Atmos Energy Corporation

Greetings, and welcome to the Atmos Energy second quarter fiscal 2019 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you, Kevin, and good morning, everyone. This is Jennifer Hiltz, Vice President of Investor Relations, and thank you for joining us. This morning, I am joined by Mike Hafner, President and CEO, and Chris Forsythe, Senior Vice President and CFO. This call is being webcast live on the Internet, and our earnings release and conference call slide presentation are available on our website at atmosenergy.com under Company and Investor Relations. As we review these 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 27 and are more fully described in our SEC filings. Our first speaker is Chris Forsyth, Senior Vice President and CFO of Atmos Energy. Chris.

Thank you, Jennifer, and good morning, everyone. We appreciate your interest in Atmos Energy. Last night, we reported fiscal 2019 second quarter earnings of $215 million, or $1.82 per diluted share, compared with adjusted earnings of $135 million, or $1.57 per diluted share in the prior year quarter. Adjusted earnings excluded $4 million benefit related to the implementation of tax reform. Year-to-date, earnings were $373 million, or $3.21 per diluted share, compared with adjusted earnings of $327 million, or $2.97 per diluted share. And adjusted earnings excluded a $166 million benefit related to the implementation of tax reform. Also yesterday, the Board of Directors approved a 142nd consecutive quarterly cash dividend of 52.5 cents, which represents an indicated annual dividend of $2.10 per share in fiscal 2019, an 8.2% increase over fiscal 2018. Our second quarter results were in line with our expectations. The recovery of the capital spending required to modernize our natural gas delivery network, continued customer growth, and a planned increase in safety-related operating expenses were the primary drivers of the quarter's results. Slides five and six provide details of the period-over-period changes to operating income for each of our segments. I will touch on a few highlights. In the second quarter, operating income in our distribution segment increased 8% to $229 million. Recovery provided by recent regulatory actions increased contribution margin by $24 million. Additionally, we continue to experience solid customer growth. Over the last 12 months, we added a net 37,000 new customers, which represents 1.2% growth. We continue to experience strong customer growth in several of our service areas, including the DFW Metroplex, the suburbs of Nashville and to the north of Austin, and the left of Kansas to the west of Kansas City. This growth added $4 million in contribution margin for the quarter and almost $8 million year-to-date. However, despite weather that was 9% colder than the prior year quarter, customer consumption declined due to varying weather patterns quarter over quarter, which reduced contribution margin by about $9 million. Operating expenses decreased by about 1%. In the prior year quarter, we incurred $23 million related to customer assistance and other non-recurring expenses related to the outage in Northwest Dallas. After adjusting for these expenses, operating expenses increased approximately 9%. More than half of this increase reflects higher depreciation and ad valorem taxes driven by last year's capital spending. The remaining increase related to a planned increase in system integrity and maintenance work, such as digital mapping of legacy assets, and work to mitigate and reduce third-party damage to our system. Additionally, we experience higher labor and training costs as we have added service technicians and leak survey specialists to support our mid-tech operations in the DFW Metroplex. Operating income in our pipeline and storage segment increased about 16% to $69 million during the second quarter. New rates from last year's grid filing contributed $12 million of this growth. Additionally, APT continues to benefit from the supply and demand dynamics in the Permian Basin. APT's through-system revenue increased about $1 million quarter-over-quarter and about $4.5 million year-to-date, net of the Rider-Rev mechanism. APT's tariff customers continue to benefit from this mechanism, while our distribution customers in Texas receive the benefit of low costs of gas produced in this region. Operating expenses increased $6 million, or about 9%. About half of this increase reflects higher depreciation expense as a result of last year's capital spending. Additionally, we planned for incremental pipeline integrity work, which was the primary driver for the remainder of the increase in operating expenses. Consolidated capital spending increased 12% to $778 million year-to-date. About 84% of this spending was dedicated to safety and reliability projects. We remain on track to achieve our capital spending target of $1.65 billion to $1.75 billion for the fiscal year. From a financing perspective, we had another busy quarter as we completed over $600 million of financing. We refinanced our $450 million 8.5% 10-year notes with a 4.125% 30-year notes. As a result of the financing, our overall cost of debt decreased to 4.6% and our weighted average maturities increased to 22 years. Additionally, as most of you are aware, we moved to the S&P 500 from the S&P mid-cap 400 in mid-February. We took advantage of this unplanned and unique liquidity event to issue 1.1 million shares through forward sales arrangements executed under our ACM program. The net proceeds of $159 million from these forward sales arrangements were used towards our equity needs for fiscal 2020 and will not be fully diluted until issued in fiscal 2020. These net proceeds combined with the $245 million in net proceeds issued under forward sales arrangements during our November equity issuance leaves us with just over $400 million to help fund our capital spending through March 31, 2020, when all of these forward sales arrangements mature. Based on the execution of these forward arrangements, the remaining availability under our ATM program, and our current capital spending outlook, we do not foresee the need for discrete equity issuance through the end of fiscal 2020. As a result of our financing activities this year, our equity total capitalization was 60%, and our short-term debt balance was zero at quarter end. including the $108 million in cash on hand at the end of March and the $404 million in net proceeds available under the forward sales arrangements, we have approximately $2.1 billion of total available liquidity. After resetting most of our regulatory mechanisms last year, our fiscal 2019 regulatory calendar has returned to a more traditional cadence. To date, we have implemented $86 million of annualized regulatory outcomes and have about $90 million in progress. Annual filings in Texas, Louisiana, and Mississippi are among the most significant of these filings. Before I turn the call over to Mike, I wanted to comment on our fiscal 2019 earnings per share guidance. Yesterday, we narrowed our guidance to a range of $4.25 to $4.35 per diluted share. Slides 12 and 13 provide additional details of our updated guidance. Earnings for the first half of fiscal year were in line with our expectations. We see potential for a modest uptick in APT contribution margins as a result of the supply and demand dynamics affecting the Permian Basin. However, as we've communicated before, seven months are focused on preparing APT for winter operations for the next fiscal year, and we do not expect the impact to be material. Additionally, we have completed our fiscal 2019 financing program, and we now have clarity on how that financing will impact fiscal 2019 results. Finally, during the first half of the fiscal year, we initiated several efforts that will further mitigate long-term risk. Following the incident in New England last fall, we are now assessing our low-pressure systems and implementing additional procedures to continue to safely manage these systems. Additionally, during the first half of the fiscal year, we initiated a multi-year effort to implement new leak detection technology. The preliminary results from the initial pilot efforts have been encouraging, and we will continue to methodically implement this technology in certain of our jurisdictions during the second half of the fiscal year. And in the second half of the fiscal year, we are planning to run additional inline inspections in our pipeline and storage segment to facilitate capital allocation decisions for fiscal 2020 and beyond. Our performance for the first half of the fiscal year and the additional clarity we have for the second half of the fiscal year leaves us well positioned to meet our 6% to 8% earnings for sure growth target for fiscal 2019. I will now turn the call over to Mike for some closing remarks. Mike.