Earnings Call: Q3 2018

Aug 9, 2018

Greetings and welcome to Atmos Energy's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. And As a reminder, this conference is being recorded. I would now like to turn the conference over to Jennifer Hills. Thank you. Please go ahead. Thank you, Brenda. 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 presentations are available on our website at atmisenergy.com. As we review these financial results and discuss further 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 30 and are more fully described in our SEC filings. Our first speaker is Chris Forsythe, Senior Vice President and CFO of Atmos Energy. Chris? Thank you, Jennifer, and good morning, everyone. Yesterday, we reported fiscal 2018 Q3 earnings from continuing operations of $71,000,000 or $0.64 per diluted share compared with $71,000,000 or $0.67 per diluted share in the prior year's 3rd quarter. Year to date, earnings from continuing operations were $564,000,000 or $5.09 per diluted share, compared with $347,000,000 or $3.27 per diluted share in the prior year period. Year to date results include a $166,000,000 or $1.49 per diluted share nonrecurring income tax benefit from tax reform. Our FERC order results were in line with our expectations, with many of the drivers underlying our performance during the first half of the fiscal year continuing into the third quarter. Operating income in our distribution segment decreased $15,000,000 to about $62,000,000 in the 3rd quarter, largely driven by a $12,000,000 decrease in contribution margin due to the implementation of tax reform. Contribution margin was positively impacted by regulatory actions, which provided an incremental $11,000,000 in contribution margin in the quarter. And we continue to experience solid customer growth. Over the last 12 months, our distribution segment added a net 34,000 customers, which represents a 1.1% net customer growth. We also continued to add transportation customers to this new system, primarily in our Kentucky Mid Safe division. Combined, this growth added nearly $5,000,000 in contribution margin for the quarter. Operating expenses rose approximately 11% quarter over quarter. We experienced a fine increase in pipeline and service activities, higher line low pay costs, higher employee related costs and increased depreciation and property tax expense resulting from our capital spending. We also incurred about $1,500,000 in trailing expenses associated with the planned Northwest Dallas outage during the 2nd quarter, bringing the total expense associated with the event to approximately $24,000,000 This particular project has been completed, and we do not anticipate material future expenses associated with this event. Operating income in our pipeline and storage segment decreased by $2,000,000 Contribution margin increased to net $11,000,000 as we recognized $24,000,000 of incremental margin from AT and T's rate case completed last August and the approval of 2 BRIC filings in fiscal 2018. This increase was partially offset by $8,000,000 reduction in revenues due to the implementation of tax reform. Offsetting the growth in contribution margin was a $13,000,000 increase in operating expenses as a result of higher depreciation related to increased capital expenditures and timing of planned pipeline integrity work. Consolidated capital spending for fiscal 2018 increased 34% to $1,100,000,000 which is in line with our expectations. 85% of our fiscal 2018 spending was focused on improving the safety and reliability of our system. Based on work included to date and planned for the remainder of the fiscal year, continue to expect our fiscal 2018 capital spending to approximately $1,400,000,000 We remain very active from a regulatory perspective. To date, we have completed 19 filings, which should add approximately $81,000,000 in annualized operating income over fiscal 2018 2019, inclusive of the effective tax reform, dollars 71,000,000 of this amount related to APT. And we have 9 filings pending seeking about $42,000,000 in annualized operating income in our distribution segment. We anticipate most of these filings be concluded during the 4th quarter with rates taking effect during the Q1 of fiscal 2019. After taking into account the lower tax expense we are incurring, the net financial impact from these regulatory outcomes is consistent with what we were anticipating at the beginning of the fiscal year. Tax reform has been a primary focus for our regulatory team during the Q3 and we emerged from the quarter with a lot more clarity in how tax reform will be heavily reflected in customer bills. In 5 of our 8 states, we have adjusted rates to reflect the lower 21% rate. In 2 states, we have started returning to the regulatory liabilities we established effective January 1st to account for the difference between the former 35% statutory rate and the current 21% statutory rate. And in 3 states, we have started to return excess deferred taxes using provisional amortization periods ranging from 18 to 40 years. These periods will be trued up in future filings. Looking forward, we expect to be refunding the regulatory liability in excess deferred taxes for several of our Texas jurisdictions in October. And in November, we expect to adjust rates in Mississippi and Tennessee for the full impact of tax reform. We are well underway to fully implementing tax reform and customer bills. Once fully implemented, we continue to estimate the annual custom benefit from tax reform will be over $100,000,000 Slides 2425 summarize the financial impact of tax reform on our fiscal 'twenty eight machine results and privacy has made to implement tax reform. Our balance sheet remains strong to support our capital spending program and the return of the benefits of tax reform to our customers. As of June 30, our equity and total capitalization was 59%, we had approximately $1,400,000,000 of borrowing capacity available under our credit facilities. As we move through our final quarter of the fiscal year, we remain on track to meet our fiscal 2018 earnings guidance range of $3.85 to $4.05 per diluted share, excluding the non recurring benefit recognized from the implementation of tax reform. The higher than anticipated growth in economic activity we saw at the beginning of the year and the anticipated impact of tax reform is materializing as expected. Slide 27 provides selected information underlying our fiscal 2018 guidance. This information has not changed from the prior quarter. Thank