Atmos Energy Corporation
Q4 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Greetings. And welcome to the Atmos Energy Fourth Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I will now turn the call over to our host, Dan Meziere, Vice President of IR and Treasurer. Thank you, sir you may begin.

[Dan Meziere:]

Thank you, Diego. Good morning, everyone, and thank you for joining us today. With me this morning 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.

[Chris Forsythe:]

Thank you, Dan. And good morning everyone. We appreciate your interest in Atmos Energy and are happy that you can join us this morning. Yesterday, we reported to fiscal 2020 diluted earnings per share $4.89, compared to diluted earnings per share of $4.35 reported in the prior year. As a reminder, our fiscal 2020 results included a one-time, non-cash income tax benefit of $21 million or $0.17 per diluted share that we recognized during the third fiscal quarter related to a legislative change in Kansas that reduced our state deferred tax rate. Excluding this non-recurring benefit, diluted earnings per share for fiscal 2020 was $4.72. This represents the 18th consecutive year of rising areas per share. In summarizing the year, the pandemic began to impact the economies of the states we serve at the end of our winter heating season. By that time we had earned 70% of our distribution center revenue for fiscal 2020. Given the economic uncertainty at that time, we were conservative about the anticipated non-residential load loss in the third and fourth quarter. And we plan to reduce O&M activities during the third and fourth quarters to keep our employees healthy and to align spending with anticipated revenues. Our residential load loss during the last six months of the fiscal year was less severe than we had originally anticipated. And we maintained our O&M spending in the back half of fiscal year in line with the revised guidance we issued after our second fiscal quarter. As a result, our fiscal 2020 EPS came in at the higher end of our earnings guidance range of $4.58 to $4.73. Taking a closer look, consolidated operating income rose over 10% to $824 million. Slides 5 and 6 provide by details of the year-over-year changes to operating income for each of our segments. I will touch on a few of the fiscal year highlights. Rate increases in both of our operating segments, driven by increased safety and reliability capital spending, totaled $140 million. We also experienced a $14 million increase in distribution of operating income, primarily due to customer growth in our Mid-Tex division.

[Kevin Akers:]

Thank you, Chris. And good morning, everyone. We appreciate you joining us today and your interest in Atmos Energy. Our success in fiscal 2020 reflects the talent and dedication of our 4,700 employees. I've said it before and I'll say it again today that they are the heart and soul of Atmos Energy and provide the foundation for the sustained long-term success of our company. I'm extremely proud of their commitment to keep our 3.2 million customers, our 1,400 communities, themselves and their families healthy and safe. I'd also like to take this opportunity to thank our state regulatory commissions, our many peer companies, our state gas associations, as well as the American Gas Association for their assistance and support during these challenging times.

[Operator:]

Thank you. At this time, we will be conducting our question-and-answer session. Our first question comes from Insoo Kim with Goldman Sachs. Please state your question.

[Insoo Kim:]

Good morning, and thank you. My first question is on year 2021 guidance. Appreciate the commentary you gave on the sensitivities on what could happen with COVID during these winter months. But as we think about the midpoint of that guidance, are you able to give us a little more specificity as to what's embedded in terms of any demand impact net?

[Chris Forsythe:]

Good morning, Insoo; this is Chris. Like I said earlier, we did a number of different sensitivities. And rather than debating it with individuals, we thought by putting the sensitivities out that you see in Slide 18 would provide our folks with the data that they can do to make some assumptions around what they want to think about the non-residential load loss. But as I said, we ran multiple scenarios and we feel like our guidance is reflective of those various scenarios. Also do want to point out that we've assumed a full O&M program this year. And to the extent that we need to pull levers a little bit, to align spending with revenues as well as keeping our employees safe, that opportunity exist for us as well.

[Insoo Kim:]

Got it. And just on top of that, what markets are you seeing the greatest risk to demand as we enter into these – to those winter months?

[Chris Forsythe:]

I think, when you look at our markets, in the back half of the year, Louisiana and Mississippi are at – excuse me – Mid-Tex with two that saw most of our other commercial decline that I commented on earlier. But right now, towards the back half of the year, it wasn't nearly as severe as we anticipated. It certainly recovered as we moved along through the third and fourth quarters. And we just have to continue to watch and see. I think it's also going to be contingent upon how the buyer spreads, how states may respond to contending the spreads, protecting the citizenry and also balancing the needs of the economy.

