Atmos Energy Corporation

Thank you for standing by. My name is Greg and I will be your conference operator today. At this time, I would like to welcome everyone to today's Atmos Energy Corporation Fiscal 2025 Third Quarter Earnings Conference Call. All lines, excuse me, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Dan Mazir, Vice President of Investor Relations and Treasurer. Dan.

Thank you, Greg. Good morning, everyone, and thank you for joining our Fiscal 2025 Third Quarter Earnings Call. With me today are Kevin Akers, President and Chief Executive Officer, 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 atmasenergy.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 32 and are more fully described in our SEC file. With that, I will turn the call over to Kevin Akers, our President and CEO.

Kevin. Thank you, Dan. Good morning, everyone, and thank you for joining us today. Yesterday, we reported -to-date Fiscal 25 net income of $1 billion or $6.40 per diluted share. And we updated our Fiscal 25 earnings per share guidance to a range of $7.35 to $7.45. 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 in 1,400 communities across eight states. The Texas Workforce Commission reported in July that the seasonally adjusted number of employees reached 14.3 million. Texas again added jobs at a faster rate than a nation over the last 12 months ending June, adding over 198,000 jobs, representing a .4% annual growth rate. We also continue to see the value and vital role that natural gas plays in economic development across our service territories. For the 12 months ended June 30, 2025, we added nearly 58,000 new residential customers with almost 45,000 of those new customers located here in Texas. Commercial customer growth remains solid as well with approximately 575 new customers connecting to the system during the second quarter and over 2,500 new customers connecting to the system fiscal year to date. Industrial demand for natural gas in our service territories also remains strong. During the third quarter, we added three new industrial customers. In fiscal year to date, we've added 22 new industrial customers with an anticipated annual load of approximately 3.4 BCF once they're fully operational. On a volumetric basis, this load is comparable to adding approximately 67,000 residential customers. During the third quarter, APT entered into a contract to transport natural gas to a customer that will generate onsite power to serve a data center in the Abilene area. The data center is expected to be fully operational by end of the calendar year. And at that time, we anticipate APT will provide approximately 30 BCF of gas annually to support this data center. As a reminder, revenues earned from this contract are included in APT's writer-rev mechanism. Therefore, 75% of this revenue will benefit APT's LDC customers. Our consistent performance reflects the vital role we play in every community. That is safely delivering reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. During the third quarter, our customer support associates and service technicians received a 97% satisfaction rating from our customers, reflecting once again 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 nine months of the fiscal year. Through those efforts, the team helped over 48,000 customers receive nearly $17.5 million in funding assistance. Additionally, Atmos Energy has been named 2025's most trusted brands by data analytics and advisory firm Esquin. Esquin surveyed residential natural gas customers, electric and combination customers of the 148 largest US utility companies. Atmos Energy placed first among all 40 utilities in the South region and received the highest score by any utility in any region nationwide. Before turning the call over to Chris, I want to briefly comment on recent Texas legislation, House Bill 4384 that became effective on June 20th, 2025. At a high level, this legislation authorizes a gas utility to defer for future recovery as a regulatory asset, post in-service carrying costs, depreciation and ad valorem taxes associated with the unrecovered gas gross plant. For non-eligible A209 capital investments such as new customer growth and system expansion. This legislation also instructs the Railroad Commission to adopt rules to implement section 104.302 of the utilities code as added by this act no later than 270th day after the effective date of this act. Before the passage of this legislation, approximately 45% of our total capital spending qualified for rule 8.209 treatment. Applying the language of this legislation means that approximately 80% of our capital spending is eligible for Texas deferral treatment. We believe most of the new capital covered by this legislation is associated with APT. We are currently in the process of updating our fiscal 26 capital budget in a five-year plan and we will provide a full update to the five-year plan during our fourth quarter earnings call in November. As I turn the call over to Chris, I want to share that our hearts and prayers continue to be with our teammates, families and neighbors in the San Angelo, Kerrville, Ingram, Burnett and other communities that were tragically impacted by the floods. No words can fully comfort you and the community for your loss, but please know that we as your teammates, friends and neighbors stand alongside you in support and are here to lend a helping hand. Chris, over to you. Thank you, Kevin and good morning everyone.

