ATO
#Thank you, Adam, and good morning, everyone.
Thank you all 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, and we expect to file our 10-Q by the end of the day.
As we review the 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 24 and more fully described in our SEC filings.
Our first speaker this morning is Chris <UNK>, Senior Vice President and CFO of Atmos Energy.
Chris.
Thank you, <UNK>, and good morning, everyone.
We appreciate you joining us and your interest in Atmos Energy.
The successful execution of our growth strategy to invest in our regulated assets continues to drive our performance.
Net income from continuing operations for the second quarter increased to $162 million or $1.52 per diluted share compared with $143 million or $1.39 1 year ago.
For the current 6-month period, net income from continuing operations reached $276 million or $2.61 per diluted share compared with $245 million or $2.38 per diluted share for the same period 1 year ago.
Slides 4 and 5 provide financial highlights for each of our segments for the 3- and 6-month periods.
Rate relief generated about $40 million of incremental margin in the second quarter and almost $68 million in the current 6-month period.
Approximately 70% of the incremental margin was reflected in our distribution segment.
Period-over-period decreases ---+ or increases rather were $29 million in the quarter and about $47 million in the current 6 months, with the largest increases in our Mid-Tex, Mississippi and Louisiana Divisions.
Margin in the pipeline and storage segment rose almost $11 million in the quarter and over $21 million in the current 6 months from APT's GRIP filing approved in fiscal 2016.
We continue to experience customer growth in our distribution business, primarily in Texas and Middle Tennessee, resulting in a $2.5 million gross profit increase quarter-over-quarter and about $4 million in the current 6-month period.
Over the last 12 months, we experienced net customer growth of about 0.8% or about 26,000 customers.
As everyone is aware, the winter heating season this year was extremely warm.
Weather this year's second quarter was 34% warmer than normal and 23% warmer than last year's quarter.
The first 6 months of fiscal 2017, weather is 29% warmer than normal and 12% warmer than the same period 1 year ago.
However, our weather normalization mechanisms, which cover about 97% of our distribution margins, worked as intended to substantially mitigate the effects of this extremely warm winter.
As a result, we only experienced a decrease in gross profit of about $1 million for the quarter and year-to-date periods.
Moving on to our spending.
Consolidated O&M for the continuing operations increased by $4 million in the quarter and about $9 million in the current 6 months, mainly due to higher employee-related costs, incremental pipeline maintenance activity and increased line locate activity, which is an indicator of the growth we're experiencing.
For example, in the first 6 months of the first fiscal year, we had 515,000 line locator requests in our Mid-Tex Division alone.
This equates to a 4% increase compared to the same period last year.
The incremental pipeline maintenance spending reflect increased levels of monitoring, integrity assessments, continuing activities being conducted at APT, combined with incremental spending related to the recently acquired North Texas pipeline and related compressors.
As a reminder, we acquired this asset during the first quarter for $85 million to provide additional capacity to serve our growing North Texas customer demand.
It also provides increased access to the Barnett Shale, Oklahoma and Northeast gas supply bases.
Capital spending increased by $23 million to about $559 million in the first 6 months of fiscal 2017.
Distribution spending increased about $90 million as we continue to focus on system safety and new infrastructure spending.
Pipeline and storage spending decreased about $67 million, reflecting the substantial completion in the prior year of an APT project to improve the reliably of gas service to its LDC customers.
Approximately 77% of our year-to-date CapEx was associated with safety and reliability spending.
And we begin to earn ---+ expect to earn on over 95% of our capital spending within 6 months of the test year end.
Our capital spending is still expected to range from $1.1 billion to $1.25 billion for fiscal '17, inclusive of the pipeline purchase.
Moving now to our earnings guidance for fiscal '17.
Our financial performance for the first 6 months of the fiscal year came in line with what we expected to be and our fiscal 2017 earnings guidance and assumptions remain unchanged.
We still expect fiscal 2017 earnings from continuing operations to range between $3.45 and $3.65 per diluted share.
Slide 18 details the key assumptions supporting our earnings guidance.
We expect the continued execution of our regulatory strategy to be the primary driver for this year's results.
We remain on track to begin implementing between $90 million and $110 million in annualized operating income increases during fiscal 2017.
Slides 7 through 14 provide details about the progress we have made during fiscal '17 in pursuing our regulatory strategy.
I will now turn over the call to <UNK> <UNK> for closing remarks.
<UNK>.
Thank you, Chris.
Excellent, excellent report.
And it's in the time to enter our favorite week here, this is derby week.
And we've recorded another solid quarter, very, very steady results, no surprises, and we're extremely encouraged with the positive outlook for the remainder of our fiscal 2017.
Progress with our rates and regulatory work continues.
