Atmos Energy Corp

NYSE:ATO

Earnings Call Analysis

Atmos Energy Q3 2024 Earnings Reflect Strong Performance and Positive Outlook

Atmos Energy reported a year-to-date diluted earnings per share of $6, up from $5.33 last year. The company's performance was bolstered by regulatory outcomes, customer growth, and strong revenues from their pipeline and storage segment. They saw a $238 million increase in operating income due to regulatory outcomes and an additional $18 million from customer growth. Operating and maintenance expenses rose slightly, with full-year expectations between $800 million and $820 million. The company projects FY24 EPS at the higher end of $6.70 to $6.80 and anticipates 6%-8% EPS growth through FY28. Atmos added 57,000 new customers and maintains a strong financial position with $4.3 billion in liquidity.

Strong Earnings Growth

Atmos Energy reported a solid increase in diluted earnings per share (EPS), rising to $6 from $5.33 in the previous year. This growth was driven primarily by positive regulatory outcomes and a significant increase in customer growth. Notably, the company’s regulatory outcomes contributed $238 million to operating income, while customer growth added an additional $18 million. This strong performance demonstrates the success of the company’s strategic initiatives aimed at safety, reliability, and expansion.

Revenue Boost in Pipeline and Storage

The Pipeline and Storage segment experienced a $19 million increase in revenue compared to the previous period, with $11 million of this realized during the third fiscal quarter. This boost was partly due to planned and unplanned maintenance affecting pipelines from the Permian Basin, which increased spreads due to reduced takeaway capacity coupled with high natural gas production. These elevated spreads are expected to continue until the end of the fiscal year, providing a further uplift to this segment.

Operational and Maintenance Costs

Operational and Maintenance (O&M) expenses saw a net increase of $16 million or roughly 3%, excluding a $14 million one-time bad debt adjustment in Mississippi. This rise is attributed to higher employment-related costs, insurance premiums, IT and maintenance costs. However, it was partially offset by a $15 million decrease in O&M in the Pipeline and Storage segment due to the timing of inline inspection work. The company anticipates O&M expenses for the full fiscal year to range between $800 million and $820 million.

Capital Investment and Financial Health

Atmos Energy’s capital spending increased to $2.1 billion, with over 8% dedicated to enhancing system safety and reliability. The company plans to spend approximately $3.1 billion for the entire fiscal year. Financially, Atmos Energy is strong, boasting an equity capitalization of 61% and $4.3 billion in liquidity, which includes $551 million from existing forward sale agreements. The company successfully completed a $325 million senior unsecured debt offering, maintaining a manageable debt profile with an average maturity of 17 years.

Revenue and Earnings Guidance

Looking ahead, Atmos Energy has raised its EPS guidance for fiscal 2024 to the higher end of the $6.70 to $6.80 range, reflecting the company’s robust performance. Factors contributing to this optimism include regulatory outcomes and elevated spreads in the Pipeline and Storage segment. The company maintains a long-term EPS growth target of 6% to 8% through fiscal 2028.

Customer and Industrial Growth

Atmos Energy added 57,000 new customers over the 12 months ending June 30, with nearly 45,000 of these additions in Texas. This growth aligns with the state's strong economic performance, which saw an annual job growth rate of 1.9%. The company also added 10 new industrial customers in the third quarter, with an anticipated annual load of approximately 2 Bcf. Year-to-date, 32 new industrial customers have been added, equating to roughly 6 Bcf in annual load, comparable to adding 110,000 residential customers.

Ongoing Strategic Focus

Atmos Energy continues to prioritize hydrostatic testing, line locating, and compliance with integrity regulations as part of its operational strategy. These focus areas are expected to persist into fiscal 2025. The company's consistent performance and customer-centric approach underline its pivotal role in delivering reliable and efficient natural gas as energy needs evolve.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atmos Energy Corporation Fiscal 2024, Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Dan Meziere, Vice President of Investor Relations and Treasurer. Dan, you may begin.

