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Atmos Energy Corporation is a company primarily engaged in the regulated natural gas distribution and pipeline and storage businesses. It operates through two main segments: the distribution segment and the pipeline and storage segment, providing natural gas services across eight states to over 3.3 million customers, including residential, commercial, public authority, and industrial clients . The company also engages in transporting natural gas for others through its distribution and pipeline systems, further supporting its revenue streams .
- Distribution Segment - Involves regulated natural gas distribution and related sales operations across eight states, serving a diverse customer base including residential, commercial, public authority, and industrial clients.
- Pipeline and Storage Segment - Consists of regulated pipeline and storage operations, including Atmos Pipeline-Texas (APT) and natural gas transmission operations in Louisiana, providing transportation and storage services to various customers.
What went well
- Atmos Energy continues to see steady inquiries from large industrial customers across various sectors—including metals, healthcare, and distilling—driving growth on the industrial side.
- There is potential upside from new large customers, such as a potential 2.3 gigawatt combined cycle plant in Northern Louisiana, which is not yet included in their plan, indicating possible additional growth opportunities.
- The company plans to invest an incremental $15 billion over the next 5 years, with a balanced financing approach of 50% equity and 50% long-term debt, aiming to maintain the strength of their balance sheet while supporting their increased capital expenditure program.
What went wrong
- Uncertainty in securing large new customers: Executives could not provide specifics about a potential large 2.3 gigawatt combined cycle natural gas customer in Northern Louisiana, indicating possible delays or challenges in securing new large-scale industrial clients. ,
- Increased operating expenses: The projected increase in O&M expenses from 3.5% to 4% annually is driven by higher compliance-related spending, system monitoring, and employee costs, which could pressure profit margins. ,
- Potential rise in bad debt expenses: Although the company anticipates bad debt expenses to remain flat over the next five years, there is an acknowledgment that bad debt expense may rise as a function of revenue, posing a risk if economic conditions worsen.
Q&A Summary
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CapEx Increase
Q: What's driving the higher CapEx plan?
A: The company is experiencing robust growth with nearly 60,000 new customers added this past fiscal year, consistent with recent years. This strong growth across residential, commercial, and industrial segments necessitates increased investment to stay ahead of demand. Additionally, risk models indicate the need for accelerated pipe replacement programs to maintain safety and reliability. Significant projects on the APT system, including completing Line S-2, WA Loop, and Bethel to Groesbeck, as well as storage enhancements, also contribute to higher capital expenditure. -
Financing Strategy
Q: How will you finance the higher capital plan?
A: Over the next five years, we have an incremental $15 billion financing assumption. We'll maintain a strong balance sheet by funding approximately 50% with equity and 50% with long-term debt, spread evenly over the period. Equity needs will be slightly lower in fiscal '25 and will ramp up in '26 and beyond. We believe we'll meet our equity requirements through the ATM program and continued issuance of long-term debt. -
EPS Growth vs. Rate Base
Q: Why is EPS growth not matching rate base growth?
A: While we're projecting 13% to 15% rate base growth, our 6% to 8% EPS growth guidance accounts for factors like equity dilution and increased operating expenses. We've also raised the O&M CAGR from 3.5% to 4%, which moderates the EPS growth relative to rate base growth. We approach our plan conservatively, considering global uncertainties, and feel comfortable within this range. -
O&M Expense Increase
Q: What's causing the higher O&M growth to 4%?
A: Between '24 and '25, there's a step-up due to the SSI rider, with flow-through increasing from roughly $6–7 million in fiscal '24 to $20–25 million in 2025. We're planning for increased compliance-related spending, including system surveys and real-time monitoring with 16 AMLD units across eight states, as well as additional employee costs to service our growing customer base. The growth in line locates, driven by infrastructure expansion in Texas, also contributes to higher O&M expenses. -
Impact of Waha Spread
Q: How will the Waha spread affect next year's earnings?
A: We have a new rider revenue benchmark of approximately $107 million for this year. While spreads have moderated since the summer, we expect them to normalize moving forward. Most demand on APT is for LDC customers, so any additional activities will be during off-peak periods. We'll continue to monitor weather impacts but are planning based on normalized conditions. -
Interest Expense Guidance
Q: Why is interest expense decreasing despite higher debt?
A: The decrease is due to higher AFUDC (Allowance for Funds Used During Construction) or capitalized interest as our spending increases. This raises the portion of capitalized interest, reducing net interest expense. Our all-in weighted average cost of debt remains relatively flat at 4.1%, ticking up very slightly year-over-year. -
Potential Large Customer
Q: Any details on the large Louisiana customer?
A: We can't share specifics about the potential 2.3 GW combined cycle customer in Northern Louisiana at this time. We generally don't discuss such projects until we have certainty around contractual obligations. However, we continue to see steady inquiries from various industrial sectors across our territory. -
Bad Debt Expense Assumptions
Q: What's your assumption for bad debt expense?