Yesterday we announced the fiscal year to date diluted earnings per share of $6.40 compared to $6 per diluted share in the prior year period. Our third quarter and fiscal year to date financial results continue to be driven by regulatory outcomes reflecting increased safety and reliability spending, customer growth and strong through system revenues at APT. Regulatory outcomes in both of our segments increase operating income by $322 million. Residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $22 million. Revenues in our pipeline and storage segment increased $12.5 million primarily due to increased throughput. Approximately $11 million of this increase was recognized during the first six months of the fiscal year. As we discussed during our second quarter call, we expected the contribution from APT through system business in fiscal 25 to be comparable to what we experienced in fiscal 24. But most of this contribution realized during the first half of the fiscal year. APT's third quarter was in line with our expectations and we continue to believe the contribution of APT through system business in fiscal 25 will be in line with fiscal 24. APT also experienced a $12.5 million increase due to higher capacity contracted by tariff-based customers due to their increased peak day demand. Consolidated O&M increased $85 million. This increase is primarily due to higher employee-related costs, increases in line locate, pipeline inspection, and system monitoring activities, and higher bandit expense. As a reminder, we recognize a $14 million non-recurring reduction in bandit expense in the first quarter of fiscal 24, resulting from a regulatory change in how we recover our bandit expense in the specific. As expected, O&M in the third fiscal quarter trended higher than the prior quarter, but we still expect fiscal 25 O&M, excluding bandit expense, to be in the range of $860 million to $880 million. Assuming the midpoint of this range, we anticipate O&M in our fourth fiscal quarter will trend approximately $10 million lower than the prior year's fourth quarter. Consolidated capital spending increased 22% to $2.6 billion, with 86% dedicated to improving the safety and reliability of our system. This increase reflects higher safety and reliability spending and higher spending to support customer growth in both of our segments. We remain on track to spend approximately $3.7 billion this fiscal year. During our third fiscal quarter, we implemented approximately $170 million in annualized regulatory outcomes, including the West Texas General Rate Case, APT's annual grip filing, annual filings for the city of Dallas and Tennessee, and the Kentucky General Rate Case. Fiscal year to date, we have implemented $351 million in annualized regulatory outcomes. And currently, we have $229 million in annualized outcomes in progress. Of this amount, approximately $205 million is associated with our annual RRN filing in Mid-Tex and the General Rate Case in Mississippi. We anticipate implementing new rates from these filings in the first quarter of fiscal 26. Our financial position continues to remain strong. We finish our third fiscal quarter with an equity capitalization of 60% and approximately $5.5 billion in liquidity. This amount includes $1.7 billion in net proceeds available under existing forward sale agreements that fully satisfy our anticipated Fiscal 25 and Fiscal 26 equity needs and a portion of our Fiscal 2027 equity needs. In June, we issued $500 million in tenure notes with a coupon of 5.2%. As a result, our overall weighted average cost of debt as of June period stands at .17% and our debt profile remains very manageable with the weighted average maturity for approximately 17 years. Turning now to our guidance, we anticipate the impact of adopting the new Texas legislation will increase our expected earnings for shares in the fourth quarter of Fiscal 25 by approximately 10 cents. Additionally, our updated guidance range includes our expectations for APTs through system business during the fourth quarter and an improvement in our past new collections experience. Therefore, as we reported last night, we have updated our Fiscal 25 earnings for share guidance to a new range of $7.35 to $7.45 from the prior range of $7.20 to $7.30. Looking forward to 26, as Kevin mentioned, we are still working through our five-year plan. As of today, we believe earnings for share will continue to grow in a range of 6% to 8% annually. We will provide a full update to our Fiscal 2026 earnings for share guidance and a full update to our five-year plan for our Fiscal fourth quarter earnings call in November. We appreciate your time this morning, and we will now open up the call to questions.

Great, thank you so much. And at this time, I would like to remind everyone again, in order to ask a question, press star then the number one on your telephone keypad. Once again, star one. And we will pause just a moment to compile the Q&A roster. All right, looks like our first question today comes from the line of Richard Sunderland with JPMorgan. Richard, please go ahead.

Hi, good morning. Thanks for the time today. Good morning. Good morning. I just want to start with that 10-cent increase from the Texas legislation that you called out. Is that essentially a half-year's impact of the legislation that you're booking all in 4Q, or how do we think about that 10 cents relative to the total uplift potential from the legislation?

Yeah, this is Chris. So the 10 cents reflects the impact of legislation beginning June 20th when the legislation became effective to the end of fiscal 2025, so effectively one quarter.

Okay. Okay, understood. That's helpful. And then I wanted to parse the through system commentary a little bit more. I know you said flat to 24 levels, could you remind us what you'd originally expected in 25 on that front? I guess I'm just trying to think of the puts and takes of the Texas benefit relative to the through system activities and how that might impact growth at 26. Thank you.

