Atmos Energy Q1 2023 Earnings Call Transcript

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Provided by Quartr
February 8, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Atmos Energy Corporation Fiscal 2023.

Speaker 1

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy today. I want to begin today's call by thanking every one of our 4,800 Atmos Energy employees across all of our 8 states for their exceptional effort and dedication to serving our customers under very challenging weather conditions during winter storms Elliott and Mara. Thank you for all that you do for our customers and our communities every day. You are truly the heart and soul of Atmos Energy.

Speaker 1

Our first quarter results reflect that effort, dedication and focus as we continued modernizing our natural gas distribution, transmission and storage systems on our journey to be the safest provider of natural gas services. Yesterday, we reported fiscal 2023 1st quarter net income of $272,000,000 or $1.91 per diluted share. And we reaffirmed our fiscal 2023 earnings per share guidance in the range of $5.90 to $6.10 Our Atmos Pipeline Texas division achieved several project milestones during the Q1. Our APT team completed filling the Cushing gas requirements at the Bezel 1B cavern and working gas is currently being injected and debroning operations continue with a targeted completion date of April of this year. This 3rd cavern provides additional support to APT's operations as well as the local distribution companies behind APT system and adds over 6 Bcf of new working gas capacity.

Speaker 1

Additionally, we completed the final portion of our 137 mile, 36 inches Line X Integrity Replacement project as well as completed Phase 2 of our 3 phase Line S2 project. While S2 breached supply from the Haynesville and Cotton Valley shale place to the east side of the growing Dallas Fort Worth metroplex, This second phase replaced 17 miles of 14 inches pipeline with 36 inches pipeline. The final phase of this project is anticipated to be in service late calendar 2024. These projects enhance the safety, reliability, versatility and supply diversification of our system and support the continued growth we are seeing in the local distribution companies behind APT system. According to the Texas Workforce Commission, the state continued a 14 month streak of record employment in December and added 650,000 jobs for the 12 months ending December.

Speaker 1

This strong employment trend continues to drive the growth in our Mid Tex and West Texas divisions were approximately 47,000 of our nearly 64,000 new customers were added for the same 12 months ending December period. Additionally, industrial demand for natural gas in our service territory remains strong. During the Q1, we added 12 new industrial customers with an anticipated annual load of approximately 9 Bcf once they are fully operational. The largest of these new industrial customers is anticipated to use nearly 6 Bcf annually. Our procurement team continues to do an excellent job sourcing the materials needed to support our capital investment as we continue modernizing our natural gas distribution, transmission and storage systems.

Speaker 1

We also maintained about 6 months of inventory for our distribution and transmission needs. And as we said before, we have ordered all of our anticipated steel pipe needs for FY 2023. Our customer advocacy team and customer support agents continued their outreach efforts to energy assistant agencies and to our customers during the Q1. Through their work, the team helped nearly 17,000 customers received over $6,000,000 in funding assistance. As a reminder, during fiscal 2022, our energy assistance teams helped Nearly 67,000 customers receive approximately $34,000,000 of funding to help with their monthly bill.

Speaker 1

As you'll hear from Chris today, our fiscal 2023 financing costs are known. We have hedged a significant portion of our financing needs beyond fiscal year 2023 and our liquidity and balance sheet remains strong. Adventist Energy is well positioned to continue delivering safe, reliable, efficient and abundant natural gas to homes, businesses and industries to fuel our energy needs now and in the future. I'll now turn the call over to Chris for his update. Chris?

Speaker 2

Thank you, Kevin, and thank you everyone for joining us this morning. As Kevin mentioned, our fiscal 2023 Q1 net income was $272,000,000 or $1.91 per diluted share. Consolidated operating income increased to $321,000,000 or 16% in the Q1. Our first quarter performance largely reflects positive rate outcomes driven by system modernization spending, continued customer growth in our distribution segment, partially offset by higher O and M spending in both of our segments. Slide 5 summarizes the key performance drivers for each of our operating segments.

