Greetings and welcome to Atmos Energy Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you, Kevin and good morning, everyone. This is Jennifer Hills, Vice President of Investor Relations and thank you for joining us. This morning, I'm joined by Mike Haefner, our President and CEO; and Chris Forsythe, Senior Vice President and CFO. This call is being webcast live on the internet and our earnings release and conference call slide presentation are available on our website at atmosenergy.com under Company and Investor Relations. As we review these financial results and discuss future expectations, please keep in mind that some of our discussions 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 27 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 your interest in Atmos Energy. Last night, we reported fiscal 2019 second quarter earnings of $215 million or $1.82 per diluted share compared with adjusted earnings of $135 million or $1.57 per diluted share in the prior quarter. Adjusted earnings, excluding $4 million benefit related to the implementation of tax reform. Year-to-date, earnings were $373 million or $3.21 per diluted share compared with adjusted earnings of $327 million or $2.97 per diluted share, and adjusted earnings excluded a $166 million benefit related to the implementation of tax reform. Also yesterday, the Board of Directors approved the 142nd consecutive quarterly cash dividend of $0.525, which represents an indicated annual dividend of $2.10 per share in fiscal 2019 and 8.2% increase over fiscal 2018. Our second quarter results were in line with our expectations. The recovery of the capital spending required to modernize the natural gas delivery network, continued customer growth in the plant increase and safety related operating expenses were the primary drivers of the quarter's results. Slides five and six provide details of the period-over-period changes to operating income for each of our segments. I will touch on a few highlights. In the second quarter, operating income in our distribution segment increased 8% to $229 million. Recovery provided by recent regulatory actions increased contribution margin by $24 million. Additionally, we continue to experience solid customer growth. Over the last 12 months, we added a net 37,000 new customers, which represents 1.2% growth. We continue to experience strong customer growth in several of our service areas, including the DFW Metroplex, the suburbs of Nashville into the north of Austin and the left of Kansas to the Western Kansas City. This growth added $4 million in contribution margin for the quarter and almost…

Thank you, Chris for that great update on the quarter. Our results for the first half of the fiscal year reflect the ongoing disciplined execution of the investments we're making in safety and reliability of our system, while continuing to - mitigate long-term risk. Capital spending increased 12% during the first six months of the fiscal year, which demonstrates our commitment to modernizing our system. As we plan to increase our spending 9% to 10% per year through fiscal 2023, we're also investing in our people and technology to support these higher spending levels. Last fall, we started to implement new technology that will digitally capture all the data - we are required to collect and retain for compliance purposes. We completed the rollout to about 20% of the nearly 1,000 company and contractor crews working on our system, we're on track to expand the rollout to about 50% of these crews by fiscal year end. This is just one example of the various initiatives we have underway to build scale and efficiency to sustain our ability to invest in safety and reliability. During the first half of the fiscal year, we also continue to find ways to mitigate risk for the long-term. The increased O&M spending that Chris referred to in the second half of the fiscal year for low pressure system assessment, systematic rollout and newly survey technology and in-line inspections on our transmission system will help us implement new procedures and technology that will enhance our ability to safely operate our system and support our risk-based capital allocation program. This spending does not affect our anticipated 6% to 8% annual earnings per share and dividend per share growth through fiscal 2023. Additionally, as Chris mentioned, our move to the S&P 500, created an unplanned and unique liquidity…

[Operator Instructions] Our first question today is coming from Christopher Turnure from JPMorgan. Your line is now live.

So I wanted to make sure we were understanding kind of the equity situation correctly. Going back to last fall, my understanding was, you guys priced around $750 million of equity, a $150 million of which had a forward component to it that your message was you would pull down before I think the first half of fiscal '20. And then separately you had a forward component to a $500 million ATM. So what exactly occurred this quarter and kind of when is that going to hit your share count?

