Susan Giles - Vice President, Investor Relations Christopher Forsythe - Senior Vice President and Chief Financial Officer Kim Cocklin - Chief Executive Officer Michael Haefner - President and Chief Operating Officer.

Spencer Joyce - Hilliard Lyons Brian Russo - Ladenburg Thalmann.

Greetings, and welcome to the Atmos Energy Corporation Third Quarter 2017 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] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Susan Giles, Vice President of Investor Relations for Atmos Energy Corporation. Thank you. Ms. Giles, you may begin..

Thank you, Doug, and good morning, everyone. Thank you all for joining us. This call is being webcast live on the Internet. Our earnings release, conference call slide presentation and 10-Q are all available on our website at atmosenergy.com.

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. Our forward-looking statements and projections could differ materially from actual results.

The factors that could cause such material differences are outlined on Slide 26 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, Susan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Our performance for the periods ended June 30 was driven by the ongoing investments we are making to improve the safety and reliability of our distribution and transmission systems.

Additionally, we continue to benefit from increased economic activity and customer growth in many of our service areas. Net income from continuing operations for the third quarter increased to $71 million, or $0.67 per diluted share, compared with $66 million, or $0.64 one year ago.

For the current nine-month period, net income from continuing operations reached $347 million, or $3.27 per diluted share, compared with $311 million, or $3.01 from the same period one year ago. Slides 4 and 5 provide financial highlights in each of our segments for the three and nine-month periods.

Rate relief generated about $14 million of incremental margin in the third quarter. Substantially, all this increase is recognized in our distribution segment. Since APT had a general rate case in progress, we did not file its customary annual GRIP filing during the second quarter of the fiscal year.

That case concluded earlier this week, and Kim will provide additional details during his remarks. Rate relief for the nine months ended June 30 was about $81 million. About 33% or $59 million of the incremental margin was reflected in our distribution segment with the largest increases in our Mid-Tex, Mississippi and Louisiana Divisions.

Increased economic activity and customer growth have also favorably impacted our performance.

In our distribution business, we continued to experience customer growth and higher consumption, primarily in Texas and Middle Tennessee, resulting in a gross profit increase of about $3 million quarter-over-quarter and about $7.5 million in the current nine-month period.

Over the last 12 months, we’ve experienced net customer growth of about 1%, or about 31,000 customers. Additionally, transportation margins have increased $1.5 million quarter-over-quarter and $4.2 million for the nine-month period, with half the increase coming from our Kentucky/Mid-States Division.

As we previously discussed, the GM assembly plant in Spring Hill, Tennessee added a third line of production early in our fiscal year. This increased production has had a positive benefits to related automotive components manufacturers in the area and indeed to the large transportation customers.

Additionally, a new fertilizer plant in Tennessee came online during the quarter, and two government Energy Consortium in Virginia have switched their boilers from coal fired to natural gas, all of which contributed to the increase.

In our Pipeline and Storage segment, APT’s intrastate pipeline benefited from a modest increase in throughput from a North Texas pipeline acquisition that we completed in December, resulting in about a $1 million increase in gross profit for the quarter and $1.7 million for the nine-month period.

Additionally, APT has recently experienced wider spreads between the Katy and Waha Hubs, which contributed about $1 million during the quarter. In the prior year quarter, spreads were in the 10% range. During the current year quarter, spreads were in the 35% to 40% range.

Rising production from the Permian basin, uncertainties surrounding exports in Mexico from the Waha basin and increased pad on the Gulf Coast in LNG and exports to Mexico have caused spreads to widen in recent months.

However, as a reminder, 75% of the incremental margins from this activity are returned to APT’s regulated customers as a revenue credit through APT’s Rider REV mechanism. The period-over-period increases, I just mentioned, reflected this revenue credit.

All these margin increases combined with the weather normalization mechanisms, which cover about 97% of total distribution margins more than offset the effects of weather that was 30% warmer than normal from 12% warmer than the same period one year ago. Focusing now on our spending.

Consolidated O&M continuing operations decreased about $3 million in the quarter, primarily due to lower legal expenses. For the current nine months, consolidated O&M increased $7 million, reflecting higher employee-related cost, increased line locate activity and hydro testing in our Distribution segment.

Additionally, in our Pipeline and Storage segment, we continued to perform significant monitoring, integrity assessments and peaking activities and have incurred additional expense to operate the recently acquired North Texas pipeline and related compressors.

