Jennifer Hills - Vice President of Investor Relations Chris Forsythe - Senior Vice President and Chief Financial Officer Michael Haefner - President and Chief Executive Officer.

Dennis Coleman - Bank of America.

Greetings, and welcome to Atmos Energy's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Jennifer Hills. Thank you, please go ahead..

Thank you, Brenda. Good morning, everyone, and thank you for joining us. This call is being webcast live on the Internet. Our earnings release and conference call slides presentation are 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 30 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. Yesterday, we reported fiscal 2018 third quarter earnings and continuing operations of $71 million or $0.64 per diluted share, compared with $71 million or $0.67 per diluted share in the prior quarter year's third quarter.

Year-to-date, earnings from continuing operations were $564 million or $5.09 per diluted share, compared with $347 million or $3.27 per diluted share in the prior year period. Yeah-to-date results include a $166 million or $1.49 per diluted share non-recurring income tax benefit from Tax Reform.

Our third quarter results were in line with our expectations with major drivers underlying our performance during the first half of fiscal year continuing into the third quarter.

Operating income in our distribution segment decreased $50 million to about $62 million in the third quarter, largely driven by $12 million decrease in contribution margin due to the implementation of Tax Reform.

Contribution margin was positively impacted by regulatory actions which provided an incremental $11 million in contribution margin in the quarter. And we continue to experience solid customer growth. Over the last 12 months, our distribution segment had a net 34,000 customers, which represents a 1.1% net customer growth.

We also continue to add transportation customers to this system in our Kentucky/Mid-States Division. Combined, this growth added nearly $5 million in contribution margin for the quarter. Operating expenses rose approximately 11% quarter-over-quarter.

We experienced a planned increase in pipeline integrity activities, higher volume locate costs, higher employee related cost and increased depreciation property tax expense resulting from our capital spending.

We also incurred about $1.5 million in travelling expenses associated with the planned Northwest Dallas outage during the second quarter, bringing the total expenses associated with the events approximately $24 million. This particular product has been completed and we do not anticipate material future expenses associated with this event.

Operating income in our pipeline and storage segment decreased by $2 million. Contribution margin increased a net $11 million, as we recognized $24 million of incremental margin from APT GRIP case completed last August and the accrual of two GRIP filings in fiscal 2018.

This increase was partially offset by $8 million reduction in revenues due to the implementation of Tax Reform. Offsetting the growth in contribution margin was $13 million increase in operating expenses, as a result of higher depreciation related to increase capital expenditures and timing of planned pipeline integrity work.

Consolidated capital spending for fiscal 2018 increased 34% to $1.1 billion which is in line with our expectations. 85% of our fiscal 2018 spending was focused on improving the safety and liability of our system.

Based on work concluded today and plan for the remainder of the fiscal year, we continue to expect our fiscal 2018 capital spending to approximately $1.4 billion. We've remained very active from a regulatory perspective.

To date, we have completed 19 filings which add approximately $81 million in annualized operating income over fiscal 2018 and 2019 inclusive of defective Tax Reform. $71 million of this amount related to APT. And we had 9 filings pending seeking about $42 million in annualized operating income in our distribution segment.

We anticipate most of these filings will be completed during the fourth quarter with rates taking effect during the first quarter of fiscal 2019. After taking to account, the lower tax expense we are incurring the net financial impact from these regulatory outcomes is consistent therefore we're anticipating at beginning of the fiscal year.

Tax Reform has been a primary focus for a regulatory team during the third quarter and we emerge from the quarter with a lot of clarity in how Tax Reform will be reflected in customer bills. In final stage we have adjusted rates reflect the lower 21% rate.

In three states, we start returning the regulatory liabilities we established effective January 1st, to account the difference between for former 35% statutory rate and the current 21% statutory rate. And the three states, we start to return exits of our taxes using conventional amortization period ranged from 18 to 40 years.

These periods will be treat up in future filings. Looking forward, we expect to refund the regulatory liability in excess differed taxes for several of our taxes jurisdiction in October. And in November, we expect adjust rate in Mississippi and Tennessee for the full impact of Tax Reform.

We are well in our way to fully implementing cash reforming and customer bills. Once fully implemented, we fully continue to estimate that the annual customer benefit from Tax Reform will be over $100 million. Slides 24 and 25 summarize the financial impact to Tax Reform for fiscal 2018 results and progress of 2018 in Tax Reform.

Our balance sheet remained strong as our capital spending program and the return of the benefits of Tax Reform to our customers. As of June 30, our equity of sold capitalization was 59% and we got approximately $1.4 billion of borrowing capacity available under our credit facilities.

As view to our final quarter of fiscal year, we remain on track to meet our fiscal 2018 earnings guidance range $3.84 to $4.05 per diluted share excluding the non-recurring benefit recognizing the implementation of Tax Reform.

The higher than anticipated growth in economic activity we saw at the beginning of the year and the anticipated impact of Tax Reform is materializing as expected. Slide 27 provides legit information underlying our fiscal 2018 guidance. This information has not changed in the prior quarter. Thank you for your time this morning.

