Atmos Energy Corporation

Thank you for standing by. My name is Amy and I will be your conference operator for today. At this time, I would like to welcome everyone to the Atmos Energy Corporation fiscal 2024 fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star followed by the number one on your telephone keypad to enter the queue. If you would like to withdraw your question, again, press the star and the number one. It is now my pleasure to turn the call over to Dan Mazur, Vice President, Investor Relations and Treasurer. You may begin.

Thank you, Amy. Good morning, everyone, and thank you for joining us. With me today are Kevin Akers, President and Chief Executive Officer of 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 our 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 could differ materially from actual results. The facts that could cause such material differences are outlined on slide 37 and are more fully described in our SEC filings. I will now turn the call over to Kevin.

Thank you, Dan, and good morning, everyone. We appreciate your interest in Atmos Energy. As Monday is Veterans Day, I would like to take this opportunity to thank those who have served in our armed forces. Approximately 300 of our Atmos Energy teammates are a part of the more than 18 million Americans who bravely served our country. Thank you for your service, and thank you to those currently serving this great nation. Fiscal 24 marked Atmos Energy's 40th anniversary as an independent company. All 5,200 of us here at Atmos Energy proudly serve our customers and our communities as we continue to be guided by the simple values of our founding chairman, Charles K. Vaughn. of honesty, integrity, and good moral character. Yesterday, we reported earnings per share of $6.83, which represents the 22nd consecutive year of earnings per share growth. Fiscal 24 also represents the 40th consecutive year of dividend growth. Our fiscal year results reflect the focus and dedication of the entire Atlas Energy team and their continued successful execution of our proven strategy of operating safely and reliably while we modernize our natural gas distribution, transmission, and storage systems. Our fiscal 24 capital investment of over $2.9 billion supported the modernization of our systems through the replacement of over 850 miles of distribution and transmission pipe and replacement of more than 55,000 service lines. Additionally, we continue to enhance the safety reliability, versatility, and supply diversification of APT system by placing into service our line PC on the southern end of APT system, as well as phase one of the line WA loop to the west of Fort Worth, and phase three or four for line S2 to the east of the DFW Metroplex. And we've completed the well integrity inspections on our Bethel salt dome cavern number two, We expect base gas and working gas injections to be completed next month, providing the availability of all three salt dome caverns for this winter season. Our capital investment also supported natural gas service to fuel the strong economic development we continue to see across our service territories. In fiscal 24, we added over 59,000 new residential and commercial customers, with over 46,000 of those new customers located in Texas. The housing market in the DFW Metroplex remained strong. For the 12 months ended September 30th, new home closings set a record high with a nearly 1% increase over the prior 12-month period, driven by the strength of the Texas economy. And according to the Texas Workforce Commission, the state continued its streak of record employment. For the 12 months ended September, The seasonally adjusted number of employed 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 327,000 jobs from September 2023 to September 2024. In addition to this robust residential customer growth, we saw solid commercial and industrial growth. In fiscal 24, we added nearly 3,500 new commercial customers, a 19% increase over the prior fiscal year. And we added 39 industrial customers, which, when fully operational, are anticipated to consume approximately 8.4 BCF of gas annually. This usage is equivalent to adding over 160,000 residential customers on a volumetric basis. Over the last five years, we added nearly 300,000 residential and commercial customers. And over the last five years, we have added 225 industrial customers with an estimated annual load of 63 BCF when fully operational. Again, on a volumetric basis, this is equivalent to adding nearly 1.2 million residential customers. This growing natural gas demand from all customer classes continues to demonstrate the vital role natural gas has in economic development across our service territories. Our customer support associates and service technicians continue to be at their best and inspire trust with our customers and in our community through their exceptional customer service. They once again received a 98% satisfaction rating from our customers. And during the fiscal year, our customer advocacy team assisted over 57,000 customers in receiving almost $23 million in energy assistance funding. I'm very proud of our Atmos Energy team and their many accomplishments in fiscal 24. Their exceptional work has us well positioned for fiscal 25 and beyond. As you know, we operate in a diversified and growing service territory that is supportive of natural gas and our investment in natural gas infrastructure to supply the growing economy and meet the growing energy demand. As a reminder, 96% of our rate base is located in six of our eight states that have passed legislation in support of energy choice. To meet the expectations of our community, our customers, policymakers, and regulators, our five-year plan contemplates $24 billion of capital investment. That investment will support the continued modernization of our natural gas distribution, transmission, and storage systems, as well as support the growing natural gas demand across our jurisdictions, with over 80% of that investment focused on safety and reliability. And at APT, we will remain focused on safety, reliability, versatility, and supply diversification while fortifying our system to support the growth of the LDCs located behind our pipeline. This includes the completion of the final phase of our Line S2 project to the east of the DFW Metroplex, continuation of the Line WA Loop project to the west of the DFW Metro and adding capacity to move additional gas from our Bethel Salt Dome facility towards Central Texas. The strength of our balance sheet, available liquidity, and regulatory mechanisms will continue to support the vital role we play in every community of safely delivering reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and into the future. I will now turn the call over to Chris for some additional color around our fiscal 24 financial results, our fiscal 25 guidance, and our updated five-year plan through fiscal 29. And then we will open the call for questions. Chris?

