Earnings Call: Q4 2019

Nov 7, 2019

Greetings, and welcome to the Atmos Energy 4th Quarter Earnings Conference 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. It is now my pleasure to introduce your host, Jennifer Hills, Vice President of Investor Relations. Thank you. You may begin. Thank you, Jesse. Good morning, everyone, and thank you for joining us. This call is being webcast live on the Internet. 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 54 and are more fully described in our SEC filings. Our first speaker is Chris Forsyth, Senior Vice President and CFO of Atmos Energy. Chris? Thank you, Jennifer, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we reported fiscal 2019 net income of $511,000,000 or $4.35 per diluted share. This represents the 17th consecutive year of rising earnings per share. Slide 6 and 7 provide 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. Consolidated contribution margin rose about 5% or about $95,000,000 Rate increases driven by increased safety and reliability capital spending provided an incremental $80,000,000 Virtually all of these increases were in our Texas, Louisiana Mississippi jurisdictions. As we've discussed over the last couple of quarters, our pipeline and storage segment benefited from the supply and demand dynamics that had impacted pricing in the Permian Basin over the last 12 to 18 months. We were able to capture a portion of the widened Waha to Katy spread, resulting in a $12,000,000 increase over fiscal 2018. However, as expected, a new merchant pipeline came online mid summer and we saw narrower spread opportunities in the back half of the fourth quarter. Finally, our distribution segment continued to experience solid customer growth. Over the last 12 months, our distribution segment added a net 37,000 customers, a 1.2% increase over last year. Consolidated operating expenses rose approximately 6%, reflecting higher depreciation expense associated with increased capital spending and higher O and M spending attributed to increased pipeline integrity and maintenance activities and higher employee costs. As we discussed last quarter, in fiscal 2019, we increased service related headcount in our Mid Tex division to support the growth in our DFW market. Additionally, we continue to roll out our rollout of advanced leak survey technology. All of this rollout has modestly increased our O and M, it plays an important role in our ability to identify mitigate risk. Finally, we continue to increase the training provided to our employees to further enable them to operate our system safely and reliably. Consolidated capital spending increased 15% to $1,700,000,000 with 87% of our spending directed towards investments to improve the safety and reliability of our system. Our ability to support this level of capital spending is due in part to the various regulatory mechanisms we have in place to minimize regulatory lag. During fiscal 2019, over 85 percent of our capital spending began to earn a return within 6 months of the test period end. We accomplished this by implementing $117,000,000 in annualized operating income increases through 23 regulatory proceedings. Since September 30, we have implemented an additional $57,000,000 through 6 regulatory proceedings that were filed in the back half of fiscal twenty nineteen. As of today, we have 4 filings pending seeking about $6,000,000 Slides 39 to 53 summarize our regulatory activities for fiscal 2019. Our ability to support this level of capital spending is also predicated on our ability to attract the necessary long term financing to fund our ongoing capital expenditure program while maintaining the strength of our balance sheet. During the Q4, we continue to utilize equity forward agreements executed under our ATM to help meet our fiscal 2020 equity needs. We issued 1,400,000 shares at an average price of $108.70 Additionally, we sold forward agreements for $1,100,000 shares for net proceeds of approximately $100,000,000 As of September 30, 2019, we had about $463,000,000 remaining under equity forward arrangements. This issuance completed a very busy financing year where we were able to successfully raise over $2,000,000,000 of debt and equity financing. In the process, we reduced the weighted average cost of debt from 5.21 percent to 4.58 percent and increased our weighted average maturities from 16 years to 22 years, helping to ensure our customers benefit from the current low interest rate environment for years to come. And our equity capitalization increased 2 30 basis points to 59% as of September 30. We finished the fiscal year with approximately $1,600,000,000 of liquidity under our credit facilities and equity forward agreements. Details of our financing activities, including our equity forward arrangement, as well as our financial profile can be found on Slides 9 through 11. Looking forward, fiscal 2020 will represent the 9th year of executing our operating plan to modernize