Welcome to Atmos Energy first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Hills, Vice President of Investor Relations.
Thank you. 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 are available on our website at atmosenergy.com. As we review these financial results and discuss future expectations, please keep in mind that some of our discussions 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 21 and are more fully described in our SEC filings. Our first speaker is Chris Forsythe, Senior Vice President and CFO at Atmos Energy. Chris?
Thank you, Jennifer. Good morning, everyone. We appreciate your interest in Atmos Energy. Yesterday, we reported fiscal 2019 first quarter earnings of $158 million, or $1.38 per diluted share, compared with adjusted earnings of $152 million, or $1.40 per diluted share in the prior quarter. Fiscal 2018 adjusted earnings and diluted earnings per share excluded $162 million, or $1.49 per diluted share benefit as a result of implementing tax reform last year. Also yesterday, the board of directors approved our 141st consecutive quarter cash dividend at $0.525, which represents an indicated annual dividend of $2.10 per share in fiscal 2019, an 8.2% increase over fiscal 2018. Slides four and five provide details of the quarter-over-quarter changes to operating income for our distribution and pipeline storage segments. I will touch on a few of the highlights.
Contribution margin in our distribution segment rose a net 1%, or about $4 million. Strong consumption, driven by colder weather in October and November, when most of our weather normalization mechanisms were not yet in effect, contributed an incremental $7.7 million. Weather was 20% colder quarter-over-quarter, with most of our service areas experiencing colder than normal conditions. Solid customer growth continued, primarily in our Mid-Tex division. Over the last 12 months, our distribution segment added a net 36,000 customers, which represents 1.1% net customer growth. This growth contributed an incremental $3.7 million to contribution margin. The implementation of tax reform into customer bills more than offset rate increases that were implemented in the prior fiscal year and the first quarter, resulting in a net $7.3 million decrease in customer rates.
However, this had no material impact to the segment's net income as a result of the corresponding reduction in our effective income tax rate. Operating expenses rose 3.5%. Higher employee-related costs, depreciation, and ad valorem tax expenses drove this increase. In our pipeline storage segment, contribution margin increased about $9 million. About two-thirds of this increase relates to the new rates that were approved in the prior fiscal year through APT's two GRIP filings. Additionally, stronger transportation margins contributed an incremental $3.1 million, net of the impact of our Rider Rev mechanism, as APT continues to benefit from wider spreads. The supply and demand dynamics in the Permian Basin, in line with colder weather, drove a 12% increase in transportation volumes. Operating expenses for this segment increased $11 million, or almost 20%. This increase was focused on pipeline integrity work and reflects the timing of these activities.
In the current year quarter, APT accelerated some hydrostatic testing that had been planned for later this fiscal year. In the prior year quarter, pipeline integrity work that had been planned for the first quarter was deferred later into fiscal 2018, resulting in a lower than normal expense for that quarter. Additionally, depreciation and ad valorem taxes rose year-over-year due to last year's capital spending. Consolidated capital spending increased 8.7% to $416 million. About 82% of the spending was dedicated to safety and reliability projects. Cold and wet weather in some of our service areas created challenging conditions, which delayed some projects. However, we benefit from having over 6,000 relatively small projects each year that allow us to quickly reallocate our spending when we face these types of challenges. We remain on track to achieve our capital spending target of $1.65 billion-$1.75 billion for the year.
From a financing perspective, we had a very busy quarter, as we completed $1.35 billion in debt and equity financing. In early October, we completed a successful $600 million, 30-year public debt issuance at an interest rate of 4.3%. The net proceeds were used to pay down outstanding commercial paper. In late November, we issued approximately $750 million of equity. The offering included an equity forward arrangement that will remain in place through March of 2020. Upon completion of the offering, we received approximately $495 million in net proceeds and allocated the remaining $245 million to the forward. As of December 31, 2018, we had not accessed the net proceeds allocated to the forward. At this time, we anticipate the net proceeds from this issuance will satisfy our equity needs for fiscal 2019.
Additionally, in November, we filed a new $500 million at-the-market equity issuance program that will support our equity needs beyond fiscal 2019. As a result of these financing activities, our equity to total capitalization was 59%, and we had no short-term debt at quarter end. When you consider the $218 million in cash on hand at the end of December, we have approximately $1.8 billion in total liquidity available to support our capital spending program. After an exceptionally busy year in fiscal 2018, we expect our fiscal 2019 regulatory calendar to return to a more traditional cadence. To date, we have implemented $21 million in annualized regulatory outcomes and have about $38 million in progress.
