Atmos Energy Corporation

Draw your question, press star, followed by the number one. As a reminder, today's call is being recorded. I will now hand today's call over to Dan Messer, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Thank you, Tamika. Good morning, everyone, and thank you for joining our fiscal 2025 second quarter earnings call. With me today are Kevin Akers, President and Chief Executive Officer of and Chris Forsythe, Senior Vice President and Chief Financial Officer. Our earnings release and conference call slide presentation, which we will reference in our prepared remarks, are available at atmosenergy.com under the Investor Relations tab. 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 29 and are more fully described in our SEC filings. With that, I will turn the call over to Kevin Akers, our president and CEO. Kevin.

Thank you, Dan, and good morning, everyone. We appreciate your interest in Atmos Energy. Yesterday, we reported year-to-date fiscal 25 net income of $837 million for $5.26 per diluted share. We updated our fiscal 25 earnings per share guidance to a range of $7.20 to $7.30. This performance continues to reflect the commitment, dedication, focus, and effort of all Atmos Energy employees to successfully modernize our natural gas distribution transmission and storage systems, while safely providing reliable natural gas service to 3.4 million customers across 1,400 communities in eight states. For the quarter, we continue to experience robust growth driven by continually favorable employment trends in Texas. For the 12 months ended March 31, 2025, we added nearly 59,000 new customers with almost 46,000 of those new customers located in Texas. The Texas Workforce Commission reported in April that seasonally adjusted number of employed reached a new record high at over 14.3 million. Texas again added jobs at a faster rate than the nation over the last 12 months ending March, adding nearly 192,000 jobs representing a 1.4% annual growth rate. Commercial customer growth remained solid as well, with approximately 850 customers connecting to the system during the second quarter and nearly 2,000 customers connecting to the system fiscal year to date. Industrial demand for natural gas in our service territories also remained strong. During the second quarter, we added nine new industrial customers with an anticipated annual load of approximately 8 BCF once they are fully operational. Fiscal year to date, we've added 20 new industrial customers with an anticipated annual load of approximately 11 BCF once they are fully operational. On a volumetric basis, that is equivalent to adding approximately 204,000 residential customers. This growth continues to highlight the value and vital role natural gas plays in economic development across our service territories. In APT, we continue our work on several projects that will enhance the safety, reliability, versatility, and supply diversification of our system, as well as support the continued growth we are seeing in the local distribution companies behind APT's system. During the quarter, work started on phase two of APT's Line WA loop. This project will install approximately 44 miles of 36-inch pipe to the west of Fort Worth to support growth in the northwestern portion of the DFW Metroplex. This phase is expected to be completed by the end of the calendar year. Work continues on APT's Bethel to Grow project as well. As a reminder, this project will install approximately 55 miles of 36-inch pipe from our Bethel storage facility to our gross bed compressor station to provide additional pipeline capacity to the growing DFW Metroplex and to the Interstate 35 corridor. This project is scheduled to be placed in service late calendar year 2025. APT completed two more interconnect projects during the quarter. Fiscal year today, APT has added over one BCF of additional gas supply that will enhance supply reliability and versatility to support APT LDC customers. During the second quarter, our customer support associates and service technicians once again received a 98% satisfaction rating from our customers, reflecting the exceptional customer service they provide each and every day. Our customer advocacy team and customer support agents continue their outreach efforts to energy assistance agencies and customers during the first six months of the fiscal year. Through those efforts, the team helped nearly 32,000 customers receive over $10 million in funding assistance. Our results for the first half of fiscal 25 reflect the hard work and dedication of all Atmos Energy employees as we continue to safely deliver reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. I will now turn the call over to Chris for his update.