our distribution, transmission and storage systems. Our plan to summarize on Slide 13, we expect fiscal 2020 earnings per share to be in the range of $4.58 to $4.73 per diluted share with about 68% of our earnings coming from our distribution segment. By fiscal 2024, we anticipate earnings per share to be in the range of $5.90 to $6.30 per diluted share. Slides 1415 present some of the details supporting our fiscal 2020 guidance. O and M is expected to be in line with fiscal 2019. Our O and M will continue to be focused on race based activities that address system safety and compliance. These activities include enhanced leak survey, pipeline integrity work and continued records establishment and retention. It also includes spending for work to help us set a baseline of understanding of our system before Finjan's new integrity management rules go into effect on July 1, 2020. As we've discussed in the past, we have been anticipating these new rules for a few years and reflected that activity in our future O and M projections. As a result, some of the last year's 5 year plan, we continue to assume O and M inflation of 2.5% to 3.5% annually. Depreciation will rise due to a high level of capital spending, interest expense will be lower as we've reduced our weighted average cost of debt and expect to capitalize more interest through AFUDC. And finally, we expect our effective tax rate to be between 20% 22% in fiscal 2020, inclusive of the impact of amortizing our excess deferred tax liabilities. Excluding this amortization, we anticipate the effective tax rate to range from 23% to 25%. Fiscal 2020 capital spending is expected to rise about 12% and range between $1,850,000,000 to $1,950,000,000 with approximately 86% of the spending dedicated to safety and reliability spending. Approximately 73% of the spending will be allocated to our distribution segment. Almost 90% of our consolidated capital spending is expected to be earning a return within 6 months of the test period end. Continued spending for system replacement and modernization will be the primary driver for the anticipated increase in capital spending, net income and earnings per share through fiscal 2024. As you can see on Slide 17, we anticipate capital spending to increase 7% to 8% per year off of fiscal 2019 spend levels for a total of $10,000,000,000 to $11,000,000,000 over the next 5 years. This level of spending is expected to approximate 4 times depreciation annually. This should result in rate base growth of about 12% to 14% per year. This translates into an estimated rate base of $17,000,000,000 to $18,000,000,000 in fiscal 2024, up from about $9,000,000,000 at the end of fiscal 2019, as you can see on Slide 18. Annual filing mechanisms will be the primary means through which we recover our capital spending. These mechanisms enable us to more efficiently deploy capital and generate returns necessary to attract new capital needed to finance our investments. And these mechanisms produce a smaller impact to our customer bills, while providing the regular rate adjustments that support our system modernization efforts. We've assumed no material changes to these mechanisms through fiscal 2024. In fiscal 2020, we anticipate completing filings for $160,000,000 to $180,000,000 in annualized regulatory outcomes that will impact fiscal years 2020 2021. Moving to Slide 20, in light of our financial performance for fiscal 2019, Atlas Energy's Board of Directors approved our 144th consecutive quarterly cash dividend yesterday. The indicated annual dividend for fiscal 2020 is 2.30 dollars a 9.5% increase over fiscal 2019. We continue to expect dividends per share to grow in line with earnings per share over the next 5 years And we will continue to target a payout ratio of approximately 50% as it strikes the right balance between using funds to invest in the modernization of our system and providing a return to our shareholders who support our operating plans with their investments. This 5 year plan continues the financing strategy that we've been executing over the last few years. It balances the interest of our customers and our investors while preserving our strong credit metrics that minimize the cost of financing for our customers. Based on our spending assumptions, we anticipate the need to raise between $5,500,000,000 $6,500,000,000 in incremental long term financing over the next 5 years. The strength of our balance sheet enables us to use a prudent mix of long term debt and equity financing in order to maintain a balanced capital structure with a targeted equity capitalization ratio ranging from 50% to 60% inclusive of short term debt. This strategy is summarized in Slide 21 and consistent with prior plans, our financing plan has been fully reflected in our earnings per share guidance through fiscal 2024. In October, we got off to a great start towards executing this plan with the issuance of $800,000,000 in long term debt. We issued a