Ladies and gentlemen, greetings, and welcome to the Atmos Energy Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan Giles. Thank you. You may begin.

Thank you, Adam, and good morning, everyone. Thank you all for joining us. This call is being webcast live on the Internet. Our earnings release and conference call slide presentation are available on our website at atmosenergy.com, and we expect to file our 10-Q by the end of the day. As we review the 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 24 and more fully described in our SEC filings. Our first speaker this morning is Chris Forsythe, Senior Vice President and CFO of Atmos Energy. Chris?

Thank you, Susan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. The successful execution of our growth strategy to invest in our regulated assets continues to drive our performance. Net income from continuing operations for the second quarter increased to $162 million or $1.52 per diluted share compared with $143 million or $1.39 1 year ago. For the current 6-month period, net income from continuing operations reached $276 million or $2.61 per diluted share compared with $245 million or $2.38 per diluted share for the same period 1 year ago. Slides 4 and 5 provide financial highlights for each of our segments for the 3- and 6-month periods. Rate relief generated about $40 million of incremental margin in the second quarter and almost $68 million in the current 6-month period. Approximately 70% of the incremental margin was reflected in our distribution segment. Period-over-period decreases, or increases rather were $29 million in the quarter and about $47 million in the current 6 months, with the largest increases in our Mid-Tex, Mississippi and Louisiana Divisions. Margin in the pipeline and storage segment rose almost $11 million in the quarter and over $21 million in the current 6 months from APT's GRIP filing approved in fiscal 2016. We continue to experience customer growth in our distribution business, primarily in Texas and Middle Tennessee, resulting in a $2.5 million gross profit increase quarter-over-quarter and about $4 million in the current 6-month period. Over the last 12 months, we experienced net customer growth of about 0.8% or about 26,000 customers. As everyone is aware, the winter heating season this year was extremely warm. Weather this year's second quarter was 34% warmer than normal and 23% warmer than last year's quarter. The first 6 months of fiscal 2017, weather…

Thank you, Chris. Excellent, excellent report. And it's in the time to enter our favorite week here, this is derby week. And we've recorded another solid quarter, very, very steady results, no surprises, and we're extremely encouraged with the positive outlook for the remainder of our fiscal 2017. Progress with our rates and regulatory work continues. We enjoy very positive relationships with our customers and the regulators in the states that we serve, which is critically important. And with our investments in our regulated assets of over $1 billion annually through 2020, we continue to demonstrate our absolute commitment to safety and reliability. And regulators and customers very much understand how important these investments are to make our system as safe as possible as we continue our journey of becoming the nation's safest utility. Rate relief continues as the primary driver of our financial results. And as of May 3, rate outcomes have provided annual operating increases of about $30 million thus far in this fiscal 2017 year. And you can see that on Slide 17. We do currently have request pending which are requesting adjustments of about $132 million, with the lion's share of that amount coming from our Mid-Tex Division rate review mechanism, which seeks an adjustment of some $43 million as well as the pending APT rate case seeking an adjustment of $55 million. And as we've discussed, the APT case was filed proposing no changes to any existing policy or precedent, particularly as it relates to cap structure and return on equity. Our team did an excellent job of presenting our case to the hearing examiners about two weeks ago, and we're expecting that initial decision by June 6 and then the statutory deadline for decision in the case by the Railroad Commission is July 10. So we'll know something by then. Looking forward with our upcoming rate activity, we do expect to submit other 5 to 7 rate filings by our fiscal year-end that, in total, would request another $15 million to $20 million of additional adjustments to our operating income. And with the sale of our non-regulated gas marketing business now fully complete, Atmos Energy is now a fully regulated pure-play natural gas utility, making the company an even more attractive investment with a stronger valuation. We continue to honor the commitments that we've made to all of our constituents, with expected earnings per share growth of between 6% to 8% annually, and providing a solid dividend we're offering our shareholders a total return proposition of between 9% and 11% on an annual basis. We very much thank you for your time this morning, and now we'll open the call up for questions. Adam?

[Operator Instructions] Our first question comes from the line of Spencer Joyce from Hilliard Lyons. Please go ahead.