Thank you, Kevin, and good morning, everyone. Our fiscal 24 earnings per share of $6.83 increased 12% over fiscal 23. As a reminder, these results include 17 cents from the one-time benefits we have discussed previously, an unplanned property tax reduction in Texas, and lower than planned bad debt expense in Mississippi resulting from a regulatory change in how we recover uncollectible accounts. Excluding these one-time items, earnings per share increased 9.2% in fiscal 24. Our performance continues to reflect the successful execution of our operating, regulatory, and financing strategies. In fiscal 24, we implemented $376 million in annualized operating income increases. These outcomes, combined with outcomes received in fiscal 23, increased operating income by over $300 million. Strong customer growth combined with rising industrial load in our distribution segment increased operating income an additional $25 million. And rising peak day demand requirements with APT's LDC customers resulting in a $15 million increase in operating income. Finally, we saw a $39 million increase from APTs through system activities. About half of this increase was recognized during our fourth fiscal quarter. During this time, while our pricing was negative for 63% of the trading days, these market conditions were primarily driven by unplanned maintenance on certain pipelines and delays in new takeaway capacity coming online, both of which caused spreads to widen more than we had anticipated. These four core market conditions were the primary reason why our fiscal 24 results exceeded the updated guidance range we provided in August. Consolidated O&M, excluding bad debt expense, increased $65 million. This increase is largely driven by higher employee-related costs due to additional headcount to support growth and higher costs associated with increased line locating activities, system monitoring, training, and administrative costs. Consolidated capital spending increased 5% or $131 million to $2.9 billion, with 83% dedicated to improving the safety and reliability of our system. This spending increased rate-based by approximately 13% to an estimated $19 billion as of September 30th. Capital spending in our distribution segment increased $322 million, primarily as a result of increased system modernization and customer growth spending. Capital spending on our pipeline and storage savings decreased to about $191 million, primarily due to the timing of cash payments for pipeline system and safety and reliability work in Texas that had been completed during the fiscal year. Finally, we completed $1.2 billion in long-term financing. We finished the fiscal year with an equity capitalization of 61% and approximately $4.8 billion of available liquidity, which leaves us well-positioned to support our future operations. Looking forward, we have initiated our Fiscal 25 Earnings for Share guidance range of $7.05 to $7.25. Assuming the midpoint of this guidance range, this implies 7.4% growth in Fiscal 24 Earnings for Share, excluding the previously mentioned one-time item. And we have initiated Fiscal 25 Capital Spending Guidance for approximately $3.7 billion. Additionally, Atmospheric's Board of Directors approved a 164th quarterly cash dividend With an indicated fiscal 25 annual dividend of $3.48, 8.1% increase over fiscal 24. Finally, we roll forward our five-year plan to fiscal 29. Our strategy remains unchanged. We will continue to focus on system modernization through disciplined capital spending, take time of recovery of our costs through our various regulatory mechanisms, and maintain a strong balance sheet by financing our operations using a balance of equity and long-term debt. We anticipate the execution of this five-year plan will continue to support 6% to 8% annual earnings per share growth and annual dividends per share growth. We anticipate earnings per share at fiscal 29 to be in the range of $9.15 to $9.55. As Kevin mentioned, we've included approximately $24 billion in our current five-year plan. This level of spending is expected to support rate-based growth of about 13% to 15% per year. By the end of fiscal 29, we anticipate rate base to increase from approximately $19 billion today to approximately $37 billion in fiscal 29. From a revenue perspective, we continue to execute our normal regulatory strategy of implementing approximately 20 rate filings per year. We have assumed no changes to our ROEs or regulatory mechanisms, nor have we assumed the implementation of new cost recovery mechanisms in this five-year plan. Since the beginning of the fiscal year, we have implemented $149 million of annualized operating income increases in our distribution segment, $516 million related to the implementation of our two annual rate review mechanisms in Texas, and $27 million related to the implementation of our two annual rate filings in Mississippi. Currently, we have three filings pending seeking about $77 million. Included in this filed poor amount is approximately $40 million related to a system-wide general rate case in our West Texas distribution. This is a required filing affecting all customers in our West Texas division based on a settlement we reached in 2020. Additionally, we are required to refresh our rates for filing five years of GRIP filings for portions of our West Texas division. We anticipate filing two similar cases in our Mid-Tex division during our first quarter to adjust our cities where we recover our costs through GRIP. Additionally, we have filed a general rate case in Kentucky seeking approximately $34 million. We anticipate completing all of these general rate cases in late spring of 2025. From a margin perspective, we have also assumed normal weather, market conditions, and modest customer growth in both our segments in this five-year plan. Additionally, we have assumed a 6% decrease in the oil and gas costs included in the customer bill, primarily due to lower commodity costs, partially offset by higher storage and transportation costs. Finally, we have assumed the contribution from APTs through system business to normalize for fiscal 24 levels. Additional takeaway capacity is now in place, which should moderate spreads, and we will have the full-year effect of the higher revenue benchmark in APT's wider breadth mechanism. On the cost side, we have assumed 4% annual O&M inflation, excluding bad debt expense. This inflation assumption is driven by increased spending for compliance-based activities that address system safety. system monitoring, and employee costs. As we've discussed before, we are not a just-in-time compliance company, meaning that we will look to accelerate compliance-related work within the five-year plan as system conditions dictate or if other opportunities arise. For fiscal 25, we anticipate O&M excluding bad debt expense to range from $840 to $860 million. Approximately $20 million of the year-over-year increase relates to the amortization of APTs system safety, and integrity mechanism. As a reminder, this new mechanism was approved in APT's last general rate case and is a flow-through mechanism for costs incurred to address new federal and state safety regulations, meaning we recognize the revenue and related O&M costs after review and approval by the Texas Rural Commission, resulting in no impact to operating income. APT made its first SSI filing earlier this calendar year, seeking recovery of approximately $19 million in eligible SSI costs. This fine was approved in October, and revenues in O&M were adjusted effective November 1st to recover these costs over a 12-month period. Turning now to our financing plan, this five-year plan includes approximately $15 billion of incremental long-term financing to support our operations and cash needs, including the expected impact of the corporate minimum tax beginning in fiscal 27. We will continue to use a combination of long-term debt and equity to preserve the strength of our balance sheet and minimize the cost of financing for our customers and overall financing risk. As a reminder, this incremental financing is included in our earnings for share guide for fiscal 25 through fiscal 29. Following the completion of our $650 million long-term debt issuance in October, our weighted average cost of debt is 4.1%, and our weighted average maturity was 18.1 years with our next material refinancing not scheduled until June of 2027. From an equity perspective, we anticipate meeting all of our needs through our ATM program. As of September 30th, we have priced $1.4 billion, which fully satisfies our fiscal 25 equity needs and a significant portion of our anticipated fiscal 26 equity needs. This recent financing activity has substantially reduced our existing shelf registration statement and exhausted our ATM program. Once we receive the necessary regulatory approvals, We intend to file for a new three-year $8 billion shelf agreement and a new $1.7 billion ATM program to support our anticipated financial needs. In closing, like Kevin, I am very excited for the long-term outlook for Atkins Energy. Our operational and financial performance in Fiscal 24 has laid the foundation for sustained success into Fiscal 25 and beyond. The successful execution of this plan will continue to support 6% to 8% fully regulated earnings per share growth and commensurate dividends for share growth while maintaining a strong financial profile, all of which supports our ability to meet our customers' needs and expectations in our growing service territories. We appreciate your time this morning. We will now open up the call for questions.

