Greetings, and welcome to the Atmos Energy Corporation's First Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Hills, Vice President of Investor Relations for Atmos Energy Corporation. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone, and thank you 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. As we review these financial results and discuss the 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 20 and are more fully described in our SEC filings. Our first speaker is Chris Forsythe, Senior Vice President and CFO of Atmos Energy. Chris?

Thank you, Jennifer and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we reported fiscal 2018 first quarter earnings from continuing operations of $314 million or $2.89 per diluted share compared with $114 million or $1.08 per diluted share reported in the prior year first quarter. Our first quarter results were significantly influenced by the accounting effects of implementing the 2017 Tax Cuts and Jobs Act. These impacts affected our first quarter results in two ways. During the quarter, we recorded a one-time non-cash benefit of $161.9 million or $1.49 per diluted share. This benefit represents a reduction in our net deferred tax liabilities that were not included in the determination of our cost and service rates due to the new lower federal statutory income tax rate. Additionally, our first quarter effective tax rate, excluding the one-time non-cash benefit decreased to 26.8% compared to 35.9% in the prior year quarter. This reduced income tax expense by approximately $16 million quarter-over-quarter. The quarter-over-quarter growth in our earnings, excluding the impacts of TCJA were primarily driven by the capital spending we are incurring to modernize our distribution and transmission systems and the time to recovery of those investments through our various regulatory mechanisms. Operating income in our distribution segment increased 11.5% to $173 million, due to a number of drivers. Recovery from recent regulatory actions provided an incremental $25.6 million in gross profit. Weather was 20% cold than the prior year first quarter, contributing almost $6 million incremental margin due to increased consumption. Additionally, we continue to experience solid customer growth. Over the last 12 months, our distribution segment added a net 32,000 customers, which represents 1% net customer growth. Additionally, we've added several new transportation customers and has seen an increase in demand, most…

Thank you, Chris for that great update on the quarter. As you can see from our first quarter results, we're off to a great start to fiscal 2018. We benefited from recent regulatory outcomes, colder weather and customer growth. It was also a busy quarter as we rolled out our updated five year plan through 2022 and confirmed the continuation of our strategy to grow by prudently investing in our infrastructure. In November, we communicated our plan to invest 1.3 billion to 1.9 billion each year with approximately 80% of that spending on safety and reliability over the next five years. During the quarter, we continued to successfully execute our investment and regulatory strategy, focused on becoming the safest and most reliable natural gas utility in the country. This strategy along with the exceptional dedication and effort on the part of our 4600 employees continues to benefit our customers in the form of improved reliability and service and we remain very well positioned for the future as we move through the seventh consecutive year of our journey to become the safest natural gas utility. Our systems were put to the test with recent cold snaps, including the coldest day in the Dallas Fort Worth Metroplex in the past 22 years that occurred on January 16. Our investments and training combined with our infrastructure and process improvements and our employees' tremendous dedication really paid off as we experienced no major disruptions in service during these periods of unusually cold weather. These tests to our system reaffirm that our investments in our infrastructure and our employees are meeting our goals of providing reliable, safe service to our customers. The regulators in our jurisdictions understand that continued investments are needed to modernize our distribution and transmission system. Our regulatory mechanisms have provided the…

[Operator Instructions] Our first question comes from the line of Christopher Turnure with JP Morgan.

Good morning, guys. I just wanted to clarify first the overall impact on 2018 of tax reform and make sure that I'm understanding your message correctly. It sounds like you're not going to have any incremental financing needs, maybe near term. So that's a neutral, but maybe you get a little bit of a higher rate base and some other kind of impacts that you're inferring for the year that drive it to a net positive for 2018 at least. Is that the right way to think about it?

Well, and a couple of things there. They will not need any additional equity financing needs. We're still evaluating our plans and needs for the year in the line of the fact that we're expecting to begin to reflect the lower tax rates in customer bills hopefully this quarter or the second quarter. In terms of longer term, you mentioned the lift in rate base due to the fact that our deferred tax balances will grow a little bit more slowly at the lower rate and that's in fact true and in terms of the other impacts, you captured it pretty well.

And then when we look at guidance being taken up by around $0.10 at the midpoint, is it fair to say maybe there's a bit of positive from tax reform there/some other customer growth impacts that might be a little bit better than you were previously anticipating?

Yeah. That's exactly right. It's really a combination of some of the impacts of the tax reform on those items that impact income today that get reflected in customers' bills tomorrow, some of the economic activity that I mentioned, little bit colder weather in late December, January, just really a combination of all the above.

And then just kind of along those lines or more specifically for the first quarter of the year, can you quantify how much gas basis helped you year-over-year and can you quantify weather versus normal.

