埃特莫斯能源 (ATO) 2018 Q3 法說會逐字稿

Greetings, and welcome to Atmos Energy's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) 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 atmosenergy.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 third quarter earnings from continuing operations of $71 million or $0.64 per diluted share compared with $71 million or $0.67 per diluted share in the prior year third quarter. Year-to-date earnings from continuing operations were $564 million or $5.09 per diluted share compared with $347 million or $3.27 per diluted share in the prior year period. Year-to-date results include a $166 million or $1.49 per diluted share nonrecurring income tax benefit from tax reform.

Our third quarter results were in line with our expectations, with many of the drivers underlying our performance during the first half of fiscal year continuing into the third quarter.

Operating income in our distribution segment decreased $15million to about $62 million in the third quarter, largely driven by a $12 million decrease in contribution margin due to the implementation of tax reform.

Contribution margin was positively impacted by regulatory actions, which provided an incremental $11 million 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 continue to add transportation customers to the system, primarily in our Kentucky/Mid-States Division. Combined, this growth added nearly $5 million in contribution margin for the quarter.

Operating expenses rose approximately 11% quarter-over-quarter. We experienced a [point] increase in pipeline integrity activities, higher line locate costs, higher employee-related costs and increased depreciation and property tax expense resulting from our capital spending. We also incurred about $1.5 million in traveling expenses associated with the planned northwest Dallas outage during the second quarter, bringing the total expense associated with the event to approximately $24 million. 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 about $2 million. Contribution margin increased a net $11 million, as we recognized $24 million of incremental margin from APT's rate case completed last August and the approval of 2 GRIP filings in fiscal 2018. This increase was partially offset by $8 million reduction in revenues due to the implementation of tax reform. Offsetting the growth in contribution margin was a $13 million 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 $1.1 billion, 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 completed to date and planned for the remainder of the fiscal year, we continue to expect our fiscal 2018 capital spending to approximate $1.4 billion.

We've been very active from a regulatory perspective. To date, we have completed 19 filings, which should add approximately $81 million in annualized operating income over fiscal 2018 and 2019, inclusive of the effect of tax reform. $71 million of this amount related to APT. And we had 9 filings pending seeking about $42 million in annualized operating income in our distribution segment. We anticipate most of these filings to be completed during the fourth quarter, with rates taking effect during the first quarter 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 to our regulatory team here in the third quarter, and we emerged from the quarter with a lot more clarity in how tax reform will be 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 to return the regulatory liabilities we established effective January 1 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, it's in the conventional amortization periods ranging 18 to 40 years. These periods will be trued up in future filings.

Looking forward, we expect to be then refunding the regulatory liability and excess deferred taxes for several of our taxes 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 on our way to fully implementing tax reform in customer bills. Once fully implemented, we continue to estimate that the annual customer benefit from tax reform will be over $100 million.

Slides 24 and 25 summarize the financial impact of tax reform on our fiscal 2018 results and progress we have made to implement tax reform.

Our balance sheet remains strong to support our capital spending program and to return of the benefits of tax reform to our customers. As of June 30, our equity to total capitalization was 59%, and we had approximately $1.4 billion of borrowing capacity available under our credit facilities.

As we move to 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 nonrecurring benefit recognized from the implementation of tax reform. The higher-than-anticipated growth and economic activity we saw at the beginning of the year and the anticipated impact of tax reform is materializing as expected.

Slide 27 provides [legit] 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 -- our call over to President and CEO, Mike Haefner, for his closing remarks.

Chris, thank you very much for the -- that great update on the quarter, and thank all of you for joining us this morning.

As you can see from our third quarter results, we remain very focused and on track to meet our fiscal 2018 target, driven primarily by our proactive pipe replacements and system modernization investments.

Our commitment to safety is paramount. From 2011 through 2017, we invested approximately $6 billion in replacing aging infrastructure and modernizing our system. And between fiscal '18 and fiscal 2022, we plan to spend an additional $8 billion, with projected capital investment growing approximately 11% per year on average, with over 80% of this spending will be focused on safety and reliability investments as it has been in the past.

A very dedicated employees are the 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 then public safety awareness.

For example, training hours in 2018 increased approximately 10% year-over-year, with the majority of that training at our world-class Charles K. Vaughan Training Center going towards technical skill development and safety. And since third-party damage is the #1 cause of leaks in our system, we continue to raise public awareness through pipeline safety efforts.

These efforts are paying off. Reported injuries for 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. Our line locate requests have increased by 50% over that same period.

We continue to see strong economic development. We're really fortunate to serve some of the fastest-growing regions in the country. The Dallas–Fort Worth metroplex alone is projected to add 1.5 million households or over 4 million 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 it had. 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 that 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're 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 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're focused on the long run and the long-term sustainability of our business, and we're dedicated to all of our stakeholders.

In closing, 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 our 3.2 million customers that we serve in over 1,400 communities in our 8-state 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 rewards, and it's this attitude that drives our success. Recently, Atmos Energy was named a 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 Atmos Energy.

Well, we appreciate your time this morning. And now we'll take any questions that you may have. Back to you, Brenda.

(Operator Instructions) Our first question comes from the line of Dennis Coleman with Bank of America.

A couple of quick ones from me. You're still on -- or we still have the guidance of $3.85 to $4.05. 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. As we look into the fourth quarter, we've got some planned pipeline integrity work, particularly on APT's Line X. So that's a big project that started in early July. And that's a variable. But right now, with where we see things as of today, we're projecting to be somewhere in the middle of that guidance range at this point.

Okay. Okay. And then a couple of more detailed questions on the -- in the distribution segment, OpEx and tax expense were a little higher than our estimates. 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 we''re just seeing some timing, particularly around some employee costs. We had some key executives retire a year ago. So the settlement charges showed up in the third quarter, not that material, but that was one item that did flow through. With respect to tax expense, are you talking property taxes or you're talking...

Yes, yes, taxes. Not income taxes.

Yes, yes. Property taxes, we're adjusting our estimates. Our property tax were mostly on a calendar basis. So as we're working through the valuation process with the property tax teams in the various municipalities, we just make adjustments to the year on what we think our full calendar year expense is going to be.

(Operator Instructions) 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. A 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.