Greetings and welcome to the Atmos Energy First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host Susan Giles, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Jessie. Good morning, everyone and thank you for joining us. This call is being webcast live on the Internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com. 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 and the factors that could cause such material differences are outlined on Slide 22 and more fully described in our SEC filings. I would like to now turn the call over to Kim Cocklin, Chief Executive Office of Atmos Energy.

Thank you. Thank you very much, Susan and good morning, everyone. It's early here in Dallas, but we want to send the shout out to all you Brady fans and congratulations to the Patriots. We do appreciate you joining us and your interest in Atmos Energy. We are off to another very, very good start. We continue to refine and sharpen our business model of delivering safe and reliable natural gas to the over the 3.1 million customers we serve in eight states and after divesting the non-regulated marketing business effective January 01, we're now the largest pure play natural gas only distributor traded on the New York Stock Exchange and the reorganization of our portfolio of asset is now complete. As a 100% fully regulated utility, we will take full advantage of this opportunity to intensify our focus on our strategy and vision of becoming the safest natural gas utility. Progress with our rates and regulatory framework continues to provide rate relief, which is the primary driver of our financial performance. We continue to emphasize and build relationships with our regulators and communicate the importance of our infrastructure investments to ensure the safety and reliability of our system. And as of yesterday, rate outcomes have provided annual operating increases of about $20 million and we filed cases that are pending, which seek about $78 million of increases. The more significant filings include the APT general rate case, the intrastate pipeline, which we've talked to everyone about for about the last three years, filed with the Texas Railroad Commission in early January and we are seeking to recover a deficiency of about $55 million. As again we had emphasize that there are no surprises in this filing, the test period for the case ended on September 30, 2016. The proposed…

Thank you, Kim. I appreciate your kind remarks and I look forward to serving my new role and good morning, everyone. We appreciate your interest at Atmos Energy. I look forward to the opportunity to meet all of you in the coming months. As Kim mentioned, we exited the nonregulated gas marketing business effective January 1. Historically, this business represented up to one third of our former nonregulated segment. The sell-off of the opportunity for us to realign our reporting segments. Beginning this quarter, we report our operations under the following three segments; the distribution segment, which is primarily comprised of natural gas distribution and related sales operations in eight states and two storage assets located in Kentucky and Tennessee. These storage assets are used for operation in these states and will fall in reported in our nonregulated segment. The pipeline of the storage segment is comprised primarily of the regulated pipeline storage operations of our Atmos Pipeline Texas division and our natural gas transmission operations in Louisiana, which are also formally reported in our nonregulated segment. And finally, the natural gas marketing segment, which is comprised of the natural gas marketing business we sold in January. We've reported these operations as discontinued operations. My remarks this morning will focus on income from continuing operations. Net income from computing operations was $114 million or $1.08 per diluted share compared with $102 million and $0.99 one year ago. Slide 3 and 4 provide financial highlights each for continuing segments for the three-month periods. Positive rate outcomes remain the primary driver of our success. Rate increases for our distribution and pipeline storage segments combined, generated almost $27 million in incremental margin for the first quarter of fiscal 2017. About $16 million of the related -- of the rate filings completed in fiscal…

[Operator instructions] Our first question is coming from the line of Chris Turner with JPMorgan. Please proceed with your question.

Good morning.

Good morning, Chris.

I wanted to get some more color on short-term debt when you guys think of terming any of that out a little ways down the road, are there any hedges in place right now in terms of forwards that you are thinking about or awarded on?

Our short-term debt was about $941 million at the end of the quarter. We did receive proceeds up on the sale at AEM of about $135 million, which was basically used to pay down that debt. As early this week, our short-term debt balance was about $750 million. As you're aware, we do have a $250 million debt financing that matures in June of '17. We do have hedges in place for that at about 3.367% and if that debt matures and we do have cash flows in place, we do anticipate refinancing at that time.

Okay. But that one particular issuance that you know is coming hedge but nothing else?

The 2019s are also hedged. We're focusing on the near-term and we have those in place at roughly 3.5% as well.

Got you. Okay. And then on the pipeline business, could you kind of remind me of the sharing mechanism with customers there and exactly how that works and kind of where you've been the past couple years if over at all.