mix of 10 year and 3rd year notes and achieved a weighted average cost of debt of 3.18 percent in this offering. As a result, overall weighted average cost of debt decreased another 26 basis points to 4.32%. From an equity perspective, we announced during fiscal 2019 that we did not foresee the need for discrete equity issuance in fiscal 2020. The equity forwards we executed during fiscal 2019 are expected to satisfy substantial portion of our equity needs for the fiscal year. We expect to remain raise the remaining equity needs for fiscal 2020 through our ATM program. In closing, the execution of our operating plans to modernize our system through disciplined capital spending, timely recovery of those investments through our various regulatory mechanisms and balanced long term financing, support our ability to grow earnings per share and dividends per share 6% to 8% annually for fiscal 2024. And as you can see on Slides 2223, the execution of this plan will also keep customer builds affordable, which helps us sustain this plan for the long term. Thank you for your time this morning. I will now turn the call over to Kevin for his prepared remarks. Thank you, Chris. Fiscal 2019 was the 8th consecutive year of successfully executing our proven investment strategy, focused on operating safely and reliably, while we modernize our natural gas distribution, transmission and storage system. Our 70,000 miles of distribution pipeline and 5,700 miles of interstate pipeline provide safe and reliable service to our customers every day. In addition to achieving our financial targets for fiscal 2019, we continue to modernize our system. Fiscal year 2019, as you saw on Slide 27, our team replaced about 7 70 miles of distribution pipe, 120 miles of transmission pipe and 53,000 service lines across the 8 states in which we operate. We continue to utilize technology to modernize our business. In fiscal 2019, we deployed new technology called Locust Map. That allows us to digitally capture our asset data as we complete our project. This technology is helping us to scale our operations and improve the quality and timeliness of our asset data collection requirements. At the end of fiscal 2019, this rollout was about 50% complete and on track to be fully implemented by the end of fiscal 2020. We also continued our systematic rollout of advanced leak detection technology to enhance our ability to monitor our system, keep the public safe and to help us prioritize the pipe replacement work. At our customer support centers, we completed the implementation associate best suited to handle their needs by using predictive analytics within our SAP system. Our electronic billing continues to be 1 of the highest in the industry at 43%. Based on a 2019 American Gas Association Edison Electric Institute benchmarking survey, our penetration for electronic billing was rated number 1 for gas only utilities and number 4 for all gas, electric and combination utilities. We increased our electronic billing penetration by 2.4% in fiscal year 2019. Also in fiscal year 2019, our Spanish account center was released along with an upgrade to our integrated voice response system. These are just a few examples of the many initiatives we have in progress or completed as we modernize our system and our business. As you know, our vision is to be the safest provider of natural gas services and training is key to part of that vision. In 2019, we provided nearly 288,000 hours at our Charles K. Vaughan Center and surpassed the 1,300,000 mark in total training hours since the facility opened in 2010. This training is critical to our success because it helps us work smarter and safer. We also completed our pipeline safety management system assessment and are working on our high level road map for addressing gaps. While we have had components of a safety management system, including procedures, policies and practices for years, the safety management system formalizes what we are doing and adds another layer of rigor and discipline for the identification and assessment of risk. It is an integral part supporting our vision of being the safest provider of natural gas services. Our employees continue to provide exceptional customer service at every opportunity. Our customers give us a 98% satisfaction rating for both our contact center agents and our service technicians. These men and women are the heart, the soul and the face of Atmos Energy. I'm extremely proud of them and how well they represent us each and every opportunity. In addition to providing safe and reliable service and exceptional customer service, our employees support the communities where we live and work. In fiscal 2019, I'm proud to say that we donated nearly $5,000,000 to various charitable causes as well as helped our most vulnerable customers gain access to nearly $6,000,000 of funding to help pay their heating bills. By all measures, fiscal 2019 was another successful year for Atmos