[Daniel Meziere, executive]

Great. Thank you, Krista. Good morning, everyone, and thank you for joining our fiscal 2024 Third Quarter Earnings Call. With me today are Kevin Akers, President and Chief Executive Officer; and Christopher 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 32 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsythe, our Senior Vice President and CFO. Chris?

[Christopher Forsythe, executive]

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we announced fiscal year-to-date diluted earnings per share of $6 compared to $5.33 per diluted share in the prior year period. Our third quarter and fiscal year-to-date results continue to be driven by two themes: regulatory outcomes reflecting increased safety and reliable spending and customer growth. Additionally, strong Food System revenues as APT, particularly during the third fiscal quarter, contributed to our performance. Regulatory outcomes in both of our segments increased operating income by $238 million and residential customer growth and rising industrial load and on distribution segment increased operating income by an additional $18 million.

Revenues in our Pipeline and Storage segment increased $19 million period-over-period. $11 million of this amount, net [indiscernible] was realized during our third fiscal quarter. Several pipelines coming out of the Permian experience planned and unplanned maintenance. This reduction in takeaway capacity up with robust associated natural gas production, wide the spreads between the Waha header on the western end of APT system and deliver points in the eastern and southern ends of the system. We expect spreads to remain elevated through the end of our fiscal year. Excluding the $14 million onetime bad debt adjustment we reported in Mississippi in the first quarter, Consolidated O&M increased at net $16 million or about 3%.

This increase is primarily due to higher employment related costs, insurance premiums, IT software and maintenance costs partially offset by a $15 million decrease in O&M in our Pipeline and Storage segment, primarily due to the timing of inline inspection work. As expected, O&M in the third fiscal quarter trended higher than the prior year quarter, and we anticipate O&M spending in the fourth fiscal part to trend higher as well as continue to focus our spending on compliance, maintenance and system monitoring. We still expect fiscal '24 O&M to be in the range of $800 million to $820 million.

Consolidated capital spending increased to $2.1 billion, with 8%-plus dedicated to improving the safety and reliability of our system. Pending our distribution segment has increased due to higher safety and liability spending in higher spending to support customer growth. Staying in our Pipeline and Storage segment is lower than the prior year due to timing. We remain on track to spend approximately $3.1 billion this fiscal year. Since the end of our second fiscal quarter, we implemented about $213 million in annualized regulatory outcomes, including all of this year's Texas script filings and our annual filings for the City of Dallas, Louisiana and Tennessee. Year-to-date, we have completed $380 million in annualized regulatory outcomes.

Currently, we have an additional $182 million in annualized outcomes in progress. Additionally, we made our first filing under APT's new System Safety, an integrity mechanism seeking a $19 million increase in revenues. This new mechanism was approved in APT's last generated rate case and a floating mechanism for costs incurred to address new federal and safety-related regulations meaning we will recognize the revenue and related O&M costs after review and approval by the [ Tech Starwall ] Commission, resulting in no impact to operating income.

Our financial position continues to remain strong. We finished our third fiscal quarter with an equity capitalization of 61% and approximately $4.3 billion of liquidity. This amount includes $551 million of net proceeds available under existing forward sale agreements that will fully satisfy our anticipated fiscal '24 equity means and most are anticipated fiscal '25 needs.

In June, we completed a $325 million senior unsecured debt offering tapping our existing 10-year 5.9% senior notes. As a result, our overall weighted average cost of debt as of June 30 stands at 4.1%, and our debt profile remains very manageable with a weighted average maturity of approximately 17 years. As we head into the fourth quarter of the fiscal year, we now believe our fiscal '24 earnings per share guidance will be at the higher end of our reaffirmed earnings per share guidance range of $6.70 to $6.80, our anticipated financing plan for fiscal '24 is complete. All regulatory outcomes that can impact fiscal '24 has been implemented.