Thank you. The floor is now open for questions. So at this time, I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Seishi with Barclays. Your line is now open.

Hi. Good morning, team. Thanks very much for taking my questions, and congrats on another strong year of execution. Thank you. First, I just wanted to quickly touch on financing for some further clarity. If I recall previously, you target $600 to $800 million a year through ATM to support your capital program. So now you have the $8 billion shelf registration. You plan to file at 1.7. ATM, you're renewing. First, I guess, how should we think about the run rate going forward? And also, could you just discuss a little bit about how should we think about financing this higher capital plan outside of the ATM program? Thanks.

Okay, well, thank you. So again, we have an incremental $15 billion financing assumption in this five-year plan. Again, we want to maintain the current strength of our balance sheets. You want to assume 50% is equity, 50% is long-term debt, and that you take that 50% assumption. And generally, relatively over the next five years, that's about what the equity need will be. It will be a little bit lower in fiscal 25. It will ramp up a little bit in 26 and beyond. But I think that's how you can think about it from a modeling perspective. And in terms of just broader financing, this increased CapEx program, we do believe that we will be able to satisfy the equity needs through the ATM program, as well as the continued issuance of long-term debt in order to preserve and maintain the strength of balance sheet.

That's great. Really helpful. And if I can quickly touch on just a financing side of the equation regarding interest costs as we roll forward to 25. Obviously, you cover $300 million for fiscal for that year. And I guess going forward and deeper into the plan, how should we think about doing more interest rate swaps and kind of maintaining the current debt to capitalization ratio in a five-year plan?

Yeah, so I'll take the second question first on the debt to capitalization. We're very comfortable with where that debt to capitalization is at this point, and we intend to maintain that going forward. And in terms of interest rate hedging, it has proven to be very successful for us in the last several years. It's saved our customers a lot of money. And Dan and his team will continue to look for opportunities to lock in hedges. at a point in time where we think it's appropriate to lock in that cost to provide cost stability going forward in the five-year plan and also for the benefit of customers. So it's something we'll consider doing just, again, as market conditions continue to evolve.

Great. Appreciate all the colors here, and I'll leave it there. Thanks again. Thank you.

Your next question comes from line of Richard Sunderland with JP Morgan. Your line is now open.

Hi, good morning, and thank you for the time today. Good morning. So starting on the CapEx side, given it's a pretty staggering raise here to your five-year plan, could you parse some of the factors underpinning the higher pace of system investment? I know you gave some color at a high level on sort of 80% for safety and reliability, what have you, but I'm curious if you could give a little bit more specificity around growth, change in replacement rates, anything else driving that higher level.

Yeah, I appreciate your question. I'll point you back to what we talked about earlier, particularly around the almost 60,000 new customers this past fiscal year. That's been pretty close over the last several fiscal years. So again, we're seeing robust growth on the residential, commercial, and industrial side. That continues to happen. year in and year out. We continue to look at the housing starts, the market stability here in Texas, as we talked about with the Texas Workforce Commission highlighting the employment growth that continues to occur year in and year out here. That's all driving the demand on our system. So again, we need to be out in front of that growth, have it in place for the anticipated winter needs and fueling those commercial industrial demand as well. So those are part of what's driving that growth fortification. But the other part of it, again, is driven by what our risk models, our risk factor tells us on a go forward with our pipe replacement program. So just as we've done in the previous years, we're going to look to those models to guide us to where and when to replace pipe. That's what's rolled out through the five-year plan there, along with meeting the expectations of demand and growth, whether it's on distribution as well as on APT system as well. You heard the 2 or 3 projects we talked about there of completing line s to w a loop. That's all the growth spec that we've talked about before as well as some of the work we're doing on storage all in this capital investment plan that we've laid out.