Right. And so Chris backing up to November, it was $748 million total equity issuance, of which, $500 million before costs were taken into the first quarter, $245 million was allocated to forward sales arrangements that expire in March of 2020. And our plan was to draw down the $245 million between January of 2019 and March 31 of 2020. When we had the opportunity presented to us that was unplanned when we moved to the S&P 500 in February, we issued $160 million under our ATM, under forward sales arrangements. So we have a total of $404 million in total forward arrangements available to us through the end of March of 2020. And we'll take that down over that next - basically over the next 11 months to 12 months based on our cash needs. But again, all of us have been contemplated in our 6% to 8% earnings per share growth target for fiscal '19 and in the five-year plan and the - net forward - the forward arrangements that we took out in February are going to be applied against our fiscal 2020 equity needs, it will not be dilutive to fiscal '19.

I think I understand now. But there's still a lot in there. So the amount that you did in February was simply priced under the forward ATM and you do not intend to pull that down during fiscal 2019 and you are still kind of leaving the forward component of the $750 million from November as - you're not specifying when you pull that down?

That's correct. Yes, we'll certainly start in the - towards the end of fiscal '19, the exact amount will be - to be determined based on our cash flow projections and cash needs.

Okay. And...

But we have to utilize all of those equity need - all of that equity by the end of - March of 2020, because the forward sales arrangements expire March 31st of 2020.

And then, your comment on these actions covering you through fiscal 2020 so I want to make sure that I'm understanding properly. You're committing that there will be no more equity issuances in the kind of normal course of business.

Admitting that we will not have a discrete equity needs such as a large scale block trade that we've done the last couple of years with the ATM remains available to us and we intend to consider using that as we go forward as part of our overall financing strategy and needs, honestly. You think back to our five-year plan that we rolled out last fall, we have $5 billion to $6 billion of incremental financing needs and we intend to satisfy those needs through a balance of long-term debt and equity. And so we're still executing towards that plan.

That's pretty clear. And then I guess just as a second question, you mentioned gas basis in Texas is helping you guys at least a little bit here. Can you give us more detail on how you're thinking about that over the next 6 months or 12 months, I think you said that you were making some preparations there in some way?

Yes, that's correct. In the summer months as you know, Chris we have to reduce the pressure on the pipeline for maintenance work to get ready for winter operations. So we don't have as much opportunity to take advantage of those spreads. We do see some modest uptick, but between the fact that the pressure is going to be coming down on the system for maintenance work and the fact that we have Rider REVs in place, where we always share in 25% of that upside. We do, like I said, we do anticipate a modest uptick that we've contemplated in our guidance, but we don't anticipate that to be all that material in the grand scheme of things.

And Chris as you look into 2020, the expectation is the Gulf Coast Express is expected to be in service in the October-November timeframe. So we expect that to begin affecting spreads in the 2020 timeframe. And the key is that, our customers are benefiting from lower cost gas and then also through the Rider REV mechanism with - in terms of their transport costs, gas costs.

Our next question today is coming from Charles Fishman from Morningstar. Your line is now live.

Just going back to the equity. Your guidance, the average diluted shares goes down a little bit. The net income guidance for '19 went down a little bit on the upper end. But correct me if I'm wrong, what happened basically was, you went out for the equity you needed and were able to get it a little better pricing and then that drove your diluted shares down or is it just a later - are you issuing them at a later date, what basically drove the average diluted share quantity down?

Generally pricing.

That's what I would have assumed. Okay. Second question, operational. Certainly a tragic event in Boston in the fall. Final report isn't in, but it sounds like a low pressure event, that utility is putting in low pressure sensing devices through their whole system. Is that something you already have? Is that something you're doing? Is that something you will be doing or what's the status as far as the Atmos System with respect to low pressure sensing?

No - it's a good question, Charles and I mean, we operated in our low pressure systems. I mean, for a long time and we're constantly working on them. As Chris mentioned, we have been pretty proactive in terms of doing a full system evaluation design evaluation and we've kind of reaffirmed and reviewed all of our procedures, re-communicated them, we've created geo-fencing in our GIS systems. So when there our line locates calls that are anywhere near a low pressure systems, we'll have individuals from the Company there to monitor any construction or digging in near our assets and then this review of our system design will then guide our next set of actions which may involve bifurcating those systems or providing, putting other kind of technical solutions like slam shut devices or additional releases on based on the needs. So we're well along that process and we expect that we haven't seen anything that concerns us at this time.