General rate cases in Kentucky and for about 15% of our Texas customers and annual filings for a TransLa service area in Louisiana, the City of Dallas, and Tennessee highlight the key filings are currently in progress. We continue to implement tax reform into customer bills with completion of our Mississippi and Tennessee annual filings during the first quarter. Virginia is the last state where we have not yet incorporated the effects of tax reform into our rates. Our general rate case currently in progress will address tax reform. We are now focused on finalizing the refund periods for our excess deferred taxes. Slide 20 details the progress we have made on tax reform to date. In summary, we're off to a solid start to the fiscal year. We remain on track to meet our 6%-8% earnings per share growth target.
Yesterday, we reaffirmed our fiscal 2019 earnings per share guidance range of $4.20-$4.35 per diluted share. I will now turn the call over to Mike for some closing remarks.
Well, thank you, Chris, for the update on the quarter, and it was a very good quarter. Thank you for those of you who are joining us this morning. As you can see from our fiscal first quarter results, we're off to a very good start to the year. We remain on track to meet our investment spending goals and our earnings growth targets. The 8.7% increase in capital spending during the first quarter demonstrates our team's consistent, predictable execution of our safety investment strategy. In order to sustain this strategy for the long term, which includes increasing our capital spending from $9 billion over the past 10 years to plan $9 billion-$10 billion over the next five years, our team is constantly looking for ways to improve and develop new advanced asset data collection technology to field employees and contractors.
During construction, crews will collect GPS locations, material, construction methods, operator qualification data for newly constructed pipelines. This will transform the process of asset data collection, data verification, project closings, and the transfer of that key data to back-end systems that are used to support operations, maintenance, damage prevention, integrity management, and our compliance programs. With thousands of capital projects completed each year, innovations like this that lie at the intersection of emerging technology, business process change, and most importantly, our employees, are certainly game-changers on our safety journey. This rollout will continue through this year, 2019, and also through 2020. This transformational technology is but one example of the many initiatives underway inside the company to scale our capabilities, capture efficiencies, and enable our very talented employees to do what they do best, which is investing in safety and serving our customers and members of the community exceptionally well.
We're also taking huge steps forward in methods of communicating with key stakeholders. In the first quarter, we implemented interactive project maps for all of our service areas that are displayed on our company website and show current and recently completed pipe replacement projects, giving our customers and other stakeholders access to status updates about projects in their communities right down to the street level. For larger projects, we now develop customized websites, conduct door-to-door visits, send out mailings, and use other channels as needed to most effectively reach our customers. We're beginning to publish annual operating reports for our regulators and also community leaders. We meet with officials in the cities we serve to keep them informed of our pipe replacement activity. In December, we issued our first corporate responsibility report under the title of an integrated annual report.
We also published our first methane emissions report, keeping key stakeholders informed of company actions, supporting our long-term commitments to good governance, our employees, customers, the 1,400 communities we serve, and the environment. I want to share some of the highlights from these reports. We adhere to strong corporate governance practices, including a focus on thought diversity at the board. Women now hold more than 20% of our board seats, and three of four directors who've joined the board since 2016 are female or minorities. This year, the board will further strengthen corporate governance by forming a new board committee to oversee the company's corporate responsibility and sustainability. In our pursuit to be the safest provider of natural gas services, we know that equipping employees with the training, tools, and support they need to operate safely and contribute at the highest level is central to our success.
Employees received more than 53,000 hours of safety training last year and more than 73,000 hours of hands-on technical training in the state-of-the-art Charles K. Vaughan Center in Plano, which is a site of more than 850,000 hours of training since its opening. In part due to this training, the OSHA rate of recordable employee injuries has decreased 23% since 2013. Over the past five years, employees also benefited from more than $1 million in higher education assistance received through the company's Robert W. Best Education Assistance Program. Employees continue to reach new heights in delivering exceptional customer service, giving customers more options and convenience when initiating service, calling about a bill, or making a payment arrangement. A new Spanish language account center was implemented in the past quarter, as well as intelligent call routing technology that anticipates customers' needs and connects them with the most qualified agents.
Our customers tell us they like what they see. 96% of our customers are satisfied or very satisfied with their interactions with our contact center agents, and 97% are satisfied or very satisfied with our onsite technicians. The company contributed $6.1 million to charitable organizations last year, and that includes $2.7 million that went to help customers in need through our Energy Assistance program. We also work with 400 community support organizations to give low-income families access to federal home energy assistance funds. I'm particularly proud of the contributions our Atmos Energy employees make in the communities in which they operate. Last year, employees contributed $700,000 during our Week of Giving campaign and volunteered more than 35,000 hours of their own time to help their community.