I will now turn to President and Chief Executive Officer, Mike Haefner for his closing remarks..

Chris, thank you very much for the great update on the quarter and thank all of you for joining us this morning. As you can see from our third quarter results, we remained very focused and on track to meet our fiscal 2018 target driven primarily by our proactive pipe replacement and system modernization investment.

Our commitment to safety is fair now. From 2011 to 2017, we invested approximately $6 billion on replacing 80 infrastructure and modernizing our system. And between fiscal 2018 and fiscal 2022 we planned to spend an additional $8 billion with rate of capital investment growing approximately 11% per year on average.

With over 80% of this spending will be focused on safety and reliability investments as it has been in the past. Our group dedicated employees are the reason for our continued success as we prefer our safety and service commitments to our customers and our communities where we life and work.

We constantly strive to become a safest provider of natural gas services through our investments, not only in our infrastructure but also in our employees and the technology and business processes used to maintain and operate our system and in public safety awareness.

For example, training hours in 2018 increased approximately 10% year-over-over with the majority of the training at our world-class training center going towards technical skills development and safety. And since third part damage is the number one cause of least in our system, we continue to raise public awareness through pipeline safety efforts.

These efforts are paying off, reported injuries for employees are down 17% year-over-year and our fiscal 2018 damage rate is below the industry average and has been reduced approximately 20% of its last six years, request an increase by 50% over that same period.

We continue to see strong economic development, we are really fortunate to serve some of the fastest growing regions in the country. The Dallas Fort Worth Metroplex is projected to add 1.5 million households over 4 million people over the next 30 years. We stand ready to serve our communities as this demand grows.

Our proven organic growth strategy driven by necessary safety and reliability investments along with consistent customer growth provides a very long time horizon of infrastructure needs ahead.

Even with the significant investments we've made, the low and stable natural gas environment is help keep customers really affordable and our proactive approach to ensure customer receive the benefit of the lower federal tax rate that made customer build an even better value.

Our regulators understand the need to increase the pace of pipeline replacement.

The various annual rate review mechanisms and infrastructure mechanisms provide transparency for those regulators to annually review the progress we're making to modernize our system by also providing the opportunity we need to unreasonable returns that are investors required by the financial resources we need to sustain our effort.

We've remained confident that all these factors will continue to provide a reasonable return to our investors through earnings per share and dividend growth in the 6% to 8% range each year. We are focused on the long run and the long term sustainability of our business and we are dedicated to all of our stakeholders.

In closing, I'd like to thank our employees for their outstanding effort. They strive the fine ways to improve every day to deliver safe, reliable, affordable and exceptional natural gas service to our 3.2 million customers that we serve in over 1,400 communities in our 8 state footprint.

They come to work every day focused on safety while providing excellent customer service and executing our capital spending program focused on modernizing our system. Our employees have a strong belief and striving to do the right thing without seeking recognition or awards. And is this attitude that drives us success.

Recently Atmos Energy was named the 2018 Most Trusted Utility Brand in the South. This distinction was not even possible without the hard work and dedication of our employees. So thanks for each of you for what you do every day to Atmos Energy. While we appreciate the time this morning and now we'll take any questions that you may have.

Back to you Brenda..

Thank you. [Operator Instructions] Our first question comes from the line of Dennis Coleman with Bank of America..

Dennis, good morning..

Good morning to all. Couple of quick ones for me.

You still on or we still the guidance of 385 to 405 and sort of now we are down to one quarter ago, I wonder if you might just talk about what gets you to the higher end of that range or lower end of that range?.

Yeah, I think - Dennis, this is Chris. Good morning. You know as we look into the fourth quarter, we've got some plan that pipeline is ready to work, we take APTs outline, so that's a big project that started in early July. And so that's a variable.

That right now with where we see things as of today we project to be somewhere middle of that guidance range at this point..

Okay, okay. And then a couple more detailed questions on in the distribution segment, OpEx and tax expense were little higher than our estimate. I wonder if there is anything particular, now you did talk a little bit about that on Slide 5 but any additional comments you might make there..

Yeah, on OpEx, I think it is seeing some timing, particularly employee cost, we had some key executive retired a year ago, so the settlement charges set up in the third quarter, not that material but that was you know one item that did flow through.

With tax expense, you are talking profit taxes or you are talking…?.

Yeah, not income taxes..

Yeah, profit taxes you know we are adjusting our estimates profit tax, we are mostly on a calendar basis. So as we are working through the valuation process with profit tax seem in various municipalities, we just make adjustments for the year and what we think our full calendar year expenses..

Got it, got it. Okay. That's helpful. Thanks very much..

Thank you. [Operator Instructions] Okay, this concludes today's question-and-answer session. I would like to turn the floor back over to management..

Thank you, Brenda. This concludes our call. A recording of this call is available for replay on our website through November 8, 2918. We appreciate your interest in Atmos Energy and thank you for joining us. Good bye..