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

Analysts:.

Greetings, and welcome to Atmos Energy 2018 Fourth Quarter 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. I would now like to turn the conference over to your host, Jennifer Hills.

VP - Investor Relations..

Thank you, Dana. Good morning, everyone, thank you for joining us. This call is being webcast live on the Internet. Our earnings release and conference call slide 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 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 23 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. Yesterday, we reported fiscal 2018 adjusted earnings from continuing operations of $444 million or $4 per diluted share compared with $382 million or $3.60 per diluted share in the prior year.

Adjusted earnings from continuing operations excludes a $159 million or $1.43 per diluted share benefit from the revaluation of our deferred taxes as a result of tax reform.

For the fourth quarter, adjusted earnings from continuing operations rose $46 million or $0.41 per diluted share compared with $36 million or $0.34 per diluted share in the prior year period.

These results exclude a $7 million or $0.06 per diluted share shrewd out to the one-time benefit from implementing tax reform after the IRS clarified the implementation day of the new capital extensive rules in August.

Our fiscal 2018 results were above the midpoint of our updated guidance range representing 16 consecutive year earnings per share growth. Slides 5 and 6 provide details of the year-over-year changes to operating income for each of our segments. I will touch a few on the fiscal year highlights.

Contribution margin in our distribution segment rose a net 4.6% or about $64 million year-over-year.

Rate increases driven by increased capital spending related to safety and reliability improvements, providing incremental $71 million, about 85% of these increases were in North Texas, Louisiana and Mississippi service areas in line with contribution to our portfolio of assets. We also continue to experience solid customer growth.

Over the last 12 months, our distribution segment added a net 34,000 customers, a 1.1% increase for the year. And our transportation margins increased 15% year-over-year.

In addition to adding customers to the system, several other our existing customers, transportation customers increased their consumption either through plant expansions or increased business activity due to the short filing. Virtually all of this increase occurred in our Kentucky/Mid-States and Texas service areas.

Combined, this growth added $17 million in contribution margin for the year. These increases were partially offset by a $51 million decline in revenue, due to the implementation of tax reform. This decline was essentially offset by a corresponding decline in income tax expense. Operating expenses rose approximately 10% year-over-year.

We increased our pipeline and storage activities and experienced higher line locate expense surveys and other employee-related costs. Additionally, we incurred $24 million of expense associated to planned outage in Northwest Dallas during the second quarter.

In our pipeline and storage segment, contribution margin increased to net $51 million or 11.2%. Revenue increased $74 million from rate activity due to full year impact of new rates in APT's most recent rate case completed last August combined with increases associated with two quick filings that were approved during the fiscal year.

The implementation of tax reform produced revenue by about $24 million. Operating expenses increased $31 million or 13%. This increase was in line with expectations with the majority of the increase related to depreciation resulting from higher capital spending.

Consolidated capital spending for fiscal 2018 increased 29% to nearly $1.5 billion, which is above our original expectation of $1.3 billion to $1.4 billion, about 85% of our fiscal 2018 spending was dedicated to safety and reliability projects.

Earlier in the fourth quarter, we filed an amended pipe replacement plan for our Mid-Tex Division for the remainder of calendar 2018. It outlined plans to accelerate our pipeline replacement activities. Most of the higher replacement plan spending was incurred in connection with this updated plan.

In fiscal 2018, we remained very active from a regulatory perspective. We implemented approximate $80 million of annualized operating income increases from 18 regulatory proceedings. We also completed three proceedings, which should result in annualized operating income increase to $21 million.

Rates from these three filings went into effect in October. After taking into account the lower tax expense resulting from tax reform, the net financial impact for rate outcomes completed in fiscal 2018 was $120 million to $140 million, we anticipated.

So far, in fiscal 2019, we completed filings in our Mississippi and Tennessee service areas, resulting in a $2 million increase in annualized operating income. These filings also helped to implement tax reforms in these states.

Currently, we have six filings in progress taking about $14 million in annualized operating income and Slide 9 provides the additional detail around the regulatory activities for fiscal 2018 and the start of fiscal 2019.

Tax reform provided unique opportunity to reduce customer builds and we won the first utilities in the country to inform that benefits to our customers. A significant amount of regulatory work issue was focused on reflecting the positive impact of cash reform in customer bills as quickly as possible.

In seven of our eight states, we have adjusted rates to reflect the lower 21% statutory rate. Virginia is the only state where we have not yet adjusted rates of tax reform.

However, we have a filing in progress that would address among other things tax reform that we have established regulatory liability effective January 1, 2018, for the difference in the new and former statutory rates.

And three states we are returning the regulatory liabilities we established effective January 1st to account the difference between the former 35% statutory rate and the current 21% rate. And in six states, we're returning the excess deferred tax liability using provisional amortization periods ranging from 18 to 40 years.

These periods would be trued up in future filings, once the filing terminations is made regarding the allocation of the excess deferred tax liabilities between the protective and non-protective components. The key take away from all this tax reform activity that we now have clarity around the implementation of tax reform into customer bills.

We now estimate that the annual custom benefit from tax reform once fully implemented will be over $125 million per year. Slides 20 and 21 summarize the financial tax -- impacts of tax reform on our fiscal 2018 results and the progress we have made to implement tax reform in our rates.

