Atmos Energy Corporation
Q1 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Greetings. And welcome to the Atmos Energy’s First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

[Dan Meziere:]

Thank you, Bob. Good morning, everyone, and thank you for joining us this morning. With me this morning are Kevin Akers, President and Chief Executive Officer; and Chris Forsythe, Senior Vice President and Chief Financial Officer.

[Chris Forsythe:]

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. We’re off to a solid start to the fiscal year. Yesterday we reported fiscal 2021 first quarter net income of $218 million or $1.71 per diluted share. Our first quarter performance largely reflects positive rate count outcomes driven by system modernization spending, customer growth in our distribution segment and lower O&M spending largely due to the timing of such spending in both of our segments. Consolidated operating income increased by 18% to $299 million in the first quarter. Slide four summarizes the key performance drivers for each of our operating segments. Rate outcomes provide an incremental $15 million in operating income. Customer growth in our distribution segment contributed an incremental $6 million, as we continue to benefit from strong population growth in some of our service areas, most notably in North -- in our North Texas Distribution business. For the 12 months ended December 31st, we experienced 1.7% net customer growth in our North Texas Distribution business and 1.4% net growth across our 8-state footprint. The ongoing effects of the pandemic reduce consolidated operating income by approximately $9 million this quarter, primarily in our distribution segments. Quarter-over-quarter operating income fell approximately $2.5 million due to global commercial demand attributable to the effects of the pandemic on the economy. Additionally, we experienced a $4.5 million decline in service order revenues, primarily due to the temporary suspension of collection activities. And bad debt expense increased about $2 million quarter-over-quarter.

[Kevin Akers:]

Thank you, Chris. As you can see, from our first quarter results, we are off to a good start. We remain focused on executing our proven investment strategy of operating safely and reliably, while we modernize our natural gas distribution, transmission and storage systems. We are continuing our investments in people, processes and technologies that will enable Atmos Energy to scale and efficiently and safely invest $11 billion to $12 billion over the next five years. Working to achieve our vision to be the safest provider of natural gas services, we provide safety messaging to our customers and our communities, innovate and advance employee training, and invest in the modernization of our system. Over the last 10 years we’ve invested more than $11 billion company-wide to modernize our pipeline infrastructure. Over 80% of which was allocated to safety and over the next five years we anticipate spending $11 billion to $12 billion as we replace approximately 5,000 miles to 6,000 miles of our distribution and transmission pipe, including the replacement of the remaining cast iron by the end of 2021. To build upon our continuous improvement efforts, in 2016, we started the process of implementing a pipeline safety management system following the American Petroleum Institute 2015 publication of the voluntary recommended practice. This voluntary measure encourages continuous improvement by reviewing practices, policies and procedures, as we learn from our experiences and from those of others in the industry. This quarter the National Transportation Safety Board held a public meeting on January 12th, related to the incident that occurred at Dallas, Texas residents in February 2018. The field and gas investigation and lab reports confirmed that unrecorded third-party excavation damage on mechanical equipment caused a major crack and leak. We are currently reviewing the complete findings and recommendations released after the meeting and expect to receive the final report soon.

[Operator:]

Thank you, sir. Our first question today is from Jeremy Tonet of JPMorgan. Please proceed with your question.

[Jeremy Tonet:]

Hi. Good morning.

[Chris Forsythe:]

Good morning, Jeremy.

[Kevin Akers:]

Hey. Good morning, Jeremy.

[Jeremy Tonet:]

Thanks for taking my questions. Just want to start off, there was a lot of concerns in the market, obviously, last March when COVID hit and this was the first heating season where you guys get to see the full impact there. I am just wondering if you could expand a bit on, can you speak to the COVID impacts on the quarter versus your expectations and are you seeing impacts kind of consistent going forward into 2021 with your expectations overall?

[Chris Forsythe:]

Sure, Jeremy. I’ll start here and Kevin feel free to jump in as well. As I mentioned earlier, we had about a $9 million quarter-over-quarter impact that we’ve attributed to COVID between commercial load loss, the decline in service order revenues and a little bit of bad debt expense. On the commercial load loss, that is certainly well within the planning scenarios that we had developed over the summer and into the fall as we established our earnings per share guidance. So from that perspective, we’re pleased to see that that the commercial load loss is in line with those expectations. We’ll continue to monitor that as we moved through the second quarter. We got a still another two months or three months left in our winter heating season, which by the end of winter heating season, we’ll have about 70% of our distribution revenues booked for the fiscal year and we’ll have some more clarity around what the impact of the margin line item will be. Same thing with the service order revenues, a lot will be contingent upon when we resumed full collection activities and we’re working with our regulators on that keeping you abreast of what we’re doing there and but, again, that is completely in line with our expectation.

