares for approximately $81 million in net proceeds. As of June 30th, we have approximately $700 million in net proceeds available under existing forward sale agreements which satisfies substantially all of our anticipated equity needs through fiscal 23. We finished the third quarter with an equity capitalization of 61.7%, excluding the $2.2 billion in interim winter storm financing, and with total liquidity of approximately $3.5 billion. Additional details for our financing activities, including our equity forward arrangement, as well as our financial profile, can be found on slides 8 through 11. Turning now to securitization, during the third quarter, we continue to make progress on that front, In Texas, the Texas Public Financing Authority continues its work on the statewide securitization program, and we believe it is on track to be completed within the next few months. As a reminder, once we receive the securitization funds, we will fully retire the $2.2 billion in interim winter storm financing. In Kansas, during the third quarter, we file our application for a financing order. Based on the approved procedural schedule, we anticipate receiving the financing order during our fiscal 23 first quarter. In closing, our fiscal year-to-date performance was in line with our expectations and supports the reaffirmation of our fiscal 22 earnings per share guidance in the range of $5.50 to $5.60 per dividend share. Slides 13 and 14 provide additional details around our guidance. The ranges included in those pages have not changed since the last quarter. However, we do anticipate our O&M and interest expense to be at the higher end of the ranges provided. Thank you for your time today. I will now 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. The fiscal year-to-date results Chris just shared reflect the continued focus on our vision of being the safest provider of natural gas services. And supporting that vision are 4,700 dedicated employees executing our safety and reliability investment strategy and our prudent regulatory and financing strategies. These strategies, combined with a strong portfolio of assets, will continue to support our ability to grow earnings per share and dividends 6% to 8% annually through fiscal 2026. We continue to see robust growth in demand for natural gas in our service territories. During the 12-month period into June 30, 2022, we added nearly 59,000 new residential customers, which represents a 1.8% increase. And during the third quarter of this year, we added 13 new industrial customers that have an expected annual natural gas usage of 5 BCF when they are fully operational. Fiscal year to date, we have added 28 new industrial customers that have an expected annual natural gas usage of 10 BCF when they are fully operational. As you heard me say before, on a volumetric basis, that 10 BCF of annual industrial customer usage is equivalent to adding 170,000 residential customers. Last month, we released our most recent corporate responsibility and sustainability report, which illustrates our environmental, social, and governance strategy, focused on reducing our scope one, two, and three emissions and environmental impact from operations in the five key areas of operations, fleet, facilities, gas supply, and customers. The report also summarizes the commitments as well as the progress made towards executing that strategy during fiscal 2021 and early fiscal 2022. I wanted to comment on one of the exciting highlights in the corporate responsibility report. That is our Zero Net Energy Home initiative. By partnering with local Habitat for Humanity organizations in each of our eight states, we are providing families with zero net energy homes that use high efficiency natural gas appliances, rooftop solar panels, and insulation to produce more energy than they consume over the course of a year, all in a cost effective manner. Again, as you've heard us mentioned before, we've completed our first zero net energy home in Evans, Colorado in September of 2021. And during the third quarter of this year, we completed a second zero net energy home in Taylor, Texas, located just north of Austin. Construction is underway on three additional zero net energy homes in Dallas, one in Jackson, Mississippi, one in Owensboro, Kentucky, and all these are scheduled for completion by November of this year. Additionally, groundbreaking is scheduled later this calendar year for an additional five zero net energy homes. one in Dublin, Virginia, one in Columbia, Tennessee, and three in Lubbock, Texas. These homes provide families with a comfortable natural gas home that demonstrates the value and vital role natural gas plays in helping customers reduce their carbon footprint in a cost-effective manner. Our fiscal year performance and participation in community projects such as these, as our Zero Net Energy Homes, reflect the commitment dedication, focus and effort of our 4,700 Atmos Energy employees as they see a vital role in our 1,400 communities by safely delivering reliable, efficient and abundant natural gas to homes, businesses and industry to fuel our energy needs now and in the future. We appreciate your time this morning and now we'll open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question today is from Julian Dumoulin-Smith of Bank of America. Please proceed with your question.

Hey, good morning, Kevin and Chris. It's Cody Clark on for Julian. Thanks for the time. Good morning. So first wondering if you can walk us through the main drivers for the remainder of the year. It seems like you're well ahead based on year-to-date results, great increases for the remainder of the year and your updated expectations on O&M and interest. I guess I'm just trying to get a better understanding of your expectations within that 550 to 560 range.

So, Cody, you muted there a little bit, but if I'm understanding correctly, you're looking for the main drivers for the remainder of the fiscal year to try to give you some color around where we might fall within the guidance range?

That's right. I'm sorry about that. Hopefully you can hear me better now.

Yeah, much better now. Thank you. Yeah, I mean, you touched on a couple of them. You know, the main drivers, again, on the O&M front, we have some compliance work that we're doing, some additional system integrity work. The timing may shift between September or October, just based on when the work gets performed. We're also monitoring our bad debt expense levels. This is kind of our big collection season, and although the bad debt expense is down year over year, typically the fourth quarter or fourth fiscal quarter is a time when we have increased collection activities, so we're kind of monitoring that as well. And then finally, on the interest expense front, we do have the floating rate note as a component of the interim winter storm financing. And rates have increased somewhat over the last fiscal year, which is driving our interest expense a little bit higher. And that could potentially tick up once the rates reset later here in the fourth fiscal quarter. So those are some of the things that we're monitoring in terms of the guidance range. I would say at this point, where we ended the fiscal quarter or on the year-to-date basis, we were in line with our expectations, and we stand behind the guidance that we put out today.