[Insoo Kim:]

Understood. And then, looking at the longer-term guidance, you guys have been so consistent historically and giving the 6% to 8% EPS, achieving most of the times at the up or even above the upper end of that. When we look at the five-year CAGR through 2025 off of the 2020 actuals, it does imply a CAGR that's around 6.5%, a little bit less than the CAGR that we've been calculating in prior years. How much of this is, you being more just conservative versus some law of large numbers kicking in terms of how much CapEx you're able to do or the financing plans that you currently have in place?

[Chris Forsythe:]

Yes. I think there is an element of conservatism in our numbers this year, as I mentioned. Because we're going to be cautious about what we're seeing around the non-residential load loss as we go into the winter heating season. If you go back to the kind of the midpoint of the guidance for fiscal 2020, how do we achieve that and then you kind of extrapolate that out, that would get you closer to 7%, I believe.

[Insoo Kim:]

Yes, understood. And just one more. At what point do you think and is this in consideration when you look over this new five-year timeframe and creating potentially a HoldCo structure to help you guys create additional financing capacity?

[Kevin Akers:]

Yes. The holding company structure, we get that question from time to time. We like the transparency that our current structure provides for our regulatory environment. It minimizes the questions that you get around what are you doing at the parent level versus at the operating level in terms of equity capitalization, debt financing, so on and so forth. We've seen instances where regulators have tried to kind of pierce that at operating company level and try to get to be parent level to impute a capitalization at the OpCo level. So, we feel like having a transparent capital structure the way we do today just takes one less question off – one less question off the table. And we can remain focused on talking about what we're doing with the spending in terms of monetizing system to make it perform more safely, more reliably and more environmentally responsible.

[Insoo Kim:]

Got it. Thank you so much.

[Kevin Akers:]

Okay. Thank you, Insoo.

[Operator:]

Our next question comes from Stephen Byrd with Morgan Stanley. Please state your question.

[Stephen Byrd:]

Hey, good morning.

[Kevin Akers:]

Hi. Good morning.

[Chris Forsythe:]

Good morning.

[Stephen Byrd:]

Congrats on the continued very good results. Wanted to build on a couple of questions there that were just asked. Just – over time, how do you think about the delta between rate base growth and EPS growth? I think you've had a fairly consistent approach there. I was just curious as you continue to get bigger. If there are any sort of changes to your thoughts around that delta between rate base and EPS growth?

[Chris Forsythe:]

As we've talked about before, Stephen, that large delta largely reflects the financing plan that we've assumed over the next five years. And we certainly believe that – certainly over the next five years that we could continue to operate and financing the corporation in a balanced fashion using a prudent mix of long-term debt and equity. The strength of the balance sheet is important as we saw earlier this year with the shocks of the markets, the ability to access the commercial paper markets, we really didn't have much material impact as a result of the strength of that balance sheet. And it also gave us the opportunity to further enhance our liquidity by $700 million because as we did have that equity capitalization in place.

[Stephen Byrd:]

Understood. That balance sheet – your conservative balance sheet certainly has been a nice asset for you all to have. Now that makes sense. I wanted to shift over to M&A, which is – I know you don't really need any kind of inorganic growth, you've got great organic growth. Really more at a high level, when you think about the skills and the capabilities that you've developed over time and you think about sort of applying that skill set to others, do you often sort of see a gap in that skill set where you could add value? Are there certain sort of categories of value-add you could provide or is that not something you spend much time kind of thinking about in the context of sort of inorganic growth?

[Kevin Akers:]

Stephen, this is Kevin. Let me start with and take us back to, as Chris and I said earlier, over the next five years, we plan to invest $11 billion to $12 billion. And you know our rate construct very well. Within six months, we start earning on 90% of that and 99% by the end of 12 months. So that's where we're going to continue to focus right there. That's our strength. We've proven that over the last decade or so that we can execute at that level. It's a very understandable story for our employees, for our investors and for our regulators to follow. And I think everybody is working hard now around the regulations at the state and federal level to meet compliance. So, I think, through our associations, through our peer group meetings and everything else, I think our industry is at the top of its game right now and its ability to operate and deliver safe, reliable natural gas service every day.

