Susan Giles - Vice President of Investor Relations Kim R. Cocklin - Chief Executive Officer, President and Director Bret J. Eckert - Chief Financial Officer and Senior Vice President.

Spencer E. Joyce - Hilliard Lyons, Research Division Todd Victor Derderian.

Greetings, and welcome to the Atmos Energy's Fiscal Year 2014 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Susan Giles, Vice President of Investor Relations. Thank you, Ms. Giles, you may begin..

Thank you, Kevin, and good morning, everyone. Thank you for joining us. Our speakers this morning are Kim Cocklin, President and CEO; and Bret Eckert, Senior Vice President and CFO. There are also other members of our leadership team here to assist with questions as needed.

Our earnings release, conference call slide presentation and our 10-Q as filed last night are available on our website. To access these materials, please visit our website at atmosenergy.com. We will refer to just a few of the slides during this live call, but we will be happy to take questions on any of them at the end of our prepared remarks.

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.

Please see Slide 20 for more information regarding the risks and uncertainties we consider in making these forward-looking statements and where to go to get more information on such risks and uncertainties. Now, I'd like to turn the call over to Kim Cocklin.

Kim?.

Thank you, Susan, and good morning, everyone. We certainly appreciate you joining us again in this second quarter and your continued interest in Atmos Energy. We had a wonderful second quarter driven by much colder conditions throughout all of our service territories. Our service technicians and fieldworkers are truly a team of impact players.

Their training, their attitude, their energy and dedication were clearly demonstrated as they provided safe and reliable service to all of our customers during long periods of sustained cold weather. We had many great performances by all of them worthy of Oscar awards.

Our financial performance followed with reported second quarter consolidated net income of $133 million or $1.38 per diluted share compared to $116 million or $1.27 per share 1 year ago.

As a result, we are increasing our earnings guidance from the previous range of $2.66 to $2.76 to $2.80 to $2.90 per diluted share and Bret is going to provide more detail of that increased guidance. Many of our peers, as you know, have reported results which reflect colder weather this winter.

While that has driven some of our performance, our strategy to grow by investing in our regulated infrastructure, which we announced and initiated in fiscal '12, has continued to contribute exceptional operational and financial outcomes.

Our system was tested operationally during the sustained periods of cold weather this winter and we delivered reliable and safe service to meet this increased customer demand. And this has been critically important, and the recent capital investments spent to fortify our systems allowed all of this to transpire.

Other important and recent accomplishments include the approval of the Atmos Pipeline-Texas GRIP filing on May 6 by the Texas Railroad Commission in the amount of $45.6 million. The pipeline also just executed a 10-year contract with Targa Resources, which will commence in October 2014.

That contract will enable us to add infrastructure and compression in the Permian Basin to increase the capacity of our pipeline by 210,000 mmbtu per day and it will provide valuable and new sources of gas supply over that 10-year period for our gas distribution customer.

In mid-February, you'll recall we completed the sale of 9.2 million shares of common stock in our first public offering since 2006. The shares were priced at $44.

We felt market conditions were optimal at this time to issue equity and we would be able -- and were able to absorb the effect of dilution as a result of the colder-than-normal weather and constructive rate outcomes.

Net proceeds from the offering of $390 million were used to repay short-term debt; to fund infrastructure spending, primarily to enhance the safety and reliability of our system; and for general corporate purposes.

The offering has allowed us to share our growth strategy into a wider audience as we have become more liquid and our market cap has crossed the $5 billion threshold. Also, our sell-side coverage has been expanded with the addition of JPMorgan, who initiated coverage on April 21.

Our debt capital ratio at March 31 was 44%, with no short-term debt outstanding and our liquidity remains strong with over $1 billion of capacity from our short-term facilities. We also successfully resolved 2 legal matters related to our nonregulated marketing operations.

Finally, I want to mention that as a result of the continued stable and reliable earnings, our Board of Directors on Tuesday of this week declared our 122nd consecutive quarterly cash dividend and the indicated annual dividend rate for fiscal '14 is $1.48, which is a 5.7% increase over the 2013 annual dividend rate.

With that, I'll turn the call over to our CFO, Bret Eckert.

Bret?.