Our balance sheet remains strong, supporting our capital spending program and returned to benefits of tax reform to our customers. As of September 30, 2018, our equity to total capitalization was 57%, a 400 basis point increase from one year ago.

The increase largely reflects the equity offering we completed last November and the recognition of the one-time benefit from tax reform. We had approximately $1 billion of borrowing capacity available under our credit facilities at fiscal year-end.

On October 4, 2018, we completed successful $600 million 30-year public debt issuance and an all-in interest rate of 4.37%. The proceeds were used to pay down outstanding commercial paper.

In LIBOR financial reforms for 2018, yesterday, Atmos Energy's Board of Directors approved a 140th consecutive quarterly cash dividend, a way to get into an indicated annual rate for fiscal '19 of $2.10 per share, an 8.2% increase over fiscal 2018.

As we look forward to fiscal 2019, we expect earnings per share to be -- in the range of $4.20 to $4.35 per diluted share and capital spending to range between $1.65 billion and $1.75 billion.

The primary driver for the anticipated increase in capital spending, net income and earnings per share is our continuing acceleration of the spending persistent to replacement and modernization.

We will provide additional detail on our financial outlook for 2019 when we work on our five-year plan through fiscal 2023 at our Investor Meeting in New York next Tuesday, November 13th. That meeting will also be webcast on our website. I would now turn the call over to Mike for some closing remarks..

Thank you, Chris, for that great update. As you can see from our fiscal 2018 results, it was another successful year where we met our financial targets driven by our proactive pipe replacement and system modernization investment. This year was not without its challenges.

The tragic event that occurred in February continues to weigh heavily on our hearts as our leaders and employees continue to dedicate themselves to all aspects of safety.

The unprecedented system performance we experienced in Northwest Dallas further reinforced our strategy of closely monitoring potential threats that may impact integrity of our system and also accelerating the replacement of aging infrastructure.

The effort to replace 24 miles of distribution main and service line serving 2,400 customers in Northwest Dallas, which would normally take one year was completed safely in three weeks. We saw the very best from our employees, our contractor partners and the affected customers during that difficult period.

And we learn new information about our system performance under various environmental operating conditions. With the support of our regulators, we're working to incorporate these findings into our risk models, our policies and our procedures.

As Chris mentioned, during the fourth quarter, we announced plans to further accelerate our pipe replacement activities in our Mid-Tex Division. We're on track to double the work crews dedicated to pipe replacement activity in Dallas by the end of this calendar year.

This increase is in addition to the 40 crews added earlier in the year, following the planned outage. With these additional crews, we intend, among other things, to perform an entire system replacement of a significant portion in Northwest Dallas by the end of 2019 to eliminate cash payment from the Mid-Tex distribution system by 2021.

We are committed to operating safely and reliably, while we continue to modernize our natural gas distribution and transmission system. Across our eight states, in fiscal year 2018, our team completed more than 6,500 capital project, replacing more than 725 miles of distribution pipe, more than 150 miles of transmission pipe and 54,000 service lines.

A significant accomplishment that was in line with expectations for transmission and above our expectations in distribution. Modernization of our system is a long-term effort. They have a proven track record of managing and growing these investments in a measured, safe and responsible manner.

And all of these investments have delivered significant benefits to our customers, our communities, the economy in the states we operate and to our investors. We continue to have the support of our regulators who understand the need to modernize and replace aging infrastructure.

We have mechanisms in place that enable us to begin recovering on 85% of our capital investments within six months of the test year-end and 99% within 12 months. This enables us to more efficiently deploy capital and generate returns necessary to attract new capital needed to finance our investments.

We have a very strong management team that's supported by an engaged Board of Directors. Last week, we announced that Sean Donohue and Diana Walters have been elected to our Board of Directors, effective November 1, 2018.

Sean and Di bring deep experience in the management of public and private enterprises, will provide great value and thought diversity to our Board. We look forward to their leadership. And, yesterday, we announced the promotion of Kevin Akers to Executive Vice President.

In addition to his current responsibilities, which include pipeline safety, customer service, supply chain management, facilities and our business process and chain management area, he'll now assume responsibility over the company's pipeline and storage operations through Atmos Pipeline-Texas that previously reported to me.

Kevin's broad company and industry experience will serve him well as a member of our management team. He continues to expand his involvement in the development and execution of the company's operating and financial strategies. Next week, at our Investor Meeting, we'll present our updated five-year plans for fiscal 2023.

Joining me will be Kevin as well as David Park, our Senior Vice President of Utility Operations and Chris Forsythe. Our strategy remains unchanged. We remain committed to meeting our goal of being updated natural gas provider.

We'll continue to focus our investments on infrastructure modernization, system modification, customer growth and deploying technology that can improve safety, drive efficiencies and support scale. These investments will enhance the value of our rate base, which is expected to slow down our continued earnings per share growth of 6% to 8% per year.

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

They come to work every day focused on safety, while providing excellent customer service, closely monitoring and maintaining our systems and executing our capital spending program. We appreciate your interest in Atmos Energy. We appreciate your time this morning. And now, we'll take any questions that you may have.

Dana?.

Operator:.

Great. Thank you, Dana. Thank you, everyone, for joining us this morning. A recording of this call is available for replay on our website through February 6, 2019. We appreciate your interest in Atmos Energy, and thank you for joining us. Goodbye..