We enjoy very positive relationships with our customers and the regulators in the states that we serve, which is critically important.
And with our investments in our regulated assets of over $1 billion annually through 2020, we continue to demonstrate our absolute commitment to safety and reliability.
And regulators and customers very much understand how important these investments are to make our system as safe as possible as we continue our journey of becoming the nation's safest utility.
Rate relief continues as the primary driver of our financial results.
And as of May 3, rate outcomes have provided annual operating increases of about $30 million thus far in this fiscal 2017 year.
And you can see that on Slide 17.
We do currently have request pending which are requesting adjustments of about $132 million, with the lion's share of that amount coming from our Mid-Tex Division rate review mechanism, which seeks an adjustment of some $43 million as well as the pending APT rate case seeking an adjustment of $55 million.
And as we've discussed, the APT case was filed proposing no changes to any existing policy or precedent, particularly as it relates to cap structure and return on equity.
Our team did an excellent job of presenting our case to the hearing examiners about 2 weeks ago, and we're expecting that initial decision by June 6 and then the statutory deadline for decision in the case by the Railroad Commission is July 10.
So we'll know something by then.
Looking forward with our upcoming rate activity, we do expect to submit another 5 to 7 rate filings by our fiscal year-end that, in total, would request another $15 million to $20 million of additional adjustments to our operating income.
And with the sale of our nonregulated gas marketing business now fully complete, Atmos Energy is now a fully regulated pure-play natural gas utility, making the company an even more attractive investment with a stronger valuation.
We continue to honor the commitments that we've made to all of our constituents, with expected earnings per share growth of between 6% to 8% annually, and providing a solid dividend we're offering our shareholders a total return proposition of between 9% and 11% on an annual basis.
We very much thank you for your time this morning, and now we'll open the call up for questions.
Adam.
You wouldn't take your eyes on those midstream.
I mean, it's a classic add-on to our intrastate pipeline, very integral part of the intrastate.
So it's just another high diameter ---+ or high-pressure, large-diameter pipe that's bringing additional supply from very important areas to our system that is experiencing some wild growth up on the north end.
Core GRIP ---+ GRIP and other rate regulated activity that we're doing from last year.
Organic good old-fashioned growth, <UNK>.
From new business.
No, no, that's the total shareholder return.
The 6% to 8% earnings per share growth and then the dividend on top of that.
You have not updated your note here recently.
You used to write about that.
But you're right about the rate base growth, it's doing about 10% to 11% with our investment of about $125 million through '20.
Yes, we came out of ---+ this is Mike.
We came out of '16 at about a rate base of $6 billion, and we expect to end this year somewhere $6.5 billion to $6.9 billion.
And 2020, $8.5 billion to $9 billion so.
No, <UNK>.
This is Mike.
It's ---+ I mean, excluding short-term debt has been preestablished precedent and it's the standard.
I mean, I would say, that's for the hearing examiners to decide, but really, we just want to take you back to the point that we communicated all along.
And that's, our case and our filing was very, very straightforward based on previously established policy and precedent.
We weren't asking for anything new and really, the environment and the way we operate the pipeline business hasn't changed since the last case.
So we're very comfortable with our case and our team did an excellent job presenting that case during the hearings.
I think the method that was really established or set as a result of the last case, the framework created by the Railroad Commission was to use a pipeline peer group and that's what we did.
And our experts referred to a pipeline peer group to establish the ROE that we recommended in the case.
Sure.
This is Chris.
Again, we have WNA coverage in 97% of our margins.
Colorado is the only one who doesn't have WNA.
Most of the mechanisms utilize a 30-year normal NOAA.
That's the period where to calculate the adjustments under the various mechanisms.
In Texas, it's a 10-year derivation that's based upon a 30-year normal.
So our coverage period generally cover November to April.
We have a couple of that go even further.
And then Virginia, although it's the smallest territory, that is an annualized ---+ a full year worth of WNA coverage.
We haven't taken it yet.
I said we haven't taken it yet.
It would be opportunistic.
We ---+ <UNK>, this is Mike.
We have a small amount of capacity right now, maybe 100 million a day.
And that's really where we are in terms of our ability to move additional gas west to east.
You might talk about what we'd have to do to add it.
Yes, I mean, to add it, we'd add compression.
And I think we add compression along our system that would allow us to bring more gas into the Metroplex and then deliveries down into Katy.
I think we're looking at maybe 200 to 300.
So clearly, the primary driver is for the benefit of the rate paying customer.
No.
Yes.
You have a question now.
Okay.
Just to remind you, a recording of the call is available through August 2 on our website, and we hope to see many of you at the AGA Financial Forum in a couple of weeks.
We appreciate your interest and thank you for joining us.
Goodbye.