[Stephen Byrd:]

Understood. Understood. Okay. And then, maybe just lastly, I know this is not likely to be relevant anytime soon. But we do think longer-term about green hydrogen and I was especially interested, just given your geography and, in some cases, your proximity to sort of a pure hydrogen infrastructure nearby. And I was just curious, your latest thoughts on sort of the cost to be able to accommodate green hydrogen, what percentage could be blended? And I appreciate that green hydrogen is quite expensive compared to natural gas. I'm not really thinking in the near-term. But also beyond sort of what you could do with your own system, whether there might, in the future, be some potential to combine your capabilities with the capabilities to sort of pure hydrogen infrastructure nearby to create really a backbone that could allow for a larger conversion to green hydrogen and usage of your systems. I know that's fairly broad, but just curious on your thoughts on that.

[Kevin Akers:]

Sure. And as we said before too, we are certainly plugged into and watching all the projects that are coming online, particularly here those in the states. As you're aware, most of those are what I would call single point source or their particular turbine or particular smaller scale project here. They are not anything on a wide distribution or transmission level. We're also watching very closely what's going on in Europe around – particularly in Germany. Right now, there are several projects on a little bit larger scale, if you will, of blending and delivering that hydrogen. So we're staying plugged in to the American Gas Association, to the Gas Technology Research Institute and other associations to continue to monitor those projects. So we can take a look at such things, as you just mentioned, what is the appropriate blending right, how and where do you do that, what's the impact on the infrastructure, the steel of those systems and the burners on the end use equipment, those sort of things. So we're plugged in, we're continuing to monitor that and we'll continue to stay in touch with those groups and, as necessary, continue our valuation of our systems and what that may look like for a longer-term.

[Stephen Byrd:]

That makes sense. That's all I had. Thank you.

[Kevin Akers:]

Thank you, Stephen.

[Operator:]

Our next question comes from Richie Ciciarelli with Bank of America. Please state your question.

[Richie Ciciarelli:]

Hey, good morning. How are you all doing?

[Chris Forsythe:]

Good. How are you doing, Richie?

[Kevin Akers:]

Good morning, Richie.

[Richie Ciciarelli:]

Well, appreciate you taking my question here. Just wanted to follow-up a bit on Stephen's question, if I could. You obviously have a robust CapEx plan in front of you. There are a few players in the space looking to divest some LDC assets, some are adjacent to your service territory. And just given where your multiple is relative to those peers, it would seem like an acquisition could be quite accretive. So just curious how you guys are thinking about the strategic landscape.

[Kevin Akers:]

Exactly. As I said before, we're focused on that $11 billion to $12 billion, going back into our system, modernizing our system both at the distribution, transmission and storage levels, if you will. And again, you look at that regulatory construct on the times we just talked about, that coming back to us and rate recovery, it's hard for me to say that you could get that type of recovery through an acquisition. We've been part of several, as you know, over the years. And they are extremely difficult at times to integrate both from a operational perspective, from an employee perspective and a cultural perspective. And right now, we have shown a decades long ability to execute on this strategy. And that's what we're going to continue to focus on, making sure we're investing in the right things, getting the right recovery for that and modernizing our system, so we can be environmentally sound as we continue to go forward and tighten our system up for our customers, our communities and our investors.

[Richie Ciciarelli:]

Got it. That's very helpful. Focus on the organic profile here. And then, just separately, on the equity needs remaining for 2021, I think, you've executed on roughly $345 million in equity forward. So is the remaining amount through the ATM program, is it roughly in the $270 million to $300 million range?

[Chris Forsythe:]

That's a pretty good assumption.

[Richie Ciciarelli:]

Okay, thanks. And then, just last one on the O&M front just in response to what you were talking about with Insoo earlier on the leverage there. Should we think about that basically that you can offset and keep O&M flat relative to this year if sales figures don't come in where you expect?

[Chris Forsythe:]

Yes, I think we'll just have to see how the year unfolds, Richie. I think, first and foremost, we still have to maintain compliance throughout the entire system. And we don't want to achieve compliance just by barely achieving – by barely making it if you will. So we'll just have to continue to look at that in terms of – we do have just general inflation as everybody does and some are just general costs as they continue to go up. So, we'll just continue to monitor that and see where the fiscal year takes us in terms of revenue looking at the portfolio of O&M activities – and we will – to the extent that we need to adjust, we will update at the appropriate time.

[Richie Ciciarelli:]

All right, great. That's all I had. Thanks a lot.

[Chris Forsythe:]

Thank you.

[Operator:]

Thank you. Our next question comes from Charles Fishman with Morningstar. Please state your question.

[Charles Fishman:]

Good morning. Slide 19, where you – 5,000 to 6,000 miles of pipe replacement over the next five years, where will you stand at the end of 2025 as far as how many miles of pipe rollout or how many years of that kind of pace goes on? What are we looking at post-2025?