Capital spending increased by $22 million to about $812 million in the first nine months of fiscal 2017. While the 83% of our total CapEx was associated with safety and reliability spending in the first nine months of the year, we expect to begin earning in over 95% of our capital spending within six months of the test year-end.

Distribution spending increased about $90 million, as we continued focus on safety – system safety and infrastructure spending.

This increase is partially offset by a $67 million decrease in spending in our Pipeline and Storage segment, reflecting the substantial completion in the prior year of an APT project to improve the reliability of gas service to its LDC customers.

Additionally, APT elected defer to fiscal 2018 a pipeline repricing project in the DFW market ahead, it’s scheduled to start in the second quarter. The deferral will allow additional time to plan and coordinate the project for the local communities that will be affected.

APT has redirected those capital dollars to other activities that will be completed by the end of the fiscal year. We expect our capital spending to range between $1.1 billion and $1.25 billion, inclusive of our pipeline acquisition.

At this point, I would like to take a couple minutes to highlight the steps we have taken during fiscal 2017 to strengthen our balance sheet. During the third quarter, we raised about $50 million in equity through our At-the-Market Equity Sales program.

All the year, we sold 1.3 shares of common stock under the program for net proceeds of $98.8 million at a weighted average price of $76.32, which was in line with our average trading price of $77 over the same period. Substantially all the shares under the ATM program have now been issued. Additionally, in June, we issued $750 million of senior notes.

We offered $500 million of 3% 10-year notes due 2027 and $250 million of 4.125% notes due 2044. This offer reduced the weighted average cost of debt to 5.1%, down from 5.9% at the end of fiscal 2016. This decrease will benefit our customers.

The net proceeds will be used to repay the outstanding $250 million 6.35% notes that matured June 2015, and for general corporate purposes, including the repayment of short-term debt.

This activity combined with $125 million of long-term debt we issued during the first quarter, provided $725 million of incremental financing, which we’d use to strengthen our balance sheet.

As a result, our equity capitalization ratio at June 30 was 54%, and our liquidity remained strong with about $1.3 billion of capacity available from our credit facilities. This management strength positions us well to sustain our growth for the long-term. Moving now to our earnings guidance for fiscal 2017.

Based on our financial performance to June 30, the substantial completion of our fiscal 2017 regulatory activities; and the increased customer growth, consumption and other positive activity I just mentioned, we now expect fiscal 2017 from continuing operations to be in the middle of the range of $3.55 and $3.63 per diluted share.

Slide 20 details the key assumptions supporting our guidance. Further, with the conclusion of the APT rate case and our Mid-Tex annual filings, we have achieved our goal of implementing $90 million to $110 million of annualized operating income increases during fiscal 2017, with about $104 million in annual operating income pre-achieved.

Slides 7 through 15 provide details on the progress we have made during fiscal 2017 in pursuing our regulatory strategy. I’ll now turn over the call to Kim Cocklin for his remarks.

Kim?.

a rate base value of $1.77 billion compared to $814 million in the last case, which occurred in 2011; an authorized return on equity component of a 11.5%; an overall rate of return of 8.87%; an authorized cap structure of 53% equity and 47% debt; and then the Rider REV mechanism, which was modified to reflect the change in the benchmark from $83.7 million to $69.4 million.

You’ll remember that Rider REV is the annual adjustment mechanism that trues up the actual third-party revenue generated by APT against the benchmark, which is now $69.4 million. And any actual amounts above or below that benchmark are allocated 75% to customers and 25% to APT.

Later this month, APT will file an annual GRIP filing for the stub period October through December 2016, which will pick up the capital that we invested in the months following the rate case at test year-end of September 30, 2016. We filed the Dallas annual rate filing in January, seeking to adjust rates by $9.7 million for the Dallas area.

After discussions with Dallas, we agreed to an adjustment of $7.8 million. The Dallas City Council disapproved that $7.8 million settled amount and reduced the amount unilaterally to $5 million. In addition, the City Council ordered Atmos to show cause that the rates we were charging were just and reasonable.

We appealed this Council’s action first taken to reduce the DARR settlement. The issue on appeal is whether our annual rate filing complies with the tariff. We will file a general rate case in response to the show cause order in August with the test year ending March 31, 2017.

And we expect both the DARR appeal and the show cause proceeding to result in early fiscal 2018. We also expect a handful of smaller regulatory filings will be made during our last fiscal quarter. But we have successfully achieved our commitment to generate annual operating income increases in the $90 million to $110 million range for fiscal 2017.