Speaker 2

Rate increases in both of our operating segments driven by increased safety and reliability spending totaled $79,000,000 Residential customer growth and increased industrial load increased operating income by an additional $5,500,000 and we saw a $5,000,000 increase in APT's 3 system business due to wider spreads driven by maintenance in some of the key takeaway pipelines in the Permian during the quarter. Consolidated O and M expense increased $26,000,000 driven by planned higher in line inspection spending in APT, Higher spending for third party damage prevention activities on our distribution system and increased employee and other administrative costs. Consolidated capital spending increased 16 percent or $111,000,000 to $796,000,000 with 88 dedicated to improving the safety and the liability of our system. This increase primarily reflects higher spending at APT, the project that Kevin discussed just a few minutes ago. We continue to execute our annual regulatory filing strategy.

Speaker 2

Today, we have implemented $115,000,000 in annualized regulatory outcomes, and we currently have about $36,000,000 in progress. Slides 19 through 23 summarize those outcomes and Slide 16 outlines our planned filings During the quarter, we completed over $1,000,000,000 of long term debt and equity financing highlighted by the $800,000,000 long term debt and we completed in October 2022 $200,000,000 in settled equity forward agreements. As of December 31, we have approximately $755,000,000 of net proceeds available under existing forward sales and arrangements that will fully satisfy our anticipated fiscal 2023 equity needs a significant portion of our anticipated fiscal 2024 needs. Finally, to mitigate interest rate risk associated with our anticipated long term debt finance needs beyond fiscal 2023, we currently have about $1,350,000,000 in forward starting interest rate swaps to effectively affect a portion of treasury component of our total cost of financing at rates ranging from 1.8% to 2.2%. All of this gives us a clear line of sight into our anticipated financing costs for fiscal 2023 and a portion of our costs beyond fiscal 2023.

Speaker 2

Our equity capitalization as of December 31, excluding the $2,200,000,000 of winter storm financing was 60%. Additionally, we finished the quarter with approximately $3,400,000,000 of liquidity. Additional details of our financing activities as well as our financial profile can be found on Slides 7 through 10. Turning now to securitization. In Texas, The Texas Public Financing Authority and the Bombardier Board continue to work diligently to determine the best outcome for customers with respect to securitization.

Speaker 2

Additionally, in January, the Texas Legislature signaled its intent to provide funding to gas and other costs incurred during winter storm Yuri that were deemed prudently incurred by the Texas Railroad Commission in November 2021. We are encouraged with these developments and continue to support their efforts. However, we do not anticipate receiving the securitization funds for interim winter storm financing matures on March 9. We currently anticipate refinancing this debt through a combination of the syndicated bank term loan and utilization of our existing credit facilities in cash to minimize the cost of the customer while providing maximum flexibility to repay this debt once the securitization process is completed. Additionally, pursuant to an order issued by the Railroad Commission, we have deferred all carrying costs associated with the interim refinancing effective September 1 and currently intend to defer carrying costs associated with the

Speaker 3

I just wanted to ask on Just the recent move in gas prices. Can you kind of just talk about how that's affecting your financial plan or your hedging strategies at all here? Clearly, it should help with Bill Headroom as well, but maybe you can just give us some more color on what the recent move means. Thanks.

Speaker 1

Yes. I'll start a little bit on the supply side and then let Chris pick up on the hedging side. Nick,

Speaker 4

Sorry, hold on.

Speaker 1

$2 range in Waha and below 2 at Katy. So the forward look particularly even Out of the Waha area and the NYMEX area being in the $2 to $3 handle certainly look good on a go forward basis. As you've heard us say before, our storage positions helped us with some of that hedge early on. I think we were all in storage at an average weight cost of $5.48 So I think we're well positioned for the remainder of this year. The forward curves continue to look good at this point as we move into the summer and fall of next year.

Speaker 1

And the supply continues to look good out there from the major producing basins. So Chris, anything else to add?

