埃特莫斯能源 (ATO) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Atmos Energy Corporation's First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Jennifer Hills, Vice President of Investor Relations for Atmos Energy Corporation. You may begin.

Thank you, Melissa. 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 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 20 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. We appreciate you joining us and your interest in Atmos Energy.

Yesterday, we reported fiscal 2018 first quarter earnings from continuing operations of $314 million or $2.89 per diluted share compared to $114 million or $1.08 per diluted share reported in the prior year first quarter. Our first quarter results were significantly influenced by the accounting effects of implementing the 2017 Tax Cuts and Jobs Act. These impacts affected our first quarter results in 2 ways.

During the quarter, we recorded a onetime noncash benefit of $161.9 million or $1.49 per diluted share. This benefit represents reduction in our net deferred tax liabilities that were not included in the determination of our cost of service rates due to the new lower federal statutory income tax rate. Additionally, our first quarter effective tax rate excluding the onetime noncash benefit decreased to 26.8% compared to 35.9% in the prior year quarter. This reduced income tax expense by approximately $16 million quarter-over-quarter. The quarter-over-quarter growth in earnings excluding the impacts of the TCJA were primarily driven by the capital spending we incurred to modernize our distribution and transmission systems and the time to recovery of those investments through our various regulatory mechanisms.

Operating income in our distribution segment increased 11.5% to $173 million due to a number of drivers. Recovery from recent regulatory actions provided an incremental $25.6 million in gross profit. Weather was 20% colder than the prior year first quarter, contributing almost $6 million in incremental margin due to increased consumption. Additionally, we continued to experience solid customer growth. Over the last 12 months, our distribution segment added a net 32,000 customers, which represents 1% net customer growth.

Additionally, we've added several new transportation customers and have seen an increase in demand, most notably in our Kentucky/Mid-States Division. Combined, this growth added almost $3.5 million of incremental gross profit. Offsetting the growth in gross margin was a 9.7% increase in operating expense as a result of increased pipeline-integrity activities and higher depreciation and property tax expense resulting from our capital investments.

Moving to the pipeline and storage segment. Operating income increased 25% or approximately $14 million. Most of this increase is driven by the incremental margin from APT's recent rate case and the approval of a GRIP filing in December. The quarter's financial results also benefited from wider spreads between the Katy and Waha hubs and the full quarter effect from the North Texas pipeline acquisition, acquired late in calendar 2016. Offsetting the growth in gross margin was a modest increase in operating expenses of $1.7 million. Depreciation and other tax expense increased as a result of capital investments but were substantially offset by lower planned amount of pipeline-integrity work.

Consolidated capital spending in the quarter increased 28.6% year-over-year to $383 million and was in line with our expectations. Over 82% of this spending was focused on improving the safety and reliability of our system.

In addition to executing the strategy during the quarter, there were a few other developments I wanted to highlight. In November, we took a couple of steps to further strengthen our financial position. First, we raised $400 million of equity through a very successful offering. A substantial portion of the $395 million net proceeds was used to reduce short-term debt. This issuance has satisfied our anticipated equity needs for fiscal 2018. Additionally, we established a new $500 million at-the-market equity issuance program. This program will support our ability to efficiently issue equity beyond fiscal 2018.

And as previously mentioned, our results reflected financial effects of the Tax Cuts and Job Act that was signed into law in late December. The act reduced the federal statutory income tax rate from 35% to 21%. Additionally, as a rate-regulated entity, the accelerated capital expense [and provisions] and the limitation of interest deductibility included in the act were not applicable to us. Because our fiscal year started on October 1, 2017, our blended federal statutory income tax rate for fiscal 2018 will be 24.5%. This rate will decline to 21% beginning in fiscal '19.

The lower rate reduced our net deferred tax liability by $908 million. Of this amount, $746 million related to items that are included in the calculation of our cost of service rates. This amount was reclassified on our balance sheet into a regulatory liability that we'll return to customers through future adjustments to their bills in accordance with IRS rules and regulatory requirements. And as previously mentioned, we recognized a $162 million onetime noncash gain related to items that were not included in the calculation of our cost of service rates.

