Atmos Energy, a consistent performer in the utilities sector, recently delivered strong first-half results for fiscal year 2024, fueled by robust customer growth in Texas and favorable pipeline spreads. The company raised its earnings guidance and painted a picture of continued stability and growth, leaving investors reassured. However, a closer look at the transcript of their Q2 2024 earnings call reveals a potentially overlooked detail: a significant uptick in anticipated O&M spending in the back half of the year. Could this surge in spending offset the positive impact of a one-time property tax benefit, and should investors be concerned about its implications for future earnings growth?

The headline story for Atmos remains positive. They've enjoyed a surge in new customers, adding over 56,000 in the first six months of the fiscal year, with a staggering 43,000 in Texas alone. This growth reflects the continued strength of the Texan economy, boasting record-high employment figures and a booming housing market, particularly in the Dallas-Fort Worth area. Atmos is also reaping the rewards of wider spreads between natural gas prices at the Waha Header and delivery points on its Atmos Pipeline-Texas (APT) system, further bolstering revenue.

Adding to the good news, the Texas legislature, in a move that initially flew under the radar, passed legislation allocating state budget surplus to offset property taxes for commercial and residential property owners. This translates into a $20 to $22 million reduction in Atmos's property tax expenses for fiscal year 2024, representing a $0.10 to $0.11 boost to their earnings per share. Investors cheered, and rightfully so. But the devil, as they say, is in the details.

While management confidently reaffirmed their fiscal year 2024 EPS guidance, raising it to $6.70 to $6.80, they also revealed an upward revision in their O&M spending range. The original range of $780 to $800 million, which already included a one-time bad debt adjustment in Mississippi, was bumped up to $800 to $820 million. This $20 to $40 million increase, coupled with the anticipated higher spending trend in Q3 and Q4 compared to the prior year, warrants closer examination.

Management attributed the increase to several factors, including system fortifications and additional maintenance in preparation for the next winter heating season, along with higher customer growth requiring additional resources. While these explanations seem reasonable on the surface, the timing of the announcement, combined with the magnitude of the increase, raises questions.

Could Atmos Be Front-Loading O&M Expenses?

Could Atmos be strategically front-loading O&M expenses, taking advantage of the favorable property tax tailwind to absorb a spending surge? Is this a one-off adjustment, or should investors brace for a new normal of higher O&M expenses, potentially impacting future earnings growth?

The implications for fiscal year 2025 are crucial. Management anticipates 6% to 8% EPS growth from an 'adjusted' base, stripping out both the property tax benefit and the Mississippi bad debt adjustment. This adjusted base, based on the midpoint of the current guidance, would be around $6.54. A 6% to 8% growth rate would then translate to an EPS range of $6.93 to $7.06 for fiscal year 2025.

However, if the higher O&M spending trend persists into fiscal year 2025, the actual EPS growth could fall short of this anticipated range. Assuming a conservative estimate of just a $10 million carryover of the O&M spending increase, or $0.05 per share, the adjusted base would be reduced to $6.49. Applying the 6% to 8% growth rate to this lower base would result in an EPS range of $6.88 to $6.99 for fiscal year 2025, notably lower than the initial projection.

Projected EPS Growth Scenarios

This potential scenario highlights the importance of closely monitoring Atmos's O&M spending in the coming quarters. The property tax windfall, while undeniably positive, may be obscuring a structural shift towards higher operating expenses. Investors seeking long-term value in Atmos Energy would be wise to look beyond the headline numbers and scrutinize the underlying drivers of the company's financial performance.

"Fun Fact: While they are known for their natural gas distribution, Atmos actually began its journey in 1906 as a supplier of ice! The company, originally named Dallas Ice Factory, only ventured into the natural gas business in the 1920s. This historical tidbit underscores Atmos's adaptability and ability to evolve with changing market demands, a quality that has served them well over their century-long existence. However, the question remains: will this adaptability be sufficient to navigate the potential challenges posed by a looming O&M spending surge?"