Speaker 2

Yes. Thanks, Kevin. Just a couple of things, First step from a financing perspective, the $800,000,000 long term debt that we issued in October satisfies our anticipated long term debt financing needs. I've also already mentioned equity. We got that priced for the remainder of the fiscal year.

Speaker 2

And you understand the math the equity given where we are and in terms of what our financing needs over the next 5 years. Additionally, we do have full access to our credit facilities today, the operating credit facility, which supports our commercial paper programs at $1,500,000,000 program. We have the ample liquidity there to support operations As well as gas supply. And then finally, this comment commenting on hedging to kind of follow-up on Kevin's point, our gas supply team kind of sets hedging program in advance of the winter heating season. And between the combination of storage that Kevin alluded to and the hedging programs, we had just under 50% of the cost locked in for this winter heating season.

Speaker 2

So to the extent that gas prices moderate For the other, say, 50% or so, that should have a positive impact on the customer bill.

Speaker 3

Appreciate that. And Chris, I know that you're already fully priced on 23 kind of equity needs here. How should we kind of think about 2024 and being opportunistic about further derisking the financial plan? Thanks.

Speaker 2

Yes. Of the $755,000,000 as I mentioned, Nick, that satisfies all of our needs and a substantial portion of our needs all of our needs for 2023 and a substantial portion of our needs for fiscal 2024. So the ATM program continues to work very well for us. We'll continue to utilize that to kind of just layer in additional pricing, if you will, on the equity needs for 2024 with an eye towards just being opportunistic on pricing. Thanks a lot.

Speaker 2

Appreciate the time today. Thank you, Nick.

Operator

Your next question comes from David Arcaro of Morgan Stanley. Please go ahead.

Speaker 5

Hey, good morning. Thanks for taking my question.

Speaker 1

Good morning. Good morning.

Speaker 5

Good morning. Could you comment On the investigation by the Railroad Commission into the some of the service challenges that your system experienced during the winter weather in December and just any initiatives or actions that you're pursuing on the back of that experience?

Speaker 1

Yes. As you know, Our team had worked very hard going into this winter storm have prepared themselves, have prepared the system. But as the storm moved in, we did have approximately 2,300 customers in a limited area of our service territory that experienced some service interruptions out of the 2,100,000, 2,200,000 residential and commercial customers that we serve here in Texas. We have been working with the commission to provide them additional information and work with them as they wrap up their investigation, which we hope will occur here very soon.

Speaker 5

Okay, got it. Thanks. That's helpful. And then I was wondering, could you elaborate a bit just on the plans for refinancing some of the floating rate notes that are coming due related to winter storm Yuri costs. And just is there an EPS impact that you might anticipate from having to refinance those just as we're waiting for the securitization process to get completed here?

Speaker 2

Dave, this is Chris. And the short answer is no. As I mentioned on our prepared remarks, we've got Yes, planned hybrid securitization that will be sorry, a term loan, a syndicated term loan that we anticipate executing here in the next few weeks, as well as utilizing some of our credit facilities and cash and with the regulatory asset order that the Railroad Commission has granted, we are deferring all of those financing costs right now into that regulatory asset until securitization.

Speaker 5

Perfect. Thanks so much.

Speaker 2

Thank you.

Operator

Your next question comes from Gabe Moreen of Mizuho Securities. Please go ahead.

Speaker 6

Good morning, guys. Maybe you can just talk to us about broadly speaking how O and M is tracking relative to your expectations so far this year? Are you seeing any let up in pressures and just curious on that, your thoughts there?

Speaker 1

Yes, I'll start and then Chris can jump in. As you heard in Chris' remarks, most of the O and M that we've experienced in the Q1 is What we thought we would see, it's in the range that we've already laid out there. And what I mean by that is that Well, with the growth that we talked about, we certainly, both on our side and in our jurisdictions, has driven increased O and M from a line locating perspective. That economic growth certainly drives new roofs, new Commercial businesses, new roads, new infrastructure, which drives up locating expenses. As a matter of fact, our Texas number of locates is up almost 10% this quarter over quarter last year.

