Atmos Energy (NYSE:ATO) Q2 2026 Earnings Call

0:00 Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Atmos Energy Corporation Fiscal twenty twenty six Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

0:30 I would now like to turn the call over to Jennifer Wernicke, Director of Investor Relations and Assistant Treasurer. You may begin. Thank you, Kayla. Good morning, everyone, and thank you for joining our fiscal twenty twenty six second quarter earnings call. With me today are Kevin Acres, President and Chief Executive Officer and Chris Forsyth, 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.

1:15 Our forward looking statements and projections could differ materially from actual results.

1:20 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, Jennifer, and good morning, everyone. We appreciate your interest in Atmos Energy. Yesterday, we reported year to date fiscal twenty twenty six net income of $985,000,000 or $5.92 per diluted share, And we updated our earnings per share guidance range to $8.40 to $8.50 Our capital expenditures for the first half of the fiscal year totaled $2,000,000,000 with over 89% of those investments focused on enhancing the safety and reliability of our distribution, transmission and underground storage systems.

2:09 Across our service territories, we continue to see steady customer growth For the twelve months ending 03/31/2026, we added over 51,000 new customers with over 39,000 of those new customers located here in Texas. And during the second quarter, we added over 800 commercial customers and four new industrial customers. This continued demand from all customer classes demonstrates the value and vital role natural gas plays in economic development across our service territories. In APT, we continue to work to 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 system.

2:58 During the second quarter, we completed Phase two of the Line WA project. This project installed approximately 44 miles of 36 inches pipeline to the West Of Fort Worth to support growth in this area of the DFW Metroplex. Additionally, APT enhanced supply optionality, reliability and system versatility with the completion of five interconnect projects and adding nearly 100,000 MCF a day of additional natural gas supply to the APT system. These investments further enhance APT's ability to serve the LDC customers behind their city gates. These LDC customers also benefit from APT's rider rev tariff, which shares approximately 75% of APT's other revenue build that is above a specified benchmark.

3:51 As a reminder, these revenues vary from year to year based upon available capacity on our pipeline and natural gas pricing dynamics in Texas. Over the last three years, these customers have received approximately $150,000,000 in total as credit from the rider rev tariff.

4:09 As you'll hear from Chris in a few minutes, natural gas pricing dynamics have positively impacted APT's other revenue build in the first half of fiscal twenty twenty six and are expected to favorably impact our financial results for the remainder of the fiscal year. Our customer support associates and service technicians continue to provide exceptional customer service, achieving customer satisfaction ratings of 97% for the first six months of the fiscal year. Truly outstanding work by this team. Additionally, during the first half of the fiscal year, our customer advocacy team helped over 33,000 customers receive approximately $9,500,000 in funding assistance. And recently, we were named to the Forbes list of America's best large employers, ranking as one of the top 100 employers overall and placing second among all utilities.

5:05 This is the sixth consecutive year Atmos Energy has been named to this list. This recognition reflects the continued dedication, focus and effort of all Atmos Energy employees to safely deliver reliable and efficient natural gas to homes, businesses and industries to fuel our energy needs now and in the future. Their commitment has us well positioned for the remainder of the fiscal year. Now I'll turn the call over to Chris for his update. Thank you, Kevin, and thank you to everyone for joining us this morning. As Kevin mentioned, earnings per share for the first six months of the fiscal year was $5.92 which represents a 12.5% increase over the prior year period. Our year to date results include $94,000,000 or $0.43 from the impact of Texas House Bill four thousand three and eighty four.

5:55 Of this amount, dollars 44,000,000 was recognized in our Distribution segment and the remaining $50,000,000 was recognized at APT. During the second quarter, the Texas Railroad Commission completed its final rulemaking to codify Texas House Bill 4,384 into Rule 70 seven-one 102. As you know, this rulemaking reduces lag in Texas by permitting gas utilities to defer post in service carrying costs, depreciation and ad valorem taxes associated with non eligible Rule eight thousand two and nine capital investments such as new customer growth and system expansion. Since adopting Rule 70 seven-one 102 in late fiscal twenty twenty five, we've been presenting the deferral of post and service carrying costs as a reduction to interest expense, be consistent with Texas Rule 8,209. With the new rule now final, we have determined it is most appropriate to present the deferral of post in service carrying costs in the income statement line items where the incurred costs are classified, O and M and interest expense.