Yes Chris, the rate feature was market-based revenue as credited back to the LBC primarily LDC customers, the benchmark was set in the last case 2011 at $84 million. And in our annual filings we've been coming in under that. As you know there is 75-25 share. So, we pick up 25%. We're insulated from that perspective. Customers would pick up 75% of any shortfall and vice versa if we run over customers benefit and 75% of any of the over. So, we've been coming in under. If you look at the filing, the filing request an adjustment to that benchmark of just around $70 million. Based on what we're seeing in terms of the changing marketplace. lower basis spreads and also declining volumes out of the Barnette shale.

Okay. So, you've been running under and you've been absorbing 25% of that difference between $84 million and where you're actually at right now for the past year or couple of years.

Correct, correct. That's why Chris, we're adjusting it from $84 million to $70 million as we've been running on. The mechanism we're proposing not to change this year and allocation either.

And in terms of an overall sharing mechanism for over earning from the rest of the assets, my understanding is there is a sharing mechanism in place there, is that correct.

Over earning, we don't over earn. You talked about…

If you were to, would you have to give it back to customers?

Are you talking about the mechanism just for that revenue? There is actually an earnings band associated with the GRIP mechanism and if we were to exceed that 75 basis points currently above the 936 allowed rate of return, if we were to exceed that, we would be called in for a case. We had to go in for a case. That's where that earnings band and the annual earnings monitor report is filed, but we have not come close to that. So, that's unrelated, but there is not a sharing mechanism there. It's just a earnings governor on the GRIP mechanism. But as Kim said on the revenue sharing related to prior, the recommended adjustment -- recommending adjustment of our benchmark is $70 million, but keeping the structure of the mechanism with the sharing 75-25 the same as it is today.

Okay. So, for the pipeline business overall, there is a ban around the authorized ROE and if you go above that ban, which you've not been doing so far, you could be called in for a case?

Yes, the earnings monitor report is filed annually and that's available. It's a public record and that reflects the return, the overall return that was achieved by the pipeline in that 12-month period and to the extent that we exceed our overall rate of return, which is the 11.8 per equity at current 50.5 design and then weighted average cost of debt, which gives us a 9.36 overall return, which includes a 75 basis point band around that but we've never ever exceeded that cap.

Okay. Perfect. That's what I wanted to understand. Thanks guys.

Sure. Thank you, Chris.

Thank you.

Thank you. The next question is coming from the line of Mark Levin with Seaport Global. Please proceed with your question.

Hey guys. Another good quarter.

Good morning, Mark.

Yes. Good morning to you Kim. Couple of quick questions and your low end, high end of the range, the $3.45 and $3.65 low end, high end of the range on CapEx, anything in particular that would happen over the course of this year, that would take you to either one end or the other?

Well, it's very early and we are very confident that we went ahead and restated and reconfirmed the guidance at that level. So, we are obviously again -- first quarter start, we thought we had an excellent quarter. Everything is performing as expected. We might have spend a little bit on O&M, but we expect that to come back in line. So, everything is lining up right now to provide us to meet the commitments that we've made to the state in the earnings range and then to generate the 6% to 8% earnings per share that we've talked about continuing to invest in the right base to do that.

And then from a political perspective, potential tax rate changes and impact on you guys and Kim, is there anything else politically that you see with the new administration that could either have a positive or negative impact looking forward.

We're in Texas, we're succeeding from the union, that's the plan. We're in that mercy, we're very thankful that we're regulated by very balanced states. All the tax information, we obviously have our subject matter experts in house, including Chris and our Vice President of Tax and then the folks in the rates and planning area. They're all studying the proposals, but who knows where they'll end up. We're staying on top of it and the information that's being provided from some other folks, we're just not in a position to provide any kind of anticipated outcome given the total uncertainty surrounding what happens in Washington. We'll wait, you might pick up -- if you're on Saturday Night Live, I think there's some better information of what's coming out daily, but it's just -- we're managing our business for the long-term and as I said before, we thrived during an Obama Administration. We thrived during the Bush Administration. We thrived during the Clinton Administration. We're going to be able to thrive and manage and that's our responsibility and accountability. So, we'll adjust if necessary, but everything that's coming out right now and most of the proposals look to be extremely manageable from our standpoint the way that we're currently capitalized and the way that we currently continue to execute our strategy.