Finally, we anticipate our effective income tax rate for fiscal 2018 to range from 26% to 28% before any return of excess deferred tax liabilities to our utility customers. We support our regulators' efforts to ensure our utility customers receive the full benefit of changes in our rates due to tax reform. Income taxes included in the determination of our rates, like other costs, are passed through to our customers. Therefore, we cannot reduce our rates until we have received regulatory approval from our regulators. We are currently in discussions with all of our regulators to determine the most appropriate manner to reflect the benefits of tax reform in customer bills as quickly as possible.

Beginning in the second quarter, our revenues will reflect the lower tax rate that we'll pass through to customers. We anticipate the reduction in operating cash flow from lower customer bills, combined with the return of regulatory liabilities establishing connection with implementing tax reform, will increase our estimated financing needs through fiscal 2022 by approximately $500 million to $600 million. Our balance sheet as of December 31 is strong and can support this incremental financing need. Equity and total capitalization at 12/31 was 57.3%, and we had approximately $1.3 billion of borrowing capacity available under our credit facilities.

I will close my prepared remarks with a few comments on our 2018 earnings guidance. Yesterday, we announced that we raised our 2018 earnings guidance from a previously announced range of $3.75 to $3.95 per diluted share to $3.85 to $4.05 per diluted share. This revised guidance excludes the onetime gain recorded in the first quarter. Our underlying operating assumptions remain the same.

We remain on track to spend between $1.3 billion to $1.4 billion in fiscal 2018, with $1.1 billion (sic) [$1.0 billion] to $1.1 billion focused on safety and reliability spending. Annual operating income increases from regulatory outcomes in 2018 are still expected to range between $120 million to $140 million before the effect of tax reform. Although the revenue requirement for these filings is expected to decrease, the anticipated bottom line impact from these filings remains unchanged.

Slides 7 through 12 provide details of the progress we have made during fiscal 2018 in pursuing our regulatory strategy. However, based on some of the growth and economic activity we are seeing, combined with the modest increase from a lower effective tax rate, we anticipate stronger earnings in fiscal 2018. As I previously mentioned, the effective lower tax rates on our cost of service revenue will ultimately flow through to our customers -- utility customers, which will reduce revenues beginning in the second quarter. However, we anticipate that we will experience a modest increase in net income as a result of a lower effective tax rate on items that impact our pretax income in the current period that are expected to be reflected in rates in a future period. Slide 15 provides additional information to support our fiscal 2018 earnings guidance.

Thank you for your time this morning. And I will turn the call over to Mike for some closing remarks.

Thank you, Chris, for that great update on the quarter. As you can see from our first quarter results, we're off to a great start to fiscal 2018. We benefited from recent regulatory outcomes, colder weather and customer growth.

It was also a busy quarter as we rolled out our updated 5-year plan through 2022 and confirmed the continuation of our strategy to grow by prudently investing in our infrastructure. In November, we communicated our plans to invest $1.3 billion to $1.9 billion each year, with approximately 80% of that spending on safety and reliability over the next 5 years. During the quarter, we continued to successfully execute our investment and regulatory strategy, focused on becoming the safest and most reliable natural gas utility in the country. This strategy, along with the exceptional dedication and effort on the part of our 4,600 employees, continues to benefit our customers in the form of improved reliability and service, and we remain very well positioned for the future as we move through the seventh consecutive year of our journey to become the safest natural gas utility.

Our systems were put to the test with recent cold snaps, including the coldest day in the Dallas-Fort Worth metroplex in the past 22 years that occurred on January 16. Our investments in training, combined with our infrastructure and process improvements and our employees' tremendous dedication, really paid off as we experienced no major disruptions in service during these periods of unusually cold weather. This test to our system reaffirmed that our investments in our infrastructure and our employees are meeting our goals of providing reliable, safe service to our customers.