[Kevin Akers:]

Charles, this is Kevin. We have a runway right now on steel service lines at about a 15 to 20-year rate. So, you look at that that will get us down about five years off of that. Like I said, there are about 22% reduction. And then, we've got about the same timeframe on industry identified. So we'll have a little over a decade or so left. And let's keep in mind, that's today's regulation, right. And what I mean by that, rules are always updated on types of equipment, various materials. And in addition, we've now gotten into this, this past decade of the system modernization, where previous years under the old rate construct, if you will, people would stay out, invest at smaller levels and try and work back through O&M reductions to do that. That model has long since gone. You have got to continue to invest in the system to keep it modernized, to keep the equipment up and leverage technology when and where you can. So, I think, these are at the current regulations with current identified materials, but also you got to keep this other construct in mind of wanting to keep your systems up-to-date as possible, right.

[Charles Fishman:]

Okay. And then, Kevin, with that argument, I mean, I look at the average monthly bill slide on 26, and I realize you're you're forward, now you're starting 2009 isn't as good as 2008 when it was much higher, I was just comparing them. But you do have significant increases. What you just told me is that the argument you used to municipalities you serve, the regulators?

[Kevin Akers:]

I don't know if that's quite stated as an argument. I think it's our investment strategy. And again, I think, when you look at the household bill there, that's the lowest bill in the household today for our customers. And you compare today's price that we have on the sheet in that $4.50 to $5.50 range, you are talking about equivalent of somewhere around $11, $12 gas when you compare that to the equivalent electric side. So, if you convert that over, you're looking at about $0.06, $0.07, $0.08, $0.09 on the electric side. So, I think we're continuing to be affordable at this investment progress that we're making. We continue to do it on an annual basis so we send the right signals there. And honestly, that paired with the production in the basis of where prices sit today are certainly helpful to us as well.

[Charles Fishman:]

Yes. Continuing on that affordability issue, we've seen some electrification mandates on the coast. I don't believe there has been anything in your service territories, just correct me if I'm wrong. But it is how – let me ask you this, how are your market share with respect to new construction? Are you maintaining your market share with respect to single family and multi-family with respect to competing against an all-electric new home or new apartment?

[Kevin Akers:]

Well, absolutely, you just heard us talk about the organic growth, particularly here in the Metroplex area. And in addition, the territories we serve in Middle Tennessee and around Olathe and Kansas area continue to show good growth as well there. So, our market share continues to be strong. And when you look at what the Metroplex is and how it's continued to grow here, I think, we've got a good long horizon of customers wanting and demanding our natural gas product, as you've seen from those percentage increases there. And as you said, we haven't seen that electrification discussion at push yet. We continue to talk with our customers, we continue to serve by our customers and they like the value the product brings. And as a price, as I said today, at the $4.50 to $5.50 range, that equates again to $0.10 or $0.11 a kilowatt electric rate and you show me somewhere where people are getting that today. So, I think we continue to remain competitive and continue to have strong market share.

[Charles Fishman:]

I would think, Kevin, with respect to these electrification mandates, the amount of energy that you as a gas utility deliver on the call today, the electric utilities would be hard-pressed to come up with that. It's a huge increase in their capacity, isn’t that correct?

[Kevin Akers:]

Yes, you're exactly right. You've seen the challenges, particularly on the West Coast. Unfortunately, some of those folks are having during the peaks right now. So you draw parallels back to a winter period in trying to meet that demand and those peak needs, it's going to be even more challenging. But as you've heard me probably say before, right now, the population in the U.S. is about 333 million, 335 million and due to head toward 360 million by 2030. That's adding our taxes, 30-plus million people here in less than a decade. So, where are you going to get that energy? Natural gas, as we just talked about, is abundant, it's affordable and it's reliable. And as the fourth largest proven reserve country in the world, I don't know why we wouldn't continue to leverage that asset and find ways to continue to grow that when we're thinking about a diversified energy portfolio going forward. So I think you're spot on with that. And that's how we view it. We view it that the industry serves 70 million, 75 million customers today, where we continue to grow with that. And we are in the right place with the right infrastructure today to continue to provide that reliable service.

[Charles Fishman:]

Okay. Very helpful. That's all I had. Thank you.

[Operator:]

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

[Dan Meziere:]

We appreciate your interest in Atmos Energy. And thank you for joining us. A recording of this call is available for replay on our website through December of 2020. Have a good day.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.