Got it. And then on the Texas pipeline case, any scenario you can envision that would have a negative or adverse impact to your long-term earnings guidance?

We're drilling that top water beta out here today aren’t you?

Big picture, I am letting you run with it, but no, is there anything, any type of situation or anything there that would cause you some concern for the long-term guidance or do you feel like there's -- that you're even under a worst case scenario, you're okay.

Yeah, I think that we are positioned like in the pipeline team again we started 3.5 ago there is absolutely no surprises to the folks that are in that case. It would do us no good. So, we want to maintain a relationship and the credibility and trust that we build with the customers and with the regulators and so there is nothing in that case other than the fact that we haven't been in for 6.5 years. So, we do have a significant deficiency, which reflects the current rate design which builds upon a 13.5 return upon a much different capital structure, which includes a 59% equity layer versus the current, the existing rates of 50.5 and then you've got a significant increase in O&M because of the need to comply with all the new regulations. The existing rates are designed on $80 million of O&M and we're spending close to $130 million right now. So, those things will be talked about and we want to be the safest natural gas utility. Our customers want safe and reliable service and we're going to work with them and meet them in the middle.

Makes perfect sense. Last question then I'll leave for someone else. Any -- as you think about your pipeline of spending or your pipeline related spending over the next several years, are you seeing or do you anticipate any bottlenecks whether it be labor materials anything that would cause you to have to slow the pace or does everything look fine as you look out over the next several years?

Yeah Mark, everything looks fine. We don't see any bottlenecks. Our relationships with regulators, we've got very strong long-term relationship with contractors. We've got just a top-notch engineering team. We got projects lined up already identified for the next five years. We got 30 years cost of spending. On pipe replacement, we got tremendous growth, North of Metroplex. We don't see any -- we don't have any concerns about materials, excess materials, labor or anything else for that matter.

Great. Appreciate it. Congrats on a great start to the year.

Thanks Mark.

Thank you. The next question is coming from the line of Brian Russo with Ladenburg Thalmann. Please proceed with your question.

Hi. Good morning.

Good morning, Brian.

Could you just elaborate a little bit on the APT general rate case process, no procedures schedule is set and there is discovery and request for information. Is there a window of time for settlement discussions?

Yes, as Kim I think said in his earlier comments, we expect to have a procedural schedule this week with the statutory deadline of July 10. We're in discovery now, I would say maybe a third way through that process and then there will be testimony, hearings, several opportunities for settlement conferences. Those conversations occur consistently throughout the process. So, we expect the proposal for decision typically would be in mid-May timeframe and you got opportunities for corrections, but it's a very measured process and there is opportunity for settlement all along the way.

Okay. And then Kim, you're filing directly with the RRC, you're not in negotiations with the cities or anything?

No, you've got -- you're correct. We filed directly with the railroad commission, the intervenors, same lawyers that represent the cities in our distribution cases and so we got great relationships with them. We work with them every year on those annual filings. So, there is really nothing new. As Kim said, we file based on preference. We've been preparing this for three years or longer. We've had open communications all along about what's driving our investment. As he said, we've seen significant increases O&M. It's driven by new compliance requirements and we've been open and transparent about it all along. And so far, the dialogue has been very good and positive. It doesn’t mean we all have significant disagreement from where it should end up, but it's proceeding as we would expect.

Okay. Great. And can you remind me was the last APT rate case settled or it was litigated?