As I mentioned ago, we anticipate spreads for APT's through-system business will remain elevated which will modestly contribute to our Q4 results, and we have a reasonably clear line of sight in the system compliance, maintenance and monitoring we will be performing in the fourth quarter. As a reminder, our guidance range includes two items totaling $0.17 that we will exclude when we initiate our fiscal '25 guidance in November. The first item is the Texas property tax benefit have been discussing all fiscal year, which would favorably impact fiscal '24 results by $0.10.

Additionally, the onetime Mississippi bad debt adjustment represented $0.07. We continue to anticipate 6% to 8% earnings per share growth from this adjusted EPS amount through fiscal '28. Thank you for your time today, and I will turn the call over to Kevin for his update and some closing remarks. Kevin?

[John Akers, executive]

Thank you, Chris. Good morning, everyone, and thank you for joining us today. We continue to benefit from solid economic growth in our service territory. For the 12 months ended June 30, we added 57,000 new customers with nearly 45,000 of those new customers located in Texas. The Texas Workforce Commission reported in July that the seasonally adjusted number of employed reached $14.2 million. Texas again added jobs at a faster rate than the nation over the last 12 months ending June, adding over 267,000 jobs, representing a 1.9% annual growth rate. Industrial demand for natural gas in our service territories also remained strong.

During the third quarter, we added 10 new industrial customers with an anticipated annual load of approximately 2 Bcf once they are fully operational. Fiscal year-to-date, we have added 32 new industrial customers with an anticipated annual load of approximately 6 Bcf once they are fully operational. On a biometric basis, the 6 Bcf of anticipated industrial loan is equal to adding approximately 110,000 residential customers. And during the first 9 months of the fiscal year, our customer support agents and customer advocacy teams continued their outreach efforts to energy assistance agency and customers, helping over 47,000 customers received nearly $19 million in funding assistance.

Our consistent performance reflects the vital role we play in every community, safely delivering reliable and efficient natural gas to homes, businesses and industries to fuel our energy needs now and in the future. We appreciate your time this morning, and we will now open the call to questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of [indiscernible] with Barclays.

[Unknown Analyst]

I just want to first quickly touch on financing. Could you just further discuss the equity needs for '25 and definitely given '25 largely done with [ fewer ] instruments and the recent renewal on ATM. Just how does that better facilitate the equity needs in 2025?

[Christopher Forsythe, executive]

Yes. Well, this is Chris. Good morning, and thanks for joining us. We typically issue between $600 million and $800 million a year in equity through the ATM program that we have. And as I mentioned a few minutes ago, we had $551 million of price at the end of June, of which that amount will basically mostly to satisfy our visit 2025 needs. So I think that, hopefully, that will give you enough color to update your models.

[Unknown Analyst]

That's great. That's great. Very helpful. Maybe just quickly turning to O&M execution for '25. You raised the midpoint guidance by $20 million last quarter. And I guess things are on track for this year. Could you talk about going forward, what are some of the key items you're focusing on O&M execution? And how are you benchmarking with the 3.5% annual increased guidance.

[John Akers, executive]

Yes. This is Kevin. Glad to have you join us today. Again, we're working through the remainder of fiscal '24 right now and anticipate it will be the same items as we move into '25. And we'll have additional detail and color as we get to our November call on '25. But again, the drivers around O&M continue to be hydrostatic testing, line locating, integrity regulations, market ball placement on difficult or hard to locate lines, those sort of things. And then looking for opportunities as we move forward to enhance those or pull things forward. when we have the ability to do that. So again, the same items that we're focused on this year, we anticipate seeing again in '25.

[Christopher Forsythe, executive]

Yes. And , I'll add to that, too, is that as I said at the end of my prepared remarks, we're still anticipating 6% to 8% EPS growth off of the adjusted EPS up for fiscal '24. So that's the overall theme to take away from. We'll perhaps take on the O&M, as Kevin mentioned, that they were still guiding to that 6% to 8% growth target.