Speaker 1

And then in addition, as you heard on some of the projects that I mentioned, we had some additional in line inspection work that we needed to pull forward on the APT side and some additional piggy activity that we slowed during the COVID period, but wanted to pick that work back up. So All things we anticipated kind of occurring during the quarter, but saw a lot more line Katy expense just given the growth that we're experiencing. Chris, anything additional?

Speaker 2

I think that's spot on Kevin and then And I would just add that from an inflation perspective that the inflation we're experiencing that we're seeing is still well within the planning parameters that we outlined in our fiscal 2023 guidance in our 5 year plan on an overall basis.

Speaker 6

Kevin, thanks Chris. And maybe if I could just follow-up with sort of apologies if I missed it, but you got a couple large projects that have either wrapped up or nearing completion. Can can you maybe just talk about kind of what's next in the queue from a larger project standpoint as you look across your system?

Speaker 1

Well, those projects that I mentioned, Line X was an integrity project, which fortifies that line that comes out of Waha and runs So west to east into Dallas. And then the S-two is another integrity and capacity project to bring in additional supply from the East. So we'll continue to monitor our system, continue to monitor that growth. We still have, as I mentioned, complete that F or the Bethel Cavern 1B project. That will take us probably into 2026 to get all 3 caverns back in service at the same time.

Speaker 1

And just as a reminder, that's not only a capacity and need for the growth behind our systems. It's also an integrity project per rules at the commission where we have to do our integrity work on those caverns every 15 years. So we'll continue to look at our storage. We'll continue to look at The larger pipe infrastructure and see where that may need increasing or fortification as we move forward.

Speaker 6

Thanks, Kevin.

Operator

Your next question comes from Richard Sunderland of JPMorgan. Please go ahead.

Speaker 4

Hi, good morning and thanks for the time today. I just wanted to follow-up on the earlier discussion around the gas price dynamics. Can you just give your thoughts on the duration of Waha weakness? We see a probability that Waha gas prices remain depressed until Matterhorn enters service in mid-twenty 24. Any thoughts around The duration here and impact to customer bills relative to your outlook last quarter?

Speaker 1

Yes. Again, our team continues to stay close with the producers out there, midstream processors to keep a handle on as you said as well as new projects that are coming online. But I think the other thing that we'll continue to work on is the tie into some of those lines. That's the other opportunity I think for us as Those projects need to build coming out of Waha and Head East. It gives us an opportunity to get additional taps or to bring in additional supply into our areas as well.

Speaker 1

So all good signs, as you say, on the forward look. Right now, we believe these prices and the conversations we're holding, numbers look really good as you head into Novi March Upcoming. So right now, I don't see things changing in the short run, at least the information we're getting out there. And then as we continue through this winter period pulling on storage and get ready to inject for next season. The pricing looks really good there.

Speaker 1

As I said before, it's in the $2 range or so. So that should have a very positive impact for our bills

Speaker 4

Great. That's all I had today. Thank you.

Operator

Your next question will come from Ryan Levine at Citigroup. Please go ahead.

Speaker 7

Good morning. Most of my questions you were asked already, but I just want to follow-up on one. In terms of the new tax DART proceeding, can you provide an update on around that regulatory activity?

Speaker 2

Yes, Ryan, this is Chris. So we made that filing, the dollar filing in mid January. We're is now beginning to work through the early discovery process and we anticipate implementing new rates under the DAR filing by the end of the fiscal year.

Speaker 7

Okay, great. That's all for me. Thank you.

Speaker 2

Okay. Thanks, Ryan.

Operator

There are no further questions at this time. So I will turn the conference back to Dan Mazir for any closing remarks.

Speaker 2

Thank you. We appreciate your interest in Atmos Energy, and thank you again for joining us.

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please Disconnect your lines.

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Atmos Energy Q1 2023
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