Greetings. Welcome to the Atmos Energy Q1 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]. Please note this conference is being recorded. I will now turn the conference over to your host, Dan Meziere, Vice President of IR and Treasurer. Thank you. You may begin.

Thank you, Hillary. Good morning everyone and thank you for joining our fiscal 2022 first quarter earnings call. With me today are Kevin Akers, President and Chief Executive Officer; and Chris Forsythe, 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 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 25 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsythe, our Senior Vice President and CFO. Chris?

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we reported fiscal '22 first quarter net income of $249 million, a $1.86 per diluted share. Our first quarter performance was in line with our expectations, reflects the ongoing execution of our operating, financial and regulatory strategies. Consolidated operating income decreased $276 million in the first quarter, primarily due to a $39 million decrease in revenues associated with the refund of excess deferred tax liabilities. As a reminder, beginning in the second quarter of fiscal '21, and through the end of last fiscal year, we've reached agreement with regulators in various states to begin refunding excess deferred tax liabilities, generally over a three to five-year period. These refunds reduced revenues throughout the fiscal year when those revenues are billed. The corresponding reduction in our interim annual effective income tax rate is recognized at the beginning of the fiscal year. Therefore, period-over-period changes in revenues and income tax expense may not offset with interim periods that will substantially offset by the end of the fiscal year. Excluding the impact of these excess deferred tax liability refunds, operating income increased $16 million over the prior year quarter. Slide 5 summarizes the key performance drivers for each of our operating segments. Rate increases in both our operating segments, driven by increased safety reliability capital spending, totaled $47 million. Continued robust customer growth in our distribution segment increased operating income by $4 million. For the 12 months ended December 31, we added 55,000 new customers, which represent a 1.7% increase. These increases are partially offset by a $20 million increase in consolidated O&M expense. As a reminder, in the prior quarter, we deferred non-compliance spending into late in the fiscal year as we evaluated our…

Thank you, Chris, and good morning, everyone. Before I begin my update today, I want to take just this opportunity to recognize and say thank you to all 4,700 Atmos Energy employees. It is through your dedication, your focus and effort that we safely provide natural gas service to 3.2 million customers in 1,400 communities across our eight states. Thank you for all you do every day for Atmos Energy. I also want to take this time to thank our hometown heroes, our first responders and emergency responders for their continued dedication and support for all of us. And as you just heard, we're off to a great start. The results Chris summarized reflect the commitment of all 4,700 Atmos Energy employees as we work together to continue modernizing our natural gas distribution, transmission and storage systems on our journey to be the safest provider of natural gas services. During the first quarter, we achieved several project milestones that further enhance the safety, reliability, versatility, and supply diversification of our system. For example, at APT, we placed into service Phase 1 of a two-phase pipeline integrity project that will replace 125 miles of Line X. As a reminder, Line X runs from Waha to Dallas and is key to providing reliable service to the local distribution companies behind APT's system. Phase 1 replaced 63 miles of 36-inch pipeline. Phase 2 includes an additional 62 miles of 36-inch pipeline and is anticipated to be completed late this calendar year. Additionally, we completed the first of a three-phase project to replace our existing Line S2. This 91 mile, 36-inch project will provide additional supply from the Haynesville and Cotton Valley shale plays to the East side of the growing Dallas Fort Worth metroplex. Phase 1 replaced 21 miles of this line and…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Richard Sunderland of JPMorgan. Please proceed with your questions.

Hi. Good morning. Thanks for taking my questions. Maybe just starting on O&M. How is the balance of work and timing tracking versus expectation? Just curious if you have any early sense here, I guess directionally where expenses are putting you in the guidance range?

Yes, sure, Richard. This is Chris. Good morning. Really the O&M spending was generally in line with our expectations. As I mentioned in my prepared remarks, when you look at our current year compared to the prior year quarter, the prior year quarter was a bit of a low mark. So when you look at where we are now, it's roughly a 15% increase quarter-over-quarter. But we looked to the midpoint of our guidance compared with last year's O&M levels, that's about a 3% increase. So right now, we're still seeing O&M trending in that $7 million to $10 million range. And we believe that at least where we are as we sit today that that spending will continue to be in line with this expectation.

Got it. Thanks for the color there. In the mid to the high level, could you outline the expected timing of major base rate cases over the next, say, two to three years, including the APT system?

Sure. Again, we typically execute '18 to '22 annual regulatory filings. The fiscal second quarter is our busiest filing period. So we'll be making a number of GRIP filings at APT as well as in our Mid-Tex and West Texas divisions. We'll also be making a regulatory filing in Mississippi in early March as well as in Louisiana, and a secondary filing in July in Mississippi. So a lot of activity to be coming over the next several months. Much of this will be implemented by the end of the fiscal year. We will also file our West Texas and Mid-Tex filings, generally at the end of March 1, first part of April, and those are scheduled to become implemented on or around October 1. So really at start of the next fiscal year. With respect to APT, the general rate case is scheduled to begin in our fiscal 2023 time period. So we've factored that into our five-year plan. So the GRIP filing that we'll make here in mid February will be the last GRIP filing before that annual rate proceeding next year.