Thanks, Kim, and good morning, everyone. Slides 2 and 3 detailed reported net income and income excluding net unrealized margin for the 3- and 6-month periods of 2014 and 2013. Excluding unrealized margins, earnings per diluted share increased 10%, from $1.25 for the second quarter last year to $1.37 in the current quarter.

For the 6 months, earnings per diluted share rose 14%, from $1.99 last year to $2.26 for the current 6 months. Weather was 25% colder than last year, resulting in higher throughput across all segments of our business and, coupled with natural gas price volatility, increased consolidated year-to-date gross profit by about $42 million.

Increased customer consumption at the LDC and higher throughput and related margins at APT contributed $19 million of this increase. The remaining $23 million increase was realized in our nonregulated operations.

Although the delivered gas business remains its core focus, AEM was able to accelerate physical withdrawals into the second quarter to generate incremental gross profit in a volatile natural gas price environment.

As Kim mentioned, investing in our infrastructure to enhance the safety and the reliability of our system is our primary strategy and these investments helped our utilities perform very well when needed most. Recovery of these investments also drove gross profit increases in our regulated operations for the 3 and 6 months.

Slide 4 outlines gross profit in our regulated distribution business and Slide 5 details gross profit from our regulated intrastate pipeline, APT, for the 3-month and 6-month periods. Rate increases lifted distribution gross profit by $13.2 million in the quarter and $15.3 million for the current 6 months.

In addition, increases from APT's annual GRIP filings increased rates by $7.3 million in the quarter and $14.1 million for the 6 months. Slides 14 and 15 detail results for our nonregulated segment. Realized gross profit increased $14.3 million in the quarter and $22.8 million for the current 6 months.

Deliveries of natural gas increased 23% during the second quarter and about 17% year-to-date due to the impact of colder weather, offset by a slight decrease in per unit margins. However, as I previously mentioned, price volatility resulted in realization of incremental gross profit in the current year.

Shifting now to the expense side of the income statement. The increase in O&M was primarily due to the timing of recognition of higher variable incentive compensation expense, as a result of increased operating results.

The distribution segment also experienced increased standby and overtime costs and lower labor capitalization rates, as our employees were focused on ensuring the safety and reliability of our distribution system during the cold weather.

Additionally, 2 litigation matters related to the nonregulated segment were resolved during the quarter resulting in lower O&M for that segment. Moving now to our earnings guidance for fiscal 2014.

As Kim mentioned, we have increased our earnings guidance for fiscal 2014, primarily due to strong earnings through the first half of fiscal 2014, bolstered by weather that was about 20% colder than normal for the 6 months.

We now expect fiscal 2014 earnings per share to range between $2.80 to $2.90 per diluted share, excluding unrealized margins at September 30, 2014. Slide 17 details revised net income and expense projections. We now project regulated operations to generate net income in the range of $256 million to $267 million in fiscal '14.

Our year-to-date experience, coupled with the continued execution of our rate strategy, should drive this year's results. We anticipate operating income increases of between $110 million and $130 million on an annualized basis from approved rate outcomes in the year.

As of May 6, about $83 million in operating income increases, again on an annualized basis, have been approved and rate actions filed and pending totaled $60 million. We expect to file another 4 to 6 cases by the end of the fiscal year, and in total, would request an additional $15 million to $20 million of annual revenue increases.

In addition, APT's demand fees were updated during the quarter to reflect current peak-day needs of its regulated customers, which should provide incremental gross profit on a go-forward basis. Slides 7 through 13 provide more details on our rate proceedings and outcomes. Turning to the nonregulated business.

We now expect fiscal year '14 net income to be between $17 million and $19 million, excluding unrealized margins. We currently anticipate breakeven results in the back half of fiscal '14 after accelerating physical withdrawals into the second quarter to capture incremental margin.

O&M expense is now expected to range between $475 million and $490 million, driven by increased variable compensation, coupled with higher levels of pipeline maintenance activities expected to occur in the latter half of the fiscal year. Our capital budget range is not changed and remains between $830 million and $850 million for fiscal '14.

Thank you for your time. And I'll now hand this call back over to Kim..

Thank you, Bret. Excellent report about an excellent quarter that we had. We do continue to focus on delivering natural gas safely and reliably to our customers.