Understood. Okay, thanks for that. And as we look toward FY23, curious if you can opine on how you see inflation cascading through your O&M budget and capital plan. What sort of trends are you expecting in the next year and any mitigating measures that you're thinking about?

Yeah, Cody, I'll start off, and then Chris can jump in there. As we've talked about before, a lot of our contracts that we have in place have been refreshed recently with our contractors and our vendors. A lot of our large projects we do, whether they're on the mid-tech side or the APT side, our bid projects there, we feel good about how those have been coming in. As Chris said, we continue to work on our integrity management projects and compliance projects. We think those are all in good standing. And on a procurement front, we, as we talked about before, try to run well ahead to make sure we have enough inventory on hand to complete and stay ahead of our compliance and pipeline replacement work. Our team tries to keep about a six-month inventory on hand and may even be looking to push that out toward the nine-month level. We have all the pipe either in the ground or on the ground to complete our 2022 project. We have the pipe in the works right now for 23, and are looking for material out into the 24 period. So as you can see, we're taking advantage when we can to make sure we've got the best pricing, that our materials are available, and we can continue to move forward at the best and most efficient manner.

Yeah, and Kevin, I'll add to that. I mean, you can spot on with just the keeping up annually with the increases on the O&M front, but I'll also comment on the Treasury side as well. I mean, our team has done an excellent job of trying to get ahead of rising interest rates, with the exception of the interim windstorm financing, which we will take out once the securitization funds are received, that we have no floating rate debt. We have executed nearly two billion dollars in a forward starting interest rate swaps on future or planned debt issuances beyond fiscal 2022 at very attractive rates and we've done that here over the last year or so and uh and in a really well position then you look at our overall weighted average cost of debt today it's at 3.8 percent which is very beneficial for our customers and finally we don't have any significant uh near-term refinancing needs our most I guess the most current one that's out there right now is about $500 million due in 2027. So from the balance sheet and financing perspective, we also have taken advantage over the last year or so of trying to lock in some of the lower rates for the benefit of customers, which also helps mitigate the impact on the customer bill.

Yeah, Cody, just to finish that off, and again, some of the same things, tools that we had in our toolkit, if you will, as we were entering and coming through the pandemic are still there for us. We haven't started back a lot of travel. We're going to the most sense of urgency meetings, those sort of things, still taking advantage of teams. So everything that we had in our toolkit during the pandemic, we continue to have today as well as I'll just again mention our ability to move projects forward and back because we are not a just-in-time compliance company. We try and run ahead of that, so that gives us some flexibility as well.

Excellent. That's very helpful. I'll pass it off there. Thanks again for the time. Thank you, Cody.

The next question is from Insoo Kim of Goldman Sachs. Please proceed with your question.

Yeah, thank you. First question, Kevin, you were talking about the industrial customers and the additions this quarter and for the year. First, can you just give a little bit more color on the mix of the types of the industrial customers and from a pace perspective of these additions, is this a little bit faster than what you had baked in, just trying to get a sense of which industries you're seeing most growth and what type of potential capital opportunities may exist in the future for you guys?

Yeah, sure. Just before we get into that, again, our service tory is extremely blessed. We have exceptional leadership at the city to state level there, great chambers of commerce, great economic development partners in each of our states. And so we have a well-diversified industrial footprint out there. For example, in a couple of our divisions, we've seen the addition of hydroponic greenhouse facilities, which are large consumers of natural gas. We've seen the location of the distilling industry, both new facilities and expansion of distilling facilities out there. We've seen an EV battery manufacturing plant locate on our facilities. We've seen concrete and asphalt facilities, expansions of colleges and universities, as well as some metals, aluminum, steel, smaller plants and then expansions of some existing ones as well. So as you can see there, it's a variety of everything across the board there, which is good for a local economy. And the thing that comes along with these expansions or new additions, as you know, is the jobs, the amount of jobs that this supports and brings into the community, which means rooftops and commercial load as well.

Got it. That's definitely a good color. Second one, the Inflation Reduction Act, obviously for the electric industry, a lot of initial thoughts there. Just for you, as it relates to that bill, just curious on your overall thoughts on what potential opportunities or challenges could exist. For example, I'm thinking of the RNG side. Obviously, you're not on the upstream side of things, but how does that if it takes place? How does that change your thinking there? And then just from a curious on the methane tax perspective, does that impact your pipeline business at all?

Okay. Yeah, there's a lot packed into that question. So let me first start with we're still reviewing, going through all the detail that's laid out in the bill. And as you know, the bill still got a long way to go through the legislative process. And Could be altered one way or the other as it makes its way through, but we're going to stay very close to the process and stay close to the details to see what potential upsides exist for us out there. However, I will say it is good to see Senator Manchin's comments that this bill is not arbitrarily shut off abundant fossil fuels, I think is his quote. Then in a recent article I saw sometime from last year, Senator Manchin indicated that natural gas must be included in any clean energy program. So for me, it's good to see and hear that because it's going to take all forms of energy, right? A diversified energy portfolio, as we've been saying for a long time, including natural gas, our nearly 3 million miles of pipeline infrastructure and our underground storage fields, which we have about 120 BCF here at Atmos Energy Corporation. all that's going to be required to meet the growing demand going forward. And, again, it's good to see that realization, the conversation at that level being taken place because a one-size-energy solution, I don't think, provides the security, reliability, and affordability that this country needs to meet the growing energy demand that's out there. So we – We look forward to continuing to see how the bill evolves. We think we are a good operator, a prudent operator. As you've seen through our pipeline replacement projects, we've tightened up our system. We've got a good environmental strategy out there. So I think we can operate in this legislation, but we're going to continue to monitor and see what the details show as this thing moves forward.

Got it. Thank you so much.

There are no additional questions at this time. I'd like to turn the call back to Dan Mazur for closing remarks.

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

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.