Got it. Thanks for outlining all that. Thanks for the time today.

Thank you, Richard.

Our next question is from Julien Dumoulin-Smith of Bank of America. Please proceed with your questions.

Hi. Good morning, team. Thanks for the time. Congratulations on everything here. Just following up here -- good morning. Just following up on Kansas here. Obviously, the process is kicking off here. Can you talk a little bit about the expectations on the tenders are ultimately on that proceeding? And frankly, anything else that you think is relevant that we should be talking about in terms of parameters? Obviously, kudos on getting the RSC finalized here?

Thank you. So on Kansas, as I said, we're kind of in early stages right now and beginning the securitization proceedings. In the terms of tenders, it will depend upon what market conditions look like. We're obviously going to be looking to seek AAA rating on that. And we will be working with our banking partners as well as with the staff to determine the appropriate period to make these securitization costs, if you will, as affordable as we can for our Kansas customers. But it's still too early to tell where we are at this point.

Got it. Understood. And actually related, especially considering the progress that you've made with the RSC, how are you thinking about the rating agencies moving forward here on removing the outlook here, removing the negative outlook to be specific?

Yes, the dialogue we've had with both Moody's and S&P has been -- they've basically been telling us we're going to wait to see what the Texas Railroad Commission financing looks like. That was issued yesterday. I'm sure they have a copy of that. We're anticipating conversations with those rating agencies hopefully here this second fiscal quarter.

Got it. And a quick last one here just on tax rate, obviously depressed here. The comments in the transcript here, to the extent to which you should expect to continue to see this rate going forward, the lower rate, just given the tax liabilities?

Sure. So our effective tax rate for the first quarter was about 5.9% that we're anticipating, including the excess deferred tax liabilities and effective income tax rate in the 7% to 9%, given that we are refunding these excess deferred tax liabilities over the next three to five years, that effective tax rate should be in place in that general range over that time period. So when you back out the impact of the excess deferred tax liability refunds, the marginal effective income tax rate is in the 22% to 24% range.

Right, yes, indeed. Thank you for clarifying that. Sorry, actually, if I can, could I ask the last question on APT.

Sure.

How are you seeing customer growth trend here? Some of your peers talking pretty robustly of late. Just curious to see what you're seeing, especially the impact to some of your other jurisdictions here, like APT?

You're talking about particularly here in the metroplex, Julien. As Chris mentioned in his opening remarks, we've been growing just a little bit north of that 1.7% here in the metroplex, probably in the 40,000 to 45,000 customer range per year. It's a lot of residential growth. And as you get those rooftops, as you know, you'll have the supporting commercial businesses as well. We do have a few industrial customers that come in the metroplex area. A lot of this is also showing up in residential rooftops down in the Austin corridor as well. Again, that's why we're putting in that Permian connector line down there; forecasted growth, forecasted demand, expansion down there with all of the people moving in from various locations across the country. That's what we're seeing at least here in Texas across our other jurisdictions, as we talked about, it's been a really good diverse mix of not only residential but as well as industrial growth as well. I think at our fourth quarter call that we added 45 industrial customers last year that we anticipate once they're fully online or utilized somewhere between 12 BCF and 14 BCF of natural gas, that equates to around 200,000 residential customers. And these are customers that are in the metals, they're in healthcare, they're in the auto industry, a good variety of distilling. So we're getting a good mix of natural gas demand and response for the product across all sectors, whether that's Kentucky, Tennessee, Mississippi, good industrial growth. We continue to see good residential growth in our Colorado properties with people coming from the West Coast into Colorado, and then again outside of Olathe, Kansas property.

Got it. Excellent. Thank you, guys. I appreciate it. I'll pass it on.

Our next question is from Insoo Kim of Goldman Sachs. Please proceed with your question.

Thank you. My first question is just on cost overall. I think you've recorded in the fiscal first quarter that distribution gas cost of over $7 per Mcf versus I think $4 range last year. And thinking about that and other potential inflation factors, whether it's labor or other commodities for CapEx, any -- when you do the math, any concern there in your ability to achieve, whether it's a '22 or beyond CapEx while managing the bill impact?

Yes, so I'll start out and then hand over to Chris. The short answer is no on that. As you've heard us talk about at the end of last quarter when we kind of rolled out our five-year plan and forward-look there, we did have some of this contemplated in our O&M projection that Chris just talked about. As well you've heard us also talk about we worked very hard throughout the procurement team to stay ahead of some of our needs. We try and keep at least a six-month inventory. We're trying to increase that now, whether that's at our supplier or in our own warehouses. And as you may have heard us say before, all of our steel pipe needs for this fiscal year, all those projects that we just talked about, all that pipe is on site, at location. So we feel like we're in really good shape. We stay ahead of our needs to our vendors. So at this point, I think given the work for our procurement team, given that we've got our pipe needs, at least our steel pipe needs covered at this point, we anticipate that our O&M levels that we have baked in right now should be able to handle what we're seeing right now. It should not have any impact on our CapEx spend going forward in the short range.