The regulators in our jurisdictions understand that continued investments are needed to modernize our distribution and transmission system. Our regulatory mechanisms that provided the opportunity to make these needed investments by allowing us to minimize lag, recover our costs and provide a competitive return opportunity for investors who entrust us with the capital to invest in the safety and reliability of our system. Through the end of the first quarter, we completed 4 filings, which should add an estimated $46 million in annualized operating income over fiscal 2018 and fiscal 2019. A total of $29 million of this amount relates to APT's GRIP filing that covered investments made between October of 2016 and December of 2016.

Additionally, in December, the Mississippi Public Service Commission approved a multipart settlement, allowing $8.9 million in new rates, as well as changes to our annual filing mechanisms going forward in order to simplify and improve the filings as well as to include up to $5 million in annual rural expansion investment and up to $5 million annually for new industrial projects. The new comprehensive settlement streamlines the regulatory review process, and it's a great example of how we collaborate with our regulators to develop win-win outcomes that benefit our customers, the economy in the states we serve and the company.

Finally, Chris described the financial effects of the recently enacted tax reform law. The bottom line is that tax reform is very good for our customers. We anticipate that the lower tax rate as a result of tax reform will provide over $100 million annually in savings to customer bills.

I want to leave you with the message that our strategy remains the same. We have a long time horizon of needed infrastructure investments. The low natural gas price environment and now lower tax environment supports our continued investment in the safety and reliability of our system while keeping customers' bills very affordable. We remain confident that we'll continue to be able to grow earnings per share and dividends in the 6% to 8% range each year.

We appreciate your time this morning and your interest in Atmos Energy. And now we'll take any questions that you may have. Melissa?

(Operator Instructions) Our first question comes from the line of Christopher Turnure with JPMorgan.

I just wanted to clarify first the overall impact on 2018 of tax reform and make sure that I'm understanding your message correctly. It sounds like you're not going to have any incremental financing needs maybe near term, so that's a neutral. But maybe you get a little bit of a higher rate base and some other kind of impacts that you're inferring for the year that drive it to a net positive for 2018 at least. Is that the right way to think about it?

Well, a couple of things there. There will not be any additional equity financing needs. We're still evaluating our financing needs for the year in the light of the fact that we're expecting to begin to reflect the lower tax rates in customer bills, hopefully, this quarter or the second quarter. In terms of longer term, you mentioned the lift in rate base due to the fact that our deferred tax balances will grow a little bit more slowly at the lower rates, and that's, in fact, true. And in terms of the other impacts, you captured that pretty well.

Okay. And then when we look at guidance being taken up by around $0.10 at the midpoint, is it fair to say maybe there's a bit of positive from tax reform there/some other customer growth impacts that might be a little bit better than you were previously anticipating?

Yes, that's exactly right. It's really a combination of some of the impacts of the tax reform on those items that impact income today that get reflected in customer bills tomorrow, some of the economic activity that I mentioned, the colder weather in late December into January. Just really, a combination of all the above.

Okay. And then just kind of along those lines but more specifically for the first quarter of the year, can you quantify how much gas basis helped you year-over-year? And can you quantify weather versus normal?

In terms of gas basis, are you talking about spreads in Katy and Waha?

Yes.

Yes. The year-over-year impact on the spread differential was about $1 million to $1.5 million. In terms of the colder weather, it's 20% colder in this quarter versus the prior year quarter, slightly warmer than normal, but we picked up about $6 million quarter-over-quarter.

Okay. So all of that is after-tax numbers?

I'm sorry, pretax.

That's all pretax, okay. So $6 million better year-over-year for weather in the first quarter but roughly in line with normal and then the spreads got you around $1 million, $1.5 million benefit year-over-year?

Yes.

Our next question comes from the line of Charles Fishman with Morningstar.

Chris, I think this is for you. I just want to tie the -- your 10-Q filing with the slides and specifically the tax reform, okay? You -- $908 million -- $908.1 million was your deferred -- net deferred tax liability decrease. $746.2 million in the Q goes to a regulatory liability that you established, got that. The $161.9 million remainder, okay, number one, that's reflected in the low -- the bottom line on Slide 2 in the net income from continuing operations?

Yes. In respect to that, it's kind of a nonrecurring onetime gain.