But I suspect that technology is rapidly changing on this stuff. But do you have some device or some way of sensing a low pressure event that has occurred or - excuse me, I guess was a high pressure event in Boston, I had it backwards. Do you have the capability of sensing that now and most of your system?

Yes, since the - I mean, since the designs were put in - the systems were put in over a longer period of time, there are various solutions to that, but yes, we have pressure sensors, we have pressure release devices as well. So we've got that type of protection in the system and what we're doing now is just going back through and doing a comprehensive review and seeing it, there are other interim or other steps we should take as it relates to low pressure.

Yes, I guess the events that really drive you nuts is a contractor doing work that has nothing to your people, but obviously that contractor could do something stupid that creates a problem for you and that's, I would assume as an ongoing issue that you'd have to address.

Yes, certainly the 70% of our hazardous leaks or calls by third-party damage. It's a very significant focus of our efforts and advocacy and it will continue to be and as I mentioned for the low pressure systems, we've taken the steps to geo-fence them in this electronically within our GIS system, so that as line locates coming in, if we have anybody work in near those systems we're going to have somebody monitoring it.

Our next question today is coming from Stephen Byrd from Morgan Stanley. Your line is now live. Mr. Byrd, perhaps your phone is on mute, please pickup your handset...

Sorry about that. Hi, this is Dave Arcaro for Stephen Byrd. Thanks for taking my question. Let's see, had a quick question, so I was wondering, just if there, what are your latest thoughts following some of the commentary coming out of the Dallas City Council over the last couple of days with the rate request there, does that change any - your views of the overall process for that rate request?

Yes, I think what we're seeing is a normal part of the process, Dave. I mean, earlier this year, we filed the $10.1 million rate increase request in accordance with the annual mechanism, we agreed to early in 2017, that request is on the City Council agenda today. City staff, we've been working with them and their consultants and representatives and they've acknowledged the efforts on both sides and try to reach an agreement. However, we haven't been able to do so in time for their needed approvals. So the staffs recommended that the City Council denied the request. Now that denial would trigger an appeal process to the Railroad Commission which we've been down that path before and our plans to continue to work with the city, we share common interest certainly on replacing aging infrastructure and we've been investing for many, many years in Dallas and we expect to reach the agreement in some point in time in the future. Our Company has made a $119 million of infrastructure improvements in the City of Dallas during that test year and we also agreed to accelerate our cast iron replacement at the city's request to 2021 and getting the last that remove in 2021 versus 2023. So maybe a longer answer than you were looking for but it's - I think, we're continuing to have discussions and we'll continue to move down the path to try to find a win-win solution.

And I was just wondering your latest thoughts on expectations for the NTSB process?

Sure. We don't have much of an update, that the core of engineers completed soil samples, they are requested in the area, they were requested to do that by the NTSB and then a public release in late February or early March, the NTSB indicated that they are finding a fact or factual report would be expected in June that - so that's the next step that would come from them and that would not at that time include any probable cause or safety recommendations, those will be sometime later and there is no timeframe on them. In the meantime, we continue to work with the NTSB and we continue to move forward on improvements in our processes around safety and then our safety investment in our systems so.

And then maybe one last question. Wanted to clarify on the increased O&M expected this year for some of the low pressure system investments, I was wondering how you anticipated getting recovery of those investments, it sounds like that's anticipated, but does that flow through mechanisms or how do you think about that?

Yes, we will seek to recover those costs maybe annual mechanisms that we have in the various jurisdictions. Again, it's safety-related. And I think everyone has got a keen eye on what happened last fall and all of our regulators have a commitment to safety and we would seek to recover those costs in our next round of filings.

Our next question is coming from Brian Levine from Citi. Your line is now live.