[Kevin Akers:]

Yeah. Jeremy, the only thing I’ll add to that, as you’ve heard us say many times before, our team, our risk management compliance team, our operations team, our shared service group, continue to adhere and follow to our practices and protocols are in place, again, allowing us to continue to execute at the highest level on all fronts. Even though we’ve seen an increase in some parts of our territory in a number of cases, we are glad to see the vaccine start to be rolling out across our service territory as well. But we believe with those practices, protocols and things we’ve been able to have in place over the last few months w will continue to execute on a go-forward basis at a very high level.

[Jeremy Tonet:]

That’s very helpful. Thanks. And maybe just kind of turning over to O&M, given the O&M tailwinds you have realized already. What are the main drivers and timing of your expected O&M growth over the course of the year?

[Chris Forsythe:]

Yeah. So in the O&M, as we talked about last quarter, we’ve assumed kind of a full O&M budget, if you will, our full compliance program. So our strategy going into the first quarter was to defer some spending that we didn’t need to do in the first quarter to kind of see how the new customer load loss was materializing. In fact, we’ve got a better handle on that now. And as you saw in some of the details around the guidance, we’re still reaffirming the O&M range that we initially put out last fall. So, again, a lot of that will be focused on compliance activities, as well as other activities designed to mitigate risk. As you heard, Kevin talked about, third-party damage, we’ll continue to step up our efforts in that particular area, as well as just other system maintenance activities that are not necessarily compliance oriented, but we certainly want to be performing to maintain the system the way that we like to maintain it. You’ve heard us talk before, we certainly assume in our O&M plan, not just what we need to meet compliance purposes just to meet just in time, but we’re also keeping an eye towards what our requirements are further down the line later in a fiscal year or into next year, so that we are well ahead of those compliance requirements so that we can meet those dead time -- deadlines without having to wait to the last minute.

[Jeremy Tonet:]

Got it. That’s helpful. Thanks. And you touched on this a bit in your commentary, but I was hoping you could expand a bit more, it seems for the -- in the marketplace for the LDC space as a whole, there’s some concern with regards to new laws that could impact, new gas hookups, effectively banning that. Just wondering, I guess, how you guys see that risk for you in your service territories and how I guess it compares for Atmos versus other LDC peers and difference that you see there?

[Kevin Akers:]

Yeah. Jeremy, I’ll start with that. As again, as I’ve said, we have very constructive rate jurisdictions and we continue to see growth, as Chris talked about across our service territory. We haven’t seen any bans, whether they’re on hookups or usage or those sort of things across our service territory. We stay in close contact through our stakeholder engagement strategy, our local public affairs and operating teams with our jurist -- city jurisdictions or state legislators as well. The -- keeping them informed of what value natural gas brings, what Atmos Energy is doing in their communities. So we stay in touch with them to keep them up to-date on an ongoing basis and haven’t really seen any even come up at the legislative level or through discussions regarding gas bans or clients hookups at this point.

[Jeremy Tonet:]

Got it. And I think we might have seen some legislation and some states that were -- at the state level that would ban or stop these types of bans. Have you guys seen anything like that in your service stories or have any expectations for that?

[Kevin Akers:]

Yeah. We’re working with associations and peer companies in all of our jurisdictions to keep an eye on bills that are being filed at the state level. These are called all fuels bills, if you will, you may recall that last year, there was one approved in Tennessee and one approved in Louisiana and we’re very encouraged by those bills. I think it highlights the value that natural gas continues to bring and the value of customer choice and choosing an affordable energy opportunity across our footprint. So we’re aware of those. We’re working with different associations. We’re working with our peer companies as well to make sure that their customers have that choice of fuel going forward.

[Jeremy Tonet:]

Got it. I’ll stop there. Thank you very much.

[Kevin Akers:]

Thank you, Jeremy.

[Operator:]

The next question is from Richie Ciciarelli of Bank of America. Please proceed with your question.

[Richie Ciciarelli:]

Hey. Good morning.

[Chris Forsythe:]

Good morning, Richie.

[Kevin Akers:]

Good morning.

[Richie Ciciarelli:]

Hey. Thanks for taking my question. Just on the customer growth side, so obviously pretty impressive this quarter. Just can you provide any more color on what you’re seeing from the customer classes and more on the residential side with new customer hookups? And how is that kind of progressed into fiscal 2Q, thus far with, potentially more immigration into the State of Texas there?