It was litigated. It was the outcome of a litigated -- certain of the issues were resolved and settled prior to the litigation, but I think the return was definitely litigated in that case and may be depreciation and normally you'll find it -- they'll pick in shoes. There's a lot of the cost that are included that we're requesting that are agreed-upon as part of the cost of service and then the rate base again has been reviewed as part of the GRIP proceedings and the filings that we've made. So, they'll be continued oversight of that and a little bit about a look back, but in the last case, I think we had a very small amount of the GRIP that we adjusted may be $1 million. It's a pretty prescriptive process and it lends itself to the opportunity of all the parties to conduct of very good and full review, but at the same time, to have as Mike said, plenty of opportunity for discussion, but it does have to be fairly -- they're prescriptive in terms of the discovery dates and the answers to those discovery requests and then the filing of the testimony and the hearing on the issues that are going to be heard, the initial decision and then the briefings and comments on that initial decision and then leading to the statutory deadline of July 10 of this year. But again, you're right to ask all the questions and we are in as good a position as we can. We can't emphasize the fact that we started looking and preparing for this about three 3, 3.5 years ago and this is certainly not our first rodeo here in Texas.

Understood. Thank you.

Thank you.

Thank you. Our next question is coming from the line of Spencer Joyce with Hilliard Lyons. Please proceed with your question.

Good morning, Kim. Good morning, Chris. Nice to have you on the call.

You're running out of companies to cover.

No kidding, but I appreciate you keeping at least one for me out there.

It will be two water companies and two utilities I guess.

Yes absolutely. Hopefully a couple of pretty quick ones for me, the recently acquired pipeline assets in North Texas, how long until those are I guess wrapped into APT a rate making or a regulatory standpoint, are they perhaps included in this most recent five-year GRC?

Spencer, this is Mike, they're not included in the rate case that we just filed, but the transaction closed on December 20, which puts it in the three months period that we will include in a GRIP filing once we come immediately, once we come out of this case. So, in the fourth quarter.

Okay. Got you.

That GRIP filing that Mike's talking about covers the period of investment -- capital investment from October 1 to 12-31-16. We have the test period ending September 30. So, all of the rates in the case that are being composed, include all of the cost and investment up until September 30 and once we get out of the case, then we will file what everybody calls a stub filing for that three month of investment and that $85 million will be included in that filing.

Okay. So, it seems pretty easy from a regulatory standpoint to just wrap those assets into your regulatory workflow if you will, just write off the bat.

Absolutely, which makes it, it's very unique because of that there is very little lag. It's immediately accretive given the transportation contracts we have that we acquired with the pipeline and that piece of that pipeline provides significant benefits to our customers. It was mentioned earlier, it's 140 miles. It runs West to East, North of the DFW Metroplex. We have one interconnected with our system today. We expect to add three others. It will be integrated in a very short order and all of our growth -- a lot of our growth is North of the Metroplex. So, it provides immediate fortification, give us additional access to additional supply in Barnette shale as well as eventually we'll be able to bring in Oklahoma and Northeast Gas and so our customers will benefit tremendously and we're able to purchase that fraction of the cost that will take to build something like that. So, it's truly a win-win.

And it's easy Spencer because of the excellent management and the strategic focus that replaced on the relationships and creating the necessary mechanisms to provide this opportunity. You wouldn't find the capability of doing this in a lot of jurisdictions or in a lot of company. Again it's six years, it's over of work where we've emphasized an efficient and effective process for ratemaking and everybody's involved, everybody understands, there is a clear line of sight from what we're doing in the field to what eventually ends up creating more safety and more reliability and an enduring to the benefit of the shareholders long-term. So, it is easy only because of what is -- what the people at Atmos Energy have been able to do throughout the entire organization.

Yes, duly noted there and I know…

Yes okay.

Yes, you've done a great job working towards being able to effectively navigate the regulatory process there in Texas. Switching gears a little bit, Chris this might be one for you, the $135 cash inflow from the AEM sale, it's mostly working capital right?

That's correct. The purchase price was $38.3 million of working capital and we estimated just prior to the end of the calendar quarter, was about $103 million. We will be truing up that working capital here in the second quarter and hope to have that completed by the end of March. In addition to that, $7 million in total proceeds from the transaction or roughly $141.5 million using the estimated working capital of $103.2. $7 million went into escrow under the terms and conditions of the purchase and sale agreement, assuming no indemnification issues that we would have to reimburse us for 0.4 we would expect to get $3 million back in January of 2018. The remaining $4 million in January of 2019.