Also highlighted in the report is the work our team does to protect the environment, which has always been important to our company, our employees, our customers, and the communities. As a founding member of the EPA's Natural Gas STAR Methane Challenge program, we work proactively to improve efficiency and reduce methane emissions. Since 2012, we've replaced over 3,500 miles of pipe, and we've decreased total emissions due to the use and loss of natural gas by 13.7% in our system. Over the next five years, we plan to replace between 5,000 and 6,000 miles of pipeline, including all remaining cast iron by 2021, two years earlier than originally planned, and between 200,000 and 300,000 steel service lines. This will reduce methane emissions another 10%-15%. As we continue to replace infrastructure, we set a goal to reduce our system's methane emissions by 50% by 2035.
In addition to pipeline replacement, we're protecting the environment in other ways. In 2018, we completed our ninth LEED-certified service center, and we have four more underway. Over 40% of our customers have signed up for electronic billing, one of the highest percentages in the industry, resulting in savings of approximately 152,000 pounds of paper every year. We partner with municipal solid waste landfill gas producers to transport renewable natural gas to market. For safety and to best serve our customers, we review and incorporate state-of-the-art equipment for leak detection, monitoring, and leak repair prioritization, including the use of 11 advanced mobile leak detection technology units that are a thousand times more sensitive than traditional technologies. In closing, as always, I'd like to thank our employees for their outstanding efforts.
They strive to find ways to improve every day to deliver safe, reliable, affordable, and exceptional natural gas service to the nearly 3.3 million customers we serve in over 1,400 communities in our eight-state footprint. They come to work every day focused on safety while providing excellent customer service, closely monitoring and maintaining our system and executing our capital spending program. We appreciate your time this morning. Now we'll take any questions you may have.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Christopher Turnure with JPMorgan. Please proceed.
Good morning, guys. It was helpful that you quantified the impact of wider basis spreads at APT on the quarter. Certainly good to see that number. It's difficult to do, but could you maybe take a crack at talking about how sustainable that might be throughout 2019 and maybe into 2020?
Chris, good morning, by the way, and thanks for being on and for your question. As we've said in the past, it's difficult to predict really beyond the current quarter. We do know that there is additional pipeline capacity expected to come on in service at the end of the calendar year. We would expect that that would normalize pricing a little bit. As you know, a lot of our transport opportunities are opportunistic as we serve primarily our firm supply customers, which would be the LDCs in our on-system industrials. As we get into the summer months, as we saw in the last summer, we do an awful lot of maintenance on the pipeline when we're in the off-peak season. We're not going to get into the prediction for the rest of the year.
We're happy we got off to a good start, had this opportunity. As you know, and others know that three-quarters of any benefits beyond the Rider Rev benchmark flow back to our tariff customers, which is creates yet another opportunity to keep customers' bills low.
At least for the first quarter, fair to say that you're running a little bit ahead of maybe the plan that you had introduced back in November?
Yes.
Okay. Switching gears, I believe legislation was introduced or at least was being discussed in Texas to increase oversight of the Railroad Commission. Could you give us any thoughts you have on that, maybe probability of success there, what that might entail, or any other legislation that you're keeping your eyes on this session?
Yeah, Chris, each legislative session there's legislation that is advanced, and we engage with those legislators as we are here in Texas. I think in Texas this time it's gotten a little more publicity. The starting point is we all share the same objective, which is pipeline safety and also a further acceleration or acceleration of our infrastructure modernization and aging infrastructure replacement. We're in discussions right now trying to find good solutions that are supportive of our strategy and also meet the interests of all of the parties. Again, the general themes focus on accelerated replacement of infrastructure, which we have been doing and certainly continue to do. Also more visibility and transparency around as leaks appear and mapping of those leaks.
In Texas, as you may know, we file every six months a leak report with the Railroad Commission. It provides an awful lot of that information. I think the net of it is very early in the session right now, we're pretty confident at this point in time that things will progress under normal pace and not have any significant impact to us.
Okay, excellent. Thanks, Mike.
Thank you, Chris.
Our next question is from Charles Fishman with Morningstar, Inc.. Please proceed with your question.
Thank you. Two questions. First, it's probably my misunderstanding. I thought in the Dallas settlement you had agreed to a 50% equity cap, and yet I notice on slide 12 you're requesting 60%. Was that just for that one settlement last year? I guess my understanding was that was what you were going to use going forward, but obviously that's not the case. Can you talk about that?
Sure, Charles, this is Chris. Good morning. When we reached the settlement with the City of Dallas last February, we agreed to reduce our ROE down to 9.8%, and increase the equity cap up to 58%. That's where we are. We also have a similar cap with our Mid-Tex in West Texas, RRM mechanisms in Texas that we established about a year ago at this point. We do have 15% of our customers, as I mentioned, where we have a statement of intent in progress. They're currently at a 10.5% and 55% ROE. We are currently preparing to go to Austin in the first part of March to have that case heard out at this point. Settlement discussions are still ongoing. The lion's share of the state has been set at 9.8% equity or ROE and 58% equity cap.