In terms of gas basis, are you talking about spreads in Katy and Waha?

Yes.

Yeah. The year-over-year impact on the spread differential was about $1 million to $1.5 million. In terms of the colder weather, it's 20% colder in this quarter versus the prior year quarter, slightly warmer than normal, but we take that $6 million quarter over quarter.

So all of that is after tax numbers?

I'm sorry free tax.

That's all free tax. Okay. So 6 million better year-over-year for weather in the first quarter, but roughly in line with normal and then the spreads got you around 1 million, 1.5 million benefit year-over-year?

Yes.

Our next question comes from the line of Charles Fishman with Morningstar.

Chris, I think this is for you. I just want to tie your 10-Q filing with the slides and specifically the tax reform. 908.1 million was your net deferred tax liability decrease. 746.2 million in the Q goes to a regulatory liability that you established, got that. The 161.9 million, the remainder. Okay. Number one, that's reflected in the bottom line of slide 2 and the net income from continuing operations.

Yes. It's kind of a non-recurring one-time gain.

Okay. But it's in that line?

Well, it's in the 314 million, we back out the 162 to come back from adjusted net income of 192. If you look at our 10-Q, that 162 is embedded in the $106 million tax benefit that you see in the first quarter.

Okay. So in the Q, when it says that 161.9 million benefit is from where it's in your businesses that are not cost of service, is that primarily storage and pipeline?

It really relates to two items. It's related to some tax attributes from our non-regulated companies that we've had in the past that we retained and the fact that goodwill is not included in our cost of service.

For that goodwill. Okay. That explains it. Yeah. And then going forward, let me - sort of a follow up here, with pipeline and storage, that's treated similar to your distribution systems, in other words, eventually those rates will be adjusted in the near future to reflect the tax benefit?

Yeah. That's correct. The majority of that segment is APT, which is of course regulated.

Okay. And the rail road commission will adjust rates or you will work with the rail road commission to adjust rates for the APT as well?

Yes.

[Operator Instructions] Our next question comes from the line of Spencer Joyce with Hilliard Lyons.

So, first just kind of a point of clarity. Am I correct in assuming that the year-over-year decline in effective tax rate was substantially compelled by the TCJA? I mean that's right, correct?

Yes.

So the quarter had a lower effective tax rate that was seemingly not offset by any margin reductions. Did you all just essentially have kind of one special quarter here where you're retaining that benefit? So I mean we may not see another quarter that's like this per se from kind of a structural standpoint or am I missing something?

Well, the effective rate that you see of 26.8% is effectively our estimate of what we're going to be for the full year. So we're expecting that effective rate quarter-over-quarter or each of the next three quarters to be in that 26% to 28% range.

And sort of beginning in fiscal Q2 here though, we'll start to see some rate reductions, potentially cap the margin growth. I'm just wondering how we can have so substantial margin growth I mean 11% plus and then be able to pay that tax rate on that, I mean that can't persist, right?

Yeah. Beginning in the second quarter, you'll see our operating revenues come down either through actual reductions in customer bills that get negotiated or approved by regulators, also the establishment of regulatory liabilities getting things back in line.

Okay. So kind of as a longer-term follow-up. Fiscal Q1 here is a bit of an anomaly, even though we had pretty great growth here, I mean, it would be fair to say that kind of your longer term growth expectations, either the explicit kind of stretch guidance, the 6% to 8%. I mean there hasn't been a step function change there, has there?

Yeah. No.

A little bit easier, I know, we had the equity deal last year and no new equity expected over the balance of fiscal '18. You mentioned that program, essentially all of that is still available. I mean, there's been very little taken on it, is that correct?

That's correct. We took zero in the first quarter because we did complete the block trade in November and so that 500 million is fully available for us after fiscal 2018.

Okay. Great. And by the way nice timing on that?

Yes.

Final one here, just kind of glancing over the cash flow statement, we still had a fairly nice cash flow benefit from deferred income tax in fiscal Q1, looks like 53 million versus 67 million last year. More fully implementing the TCJA stuff over the balance of the year, can you give us a little guidance on what those figures will look like over the balance of this year? I mean, will they scale down considerably from the 50 plus million that we had in Q1?

Yeah. The deferred taxes will scale down. A lot of it would depend on the underlying activity in the business. In terms of total operating cash flow, a lot of that's going to be contingent on the timing of when we actually reflect the newer rates and customer bills. We're working with our regulators as we speak to find the best way to get those into rates as quickly as possible.

Thank you. There are no further questions at this time. Would you like to make any closing remarks?

Yeah. Thank you, Melissa. Just in closing, I want to note that a recording of the call is available for replay on our website through May 2. We appreciate your interest in Atmos Energy and thank you for joining us. Good bye.