Atmos Energy Q3 2022 Earnings Report

Atmos Energy EPS Results

• Actual EPS: $0.92
• Consensus EPS: $0.86
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: $0.78

Atmos Energy Revenue Results

• Actual Revenue: $816.43 million
• Expected Revenue: $757.70 million
• Beat/Miss: Beat by +$58.73 million
• YoY Revenue Growth: N/A

Atmos Energy Announcement Details

• Quarter: Q3 2022
• Date: 8/3/2022
• Time: After Market Closes
• Conference Call Date: Wednesday, August 3, 2022
• Conference Call Time: 9:55PM ET

Atmos Energy (NYSE:ATO) (NYSE:ATO) is a regulated natural gas distribution and pipeline company headquartered in Dallas, Texas. Through its utility operations, the company delivers natural gas to residential, commercial, industrial and agricultural customers, with services focused on safe and reliable energy delivery.

Atmos Energy serves customers across eight states: Colorado, Kansas, Kentucky, Louisiana, Mississippi, Tennessee, Texas and Virginia. Its operations include local natural gas distribution as well as pipeline transportation and storage activities, primarily through its Atmos Pipeline-Texas business.

The company traces its roots to 1906 and has expanded over time through growth and acquisitions in the natural gas industry. Atmos Energy is led by John A. Sells, who serves as president and chief executive officer.

Atmos Energy Q3 2022 Earnings Call Transcript

Key Takeaways

• Net income rose to $129 million in Q3 ($0.92 per diluted share) from $102 million ($0.78), with YTD net income of $703 million ($5.12) versus $617 million ($4.77) last year.
• Rate increases of $172 million driven by safety, reliability, and system expansion, while robust customer growth in distribution offset consumption declines.
• O&M expenses increased by $25 million due to higher pipeline maintenance and employee costs, partially offset by lower bad debt expense.
• Capital spending increased 27% to $1.7 billion in Q3, with 87% dedicated to safety and reliability, and full-year capex is forecast at $2.4–2.5 billion.
• EPS guidance reaffirmed at $5.50–$5.60 for FY22, and the company expects to grow earnings per share and dividends by 6%–8% annually through FY26.

Presentation

[Operator]

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 Meziere, Vice President of Investor Relations and Treasurer. Please go ahead.

[Daniel M. Meziere, VP of Investor Relations and Treasurer at Atmos Energy]

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 Forsythe, our Senior VP and CFO. Chris?

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Thanks, Dan, and good morning, everyone. We appreciate you joining us in your interest in Atmos Energy. Fiscal 2022 third-quarter net income increased $129 million or $0.92 per diluted share from $102 million or $0.78 per diluted share in the prior quarter. 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 five and six provide operating income highlights for each of our segments for the three and nine months ending June 30. I will focus on some of the more significant drivers underlying our fiscal year to date performance.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Rate increases in both our operating segments totaled $172 million, primarily driven by increased safety and reliability spending and 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, partially offset by lower bad debt expense.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Finally, reductions in fiscal 2022 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. We remain on track to spend $2.4 billion-$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.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Of this amount, we have implemented $202 million, and we will implement the remainder on September 1. 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 2023 equity needs. During the quarter, we executed four sales agreements under our ATM program for approximately 2.9 million shares for $337 million. We sold agreements on 731,000 shares for approximately $81 million in net proceeds. As of June 30, we have approximately $700 million in net proceeds available under existing forward sale agreements, which satisfy substantially all of our anticipated equity needs through fiscal 2023.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

We finished the third quarter with an equity capitalization of 61.7%, excluding the $2.2 billion of interim winter storm financing and with total liquidity of approximately $3.5 billion. Additional details of our financing activities, including our equity forward arrangements as well as our financial profile, can be found on slides eight through 11. Turning now to securitization. During the third quarter, we continued to make progress on that front. In Texas, the Texas Public Finance 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've received the securitization funds, we will fully retire the $2.2 billion in interim winter storm financing. In Kansas, during the third quarter, we filed our application for a financing order.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Based on the approved procedural schedule, we anticipate receiving the financing order during our fiscal 2023 first quarter. In closing, our fiscal year to date performance was in line with our expectations and supports the reaffirmation of our fiscal 2022 earnings per share guidance in the range of $5.50-$5.60 per diluted 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'll now turn the call over to Kevin for his update and some closing remarks. Kevin?

[Kevin Akers, President and CEO at Atmos Energy]

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. In supporting that vision are our 4,700 dedicated employees executing our safety and reliability investment strategy and our prudent regulatory and financing strategy. These strategies, combined with a strong portfolio of assets, will continue to support our ability to grow earnings per share and dividends 6%-8% annually through fiscal 2026. We continue to see robust growth and demand for natural gas in our service territories. During the twelve-month period ended June 30, 2022, we added nearly 59,000 new residential customers, which represents a 1.8% increase.

[Kevin Akers, President and CEO at Atmos Energy]

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 1, 2, and 3 emissions and environmental impact from operations in the five key areas of operations, fleet, facilities, gas supply, and customers.

[Kevin Akers, President and CEO at Atmos Energy]

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 8 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 the year, all in a cost-effective manner. Again, as you've heard us mention before, we've completed our first zero net energy home in Evans, Colorado, in September 2021. During the third quarter of this year, we completed a second zero net energy home in Taylor, Texas, located just north of Austin.

[Kevin Akers, President and CEO at Atmos Energy]

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.

[Kevin Akers, President and CEO at Atmos Energy]

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.