And as Chris mentioned, more details on these filings are available in the slide deck. You’ve heard this before, we have been and continue to deliver on our promises and commitments. Investing in the safety and reliability of our system is the highest and best use of our capital, as we strive to become the nation’s safest utility.

As the frontrunner and launching this growth through infrastructure investment strategy back in October of 2011, our total return to shareholders was 205% as of June 30, over 70% greater than the peer group average of 120%.

We remain resolute in continuing to deliver on our commitments of growing rate base by 9% to 10% and earnings per share by 6% to 8% annually and providing a projected annual total return to shareholders of 9% to 11%. And in November, we will communicate our refreshed five-year plan, which will provide projections through fiscal year 2022.

One final note is the management changes that were announced yesterday. Mike will become President and CEO on October 1, 2017, and I will become Executive Chair at that time. This is not sudden and it shouldn’t be unexpected. We’ve been at this transition for three years. Mike has run all the business day to day during this time.

We have an exceptional leadership team in the business units and certainly in our shared service groups. Mike will bring and has an edge that is strategic, focused, keen, astute, competitive, motivated and extremely employee centric. I’m going to stay as an active employee and be available to support Mike in any manner that he chooses.

On a personal note, I do want to thank all of you who helped me be a better CEO. The analyst and portfolio management community is extremely professional and prepared. I appreciate what you do and how you do it.

I’m very proud that Atmos is covered by an exceptionally talented, experienced and dedicated group of analysts, particularly the ones that have a buy on us. Now, Atmos will continue to grow and flourish with Mike and his team, and we are going to continue to be the bell cow in our sector. With that, we are going to take questions.

Doug, we’ll turn it over to you..

Thank you. Ladies and gentlemen at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Spencer Joyce with Hilliard Lyons. Please proceed with your question..

Hi, Kim, good morning..

Hi. Good morning, Spencer..

Yes, I’d tell you I was saddened last night to see the news, but I’m honored to be the first here to congratulate you on an amazing run at the helm here, and thank you for what you’ve done for our clients and shareholders..

You’re too kind, Spencer, good to hear..

I’m going to miss our quarterly banter here, but do love you staying on as Executive Chairman to kind of keep tabs on the company here?.

I’m glad to hear it from you, and I’m glad you’re still surviving the hockey for AMEX Serve League..

Yes, I’m a little creaky, but so far hanging in there. Congrats on a nice quarter, not a whole lot operationally for me. But actually want to go back to Chris for a second. Chris, you mentioned LNG a little bit and how that had affected the company. Can you just kind of walk back through that? I know that’s kind of a new piece of the commentary there.

And just given how much activity is there in your region, I know, it’s been something we’ve kind of been looking toward for a little while.

But can you just kind of rehash your comments toward LNG?.

Well, I think, what I was trying to convey was that, the LNG activity along the Gulf Coast is impacting the spreads between Katy and Waha, and as a – as one of the shippers that we have the opportunity to take advantage of those spreads.

So it’s the spreads themselves and the increased transportation and through system revenues that we’re generating from that is where the LNG opportunity is going impacting us. It’s not LNG in and of itself, but it’s the spreads and then therefore the resulting through system revenues that we are able to pick up on that..

The – in addition to that, there’s lots of increasing petrochemical activity along the Gulf Coast. So that’s also helping to drive the spreads, which of course, feeds into our transportation services we can provide by the pipeline..

Okay.

And will that be somewhat volatile kind of year-to-year or quarter-to-quarter, not that it’s hugely impactful to the overall company? But I mean, is it sort of cyclical or volatile, or is it really just kind of a step function change?.

Well, yes, it’s – the way we look at our pipeline, we’ve got really all of our capacity, excess capacity, subscribed between Waha and Katy in long-term contracts. But we can take advantage of the spreads in our daily business when we have excess capacity. So it’s just another way for us to pick up crumbs along the way.

And again, it benefits our rate-paying customers and draws more gas to the system, increases the value of our assets, gives us opportunity to invest additionally and enhancing those assets as well..

And there – Spencer, there’s really no way to anticipate or manage the variability in the geographical spreads that show up. The only time that you can really plan for them is maybe in the summer when certain of the pipelines are taken out of service or maintenance activities and then you’ll see some spreads pop up.

But this LNG thing, that shows up kind of unexpected. So not any way to model it. But as Mike said, we are perfectly situated with our pipe and because we connect to Waha, Katy and Carthage, that we can – we could certainly take advantage and will take advantage of this – of the geographical spreads that may show up at any point in time..

Okay. Thanks for the color there. And finally, just one other small one.