Thank you, Kevin, and good morning, everyone. Thank you for joining us today. As Kevin mentioned, diluted earnings per share for the first six months of the fiscal year is $5.26, which represents a 6.7% increase over the prior year period. Operating income increased to $1.1 billion, or 14.6%, for the first six months of the fiscal year. I'll highlight a few key drivers for our financial performance. Rate increases in both of our operating segments sold $185 million. Residential commercial customer growth in our distribution segment combined with higher industrial load increased operating income by an additional $14.4 million. Revenues in our pipeline and storage segment increased $11.4 million, reflecting a 10% increase in volumes transported across our system. combined with wider spreads between the Oaxaca header and the western end of APT's system, and delivered points on the eastern end and southern end of its system. APT also experienced an $8 million increase due to higher capacity contracted by tariff-based customers due to their growing peak-day demand. Consolidated O&M expense increased $74 million. This increase is driven by several factors. Employee-related costs increased approximately $27 million primarily due to increased headcount and overtime to support company growth. Additionally, bad debt expense increased to $15 million. As a reminder, we recognized a $14 million non-recurring reduction in bad debt expense last fiscal year, resulting from a regulatory change in how we recover our bad debt expense in Mississippi. We also experienced a $14 million increase in O&M associated with higher levels of line locating, pipeline inspection, and system monitoring activities. Finally, we experienced a $9.4 million increase in APT system safety and integrity expense, which is offset by a corresponding increase in revenue resulting in no impact to operating income. From a regulatory perspective, we've implemented approximately $153 million in annualized regulatory outcomes, and we currently have over $389 million in progress. Of this amount, we anticipate implementing between $175 and $180 million in annualized operating income increases in fiscal 25, with remainder expected to be implemented in the first quarter of fiscal 26. Included in this amount is $39.2 million requested in our West Texas general rate case. On April 25th, the Administrative Law Judge issued a proposal for decision with the following key recommendations. A 9.8% return on equity, actual capital structure, which reflects a 60.97% equity layer, Approval of a rate base totaling $1.2 billion. Approval to capitalize cloud computing costs as a fixed asset to be covered over a 15-year period, which essentially treats these costs as a capital expenditure rather than an O&M line item. And the authorization of two regulatory asset trackers. The first is a system safety integrity regulatory asset that will allow us to defer O&M incurred after June 30th of 2024 in excess of $3.5 million. related to system safety integrity regulations adopted by the Railroad Commission in Benson. These costs will be considered for recovery in a future right filing. The second provides for regulatory asset or liability treatment to capture the effects of changes in federal and state income taxes, including the corporate alternative minimum tax. The proposal for decision is scheduled to be considered by the Railroad Commission on May 13th. If approved as filed, the settlement would result in a $30.6 million increase in annual operating income. In our Mid-Tex Division, the two general rate cases we filed last fall for the ATM Cities Coalition and our environs customers were consolidated into one general rate case during our second fiscal quarter. As a reminder, this consolidated case represents approximately 15% of the Mid-Tex Division's customer base. On April 30th, we filed with the Administrative Law Judge a proposed settlement on this consolidated case. The key terms of the proposed settlement, ROE, capital structure, and the accounting improvements I just described, are the same as what is included in the West Texas proposal for decision. Additionally, the recommendation includes approval of a rate base allocable to these customers of approximately $1.1 billion. If the Administrative Law Judge recommends a settlement for approval, we anticipate the settlement will be scheduled for consideration by the Rural Commission on June 10th. If approved as filed, the settlement will result in a $6.7 million increase in annual operating income. Additionally, we expect the Railroad Commission will also consider APT's 2024 grant filing for $77.2 million at its June 10th meeting. Finally, in Kentucky, we completed a hearing this week before the Public Service Commission regarding our general rate case. We anticipate a final order during our fiscal fourth quarter. Our balance sheet and financial position continue to remain strong. Our equity capitalization as of March 31st was 61%, and we did not end any short-term debt outstanding. During the second quarter, we extended our four credit facilities, totaling $3.1 billion. At quarter end, we had $5.3 billion in available equities to support our operations. Included in this amount is $1.7 billion in net proceeds available from our ATM activities, which is expected to satisfy the remainder of our anticipated fiscal 25 equity needs and all of our anticipated equity needs for fiscal 26. Our fiscal year-to-date performance gives us confidence to increase our fiscal 2025 earnings per share guidance from a range of $7.05 to $7.25 to a new range of $7.20 to $7.30. We expect the remaining contribution to fiscal 2025 earnings per share to be recognized somewhat evenly by quarter in the back half of the fiscal year. The increase in our guidance largely reflects the strength of APT through system business during the first half of the fiscal year and our expectations for this part of APT's business for the remainder of the fiscal year. As a reminder, following a strong fiscal 24 performance, we entered fiscal 25 assuming a return to more normalized through-system marketing conditions as a result of increased takeaway capacity in the Permian Basin. Now we currently expect APT's through-system business to perform just slightly less than in the prior year. However, the timing of these revenues in fiscal 25 is expected to be different than in fiscal 24. Through March 31st, About half of the expected contribution for fiscal 2025 from this portion of APT's business has already been recognized. In the prior year, nearly 80% of APT's three-system business was recognized in the second half of the fiscal year. Additionally, we anticipate our ad valorem taxes to be lower than planned and have increased our O&M spending to stay ahead of compliance work to further enhance the safety and reliability of our system. We will also perform some additional maintenance this summer to prepare for the upcoming winter heating season. We now anticipate our O&M, excluding that debt expense, to be in the range of $860 to $880 million. A significant portion of the year-over-year increase has already been recognized, and we anticipate O&M in the back half of fiscal 25 to be just slightly higher than in the same period in the prior year. Finally, our capital spending guidance remains on track to be approximately $3.7 billion. We appreciate your time this morning and your interest in Atmos Energy. Well, now I'll open up the call for questions.