Got it. Thanks for that reminder and that's good color. My second question is kind of related to that or maybe on the other side. I think we've seen the gas basis in your Texas region kind of widen out, again, talks about takeaway capacitor concerns. You're obviously working in line to connect with the Kinder line there, but any views on future gas cost forecast in your Texas jurisdiction and any opportunity to potentially take advantage of that spread in the near or longer term? Acknowledging that from a hedging perspective, I know you're limited on kind of what you can do.

Yes, I'll start out and again we'll see if Chris wants to add anything here. I'm looking at the Waha prices this morning, cash prices, and we’re sitting at $3.60 out there. The forwards for Waha if you're taking a look at that for the April off period is around $3.45, something like that. So no crystal ball here, obviously. But I think when you look at the rig count that we're seeing, just last week of well over 600 rigs in the U.S. working, about half those in the Permian, we're seeing production levels that are now in the 14 BCF to 14.25 BCF a day range with projections. I think by the end of this calendar year first of '23 in the 16 BCF a day range, I would hope that kind of supply pushes these prices down even further. But we'll have to wait and see on that piece of it. But very encouraged again by the number of rigs, the supply that's coming online. And just one last comment there on the basis differential. Remember that that's part of our Rider REV mechanism we have on APT and 75% of that goes directly back to the customer to reduce those rates, so that is a sharing mechanism there for those customers' benefit. Chris, anything additional?

Yes, I think the Rider REV comment is spot on, Kevin. We don't -- we certainly think about that in our planning process. It is not a material portion of APT business.

Got it. But at least it would help with the bill headroom, so I guess indirect benefit on that front.

Yes.

Got it. Thank you so much.

Thank you.

[Operator Instructions]. Our next question is from Ryan Levine of Citi. Please proceed with your questions.

Good morning.

Good morning.

I was hoping just to follow up on the APT expansion to the Permian Express. Can you elaborate on kind of the timeline in terms of executing on that project and if you're seeing any other commercial development opportunities off of APT that are getting more traction?

Well, as I said in my opening remarks there, this is going to be a 22 mile line, 36-inch. It certainly will help us meet the forecasted growth in that Austin corridor, both in Williamson and Travis counties down there. And we anticipate this line to be in service late this calendar year, it could be first of next year. We're well on our way with all the necessary aspects to get that project rolling forward. So you're right. Those are the projects outlined; Phase 2, S2 Phase 2 and Phase 3 of S2 and then project here are the major projects we have on tap for APT along with the finalization of that third cavern there. And those all again will bring that diversity, reliability and versatility to APT system, many areas to bring supply and increase capacity.

And you have all the right aways [ph] and supplies already procured to help execute on that project?

Yes, we have the majority of what we need to begin work on that at this time.

Okay. And switching gears in terms of the financing plan. You outlined your maturity schedule. It looks there is a bigger maturity due next year with some floating rate. Curious how you're thinking about staggering your debt maturities going forward and also in context of the recent decision from yesterday?

Sure. So the big maturity that you see next year is the $2.2 billion interim Winter Storm financing we executed last March. We're anticipating with the completion of the Texas securitization process by the end of the fiscal year that we would use the net proceeds received from that securitization process to repay that $2.2 billion. So, again, setting aside the $2.2 billion, when you look at it, the average maturity is 19.23 years. We're in a very, very good spot. And as we continue to execute the five-year financing plan, Dan is here and his team are looking at all the options that are on the table in terms of laddering and maturity schedules, all in with the idea of trying to minimize costs for our customers.

Okay. And then last question for me. There continues to be talk of LDC assets in the market for sale. Curious if there's any change in how you're looking at deals and if you're spending any more time contemplating acquisitions?

Well, as we've said before, we certainly don't have our heads in the sand here. We always got our eyes and ears open on the market and what's going on. But we believe we have the best properties out there and we're in very supportive natural gas states, communities, we have very supportive regulatory and legislative jurisdiction that you know with six of our eight states having All Fuels Bill. Another one, Virginia, I believe has something in the legislature this year along the lines of an All Fuels Bill, so that could move us to seven of our eight jurisdictions. As we talked about this morning, these communities are growing. They're expanding both residential, commercial and industrial. And as we've talked about before, we don't need an acquisition to meet our 6% to 8% earnings per share growth that we talked about in our plan. So at this point, we remain focused on executing our system modernization strategy, as we continue our journey to be the safest provider in natural gas services.

I appreciate the time. Thank you.

Thank you.

We have reached the end of the question-and-answer session. I will now turn the call back over to Dan Meziere for closing remarks.

We appreciate your interest in Atmos Energy and again thank you for joining us. A recording of this call is available for replay on our Web site through March 31, 2022. Have a good day.