6:52 This updated presentation has been reflected in our fiscal second quarter and fiscal year to date results, which reduced reported O and M for the first six months of the fiscal year by $41,000,000 Our year to date performance was influenced by several additional factors. Freight increases in both of our operating segments totaled $171,000,000 Operating income increased by an additional $32,000,000 due to residential and commercial customer growth and increased customer load. Finally, APT's through system revenues net of brighter rev increased about $16,000,000 or $08 The expansion of all of this increase reflected higher spreads realized during fiscal twenty twenty six compared with fiscal twenty twenty five. During the first six months of fiscal twenty twenty six, the spreads we captured averaged $4.35 compared to $1.80 in the prior year period, reflecting rising associated with gas production, constrained takeaway capacity, and lower demand due to unseasonably warm weather during this past winter heating season.

7:53 Excluding the impact of Rule 70 seven-one 102 deferrals, consolidated O and M increased $27,000,000 reflecting higher employee, compliance and safety related spending in our Distribution segment and higher maintenance spending at APT. From a regulatory perspective, since the beginning of the fiscal year, we have implemented $136,000,000 in annualized operating income increases in our distribution segments.

8:18 Currently, have 13 filings in progress seeking nearly 600,000,000 in annualized operating income increases. Expect to implement approximately 40% of this amount primarily during our third fiscal quarter. The largest filing we expect to implement during the second half of the fiscal year, APT's GRIP filing seeking $112,000,000 in annualized operating income increases, it's scheduled to be considered by the Texas Railroad Commission next Tuesday, May 12. Our equity capitalization as of March 31 was 61% and we did not have any short term debt outstanding. During the second quarter, we extended our four credit facilities that provide $3,100,000,000 in total liquidity. At quarter end, we had $4,100,000,000 in available liquidity to support our operations.

9:03 This amount includes approximately $890,000,000 in net proceeds available under existing forward sale agreements, which is expected to satisfy the remainder of our anticipated fiscal twenty twenty six equity needs and a portion of our anticipated equity needs for fiscal twenty twenty seven. As we reported last night, we have increased our fiscal twenty twenty six earnings per share guidance from an original range of $8.15 to $8.35 to a new range of $8.40 to $8.50 expect the remaining contribution to fiscal twenty twenty six earnings per share to recognize somewhat evenly by quarter in the back half of the fiscal year. Two key items are driving the increase in our fiscal twenty twenty six guidance.

9:45 First, our guidance reflects our expectations for the performance of APT's TruSystem business for the second half of the fiscal year. As we've mentioned before, going into a fiscal year, we based our assumptions for this line of APT's business, assuming revenues in line with our benchmark based on historical norms for available capacity on our system and pricing. Although we have recently seen some modest improvement at Waha, we anticipate natural gas pricing in the Permian will remain challenging for the remainder of our fiscal year. As I mentioned earlier, this part of ATT's business added $08 period over period. We currently anticipate that ATT's three system business will add an additional $08 to $1.02 for fiscal twenty twenty six results during the second half of the fiscal year.

10:28 Secondly, with final rule making completed and improved visibility into the timing of our capital spending in Texas for the remainder of the fiscal year, we believe the impact of implementing Rule 70 seven-one 102 will be higher than originally planned. We estimate this impact will range from 155,000,000 to $165,000,000 for the entire fiscal year, including the deferral of incurred post and service carrying costs, depreciation and ad valorem taxes. We still anticipate our O and M to be in the range of $865,000,000 to $885,000,000 We have reflected the estimated impact of Rule 70 seven-one 102 deferrals in our O and M guidance. However, we anticipate this decrease to be substantially offset by higher system monitoring compliance and employee costs. And we anticipate our interest expense to be in a new range of $155,000,000 to $160,000,000 This increase is solely due to the reclassification of the 70 seven-one 102 deferrals from interest into O and M that I mentioned earlier.