[Operator]

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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 Julien Dumoulin-Smith of Bank of America. Please proceed with your question.

[Kody Clark, Research Analyst at Bank of America]

Hey, good morning, Kevin and Chris. It's Kody Clark on for Julien. Thanks for the time.

[Kevin Akers, President and CEO at Atmos Energy]

Good morning.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Hey, good morning.

[Kody Clark, Research Analyst at Bank of America]

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, rate 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 550-560 range.

[Kevin Akers, President and CEO at Atmos Energy]

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.

[Kody Clark, Research Analyst at Bank of America]

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

[Kevin Akers, President and CEO at Atmos Energy]

Yeah, much better now. Thank you. Yeah, I mean, you've 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 to between September or into October, just based on when the work gets performed. We're also monitoring, you know, our bad debt expense levels. This is our kind of a big collection season. Although the bad debt expense is down year-over-year, typically the fourth quarter or fourth fiscal quarter is a time where we have increased collection activities. We're kind of monitoring that as well.

[Kevin Akers, President and CEO at Atmos Energy]

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. That could potentially tick up once the rates reset later here in the fourth fiscal quarter. I mean, those are some of the things that we're monitoring in terms of the guidance range. I would say, you know, at this point, you know, 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.

[Kody Clark, Research Analyst at Bank of America]

Understood. Okay, thanks for that. As we look toward FY 2023, 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 into next year and any mitigating measures that you're thinking about?

[Kevin Akers, President and CEO at Atmos Energy]

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-Tex side or the APT side, are bid projects there. We feel good about how those have been coming in. As Chris said, we continue to work on our integrity management and compliance projects. We think those are all in good standing. On the procurement front, as we talked about before, we 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.

[Kevin Akers, President and CEO at Atmos Energy]

Our team tries to keep about a 6-month inventory on-hand and may even be looking to push that out toward the 9-month level. We have all the pipe either in the ground or on the ground to complete our 2022 projects. We have the pipe in the works right now for 2023 and are looking for material out into the 2024 period. 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.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Yeah. Kevin, I'll add to that. I mean, you're spot on with just the keeping up annually with the increases on the O&M front. 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 winter storm financing, which we will take out once the securitization funds are received, that we have no floating rate debt. We have executed nearly $2 billion in forward-starting interest rate swaps on future or planned debt issuances beyond fiscal 2022 at very attractive rates.

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

We've done that here over the last year or so, and in a really well position. When you look at our overall weighted average cost of debt today, it's at 3.8%, which is very beneficial for our customers. Finally, we don't have any significant 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. From a balance sheet and financing perspective, we're also have taken advantage of, over the last year or so, of trying to lock in some of the lower rates for the benefit of the customers, which also helps mitigate the impact on the customer bill.

[Kevin Akers, President and CEO at Atmos Energy]

Yeah. Cody, just to finish that off. 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. 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.

[Kody Clark, Research Analyst at Bank of America]

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

[Christopher T. Forsythe, SVP and CFO at Atmos Energy]

Thank you, Kody.

[Operator]

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

[Insoo Kim, Equity Research Analyst at Goldman Sachs]

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? 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.

[Kevin Akers, President and CEO at Atmos Energy]

Yeah, sure. Just before we get into that, again, our service territory is extremely blessed. We have exceptional leadership at the city, the state level there, great chambers of commerce, great economic development partners in each of our states. 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 a 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.

[Kevin Akers, President and CEO at Atmos Energy]

As you can see there, it's a variety of everything across the board, there, which is good for our local economy. 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.

[Insoo Kim, Equity Research Analyst at Goldman Sachs]

Got it. That's definitely good color. Second one, you know, the Inflation Reduction Act, obviously for the electric industry, a lot of you know initial thoughts there. Just for you know, as it relates to that bill, just curious on your overall thoughts on what, you know, potential opportunities or challenges could exist. You know, for example, I'm thinking of the RNG side. Obviously, you're now on the upstream side of things, but how does that, if it takes place, how does that change your thinking there? And then just curious on the methane tax perspective, does that impact your pipeline business at all?

[Kevin Akers, President and CEO at Atmos Energy]

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. As you know, the bill's 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 gonna 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. In a recent article I saw sometime from last year, Senator Manchin indicated that natural gas must be included in any clean energy program.

[Kevin Akers, President and CEO at Atmos Energy]

For me, it's good to see and hear that because it's gonna take all forms of energy, right? A diversified energy portfolio, as we've been saying for a long time, including natural gas. Our nearly 3,000,000 miles of pipeline infrastructure and our underground storage fields, which we have about 120 Bcf here at Atmos Energy. All that's gonna be required to meet the growing demand going forward. 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. We look forward to continuing to see how the bill evolves. We think we are a good operator, a prudent operator.

[Kevin Akers, President and CEO at Atmos Energy]

As you've seen, through our pipeline replacement projects, we've tightened up our system. We've got a good environmental strategy out there. I think we can operate in this legislation, but we're gonna continue to monitor it and see what the details show as this thing moves forward.

[Insoo Kim, Equity Research Analyst at Goldman Sachs]

Got it. Thank you so much.

[Operator]

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

[Daniel M. Meziere, VP of Investor Relations and Treasurer at Atmos Energy]

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.

[Operator]

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

Participants

Executives

• Christopher T. Forsythe, SVP and CFO
• Daniel M. Meziere, VP of Investor Relations and Treasurer
• Kevin Akers, President and CEO

Analysts

• Insoo Kim, Equity Research Analyst at Goldman Sachs
• Kody Clark, Research Analyst at Bank of America