Just to follow-up on the Permian Waha Katy places movements, is there a way to quantify exactly what the impact was for the first quarter or for the first calendar quarter given your sharing mechanism?

In the first calendar quarter. So year-over-year, we're up about $4.5 million quarter-over-quarter we're up about $1 million. So it was about $3.5 million in the first quarter year-over-year - quarter-over-quarter last fiscal year - I'm sorry, last quarter.

And then in terms of going into the second quarter, are you seeing that directionally move up relative to this past quarter?

Yes. As we look into our third and fourth fiscal quarters I mean we do see the opportunity for a modest uptick in the - in those spreads. But as I indicated, with the maintenance work that we have planned for the pipe - the summer, combined with the effect of the Rider REV mechanism and how we share - 75% of that upside benefit flows back to the tariff customers on APT, we expect that to - that impact to be modest for us.

And then last question. To the extent that you're able to comment, is there any update on the Georgetown incident?

Sure, and let me - for others on the call, with the Georgetown situation is pretty much behind us right now. It goes back to February 20th and there was a leak reported. We responded and identified two leaks and repaired those leaks and then what we identified was residual gas in the soil that had migrated and that led us to evacuate up to at a peak 85 structures that affected approximately 140 combined businesses and residents. And then we worked on getting that residual gas out of the soil. So all the evacuations have been listed except for one business and during this process, we provided financial support and we've been processing any claims for affected businesses and residences. We've got business interruption in insurance we believe will cover any cost that they get into that territory and we don't expect the impact. So we don't expect the impact to be material on the year, but that's largely behind us and I'll tell you about our team did, just an absolutely phenomenal job of responding to the situation there, working with the community and with all the regulators and city and state leaders.

[Operator Instructions] Our next question is coming from Dennis Coleman from Bank of America. Your line is now live.

This maybe a question that has a little more detail than this now, I'm happy to take it offline if you would like. But I'm wondering there's quite a big swing in cash flow and I'm sort of working through the various statements trying to figure out where this is coming from. But is there a simple explanation we said drop of close to $200 million in cash flow for the six months?

Virtually all of that is the timing of the - of our deferred gas cost recoveries. We were somewhat over-recovered last year and we began working that balance down, returning those monies back to customers through the PGA and that continued into this year. So that - that's virtually all of the decrease. And that was planned as we moved into fiscal '19.

So that's all encompassed in the financing plans and whatnot.

Exactly.

So that will sort of this - the 2019 run rate is more of what we should expect...

Yes, it should level out now that after we kind of got into a situation where last year, we just moved a lot of volumes because it was cold and this happens to us from time to time under those PGA mechanisms in every jurisdiction got a different time period in which those rates are reset and so we're just working through that standard process. So we should be back to more on the call the day quote-unquote normal run rate going forward.

And then just to make sure I understand the equity forwards. Are you able to do sort of 5s and 10s on this, are there - does that have to be discrete draws or is there one-time mechanism and does - are there any differences in that regard or the $106 million related to the S&P 500 move versus the prior forward?

Well, there are couple of things. We issued the forwards in February under the ATM program. So - and we could - you can go out and issue shares on a daily basis, if you want. In the past where we've executed what I would call more of a regular way of the issuance where we were taken those shares and it would become diluted daily as we move forward. This forward - or the ATM program that we stood out last fall, we added a forward feature to it and that gives us the ability to access the market on a daily basis and then basically allocate those shares under forward arrangements. So it could be a daily, it can be around an unplanned liquidity event like we did in February. It's all subject to the average daily trading volumes in kind of what and how ATM programs generally works. So we don't have any specifics around. We have to target this, we've to target that. We'll just - we look the market conditions and we'll take advantage for our pricing as we see it.

But when you actually call for the cash, are there any limits in that regard?

No. The only limit we have is that, we have to utilize all of the forwards and all of that cash of those net proceeds under those arrangements by March 31 of 2020 when those arrangements expire.

And we reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you for joining us today. A recording of this call is available for a replay on our website through August 8, 2019. We appreciate your interest in Atmos Energy and again, thank you for joining us. Goodbye.