11:26 Finally, we remain on track to spend approximately $4,200,000,000 in capital expenditures for fiscal twenty six. We appreciate your time this morning and your interest in Atmos Energy. We'll now open up the call for questions. Your first question comes from the line of Julien Dumoulin Smith with Jefferies. Your line is open.

11:56 Hi, good morning team. It's Paul Zimbardo on for Julien. Thanks for taking the time. JULIEN Good morning. Thank you. The first I had was just on the dividend increase, like roughly 15%, again, quite impressive and better than where you've been trending in the past. Just any thoughts on kind of how sustainable do you intend to kind of keep increasing above trend? And just overall thoughts on the dividend prospectively would be useful.

12:27 Yes. I think we stated for a while now that we're going to grow the earnings per share at a six to 8% range and commensurately grow the dividend and that's where we're going to continue to go as we move forward. Yes. As a reminder, that 15% year over year is reflective of the dividend being rebased in addition to re basing the earnings per share because of the expected impact from Texas Rule 70 seven-one 102.

12:55 Okay. So you're kind of converging back to where you were before after the rebase. Okay. Yes. And then the other was just could you unpack a little bit more? I know you gave some detail on the kind of the shift between O and M and interest expense. If you could give a little more details and just confirming that is kind of a basically a one for one change not a net earnings impact there? Correct. It is not a net earnings impact. It's reclassification in how we present the deferral of the post incurred post and service, incurred service airing costs at the end of the day. So originally, had all of that in the interest expense line item. Final rulemaking, we looked at the proper classification of that, incurred post in service carrying costs reflects all costs associated with the gas plant investments that has been subject to the rulemaking that has not yet been collected in rates

13:53 that includes O and M, interest and other costs to be elected and to present that deferral in the line under the income statement where the costs were originally incurred and reported, if that makes sense. Okay. Now that does make sense. And then if I can sneak in last one quickly. You mentioned there's been a pretty dramatic move in Waha. Just any way that you would frame that kind of beyond 2026 for customers?

14:22 No, I mean, obviously we don't have a crystal ball out there. We'll continue to watch what happens over the next six months. We're not even into the real heat here in Texas. So the power gen load hadn't kicked in yet as well. As Chris said earlier, we have seen some moderation from some of the historic highs at Waha and the basis differential. We're going to continue to monitor as we go through the next six months. We'll keep you updated on these calls as we move forward. Okay. Thank you very much team. Thank you. And your next question comes from the line of Richard Sunderland with Truist Securities. Your line is open.

15:02 Hey, good morning. Thanks for the time today. Good morning. How are you? Great. Thank you. Turning to the guidance raise, I know you parse two different pieces there. How do you think about that as a base for growth going forward? Obviously, that clarification on rulemaking for Texas seventy seven thousand one hundred and two sounds like a new long term view, but is that eight forty to eight fifty a good clean base for the six to 8%? Yes. At this point, we think that's a pretty good base to think about fiscal twenty twenty seven and beyond as a launch point within that range. Great. Thank you for that. And then, on the ATM, I think if I'm reading the disclosures correctly, you didn't price anything on the quarter. I know you're a little bit ahead with having part of '27 address, but how are you thinking about activity there? Was there any hang up on the quarter specifically and just timing overall of ATM activity?

16:03 No. On the ATM activity, you're correct. We didn't price anything during the second quarter. As you mentioned, we were fully priced for fiscal twenty twenty six. Got a pretty good portion already established for fiscal twenty twenty seven. So we just wanted to kind of see what the market was doing. As you know, there's a lot of volatility in the second quarter with geopolitical events and economic news and whatnot. So we decided to keep our powder dry for the quarter, but we'll evaluate as we move forward pricing opportunities, we can get ahead further ahead on fiscal twenty seven's equity needs at the right time.