you for your time this morning. I'll now turn the call over to President I'll call over to President and CEO, Mike Aitner, for his closing remarks. Chris, thank you very much for that great update on the quarter and thank all of you for joining us this morning. As you can see from our Q3 results, we remain very focused and on track to meet our fiscal 2018 targets, driven primarily by our proactive pipe replacement and system modernization investments. Our commitment to safety is paramount. From 2011 to 2017, we invested approximately $6,000,000,000 on replacing AV infrastructure and modernizing our system. And between fiscal 'eighteen and fiscal 2022, we plan to spend an additional $8,000,000,000 with the rate of capital investment growing approximately 11% per year on average. With over 80% of this spending, we will focus on safety and reliability investments as it has been in the past. Our very dedicated employees have a reason for our continued success as we fulfill our safety and service commitments to our customers and the communities where we live and work. We constantly strive to become the safest provider of natural gas services through our investments, not only in our infrastructure, but also in our employees and the technology and business processes used to maintain and operate our system and in public safety awareness. For example, training hours in 2018 increased approximately 10% year over year with the majority of our training at our world class Charles K. Vaughan training center going towards technical skills development and safety. And since third party damage is the number one cause of leaks in our system, we continue to raise public awareness through pipeline safety efforts. These efforts are paying off. Reported injuries from employees are down 17% year over year and our fiscal 2018 damage rate is below the industry average and has been reduced approximately 20% over the past 6 years, while our line locate requests have increased by 50% over that same period. We continue to see strong economic development. We're very fortunate to serve some of the fastest growing regions in the country. The Dallas Fort Worth Metroplex alone is projected to add 1,500,000 households or over 4,000,000 people over the next 30 years. We stand ready to serve our communities as demand grows. Our proven organic growth strategy driven by necessary safety and reliability investments along with consistent customer growth provides a very long time horizon of infrastructure investment needs ahead. Even with the significant investments we've made, the low and stable natural gas price environment has helped keep customers' bills very affordable and our proactive approach to ensure customers receive the benefit of a lower federal tax rate has made customers' bills an even better value. Our regulators understand the need to increase the pace of pipeline replacement. The various annual rate review mechanisms and infrastructure mechanisms provide transparency for those regulators to annually review the progress we are making to modernize our system, while also providing the opportunity we need to earn reasonable returns that our investors require to provide the financial resources we need to sustain our efforts. We remain confident that all of these factors will continue to provide a reasonable return to our investors through earnings per share and dividend growth in the 6% to 8% range each year. We are focused on the long run and the long term sustainability of our business and we are dedicated to all of our stakeholders. In closing, I would 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 our 3,200,000 customers that we serve in over 1400 communities in our Apex footprint. They come to work every day focused on safety while providing excellent customer service and executing our capital spending program focused on modernizing our system. Our employees have a strong belief in striving to do the right thing without seeking recognition or award and it's this attitude that drives our success. Recently, Atmos Energy was named the 2018 Most Trusted Utility Brand in the South. This distinction would not have been possible without the hard work and dedication of our employees. So thanks to each of you for what you do every day for Amerencing Energy. Well, we appreciate your time this morning and now we will take any questions that you may have. Back to you, Brenda. Thank you. First question comes from the line of Dennis Coleman with Bank of America. Dennis, good morning. Good morning, Tal. A couple of quick ones for me. You're still on or we still have the guidance of $385,000,000 to $405,000,000 and sort of now we're down to 1 quarter to go. I wonder if you might just talk about what gets you to the higher end of that range or lower end of that range? Yes. I think Dennis, this is Chris. Good morning. As you look into the Q4, we have got planned pipeline integrity work, particularly on APT's Upline X. So that's a big project that started in early July. And so that's a variable. But right now with where we see things as of today, we're projected to be somewhere in the middle of that guidance range at this point. Okay. Okay. And then a couple more detailed questions on the in the distribution segment, OpEx and tax expense were a little higher than our estimate. I wonder if there's anything particular. I know you did talk a little bit about this on Slide 5, but any additional comments you might make there? Yes. On OpEx, I think you just seen some timing, particularly around employee costs. We had some key executives retire a year ago. So the settlement charges showed up in the Q3, not that material, that was one item that did flow through. With Perceptrix tax expense, are you talking property taxes or are you talking Yes, tax taxes, not income taxes. Yes, yes. Property taxes, we are adjusting our estimates of our property tax. We are mostly on a calendar basis. So as we are working through the valuation process with the property tax teams in the various municipalities, we just make adjustments to the year and what we think our full calendar year expense is going to be. Got it. Got it. Okay. That's helpful. Thanks very much. Thank Okay. This concludes today's question and answer session. I'd like to turn the floor back over to management. Thank you, Brenda. This concludes our call. Recording of this call is available for replay on our website through November 8, 2018. We appreciate your interest in Atmos Energy, and thank you for joining us. Goodbye.