[Chris Forsythe:]

Yeah. I’ll start and Kevin, you can certainly help out as well. Yeah. As I said, we’ve got 1.4% across the 8-state footprint, 1.7% here in North Texas and a lot of that is new residential growth. And it’s a trend that we started what we’ve really been seeing now for quite some time, but it’s continued throughout this pandemic. I think the stories are reading. You see more and more folks that are interested and maybe moving into the suburbs, looking for either a first home or getting a different type of home as they’re accommodating their work-from-home protocols and strategies. So that’s what’s driving a lot of growth. Certainly here in the North Texas area, we continue to see robust economic -- underlying economic activity in terms of companies evaluating the Dallas Fort Worth market and in terms of relocating in this area, and we continue to see how we come to Dallas there. There are cranes and construction everywhere. So I think we’re still seeing that underlying activity and a lot of that’s being driven by the residential class and that’s consistent to across our footprint and really in our first quarter, the number of hookups that we had from a residential perspective was one among the highest that we’ve seen in a number of years and we are grateful to see that not only in North Texas, but across most of our service territory.

[Kevin Akers:]

Yeah. Chris, I just quickly add to that. In addition in some of our other states, Mississippi, Kentucky, we’re seeing industrial expansion as well, which is a good sign in this economy, as well as new industrial customers coming into those locations as well. So we see it, as Chris said, with residential commercial starting move in the Metroplex, but again, good opportunity on the industrial side and our other footprint as well.

[Richie Ciciarelli:]

Got it. That’s very helpful. And then just on your equity needs, obviously, you mentioned you price a good portion of forward and then the remaining is through the ATM this year. But just as you think about kind of your long-term plan, keeping that cap structure towards the 60% level given you can an actual cap structure in Texas. I mean and just given where your multiple is, could you look at other forms, whether it’s portfolio optimization to kind of recycled capital or creating a whole cost structure. Just curious how you guys are thinking about that, just given where your multiple is today?

[Chris Forsythe:]

Sure. I mean, we certainly we go put together our strategic plan every year, refresh it, if you will. I mean, these are things that we’re certainly thinking about. I’ll just remind everybody that when we put together our most recent five-year plan consistent with what we’ve done the last several years, all of our equity financing is already assumed in that five-year plan. So when you look at the 6% to 8% earnings and dividends per share growth, the projected share price that we put out, or sorry, earnings per share out in the out years that has assumed a wide variety of potential stock prices. And we put we put that guidance out after we’ve gone through that rigorous assessment. So we feel right now the current financing strategy is one -- that is one been successful for us in the past. We continue to believe that will be successful for us in the future. And but we will continue to evaluate certainly different structures. And we’ve talked about before in terms of asset dispositions, our 8-state footprint, we’re very, very comfortable with. We’ve got good jurisdictions, very constructive jurisdictions that we are very familiar with these jurisdictions and as this -- again, we always consider it but that’s not a key part of our strategy and we don’t need that type of activity to achieve the 6% to 8% earnings per share growth over the next five years.

[Richie Ciciarelli:]

Got it. That’s helpful. And just one more if I can flip in on the RNG front, you mentioned you’re looking over, I guess, 20 different RNG opportunities. Are you seeing this coming from new outlets or what’s kind of driving this demand? Is it more on the dairy farm side or landfills? Just curious what kind of customer base you’re looking at over there?

[Kevin Akers:]

Yeah. You hit the answer there with the last two. It’s the dairy industry itself and its landfill projects at this point probably have the majority of those approximately 20 projects that we’re looking at and it’s scattered across our footprint. As we mentioned in their opening remarks, we just closed out a supply project with a firm there in Colorado and we continue to work on several others across Kentucky and other parts of our jurisdiction as well. But there are in that area. There are in the dairy side and the landfill side at this point.

[Richie Ciciarelli:]

All right. Great. That’s all I had. Thanks for all the time.

[Chris Forsythe:]

Thank you, Richie.

[Operator:]

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

[Insoo Kim:]

Thank you. My first question is a follow-up to the customer growth one. When you look -- when we look at what’s embedded in your five-year growth plan, what’s the range of customer growth across your jurisdiction that you’re assuming?