Okay. Perfect. Perfect. Very helpful there. Last one real quick, am I right that there were a few assets that were previously held in the non-reg segment that have now migrated into the pipeline and storage and Chris, I apologize, I think you might have hit this.

Yes, I touched on it briefly. The primary asset is our 21 mile intrastate pipeline in Louisiana. We refer to it as Trans Louisiana Gas Pipeline or TLGP. We had that -- that pipeline was built in 1985 to help supply our Louisiana gas distribution operations at that time. So, that is the primary asset that moved from the nonregulated segment. We also have a couple of other smaller assets that aren’t material that did roll up in the segment as well, but that was the primary piece.

Okay. Perfect. Just a point of clarity on mine there, but in any case Kim as always, congrats on a nice quarter and we'll be talking soon.

Thank you. Thank you, Spencer. Look forward to seeing you soon.

Thank you. The next question is coming from the line of Charles Fishman with Morningstar. Please proceed with your question.

Good morning. Kim, first of all I am in total agreement with you. You're spending a lot of time speculating on what might come out Washington DC is a exercise in futility. However, my job as an analyst is obviously to try to think about those kind of things, but specific to Atmos and tell me if my thinking is right. Since your debt is at the Op Co level, really you're in pretty good shape, but you would just wait until there is changes to your returns that reflect any kind of changes in the tax increases and you should be pretty neutral regardless of what comes out of DC. Am I thinking about that correctly?

Under the current all -- all the current propaganda that's coming out, we would be neutral to good.

Okay. And then let me maybe as a follow-up, your payout ratio is still 50%, 55% I believe.

It's right around 51% yes.

But your target is 50%, 55%.

Yes. We're growing the dividend at a rate equivalent to the earnings per share rate of 6% to 8%.

?:

Absolutely. That's a very important lever that we have available to us because we have one of the -- it may be the lowest payout ratio in the peer group. So consequently, our highest and best use right now based on the current laws that are in place and the tax statement is to pour the dollars back into the ground and improve our safety and reliability. But for sure, if there is motivation and incentives, then you're rewarded and we need to reward our shareholders in that manner, we certainly would.

Okay. That's all I have. Thank you for that help.

Thank you. And the next question is coming from the line of Ted Durbin with Goldman Sachs. Please proceed with your question.

Hey, guys. How are you?

Ted, what happened, it thought you were in the MLP space.

I'm still here guys. I haven't forgotten about you.

Welcome back. Good to hear your voice.

Good to hear you. Let's question usually obviously on the pipeline rate case, so I guess maybe just starting with the ROE, you are asking for a 13.5 year, you authorized to 11.8 year. You are in the Mid-Tex between 10 and 10.5 range, I guess how do you square that as relative to other sort of numbers?

For the 118 it was set back in the 11 and there is a much different economic climate out there. There is currently different administration out there. I mean there's a whole lot of discussion and debate about what the tax treatment should be. The fed has indicated that they are definitely going to on make a move this year once now we hear twice maybe three times, so you are looking at 75 basis point potential move maybe even more depending on what the economy does. So, I mean given the risk profile of the intrastate pipeline and the fact that the peer group is the FERC and you cover those folks. So, I mean that's what they're going to look at and we are not being overzealous in requesting a 13.5%. We think that reflects the level of our return that we need to compete and attract capital in the marketplace going forward.

Okay. And a similar question I guess you're asking for 60% equity layer, you are authorized to 50% before you are running at 50% of the corporate level I guess what's is the gist of that risk…

It will be. There is better that the actualcapstructure for the parent because we're not the hold-co. It is what it is and 60% equity ratio and taxes is recognized as it's not out of the ordinary. And again it's not considered excessive. And we don't anticipate much of an argument on the 59.7 that we've reflected in the case. And in taxes short-term debt is excluded from calculation which is why this is coming at 59.

Got it. And then on the GRIP itself is the presumption is that that will continue here even though you're in for the general rate cases or anything that would change that mechanism at all coming out of this case.

No, no. That's a statute, that's legislation. So, the regulators really can't touch that, that has to be adjusted over, it would be modified only by the legislature and that legislation was enacted in 2003.

And so, then the ROE established in this case just to make clear that's where they are going to the GRIP filing on a forward basis as well?