Energy. I'm very excited about the future of Atmos Energy and I look forward to executing the 9th year of our successful strategy as we maintain our focus on our vision of being the safest provider of natural gas services. This straightforward focused improving strategy benefits all stakeholders as we strive to safely provide excellent customer service in an environmentally responsible manner. The $10,000,000,000 to $11,000,000,000 capital spending plan over the next 5 years will continue to be in the areas of system modernization, system fortification, customer growth and technology that improves safety, drive efficiencies and build scale. Over 85 percent of these investments will be focused on safety and reliability identified by our risk based capital allocation strategy. Continued emphasis will be placed on removing industrial identified materials such as bare steel, vintage plastic and cast iron. Atmos Pipeline Texas investments in addition to safety will focus on reliability, fortifying our ability to meet the growing demand, particularly here in our North Texas service territory. At the end of the 5 year investment period, our SAVE system will be significantly more modern. As you can see on Slide 27, we anticipate this level of filming will support the replacement of 5 6000 miles of distribution and transmission pipe or about 6% to 8% of our total system. Included in this amount is the replacement of our last 400 miles of cast iron in our system by the end of 2021 and the replacement of all bare steel main outside of our Mid Tex division. We also plan to replace between 200,000,300,000 steel service lines, which is expected to reduce our inventory by 29%. And 75% of our system will be equipped with wireless meter reading by the end of this period. Finally, this level of replacement is expected to reduce methane emission from our system by 10% to 15% over the next 5 years. We continue to fine tune our planning and forecasting capabilities, incorporating lessons learned and new requirements to ensure the work is done right and to further improve our ability to execute on our strategy. We have a proven track record of managing and growing these investments in a safe and responsible manner because of our employees and our leaders. They have displayed the skills, experience, training and have the technology to execute this strategy exceptionally well. Our management committee leads the execution of this strategy. This committee is supported by 7 divisional leadership teams, each comprised of a President and Vice President representing operational and financial areas of responsibility and a strong centralized shared service team. This somewhat unique structure helps us to ensure strong governance and executional oversight at the local level, and it also serves to internally develop a wide number of people for potentially more senior roles in the company. Our management team is supported by an engaged Board of Directors. Our Board of Directors possesses a strong balance of experience to provide deep insight, strong governance and management oversight with a fresh perspective. During fiscal 2019, we further strengthened our Board oversight with the establishment of the Corporate Responsibility and Sustainability Committee. This committee now monitors the current and emerging ESG landscape for issues that could materially affect our business and oversees all of our ESG efforts. Together, this positions Atmos Energy for sustained success in the future as we continue to provide safe, reliable, efficient and affordable natural gas service to our 3,000,000 customers in over 1400 communities. All as we continue working in sync with our regulators to advance safety and reliability. Atmosphere is the secret sauce that supports us and provides the necessary foundation for our continued success and our ability to execute consistently. Now 20 years old, AtmosSpirit established the long standing guiding principles of our culture today. These principles are inspire trust, be at your best, bring out the best in others, make a difference and focus on the future, reflect the values, beliefs and behaviors we embrace as a company. In closing, I would like to thank our 4,700 employees for their dedication to safely operating our systems, providing exceptional customer service and for giving back to the communities where they live and work each and every day. They are the heart and soul of our company and the biggest reason Atmos Energy will be successful for the long term. We appreciate your time this morning. And now we will take any questions you may have. Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. It appears we have no questions at this time. So I'd like to pass the floor back over to Ms. Hills for any additional concluding comments. Thank you for joining us today. A recording of this call is available for replay on our website through February 5, 2020. We appreciate your interest in Atmos Energy. Goodbye.