Okay. Maybe I'm still misunderstanding this. On slide 12, if I look at the first two filings, well, one's a filing, one's intent to file. You show an authorized capital structure on the third bullet point on each one of 60% equity. Why is that 60% and then it was 58% before?
Right. Yeah. The requested capital structure is under the law, we have to file based on where we ended the test year-end. We ended it right at 59.7% with all the financing activities that we had in the quarter. That will just be a point of discussion when we go through the process that we're actually beginning to go through the discovery process right now.
It sounds like the 58% is not really a hard cap. It's subject to discussion each round.
Generally, we try to adhere to the terms, given that where we were at the end of the test year-end, we had to file based on where our equity capitalization was. Remember too, Dallas is on a 13-month average as well. It looks a little bit different vis-a-vis the test year-end of September 30th. It'll get worked out in the negotiations.
Okay. Second question. I noticed on the Q that regulatory excess deferred taxes, let's see, they were $740 million at the end of your 2018 fiscal year. They're down about $718 million, so a $22 million drop during the quarter. I realize Virginia's not in there yet, and I realize every jurisdiction has a little different amortization schedule. Is that from a modeling standpoint, as an analyst, that was $22 million, maybe $25 million per quarter is how we'll see that liability going down over the next few years. Is that reasonable?
Yeah, that sounds about right. If you go to slide 20, if you want to try to get a little bit more detailed in terms of modeling, we have provided the provisional amortization periods by jurisdiction, and if you wanted to get an approximation of the excess deferred taxes by jurisdiction, you can kind of do it somewhat pro rata based on our rate base. You can use the amortization periods provided on slide 20 to the deck to help out with the modeling on that. Again, it's very difficult right now because it's being folded in jurisdiction by jurisdiction. For example, as I mentioned, Mississippi and Tennessee just started. Tennessee was mid-October. Mississippi was in the first of November. West Texas and Mid-Texas RMs were in October.
I understand the modeling can be a little bit challenging, but I think the information in slide 20 ought to give you a pretty good indication of how that's going to flow back. At the end of the day, with actually flowing fully in rates, we expect our customers to benefit more than $125 million per year. That's inclusive of the [new] 21% rate as well as the flow back of the excess deferred taxes.
I'm probably too lazy to do it jurisdiction by jurisdiction. I guess I was looking for an easy way out. It sounds like if I do, like, $100 million per year, realizing that once we get Virginia in there, that I'll be close.
Yeah. Virginia is very small. If you do 740 divided by 25, that may be a good way to start if you're doing some high-level modeling.
Yeah. Okay. That's all I had. Thank you.
As a reminder, star one on your telephone keypad if you would like to ask a question. Our next question is from Ryan Levine with Citi. Please proceed with your question.
Good morning.
Good morning, Ryan.
Would you be able to comment on the current labor availability within your service territories and how that's evolved over the last few quarters? If there's any that's viewed to be a governor to some of the acceleration of the CapEx programs?
Yeah. It's a good question, it's something that we've commented on before. We haven't seen a change in the labor market in the last year or so, but it is a constraint for us as we are growing and working with our contractors so that they can grow their crews. The big issue is not just finding people, but it's people with appropriate qualifications to work on our system safely. We've kind of baked in what we think they're capable of doing in our estimates in terms of pipe replacement that we're able to complete each year. It's something that we watch very closely. Again, it is a constraint. We factored it into our plans. We believe we have, and we haven't really seen a change in those market conditions kind of year-over-year. We're pretty comfortable right now with what we're seeing.
Okay, thanks. Then second question, is there any update that you're able to communicate around the NTSB investigation and the timeline for any type of conclusion?
Really, there's nothing new for us. We initially expected the factual report, which would be the first piece that would come out to be somewhere in the end of this first calendar quarter or second calendar quarter. With the government shutdown, we're not sure what the impact that will have on that. I know they got pretty backed up, and there were a number of other investigations that they had to start up once they got back. We really don't have any information either way. Again, the sequence is a factual report typically would come out, and then sometime after that would be their safety recommendations.
Okay. This is considered a non-essential government agency. Is it safe to assume that no work was done during the shutdown?
Yes.
Okay. Thank you.
Yep. Thank you, Ryan.
There are no more questions at this time. Go ahead, Jen.
Thank you, everyone, for joining us this morning. A recording of this call is available for replay on our website through May 9th, 2019. We appreciate your interest in Atmos Energy, and thank you for joining us. Goodbye.