Yes, that's right.

Okay. That's great. And then last one the rate case at least what do you have baked into, so you got the long-term guidance 410 to 440 in 2020 what have you baked in terms of ROE and equity layer on the taxes, interest about?

Nice try, nice try. We're not getting there yet, we've not taken it, come on. We'll remind you that when we established the 410 to 440 for the 2020 fiscal period, it was prior to the time that we filed this case, I think it was year and half ago or so that we established. So, we baked in assumptions and again we're not -- we don't put out those commitments lightly, those are things that trust and confidence by you all we know that you take into the bank and put them in your model. So, we've got. Those are very important and we understand the significance and importance of making those representations.

Understood. And then if I could get two more on still on the pipeline system lot of talk now on the risk that there may not be enough gas take away out of the West Texas, out of the Permian with all the activity out there. Is there any more room to squeeze any more volumes on the western end of the system?

We have some capacity available yes and there has been a lot of interest in conversations with producers.

Anyway, to quantify that is I don't know 100 million cubic feet per day or less or more?

I mean it's in the 200 million a day I think we have to trade this one down.

Got it.

In West Texas.

In West Texas, so just be adding compression or you wouldn’t consider loop in the line or anything like that?

We haven't included at this point to find out the opportunity for incremental capital investment, but that is something that where the team is looking at as well as at this point in time. Obviously, anything that we would do there is really in to the benefit of our LDC customers. I mean we are in a good location out there and we have expanded in the past, so we have the capability with our right away that we have in place to potentially look at the flow studies that would incorporate some additional looping of lines to increase capacity or we could add compression. And that's all certainly you know a daily task that we look at and if the need arises and the opportunity that arises we are in positions to take full advantage of it.

We did that a number of years ago, I mean where the economics makes sense and we got a long-term in our contracts is certainly something that we will do.

Got it. And then similar question the last one for me, is a lot of activity north of you on the scope and stack in Oklahoma some questions around gas take away there, how much room is there on the northern end of the system to take an incremental gas?

Really that acquisition of North Texas pipeline for [Manley] gives us an awful lot of opportunity as east end of that 140-mile pipeline, we got interconnects with three interstate lines. We don't have the capability right now, but in the future we would have the capability to bring gas into the system from Oklahoma as well as from the Northeast. So, lot of opportunity there in the future.

Anyway to quantify how much more you could bring in you think?

Not at this time.

Okay. All right. I'll leave at that. I appreciate all the answers.

Thanks, Ted.

Thank you. Our next question is from the line of Joe Zu with Avon Capital Advisors. Please proceed with your question.

Good morning.

Joe Zu, how are you doing?

I'm good. Congratulations and Chris congratulations.

Thank you very much, Joe Zu.

Most of my questions have been answered. Just a quick on tax side, do you take any repair tax deduction?

Yes, we do.

Can you quantify that?

It's roughly 30%, 45% of our capital expenditures on an annual basis.

And do you expect any tax reform will remove that deduction?

As you look at the side-by-side comparisons of house plan -- Trump plan, I mean there is house plan the 100% expensing on the Trump plan, there is the potential for optionality. So, if one of those plans move forward in their current versions, yes, that would impact the repairs deduction. But as Kim said there is a lot of noise out there right now we're just kind of evaluating all the options. And we are really not in a position at this point to definitely say one way one way or the other how tax reform is going to impact us.

Right and if all things considered, it should be neutral too good for you guys right.

Yes. Based on current proposals and what we're seeing, definitely neutral to good Joe. Again, the people, we're not going to put out any kind of prognostication on what could happen based on what's up there now because there's so much that can change that would be I think reckless and imprudent to say okay, if this happens then there's this much accretion or that happens then there's this impact. I think that send you down some rabbit trails that are pretty unnecessary at this point.

Right. Understood. Thank you very much and congratulations on a good quarter.

Thank you, Joe.

Thank you. It appears we have no further questions at this time. So, I would like to pass the floor back over to Susan Giles for any additional or concluding comments.

Thank you, Jessie and I just want to remind you all that a recording of the call is available on our website through May 3. We appreciate you joining us. Have a great day.