[Operator]

Your next question comes from the line of Richard Sunderson (sic) [ Sunderland ] with JP Morgan.

[Richard Sunderland, analyst]

Thank you for the time today. Looking at '24 results, you've called out the $0.17 of one-offs. I'm curious how we should think about the rest of the business into '25. Does everything else continue into '25 other than APT spread benefit meaning take the 60 top end, less $0.17 and maybe back out another roughly $0.10 for the spread pickup.

[Christopher Forsythe, executive]

Yes. I think you're on target there, Rich. Backing out the $0.17 off of whatever you want to assume for the outcome for fiscal '24. APT, we will have some spread activity next year, but we just can't predict it. And so I wouldn't necessarily discount too far off of what you -- the two onetime items when you're starting your 7% or 8% or 9%, whatever you want to do on the growth target for fiscal 2025 because we will have some activity. It's just this time this year, particularly in the third quarter, we saw some elevated spreads. And as you commented, it's expected to revert back to the mean, which means we'll still have some activity there.

[Richard Sunderland, analyst]

Okay. Great. That's really helpful. And I guess one quick follow-up on that spread opportunity. I know you referenced in the script kind of a continuation into 4Q. Is that already contemplated in the higher-end guidance language? Or is that potential upside depending on how that materializes?

[Christopher Forsythe, executive]

No, that's all contemplated in the guidance that we've updated here this morning.

[Operator]

Your next question comes from the line of Ryan Levine with Citi.

[Ryan Levine, analyst]

Good morning. To follow up on the APT spread dynamics, what are you assuming for the Matterhorn in-service date with the current '24 guidance. And are you assuming that the spread remains ride for the remaining portion of your fiscal year?

[John Akers, executive]

Yes. As Chris said, again, we don't anticipate any further maintenance this year on the upstream segments of APT there that would impact the spreads right now. They've mitigated from the highs we've seen over the last quarter somewhat. And look, going forward, definitely, Matterhorn will be coming on, I think if you read some of the documentation from the upstream folks, sometime in September, October, early fall, that will be coming on. We just have to watch and see what that does for the dynamics out there. And then as we normally get into the shoulder much and winter period, demand will drive it further from there on the spread impact.

But again, I always like to remind here, why APT exists and that's to serve the customers behind it, the LDC is behind it. And then when we have opportunity, we'll move that gas across our system. So right now, again, we don't anticipate any further maintenance upstream that would impact the spreads any further than what we're currently seeing today at this point.

[Ryan Levine, analyst]

Okay. And then a follow-up on that. Given the strong performance this fiscal year on APT, does that have any implications for resetting the bar on which you get the sharing mechanism in future time periods.

[John Akers, executive]

No, that's said in the rate case itself on a go forward. So the next time that will potentially be looked at would be in the next 5 years in the next required filing.

[Christopher Forsythe, executive]

Yes. So as a reminder, that bar was set at $106.9 million. And so that's the benchmark we have to achieve to begin sharing over and above that amount. And of course, it works the other way too, if we fall short, but 1 of 6.9% is the target we're looking at.

[Ryan Levine, analyst]

Okay. And then last question for me. To the extent that there is new gas generation or infrastructure built in your service territory, do you see any opportunities on the LDC side to maybe build some infrastructure to support the movement of gas associated with some of the gas generation that may be coming?

[John Akers, executive]

Yes. As we've talked about on previous calls, there's always that opportunity out there. But let's remember, the power generators that we currently have behind APT system. We're one of several suppliers to them so they can move or flex between suppliers at their will out there. So we wouldn't be a sole supplier. And we'll just continue to keep an eye on that over the next few years and see how that develops. But again, we would be one of several suppliers or inputs into those facilities.

[Operator]

That concludes our question-and-answer session, and I will now turn the conference back over to Dan for closing remarks.

[Daniel Meziere, executive]

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

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.