I guess, first things first, congrats on another beat here, nice quarter. One question for me. I know we talked about it a little bit last quarter, but the midstream assets you picked up from EnLink several months ago, are those performing kind of in line? And are they driving any discernible impact to the consolidated results? I know it was really a gross margin beat for me kind of across the board here.

You wouldn't take your eyes on those midstream. I mean, it's a classic add-on to our intrastate pipeline, very integral part of the intrastate. So it's just another high diameter, or high-pressure, large-diameter pipe that's bringing additional supply from very important areas to our system that is experiencing some wild growth up on the north end.

Yes. So of the 16% or so or I guess it's about $17 million or so of margin growth in the quarter, how much would be attributable to that kind of, or layering in that piece in the system?

Yes. There really isn't a material increase in margins as a result of the EnLink acquisition for the quarter or year-to-date period.

Okay. So all that growth there is on a core GRIP driven?

Core GRIP, GRIP and other rate regulated activity that we're doing from last year.

Organic good old-fashioned growth, Spencer.

Yes, hey, that's the highest quality there.

From new business.

Yes, one last question. Kim, I heard you reference a 9% to 11% range at the end of the call. That is rate base growth through...

No, no, that's the total shareholder return.

Oh, okay, okay.

The 6% to 8% earnings per share growth and then the dividend on top of that. You have not updated your note here recently. You used to write about that.

Okay. I got you. I wanted to make sure I didn't miss a 9% to 11% EPS growth or something there. That caught my...

But you're right about the rate base growth, it's doing about 10% to 11% with our investment of about 125 million through '20.

Yes, we came out of -- this is Mike. We came out of '16 at about a rate base of $6 billion, and we expect to end this year somewhere $6.5 billion to $6.9 billion. And 2020, $8.5 billion to $9 billion so.

Our next question comes from the line of Brian Russo from Ladenburg Thalmann. Please go ahead.

Just on the APT rate case. The RRC staff testimony is out. There's quite a bit of intervenor testimony filed as well. Obviously, ROA is -- ROE is a debatable item. But on equity ratio, the intervenors -- the staff agreed with your equity ratio filing. The other intervenors suggested to add short-term debt to the cap structure when calculating your equity ratio. And I'm just wondering, is there any precedent for the RRC to include short-term debt in past rate cases for you or your peers?

No, Brian. This is Mike. It's -- I mean, excluding short-term debt has been preestablished precedent and it's the standard.

Got it. Okay. And are all the intervenors kind of influentially equal? Or do some carry more weight than others?

I mean, I would say, that's for the hearing examiners to decide, but really, we just want to take you back to the point that we communicated all along. And that's, our case and our filing was very, very straightforward based on previously established policy and precedent. We weren't asking for anything new and really, the environment and the way we operate the pipeline business hasn't changed since the last case. So we're very comfortable with our case and our team did an excellent job presenting that case during the hearings.

And in the last APT rate case outcome, was the ROE established based on a pure-play midstream peer group? Or was it established on a blended regulated gas LDC and midstream peer group?

I think the method that was really established or set as a result of the last case, the framework created by the Railroad Commission was to use a pipeline peer group and that's what we did. And our experts referred to a pipeline peer group to establish the ROE that we recommended in the case.

Got it. Okay. And can you just broadly speak about your weather normalized mechanisms in your larger jurisdictions that offset the mild weather?

Sure. This is Chris. Again, we have WNA coverage in 97% of our margins. Colorado is the only one who doesn't have WNA. Most of the mechanisms utilize a 30-year normal NOAA. That's the period where to calculate the adjustments under the various mechanisms. In Texas, it's a 10-year derivation that's based upon a 30-year normal. So our coverage period generally cover November to April. We have a couple of that go even further. And then Virginia, although it's the smallest territory, that is an annualized, a full year worth of WNA coverage.

Okay. So I'm just curious, is it almost, I understand kind of the GAAP earnings concept of that, but is it almost real-time cash recovery as well?