So as we think about, you know, on the through system business, we really didn't, as we talked about a year ago, we had anticipated spreads that were probably more in line with historical norms. Obviously in the first quarter, quarter and a half of this fiscal year, with some of the takeaway capacity that had been delayed into, or late last year into early this year, that drove spreads. We also saw some volumes. As we think about fiscal 2026, as we sit here today, we're anticipating probably more normal operating environment, both from a throughput and a spread perspective. And we'll adjust as we move through the fiscal year based upon what happens with the market.

Yeah, I'd just add to that again, I think it's a little early to start trying to see after a crystal ball at 26 is going to be. I think if you look right now, we've got to get through the rest of the summer cooling low, see where production continues to be at that point. We'll know more as we get closer to our updated five-year plan and what that may look like.

Great. Thanks for the time today. Thank you.

Thank you. Thanks, Richard. And again, folks, if you do have any questions today, star one on your telephone keypad, once again, star one. All right, looks like our next question comes from the line of Christopher Jeffrey with Mizuho Securities. Christopher, please go ahead.

Hi, good morning, everyone. Just wanted to follow up on the project discussed in the Abilene area with the data center. Just curious if you could kind of size up how big of a capital outlay that would be, whether you're seeing other potential projects like that in, you know, throughout the system.

Again, as we said on our previous calls, we continue to get inquiries in almost every state that we have right now. And they continue to go back and forth. Some of them are standalone, some of them are grouped together. But again, we'll continue to report on those once we have signed contracts and agreements to deliver natural gas service. But inquiry continues to be strong across the service territory. It's a matter of when those projects actually are signed and ready to break ground on those. As we move into the rest of the county year and into next year, we'll see how the load continues to develop on those. That particular project there in Abilene, again, we may have a little bit more additional clarity on growth of that load as we finish up a five-year plan.

Great, thank you, Kevin. And then maybe just a point of clarification. You mentioned, I think, 45% total spending previously qualified for 2009, and that moves up to 80%. Is that just in Texas, or are you talking about Atmos as a whole entity?

Yeah, the 80% was Atmos as a whole entity, if you will. And again, as I said in my comments, we believe the majority of that increase is reflected through APT's investment. Again, going back to the growth that we mentioned in the call and continue to mention, quarter over quarter, that's showing up and requires system investment and expansion, as well as new supply points, expansion of storage, all those sort of investments on APT's side to support the LDCs behind its system.

Got it. I guess just to follow up on that point, it seems like, you know, looking at the change in guidance on slide 13, most of the increases coming from the distribution segment. So should we think of the increase from the tax benefit at APT or at distribution?

When you say the tax benefit, Chris, which benefit are you referring to?

Sorry, the legislation benefit, HB43E5.

Yeah, I think right now it's roughly the way we're forecasting our fourth quarter assets placed in the service. It's probably two-thirds distribution, one-third APT for the fourth quarter.

Okay, great. Thanks, everyone.

Thanks, Christopher. And our next question comes from the line of Nick Campanella with Barclays. Nick, please go ahead.

Hi, good morning. This is St. Fritz today and thanks for taking the time. I just have a quick clarification on the 10 cents. So it sounds like we should annualize that. Just wondering, how should we think about that, lumping that into the 6 to 8 percent annual CAGR going into the long term? Thanks.

Yeah, it may be a little bit too simple to lump. You know, just take 10 cents multiple by four because what's predicated on how the, when the deferrals start is when assets are placed in the service. So we have to think about what, you know, for each one of our projects, both in distribution and APT or the time in their closings, if you will, placing those assets in the service -a-vis when they will be awfully reflected in the rates. So as we talked about, we're still modeling that impact going forward, which is why we are, have a full update on FY26 as well for one year plan and the five year plan when we roll that update that in November.

Understood, that's helpful. And maybe just to follow up based off a stronger or more robust operating cash flow, I guess, how does that affect your thoughts on financing the future growth? And do you see any possibility to moderate external equity needs? I mean, I understood you're mostly secured for 25, 26, but just wondering how should we think about that?

Yes, we'll continue to finance the corporation or operating cash flow needs in a balanced fashion using a blended mix of equity and long term debt. And again, would you see the increase in the operating cash flow? That was something we had anticipated in developing the five year plan. And when we established the financing targets in that five year plan a year ago, that was contemplated.

Got it. Thanks for the call, I appreciate it.

Thanks, Nick. And the last call for questions, again, star one on your telephone keypad, star one. Going once, going twice. OK, there are no further questions, so I will now turn the call back over to Dan Mazir for closing remarks. Dan?

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