Okay. That's in that -- but it's in that line?

It's in the -- well, it's in $314 million. We back out the $162 million to come back from adjusted net income of $192 million. If you look at our 10-Q, that $162 million is embedded in the $106 million tax benefit that you see in the first quarter.

Okay, okay. So when -- in the Q, when it says that, that $161.9 million benefit is from -- where it's -- in your businesses that are not cost of service, is that primarily storage and pipeline?

It really relates to 2 items. It related to some tax attributes from our nonregulated companies that we've had in the past that we retained and the fact that goodwill is not included in our cost of service.

Okay, that's right, goodwill. Forgot goodwill. Okay, that explains it.

Yes.

Yes, okay. And then going forward, let me -- sort of a follow-up here. With pipeline and storage, that's treated similar to your distribution systems. In other words, eventually those rates will be adjusted in the near future to reflect the tax benefit?

That's correct. The majority of that segment is APT, which is, of course, regulated.

Okay. And the Railroad Commission will adjust rates or you'll work with the Railroad Commission to adjust rates for the ATP -- or APT as well?

Yes.

(Operator Instructions) Our next question comes from the line of Spencer Joyce with Hilliard Lyons.

So first, just kind of a point of clarity. Am I correct in assuming that the year-over-year decline in effective tax rate was substantially compelled by the TCJA? I mean, that's right, correct?

Yes.

Okay. So the quarter had a lower effective tax rate that was seemingly not offset by any margin reductions. Did you all just essentially have kind of one special quarter here where you're retaining that benefit so, I mean, we may not see another quarter that's like this per se from kind of a structural standpoint? Or am I missing something?

Well, the effective rate that you see at 26.8% is effectively our estimate of what we're going to be for the full year. So we're expecting that effective rate quarter-over-quarter or each of the next 3 quarters to be in that 26 to 28% range.

Okay. And sort of beginning in fiscal Q2 here though, we'll start to see some rate reductions potentially cap the margin growth. I'm just wondering how we can have so substantial margin growth, I mean 11% plus, and then be able to pay that tax rate on that. I mean, that can't persist, right?

Yes. Beginning in the second quarter, you'll see our operating revenues come down, either through actual reductions in customer bills that get negotiated or approved by our regulators or through the establishment of regulatory liabilities.

Okay. Okay, great. So...

That will put things back in line.

Okay. So kind of as a longer-term follow-up, fiscal Q1 here is a bit of an anomaly. So even though we had a pretty great growth here, I mean, it would be fair to say that kind of your longer-term growth expectations, either the explicit kind of stretched guidance, the 6% to 8%, I mean, there hasn't been a step-function change there, has there? I mean, we...

No.

Okay. Okay, great. Yes, that's really helpful. A little bit easier, I know we had the equity deal last year and no new equity expected over the balance of fiscal '18. You mentioned the at-the-money program. Essentially, all of that is still available. I mean there's been very little taken on it. Is that correct?

That's correct. We took 0 in the first quarter because we did complete the block trade in November. And so that $500 million is fully available for us after fiscal 2018.

Okay, great. And by the way, nice timing on that.

Yes.

Yes.

Final one here. Just kind of glancing over the cash flow statement. We still had a fairly nice cash flow benefit from deferred income tax in fiscal Q1. It looks like $53 million versus $67 million last year. More fully implementing the TCJA stuff over the balance of the year, can you give us a little guidance on what those figures will look like over the balance of this year? I mean, will they scale down considerably from the $50-plus million that we had in Q1?

Yes. The deferred taxes will scale down. A lot of it will depend upon the underlying activity in the business. In terms of total operating cash flow, we're a lot of that is going to be contingent on the timing of when we actually reflect the newer rates in customer bills. We're working with our regulators as we speak to find the best way to get those into rates as quickly as possible.

Ms. Hills, there are no further questions at this time. Would you like to make any closing remarks?

Yes. Thank you, Melissa. Just in closing, I want to note that a recording of this call is available for replay on our website through May 2.

We appreciate your interest in Atmos Energy, and thank you for joining us. Goodbye.