Yes. Yes, we adjust our bills in the month, every month based upon the heating degree days and the mechanisms that are built in the billing systems.

Our next question comes from the line of Dan Fidell from U.S. Capital Advisors. Please go ahead.

I'm sorry, what was that? I was just wondering if you could talk a little bit about any additional APT expansion opportunities you see at sort of, specifically, in relation to gas takeaway capacity in the Permian. I think in the past, I think I've seen some comments about basically adding compression at Waha being an opportunity. So just in a broad sense, if you could talk about APT and expansion there.

Yes. We have, right now, we have a 36-inch pipe coming out of Waha to the Metroplex area. And we're, our team's in discussions with producers out there. We have a little bit of ability to add some capacity there as well as the opportunity to move some more gas by adding compression. But all that's being discussed right now. And again, I mean, from our perspective, the sole benefit of that is to our LDC and other tariff customers. It's really providing more access to additional supply. And also, helping those customers by creating markets for the producers.

Okay. Would you sort of characterize it as sort of opportunistic, taking a look or something we might sort of consider more of a substantive approach?

It would be opportunistic.

Our next question comes from the line of Charles Fishman from Morningstar Research. Please go ahead.

Kim and Chris, I'm looking at the transcript from last quarter, and this question was asked before about tax reform. Let me ask it again to both of you. Your response last time, just to refresh your memory, was, what you'd heard so far was neutral to good. Is there anything you've heard since you answered that question that would change that response? Or move it one, move the boundaries one way or the other?

No. Given the limited information that's been provided, it's still, we still handicap it as neutral to good for us.

Okay. That was the only question I had. Okay. Great. And I realize that there's a lot of moving pieces still, so that's certainly an appropriate answer.

Our next question comes from the line of Faisel Khan from Citigroup. Please go ahead.

Just a couple of questions to clarify your comments on the capacity between Waha and the destination that's east. So are you saying that right now, you've got no excess capacity right now to move volumes east from Waha into Carthage and Katy? Or is that full you're saying? And so you're exploring what you can expand after 36-inch pipe? Or do you have excess capacity right now? And could you move more volume as production ramps up in the Permian?

We -- Faisel, this is Mike. We have a small amount of capacity right now, maybe 100 million a day. And that's really where we are in terms of our ability to move additional gas west to east.

You might talk about what we'd have to do to add it.

Yes, I mean, to add it, we'd add compression. And I think we add compression along our system that would allow us to bring more gas into the Metroplex and then deliveries down into Katy.

How much more? What's the potential expansion opportunity?

I think we're looking at maybe 200 to 300.

Okay. And is the way that it works, if you add compression then that would -- would that -- once you establish your -- once you get to the rate case here in APT and you add these volumes, would that lower the overall system rate for all the customers on APT or would it be additive to the margin?

Yes. Through the Rider REV mechanism, there's a credit back to the tariff ratepayers. And then there's a sharing mechanism, where above it there's an established benchmark and then above that benchmark, 3/4, 75% of that would be returned to customers through adjustments in rate. And below that benchmark, if we fall below the benchmark, 75% of that would be credited or increased in rate.

Okay. Got it. And that makes sense.

So clearly, the primary driver is for the benefit of the rate paying customer.

Sure. That totally makes sense.

[Operator Instructions] Our next question comes from the line of Mark Levin from Seaport Global. Please go ahead.

Two quick questions. Kim, this one's for you. Is there any scenario in which you can envision from the Texas Railroad Commission that would impede your ability to hit guidance this year?

No.

Or next?

No.

Got it. That's my first question. Second question is with regard to M&A. And I'm speaking more generally, not about Atmos specifically, but in terms of industry M&A. Do you expect or do you think that the tax reform uncertainty at this point will likely cause or create a temporary or a pause or a delay in the rather voluminous amount of M&A we've been having over the last year or so?

Yes.

Perfect.

You have a question now? Okay.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the call back over to management for any closing comments.

Just to remind you, a recording of the call is available through August 2 on our website, and we hope to see many of you at the AGA Financial Forum in a couple of weeks. We appreciate your interest and thank you for joining us. Goodbye.