A: We're anticipating bad debt expense to be fairly flat year-over-year in the five-year plan. After adjusting for changes in recording uncollectible accounts in Mississippi, we're normalizing to pre-pandemic levels. While it may rise slightly with revenue growth, our comprehensive collection strategies should mitigate significant increases. -
Customer Growth in Texas
Q: What's assumed for Texas customer growth?
A: We've assumed a growth rate consistent with recent trends over the past few years. Continued residential growth, along with the subsequent commercial impact, is expected to persist in our five-year plan. -
O&M Expense Timing
Q: Is the 4% O&M growth lumpy over time?
A: Year-over-year, the 4% O&M growth is expected to be fairly steady. There might be some quarterly variations as we adjust work schedules to address system needs, but overall, we anticipate consistent annual growth.
Guidance Changes
Annual guidance for FY 2025:
- Earnings Per Share (EPS): $7.05 to $7.25 (raised from $6.70 to $6.80 )
- Capital Spending: Approximately $3.7 billion (raised from approximately $3.1 billion )
- Annual Dividend: $3.48 (no prior guidance)
- O&M Expense: $840 million to $860 million (raised from $800 million to $820 million )
- 5-Year Plan to Fiscal 2029: Approximately $24 billion of capital investment (no prior guidance)
- Long-term Financing Plan: Approximately $15 billion (no prior guidance)
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Given the significant increase in your 5-year capital plan to $24 billion and expected rate base growth of 13% to 15% annually, can you provide more detail on the specific projects driving this increase, and how you plan to manage the execution risk associated with this elevated level of investment?
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Your assumption of 4% annual O&M inflation excludes bad debt expense; with recent changes in accounting for uncollectibles and potential economic uncertainties, how confident are you that bad debt expense will remain flat over the next five years, and what impact could higher bad debt levels have on your financial projections?
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With plans to finance $15 billion in incremental capital using a 50/50 mix of equity and long-term debt, can you elaborate on your strategy to raise the required equity capital, and how you intend to mitigate the potential dilutive effects on existing shareholders?
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You've assumed no changes to your ROEs or regulatory mechanisms over the 5-year plan; considering the evolving regulatory landscape, what risks do you see to these assumptions, and how might any changes impact your earnings projections?
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Your 5-year plan is based on assumptions of normal weather, modest customer growth, and a 6% decrease in oil and gas costs; given the volatility in commodity prices and potential economic slowdowns, how sensitive are your earnings projections to deviations from these assumptions, and what contingencies are in place to address potential adverse scenarios?
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025
- Guidance:
- Earnings Per Share (EPS): $7.05 to $7.25, implying a 7.4% growth in fiscal 2024 EPS, excluding onetime items .
- Capital Spending: Approximately $3.7 billion .
- Annual Dividend: $3.48, an 8.1% increase over fiscal 2024 .
- O&M Expense: $840 million to $860 million, excluding bad debt expense .
- 5-Year Plan to Fiscal 2029: Approximately $24 billion of capital investment, supporting a rate base growth of about 13% to 15% per year. Anticipated EPS for fiscal 2029 is $9.15 to $9.55 .
- Long-term Financing Plan: Approximately $15 billion of incremental long-term financing .
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Earnings Per Share (EPS): Expected to be at the higher end of $6.70 to $6.80, including two items totaling $0.17 to be excluded in fiscal 2025 guidance .
- EPS Growth: 6% to 8% growth from the adjusted EPS amount through fiscal 2028 .
- O&M Expenses: $800 million to $820 million .
- Capital Spending: Approximately $3.1 billion .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Earnings Per Share (EPS): Increased to $6.70 to $6.80, including $0.10 to $0.11 for Texas property tax benefit and $0.07 for Mississippi bad debt adjustment .
- O&M Expense: Increased to $800 million to $820 million, inclusive of the Mississippi bad debt expense adjustment .
- Capital Spending: Increased to approximately $3.1 billion .
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: FY 2024
- Guidance:
- Earnings Per Share (EPS): $6.45 to $6.65, including the impact of Texas property tax legislation changes .
- Property Tax Impact: $20 million to $22 million pretax, translating to an EPS impact of $0.09 to $0.11 .
- Equity Capitalization: 60% .
- Available Liquidity: $3.2 billion, including $433 million of net proceeds under existing forward sales agreements .
- Weighted Average Cost of Debt: 4.1% .
- Weighted Average Maturity: Approximately 18 years, with the next refinancing in June 2027 .
- Forward-Starting Interest Rate Swaps: $900 million in swaps with an effective weighted average treasury rate of 1.54% .
Recent developments and announcements about ATO.
Corporate Leadership
Leadership Change
Karen E. Hartsfield is retiring from her role as Senior Vice President, General Counsel, and Corporate Secretary at Atmos Energy Corporation. She will transition to a Senior Advisor position after December 31, 2024. Jessica Bateman Pulliam will step up to fill her position starting January 1, 2025. Ms. Bateman Pulliam is joining from Baker Botts L.L.P., where she was a partner and co-chair of the Securities and Shareholder Litigation Group .