Great, very clear. Thank you. And then. Turning again to some of the numbers in this update, comparing the 13% to 15% rate-based growth versus your 6% to 8% EPS growth guidance, the numbers seem to imply you should be at or above the top end of the earnings range. I realize there's equity dilution, but I'm curious what is keeping the CAGR at 6% to 8%. Is there any reason you should not be at the top end or higher?

Well, again, we look at our plan with a very conservative eye. There's still a lot of things, as you know, just coming out of an election, what's going on around the world that we'll continue to take in our decision and thinking as we move forward there. But again, we believe that's our comfortable range as we've executed upon over the last several years. And given where we set today, we think that's very comfortable on a go-forward basis for us.

Yeah, I'll also add to that. We've also increased the O&M CAGR, if you will, from 3.5% to 4%. That's also a of a modifying effect on the earnings per share growth, vis-a-vis the rate-based growth.

Got it. Understood. Thank you for the time today.

Thank you.

The next question comes from the line of Christopher Jeffrey with Mizuho Securities. Your line is now open.

Hi, good morning, everyone. Thanks for taking the questions. Maybe just one from me on the 25 guide kind of off of 2024. You mentioned in your comments about the strong benefits from the Waha spread. Just kind of how you're thinking about that year over year and kind of versus this year's level. Thanks.

Yeah, again, as Chris said in his comments, we've got a new rider ref benchmark that's out there, approximately $107 million going into this year. Spreads did mitigate somewhat coming out of the summer period. We'll continue to look and see how weather affects that. But on a go forward, we look for things to normalize to a certain extent from what we saw earlier this summer period. And that's how we will approach it on a go forward is more on a normalized basis. Again, most of that or all of that demand on APT is for the LDC customers behind the pipes that are out there. So anything we'll do will have to be on off-peak or through the summer period when maintenance isn't occurring out there. So we'll look to that again back on a normalized basis.

Got it. Thanks. And then, Chris, you mentioned about taking the O&M from three and a half to four. Just curious... Maybe what you're seeing there, is that related at all to the SSI rider at APT? And kind of is there any maybe cadence if that's front-loaded, back-loaded, or kind of consistent? Thanks.

Yeah, certainly between 24 and 25, we'll have a step-up because of the SSI rider. We had roughly six or seven million flow through in fiscal 24. We're looking for closer to 2025 in 2025. Again, it's offset in the margin line item. But we're also just planning for just increased compliance related spending, you know, system surveys, system monitoring, more real-time monitoring in the system. You've heard us talk about our AMLD units. We have 16 now that are on the system that we're using in all eight of our states to monitor our system a lot more closely. And then just we have employee costs as our As our population, our customer growth continues, we'll have to continue to add, you know, service technicians and the like to make sure we're properly serving those growing needs.

The additional thing I'll add there is our line locates with this growing base, particularly here in the Texas region. We continue to grow the number of line locates that we continue to do, as well as the rest of the infrastructure is driving that locates. And what I mean by that, as you have water, infrastructure being put in with the growing population, fiber, all of those drops need for us to go out and locate and protect our assets as well.

Great. Appreciate it. Congrats on the update.

Thank you.

Your next question comes from the line of Paul Zimbardo with Jefferies. Your line is now open.

Hi. Good morning, team.

Good morning. Good morning.

