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Atmos Energy sees operating costs rise as it deploys safety technology

Atmos Energy Corp. said its operating expenses are on the rise as the company deploys new safety technology to parts of its natural gas distribution system, driving up the cost of analyzing a flood of data.

The Dallas-based gas utility saw operating and maintenance costs rise nearly 5% in the first nine months of its fiscal year, with the $20.6 million increase in O&M costs offsetting a "modest increase" in contribution margin. The company chalked up the increased costs to higher pipeline maintenance, steeper employee and training costs and software licensing fees.

Drilling down into the numbers during an Aug. 8 conference call, Atmos executives highlighted the role of new leak detection technology and opportunistic maintenance on O&M expenses. While automobile-mounted advanced mobile leak detection helps Atmos identify and mitigate gas leaks, it has also contributed to the company's annual O&M inflation rising above its target of 2.5% to 3.5%.

"This technology is 1,000 times more sensitive than traditional survey technology. Therefore, we are finding more potential leak indication, which drives the need to hire or contract people to evaluate and assess these indications," Atmos CFO Christopher Forsythe said.

In addition to the challenge of processing the sheer bulk of information gathered through the leak detection technology, known as Cavity Ring-Down Spectroscopy, Forsythe noted that because the tech is new to Atmos, it requires "a little bit more assessment" to process the data.

"A lot of that work is O&M, but over time we expect as we gain proficiency that should come back into line with the 2.5% to 3.5% guidelines that we established for the five-year plan last fall," he said, adding that the company expects to roll forward that guidance in 2024.

Atmos now deploys about a dozen leak detection units in Texas and also has one unit each in Louisiana and Mississippi, said Executive Vice President Kevin Akers, who was named incoming CEO on Aug. 7. Atmos plans to roll out additional units in West Texas during its next fiscal year. According to Forsythe, productivity among Atmos crews performing the work has improved lately.

The company is also taking advantage of rising margins to "take risk off the table" by beefing up its schedule of preventive maintenance, Forsythe said.

"That's in-line inspection, that's right-of-way maintenance, that's low-pressure system assessments — anything we can do to reduce risk in the current period that will benefit for future periods," he said. "So that's the type of work that you're seeing in the O&M line item. And we'll just continue to manage that going forward as needs arise and as opportunities arise as well."

Following a deadly 2018 explosion in Dallas, Atmos announced it would ramp up spending on pipe replacement to $9 billion to $10 billion over the next five years, compared with $9 billion during the previous decade.

Atmos reported fiscal third-quarter net income of $80.5 million, an increase from $71.2 million in the year-ago period. Earnings per share of 68 cents were in line with the S&P Global Market Intelligence consensus normalized EPS estimate.

Shares of Atmos were trading about 1% higher above $109 following the conference call.