At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Your first question is from the line of Richard Sutherland with J.P. Morgan.

Hey, good morning. Thank you for the time today.

Good morning. Good morning.

Appreciate all the commentary here. Wanted to start with guidance. It sounds like APT through system activity certainly contributing to some of the upside here. Is the higher guidance for 2025 a fair base to think about growth going forward or does some of that normalization that you had originally anticipated for 2025 need to be factored in for growth for 2026 and beyond?

Yeah, it's a good question, Richie. So we'll still figure looking at what will happen for the rest of the summer. As you know, conditions are very volatile in the market right now. And as we set our fiscal 26 plans, we'll take a snapshot of market conditions, probably late summer, early fall, prior to us releasing our fiscal 26 guidance and updated five-year plan to really reflect what we think will be truly reflective of that business from the next fiscal year.

Okay, got it. Sounds like more to come. Again, similarly on the O&M, it seemed like some of the higher O&M for 25 is a pull forward from 26. Is that a fair characterization? How are you thinking about the higher O&M this year and any efforts to de-risk 26 on that front?

Yeah, a couple of things. There's certainly an opportunity to pull forward, as I described, with the lower than plan ad valorem expense, these to be our expectations. Also, we've talked many, many times. We are not a just-in-time company from an O&M for spending perspective, so if we have opportunities to further stay ahead of our compliance deadlines or if we see opportunities coming out of the winter heating season this last six months to get ready for the next six months, we'll perform some additional maintenance in the summer months when our crews and folks are available. It's a little bit of both. It's just kind of opportunistic based on the operating conditions of the system at this point in time, as well as taking advantage of opportunities to pull forward a little bit from future periods.

Yeah, the only thing I'll add to that is that, again, with the blessing we have of being in growth properties right now, we had an increase in the number of line locates from the previous year. And we'll continue to see that probably going forward, just given the economic conditions that I discussed earlier in my remarks. So that's the other part of that O&M, if you will, is sometimes with growth, people don't see that you'll have increased line locating expenses as well.

Got it. That's very helpful. Just a quick follow-up on the O&M discussion there. It sounded like in the Texas GRCs that there is some retroactive component to the REG asset tracker you were referencing. I may not be understanding all the puts and takes here, but just wanted to clarify, if you get the final orders in line with settlement, is that upside from that retroactive component? And I mean upside versus 25 guidance, to be clear.

At this point, we reflect in our guidance our expectations for O&M, but the cloud computing treatments as well as the SSI in our current guidance.

Great. Thank you so much for the time.

Thank you.

Your next question comes from the line of Nick Caponella with Barclays.

Hi. Good morning, team. This is actually Faye for Nick today, and thanks for taking my question. I just want to quickly follow up on financing. It seems like year-to-date equity issuance is slightly higher than year-to-date 2024. Again, I think with higher capital plan, higher rate-based growth, Can you update us on the equity financing for the rest of the year if there is any changes from the messaging from last quarter? And also kind of seeing the interest rate swap to be in a similar spot as last quarter. Just generally, can you speak to the strategy managing the costs over there as well? Thanks.

Sure. This is Chris. So, I mean, our financing strategy hasn't changed since prior quarter or really for the last several years. We'll continue to finance the corporation in a balanced fashion using a combination of equity and long-term debt with equity coming through the ATM. We talked about having $1.7 billion on the page now that's been priced to reflect our equity needs, our anticipated equity needs for fiscal 25 as well as 2026. And we'll draw that down as the cash needs of the corporation dictate when we need to use that. Additionally, from a long-term debt perspective, you know the swap that we have in place, that's again tied to our anticipated debt issuance in the fall for anticipating a 30-year issuance at this point in time. So at this point, we don't see any changes in executing that particular debt transaction and utilizing that swap for the benefit of our customers.

Got it. That's very helpful. And I just want to follow up on economic development and seeing the tremendous growth in Texas driven by T&I customers. Could you talk about, first of all, definitely generally gas need in the region, and obviously you're adding large quantity of new gas demand each quarter. I guess at this point, is there any pipeline of projects you're working on or if there's any quantifiable backlog that you can discuss? I'll leave it there.

Yeah, I'm not sure about your question about backlog. We don't have a backlog per se. I talked about the two high priority projects for APT, the WA loop and Bethel to growth spec project right now. Additionally, we're finishing up work on our third salt dome cavern that's part of an integrity maintenance program. We anticipate that to be wrapping up sometime in the next nine to 12-month period that's out there. Everything else is all scheduled work that we have lined out on a one-, three-, and five-year basis, according to either reliability, supply, versatility, and or our risk model safety concerns or direction that way. As we have in our slide deck, we point to 85% investment on capital for safety and reliability for the fiscal year-to-date period.