I had a couple of questions, one big, one small. The first, I'll start with the bigger one. There's a new, very large potential natural gas customer that Entergy's talked about, like 2.3 gigawatts a combined cycle in northern Louisiana. It looks like you're the local gas utility there. Just any way you could frame potential, whether it's kind of the local or broader capital needs related to that, and just how you're thinking about some of these lumpier economic development activities you're tracking across your footprint would be helpful.

Yeah, I don't have any specifics that we could share at this point on the Louisiana customer, but in general, as we talked about large industrial loads over a period of time, we work with both our state economic development group, chambers of commerce, and local communities on sourcing and siting of these particular customers. what is best for them what may benefit you know their energy demand for natural gas how it's located to either our distribution or transmission assets and then we'll work with the customer on timing over over a period of years when they anticipate ramping up their usage that way but we continue to see steady inquiries as you've heard quarter after quarter as described from various aspects of the industrial sector whether it's metals, whether it's healthcare, whether it's distilling, various factors continue to drive the growth on the industrial side.

Okay, great. That potential customer in northern Louisiana, is that something that could be upside to the plan, or we should kind of think about that within the scope of your capital guidance you put out?

Again, we have a lot of customers across our territory looking and citing on a daily basis. We generally don't talk about those until we have certainty around contractual obligations, ready to serve needs, those sort of things. And right now at this point, we're not at a point where we can discuss any particulars that aren't at that state of process. Okay.

Understood. And then the smaller one, just in terms of 2025 guidance and interest, it looks like it ticks down a little bit versus the balance is up, the weighted cost of debt is up. Is that a function of lower short-term rates on commercial paper or just any other dynamics there we should be cognizant of? Thank you.

That's really the influence of AOTDC or capitalized interest. As our spending goes up, we do have a higher portion of capitalized interest and Again, with an all-in weighted average cost of 4.1, ticked up very slightly, I mean, less than 5 or 10 basis points year over year. It's relatively flat. And then you've got the increased capitalized interest component, which is driving the net interest expense down a bit.

Okay, excellent. Makes perfect sense. Thank you, team.

Thank you.

And just as a reminder, before we take our last couple of questions, the Prompt to enter the queue is pressing star and the number one on your telephone keypad. Your next question comes from the line of Ryan Levine with Citigroup. Your line is now open.

Good morning, and thanks for taking my questions. Good morning. What's your assumption? Good morning. What's your assumption for bad debt expense, and how does that impact the outlook? It looked like that was excluded from the 4% O&M guide. Is there any lumpiness to that with some of the changes to how that's being... accounted for?

No, really, no changes anticipated. It was a little bit skewed this year, obviously, with the change in how we record our collector uncollectible accounts in Mississippi. We're kind of beginning to normalize into more of a pre-pandemic state in terms of that debt expense. It's always going to rise a bit as a function of revenue going up a bit, but as we continue to work our comprehensive collection strategy of not only just Working with customers around energy assistance, offering them installment plans, levelized billing and the like, we anticipate that to be fairly flat year over year in the five-year plan.

Okay. And then what are you assuming for population growth or customer count growth in the Texas market in particular? And how sensitive is your outlook to that forecast?

Yeah, I would say, you know, we've assumed a growth rate that is in line with what we've experienced here over the last couple of years. You heard Kevin talk earlier in the call about just continued growth from a residential perspective, certainly, and then the knock on commercial impact. So we've just assumed basically recent trends that will continue going forward in this five-year plan.

And then last question, in terms of the 4% O&M guidance, How lumpy is that throughout the forecast time period? Are there periods that are higher than that and others that are lower than that, or any color you could share?

No, I think year over year it's going to be, I would say, fairly gradual, 4% every year. You might have a little bit of lumpiness within quarters as we move work around to address the system needs, operational constraints, so on and so forth. But year over year we expect that to be fairly level, 4% every year.

Great, thank you.

Thank you.

There are no further questions at this time. Mr. Mazur, I turn the call back over to you.

We appreciate your interest in Atmos Energy and thank you again for joining us this morning. The recording of this call is available for replay on our website through December 31st. Have a great day.

Thank you. This concludes today's conference call. You may now disconnect.