Can you talk a little bit about the assets – the pipeline assets we acquired in North Texas earlier in the year? Have they been, I guess, integrated for lack of a better word pretty smoothly? I mean, are they kind of up to par now that you’ve had them for a quarter or two?.

Yes absolutely, Spencer. They were, again, perfectly positioned assets for our system. They’ve been operationally integrated completely with the assets in their current state.

As Chris mentioned, we’ve had some incremental O&M directed there towards maintenance and integrity work on both their pipeline and our – and the compressor station to kind of upgrade some of the capabilities. But we’ve also got increased margin revenue from those contracts we have on that pipe already.

And I just kind of – Dennis Gordon, who runs the pipeline now – Dick Erskine just retired – or is retiring this week. You guys will have a chance to meet Dennis in November, when we come out and refresh the five-year plan.

And Dennis will talk about the opportunities and the capital that we have in their five-year plan to further integrate that asset by creating interconnects with our – some of our existing – other existing pipe segments. So it’s just been working exceptionally well and as well as we expected..

Okay. Yes, great to hear, and look forward to obviously any updates at that November time..

The other point there is that, as Chris may have mentioned, that the GRIP filing we’ll make now, which as Kim said, covers the capital investment from last October through December of 2016, that will also include the $85 million that was spent on that asset purchase..

Okay, perfect. That’s all I had. Thanks, guys..

Thanks, Spencer..

Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed with your question..

Hi, good morning..

Good morning, Brian..

Is it accurate to say that the Railroad Commission’s final order is relatively similar to what the proposal before decision was?.

Yes, it’s exactly that..

And so, would you view this order as constructive and supportive of the 6% to 8% of forecasted EPS CAGR?.

Yes, we would, absolutely yes. I mean, first of all, we think it’s a very reasonable outcome. Equity at 53% is higher than our last case coming out of 50%. We’ve got the ROE of 11.5%, which is a little under the 11.8%, but with $13 million increase in operating income, you’ve got a $1.77 billion rate base versus $814 million in the last case.

And really importantly is that, the final order kind of reaffirmed that this is a pipeline asset and it should be compared to a pipeline peer group. So again, that reaffirms that precedent.

And I think further, one commissioner during the commissioners’ conference reaffirmed the importance of certainty in regulation in the State of Texas and to the companies operating in the State in Texas. So from that perspective, it’s a good outcome. It shows the balance, I think, that the commission has to strike between the interests of all parties.

And it really supports and enables our continued investment in safety and reliability in the pipeline, further fortification for all the customer growth were experienced in North Texas, and then adding supply diversity. It’s a key component. It’s going to really enable us to continue the growth, EPS growth in the 6% to 8%..

Got it. Thanks for that. And then so now you just file GRIPs on an annual basis.

And then what’s the rules there? How many GRIP filings can you make until you have to file another rate case?.

I think it’s five years..

Five years, got it. Okay.

And with obviously, the major regulatory item behind you, what should we look for going forward in terms of the more meaningful regulatory filings?.

I think, GRIP, for the pipeline, we’ll have the GRIP filing later this month. We’ll have a GRIP filing at the beginning of the second quarter of next year to fix up all of our investments in calendar year 2017. And so for the pipeline, it’s – that’s really the focus.

It’s getting back into the mode of enhancing the system and modernizing it and making our GRIP filings..

Okay. And then just lastly, on the revised guidance, it looks like the midpoint was increased by $0.04. And you cited a number of operating performance type of items that enabled you to tighten the range and raise the midpoint.

Is this midpoint kind of like the going-forward base to forecast 6% to 8% EPS CAGR?.

Yes, I would say that’s the case..

Okay, great. Thank you..

Thanks, Brian. We’ll see you next week..

[Operator Instructions] Our next question comes from the line of [Geoff Healy] [ph] from [Guardian Life] [ph]..

Hi, Kim, this is Geoff Healy from Guardian Life. Just not many questions.

But I just want to call on behalf of the buy-side fixed-income investors out there and really want to tip my hat to you guys and the tremendous job you did at Atmos, and hopefully looking forward to continuing to support the growth going forward, and best of luck in your future endeavors..

Thank you, Geoff, very much. Enjoyed it very much, and we appreciate your interest and your continuation to vote with your wallet..

Sounds great. Thanks a lot, Kim..

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments..

Thank you, Doug. Just to let you know, a recording of the call is available for replay on our website through November 8. We appreciate your interest in Atmos Energy and thank you for joining us. Goodbye..