Understood. That's helpful, caller. Thanks again.

Thank you.

As a reminder, to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Julianne DeMalle-Smith with Jefferies.

Hey, this is Spark for Julian. Just really quick, legislatively, I'm just wondering what are some of the key bills you guys are monitoring and what potential benefits or implications do they carry for your business? Like, for example, we noticed there's HB 4384 regarding the standalone depreciation tracker for gas LDCs. Do you see that as a potential benefit for your business? Just any color on that form would be helpful. Thank you.

Yeah, we continue to monitor all the sessions across our eight states. We have two that are currently closed or concluded their session, Mississippi and Kentucky. Don't want to get too far ahead of the work that's continued going on across our legislative bodies right now, but we do see some bills out there that have our interest right now, but we think it needs to go through the final steps of the legislative process and then If they're related to the utility side of the business, they'd have to go to that particular jurisdiction's commission to see how it folds into either tariffs or rules or action for that company. So don't want to get too far out in front of what the legislature is going to do for the remaining session. But again, we're keeping an eye on everything that's out there.

Thank you. That's very clear. And maybe just another housekeeping question. So since you raised the FY25 EPS guidance, so the new guidance midpoint is now $7.25. Should we use the new EPS guidance midpoint as the new EPS base?

When you say new EPS base, what do you mean there?

It's for calculating the five-year CAGR.

At this point, I think that's a pretty safe assumption.

Got it. Thank you.

Your next question is from the line of Paul Fremont with Lindenburg Bauman.

Thank you very much. Congratulations on a strong quarter, and my question has been answered. Thank you.

Thank you. Your next question is from the line of Christopher Jeffery with Mizuho Securities.

We can't hear you on this end.

Sorry, is that better?

That's better. Thank you.

Okay. Just a couple quick ones from me. I just noticed the timing for the Colorado rate case expectation got pushed back a bit. Just any kind of thoughts on timing there and expectations for when you get to that case?

No, that's something we're always looking at, what we have going on in the jurisdiction, what we have going on in other jurisdictions, ongoing conversation with our regulatory jurisdiction. So I wouldn't read a lot into that at this point.

Great. And then maybe just on the West Texas issue, the cloud computing costs that you mentioned, Kevin, in the opening remarks, just kind of expectations for that to be implemented more wholesale across Texas or any other states? Does that kind of change how you're approaching, you know, thinking about those types of costs within rate base?

I would just kind of view this as a continuation of our ongoing regulatory strategy of seeking to reduce lag where we can. Oftentimes, we'll start with an individual jurisdiction who will include something into their regulatory construct. We then try to seek to replicate that in other states to the best of our ability. So we'll see where the Railroad Commission's vote comes down next week, and then after from the May 13th to West Texas and again from Mid-Tex on June 10th. And then we'll see if it makes sense for us to bring that to other jurisdictions within the enterprise.

Got it. Thanks. And just to clarify, so that would be the first jurisdiction that that type of cost is included?

Correct.

Great. All right. Well, thanks again. Have a great day.

Thank you. Your next question is from the line of Ryan Levine with Citigroup.

Good morning, everybody. Just a quick one. In terms of APT expansion projects, the business continues to grow pretty materially. What are the underlying growth assumptions that embed the expansion projects that you have underway, and what conditions would merit further expansion or upside to your existing plans?

It's all part of our planning process. Again, it's based on what the city models are and what they're seeing for growth of population increases across the service territories. What we're seeing for demand anticipated capacity requirements off of that growth, we put those in our models and then try and forecast out when we expect that demand to show up and make sure we have the pipe and the supply already there to meet those anticipated demands. That's something we go through several times a year and then reaffirm again with our customers what their MDQs are as we head into winter. Then post-winter on APT, we'll review what actual MDQs they achieved and we'll reset the go-forward basis that drives our modeling for the next several years.

So given the winner is largely behind us, has that refresh already occurred for this calendar year so that we wouldn't expect any material changes until a review post-winter 2026 of expansion opportunities?

The review is ongoing at this point. We continue to have conversations with those LDCs behind our city gate there on APT. And we'll look to make sure those are reset prior to heading into next heating season, if any adjustments at all are required.

Okay, great. Thanks for taking the questions.

Sure.

At this time, there are no further questions. I will now hand today's call back over to the presenters for closing remarks.

We appreciate your interest in Atmos Energy and thank you again for joining us today. The recording of this call is available for replay on our website through June 30th. Have a good day.

This does conclude today's call. Thank you for joining. You may now disconnect your lines.