Atmos Energy is the second largest pure natural gas utility in the country with about 95% of our annual earnings derived from our regulated operations and we continue to project 9% to 10% annual rate base growth and 6% to 8% annual earnings growth through fiscal 2018, with no equity offerings anticipated through that same period.

Coupled with the 3% dividend yield, total annual shareholder return is expected to be in the 9% to 11% range through fiscal 2018.

We are resolute, as we said many times on our commitment that we made in 2012, that investing in the safety and reliability of our system is the highest and best use of our capital as we strive to be the safest utility in the country. We certainly appreciate your time this morning and we're now ready to take questions.

Kevin?.

[Operator Instructions] Our first question today is coming from Spencer Joyce from Hilliard Lyons..

Looks like might not be the only one that's thinking that, too, with the way the stock's been acting the past couple of days. In any case, just one real quick one from me and, Bret, this might be for you. If we look out to October, we have -- I'm seeing $0.5 billion or so of long-term notes due.

Have you all announced a plan for that, should we be thinking about an upsize or a refi or refresh me, do we have any interest rate locks or anything in place for that?.

We do. It's a great question. There are $500 million 30-year senior notes that are currently at 4.95% due mature in October of 2014, which is our fiscal year '15. We have put a forward-starting swap about 1.5 years ago on that issuance effectively fixing the treasury yield at 3.129%.

We do plan to obviously issue senior notes, 30-year senior notes to replace that expiring tranche of debt. We're currently looking at that. We may upsize that facility slightly as we get closer to that, but that's our current plan.

And keep in mind, Spencer, we've also put forward-starting swaps on our expiring issuance that follows that in June of 2017, $250 million, 30-year notes that is effectively fixed at 3.36% and then we began in this quarter layering on some forward-starting swaps on the March 2019, we have $450 million of 8.5% 10-year senior notes, we've right now put forward-starting swaps in a little over 60% of that issuance, fixing the treasury at about 3.95%.

So we continue to take advantage of this low interest-rate environment, allowing us to continue to fund our growth..

Yes, that's fantastic, I'll add those notes in and make those adjustments. In any case, pretty clean quarter..

[Operator Instructions] Our next question is coming from Todd Derderian from John Hancock..

My question is pretty simple. Obviously, you've done some great investment in CT [ph] in reliability, which has been the key to your undeniably strong results.

Should the spending mix that's currently in the high 60s be consistent through 2018? And do you anticipate any problems with existing regulatory lag, which you're working very hard to reduce?.

No, I think we've announced that we continue to see spending levels from a capital expenditure standpoint of 850 to 950 through 2018 with that investment continued focusing on our infrastructure to enhance the safety and the reliability of our system.

We remain laser focused on regulatory execution and will continue to look to earn a fair return on investments..

And Todd, the regulators are also very interested in ensuring that the infrastructure in their jurisdictions is the most safe and reliable that it can be, and it's state-of-the-art.

So we've been working as a partnership with the safety divisions and with the regulators and have come up with what we see and find is very acceptable treatment for our investment.

And as Bret pointed out, we've also focused on taking a great deal of time to focus on ensuring that we have the appropriate strategy, then financial engineering in place to fund that through fiscal '18 by continuing to try to stay ahead and take advantage of the low interest rates for the expiring issuances during the same period, the '15s and the '17s and then the '19 debt.

So it's a program that's going to continue and it's working very, very well and paying great dividends for our customers, for our regulators and for our shareholders, but the biggest emphasis from our standpoint is safety.

We want to be the safest utility in the United States and we want our employees to be the best trained and to strive to be incident-free every day and we try to remind each other as we wake up to do that..

Well, I think with your good relations with the regulators that you are well on your way to maintaining that reputation. And lastly, with the quarterly dividend, we couldn't be more pleased with that continued consecutive raise and declaration and percentage..

[Operator Instructions] If there are no further questions, I'm going to turn the floor back over to management for any further closing comments..

Well, thank you, all, for joining us. We will have a recording of the call available for replay on our website through August 6, and I will be here all day if you have any further questions. Again, we appreciate your interest in Atmos Energy and thank you for joining us..

That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today..