[Kevin Akers:]

Yeah. Well, we put together the plan. We’re pretty conservative on that growth estimate. It’s difficult to estimate when exactly it will materialize. So we basically just assume that the same customer count or customer base that we have at the time that we published the plan and that -- and just let that growth be a bit of an upside for us as it materializes. Again, primarily, because it’s very difficult to forecast in which period that growth may occur.

[Insoo Kim:]

Got it. So I guess when we look at the capital spend and the rate base growth, it’s not -- the bulk of it, again, is just infrastructure replacement and modernization as opposed to new customer line hookups.

[Kevin Akers:]

Right. As I mentioned…

[Chris Forsythe:]

Exactly. You can get a lot more here.

[Kevin Akers:]

Yeah.

[Insoo Kim:]

Right.

[Chris Forsythe:]

Over 80% of the folks there.

[Insoo Kim:]

Yeah. Got it. My other question is, to your comments on kind of safety improvement initiatives and actions that you’ve taken already and following up on the NTSB recommendations, when given the report that had come out about a month ago. Do you -- what do you see from either an O&M perspective or I guess, a capital perspective that could be elevated versus your plan or is that already embedded in the growth plan that you’ve laid out?

[Kevin Akers:]

Yeah. Because we continually evaluate our practices and our protocols and adopted several the recommendations already into practices, you’ll find that on our website. We don’t believe that implementing the recommendations that have been laid forward will have a material impact on capital or O&M at this point.

[Insoo Kim:]

Got it. That’s it for me. Thank you.

[Kevin Akers:]

Thank you.

[Operator:]

Our next question is from Charles Fishman of Morningstar. Please proceed with your question.

[Charles Fishman:]

Good morning. Just another follow up on the NTSB report, so at this point, we’re just waiting on the final report. You’re waiting on the final report. Is there anything else that’s triggered by that final report? I mean, is there any -- is the Railroad Commission waiting on that report to issue some kind of final -- their final report, any of your city regulatory bodies, any insurance claims, any legal issues? I mean, is there anything else that’s out there besides this final NTSB report?

[Kevin Akers:]

There’s a lot packed in there. Let me see if I can cover all those for you. The final report itself from our understanding, Charles, is merely just corrections or edits to the abstract and other information that you’ve seen out there already. And again, we anticipate that coming out really soon. And the Railroad Commission was a party to the investigation just as we were and they paused their investigation until the NTSB was complete. So we anticipate them to pick up their investigation sometime here soon. As you saw on the recommendations, they’ll be partnering with SAMSA to do an audit of our integrity management programs. So we anticipate them to pick their investigation backup and close it out relatively soon. I think on your other question, there is no open litigation related to the incident.

[Charles Fishman:]

Okay. And looking at the preliminary reporter on virtual meeting last month, it appears the Railroad Commission and Pipeline and Hazardous Materials Administration. They have to do this too. So, I guess, I mean, their report will include the things they have to do?

[Kevin Akers:]

Yeah. We will all receive -- in that NTSB report, those recommendations, as you pointed out, were directed to several of the parties to the investigation, will all have responses back to the NTSB. And it’s my understanding that our initial responses will have a timeframe of about 90 days or so to get our initial response back once we received that final report.

[Charles Fishman:]

Okay. And then just one other almost a housekeeping question, slide 13, footnote two, where you have no regulatory assets or liabilities related to COVID-19 at this point? Yet, it’s my understanding you have received approval to record regulatory assets in just about all your service territory. So the decision not to record any regulatory asset at this point based on COVID-19. Was your decision -- driven by the fact that you were able to control your expenses at this point that they were reduced enough that you didn’t feel a need to record any Reg assets? Is that a fair assessment of that?

[Chris Forsythe:]

Yeah. It’s pretty close. I mean, as you mentioned, Charles, we’ve got the orders that cover about 90% of our customer base right now. We’re evaluating the language in those orders. They were sufficiently broad and so we’re interpreting and how best to evaluate that order vis-à-vis our filings talking with our regulators and we anticipate by the end of the fiscal year that we will establish some form of regulatory asset. It’s just a matter of timing in this fiscal year when we establish that, but we are closely evaluating that right now and that’s been factored into the guidance for the remainder of the fiscal year.

[Charles Fishman:]

Got it. Okay. So it’s more timing that you didn’t have anything in the first quarter. Got it. That’s all I have. Thank you.

[Chris Forsythe:]

Thank you, Charles.

[Operator:]

There are no additional questions at this time.

[Dan Meziere:]

We appreciate your interest in Atmos Energy and thank you for joining us. The recording of this call will be available for replay on our website through March 31, 2021. Have a good day.