16:42 Great. Thanks for all that. Thank you. Your next question comes from the line of Ryan Levine with Citi. Your line is open. Good morning and thanks for taking my questions. Good morning. I appreciate the disclosure around the commodity price movements in Waha. Are you able to break out what the earnings contribution was this quarter and any early indications of what you were seeing last month? Breaking out the earnings for the quarter on just the APT Thru System business?

17:24 Correct. Well, as I said, I look at it more year on over year basis because we really just look at our performance in totality on a full fiscal year basis. And that was $16,000,000 or about $08 year over year. Okay. And would you and given what we saw last month, would the monthly benefit be trending higher, given some of the commodity spread movements that we've seen? Well, as I mentioned, kind of in wrapping up my comments around the guidance, we're anticipating another $08 to $0.12 in the second half of this fiscal year, which contemplates the activity you saw in the month of April.

18:10 Great. And then lastly, just in terms of the Dallas Fort Worth area growth dynamics, what are you seeing on the ground in terms of kind of just customer growth and expansion of volumes across your footprint? Again, as we talked about in my opening remarks, of the 53,000 or so we added for the last twelve months ending March, 39,000 plus or so of that was here in Texas. So again, we continue to see good growth across all areas, good residential growth across Texas. And again, on our opening remarks there, good commercial growth as well with what we've added year to date and the industrial side continues to show good positive results as well across the footprint adding new industrial accounts, Kentucky, Tennessee, Virginia area as well.

19:08 Appreciate the time. Thank you. And your next question comes from the line of Aditya Gandhi with Wolfe Research. Your line is open. Hi, good morning. Thank you for taking my questions. Good morning. I wanted to start on your comment about $840,000,000 to $850,000,000 the updated guidance range being a good base or launch back for 6% to 8% growth 2027 and beyond. Just can you maybe speak to how you're thinking about APD spreads maybe normalizing when you get back out to 2027 and how we should think about that impact in 2027 and beyond? Is that sort of contemplated within sort of your 6% to 8% growth view off of the updated guidance range?

20:00 Yes. At this point I'd encourage us to let's get through the next six months and just see what the world brings. Again, we've seen where the spreads have been the previous six months. We've got a short window into what it looks like here in the next few weeks. But again, we haven't even gotten into the heating season yet here. So we're going to let the market move through the next six months. We'll see what it presents itself. And as we get closer to the end of 'twenty six and we're ready to talk about 'twenty seven, we'll let you know what we think about the market and where the market currently stands and how we incorporate that into '27 and forward. Understood. Thank you. And my second question is regarding your comment about the benefit from the Texas legislation, now the final rulemaking being higher than originally planned, sort of in that 155,000,000 to $165,000,000 range for fiscal year 2026.

20:58 Can you, one, clarify, is that a pretax or post tax amount? And it seems significantly higher than the original sort of maybe $0.40 annual run rate that you had pointed to. How should we think about that benefit sort of beyond '26? Should we see a similar or maybe even growing benefit as your capital plan grows in the Altus? Yes. So to clarify, the 155,000,000 to 165,000,000 amount impact from 77,102 for the full fiscal year is a pre tax number. And as I mentioned earlier, kind of going into the fiscal year, rule was fairly new when we were establishing our budget and guidance. There were certainly rulemaking that was going on that actually modified the rule a little bit from our original thinking.

21:48 So we've got a better handle on that going forward now, also visibility in our spending as I mentioned. This is basically as we talked about at the beginning of the fiscal year, a rebasing year because we're now layering in the impact of the new rule to all of APT spending and remainder distribution spending in Texas that didn't qualify under Rule 8,209. So going forward, we are still guiding in that 6% to 8% off of, as you mentioned earlier, a new range of eight forty to eight fifty. So the impact is in our five year guidance is reflective of that as well. So we feel confident, we're not going see another rebasing going into fiscal twenty twenty seven, it's going be more steady state as we move forward.

22:37 Got it. Thank you for clarifying that. There are no further questions at this time. Jennifer Wernicke, I turn the call back over to you. We appreciate your interest in Atmos Energy and thank you for joining us. A recording of this call is available for replay on our website through 06/30/2026. Have a good day. And this concludes today's conference call. You may now disconnect.