Greetings, and welcome to Atmos Energy First Quarter 2019 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Hills, Vice President, Investor Relations..

Thank you, and good morning, everyone, and thank you for joining us for. 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 21 and are more fully described in our SEC filings. Our first speaker is Chris Forsythe, Senior Vice President and CFO at Atmos Energy.

Chris?.

Thank you, Jennifer, and good morning, everyone. We appreciate your interest in Atmos Energy. Yesterday, we reported fiscal 2019 first quarter earnings of $158 million, a $1.38 per diluted share, compared with adjusted earnings of $152 million or $1.40 per diluted share in the prior-year quarter.

Fiscal 2018 adjusted earnings and diluted earnings per share, excluding $152 million, a $1.49 per diluted share benefit as a result of implementing tax reform last year.

Also, yesterday, the board of directors approved the 141st consecutive quarterly cash dividend of $0.525, which represents an indicated annual dividend of $2.10 per share for fiscal 2019, an 8.3% increase over fiscal 2018.

Slides 4 and 5 provided details of the quarter-over-quarter changes to operating income for our distribution and pipeline storage segments. I'll touch on a few of the highlights.

Contribution margin in our distribution segment grows a net 1% or about $4 million, strong consumption driven by colder weather in October and November when most of weather normalization mechanisms were not yet in effect, contributing an incremental $7.7 million.

Weather was 20% colder quarter-over-quarter with most of our service areas experiencing colder-than-normal conditions. Solid customer growth continued, primarily in our Mid-Tex Division, although in the last 12 months, our distribution segment added a net 36,000 customers, which represents a 1.1% net customer growth.

This growth contributed an incremental $3.7 million of contribution margin. The implementation of tax reform into customer bills more than offset rate increases that were implemented in the prior fiscal year and the first quarter, resulting in net $7.3 million decrease in customer rates.

However, this had no material impact to the segment's net income as a result of the corresponding reduction in our effective income tax rate. Operating expenses rose 3.5%. Higher employee-related costs, depreciation and ad valorem tax expenses drove this increase. In our pipeline and storage segment, contribution margin increased about $9 million.

About 2/3 of this increase relates to new rates that were implement approved in the prior fiscal year through APT's 2 GRIP filings. Additionally, stronger transportation margins contributed incremental $3.1 million, net of the impact to -- of our Rider REV mechanism as APT continues to benefit from wider spreads.

The supply and demand dynamics in the Permian basin combined with colder weather drove a 12% increase in transportation volumes. Operating expenses for this segment increased $11 million or almost 20%. This increase is focused on pipeline integrity work and reflects the timing of these activities.

In the current year quarter, APT accelerated some hydrostatic testing that new client provided this fiscal year. In the prior year quarter, pipeline integrity work that had been planned for the first quarter was deferred later into fiscal 2018, resulting in a lower-than-normal expense for that quarter.

Additionally, depreciation and ad valorem taxes grow year-over-year due to last year's capital spending. Consolidated capital spending increased 8.7% to $416 million, about 82% of the spending was dedicated to safety and reliability projects. Colder wet weather in some of our service areas created challenging conditions, which delayed some projects.

However, we benefit from having over 6,000 relatively small projects each year that allow us to quickly reallocate our spending when we face these types of challenges. We remain on track to achieve our capital spending target of $1.65 billion to $1.75 billion for the year.

From the financing perspective, we had a very busy quarter, as we completed $1.35 billion in debt and equity financing. And early October, we completed a successful $600 million, 30-year public debt issuance at an interest of 4.3%. The net proceeds were used to pay down outstanding commercial paper.

In late November, we issued approximately $750 million of equity. The offering included an equity forward arrangement that will remain in place through March of 2020. At contemplation of the offering, we've received approximately $495 million in net proceeds and allocated the remaining $245 million to the forward.

As of December 31, 2018, we had not accessed the net proceeds allocated to forward. At this time, we anticipate the net proceeds from this issuance will satisfy our equity needs for fiscal 2019. Additionally, in November, we filed a new $500 million at-the-market equity issuance program that will support our equity needs beyond fiscal 2019.

As a result of these financing activities, our equity to total capitalization was 59%, and we had no short-term debt at quarter-end. We can consider the $218 million in cash on hand at the end of December, we have approximately $1.8 billion in total equity available to support our capital spending program.

After an exceptionally busy year, in fiscal 2018, we completed our fiscal -- we expect our fiscal 2019 regulatory calendar to return to a more traditional cadence. To date, we've implemented $21 million in annualized regulatory outcomes and have about $38 million in progress.

General rate cases in Kentucky and for about 15% of our Texas customers and annual filings for TransLa service area in Louisiana, the City of Dallas and Tennessee highlight the key filings that are currently in progress.

We continue to implement tax reform into customer bills with completion of our Mississippi and Tennessee annual filings during the first quarter. Virginia, as the last date, we have not yet incorporated the effects of tax reform into our rates, but our general rate case currently in progress will address tax reform.

We're now focused on finalizing the refund periods for our excess deferred taxes. Slide 20 details the progress we have made on tax reform to date. In summary, we're off to a solid start to the fiscal year. We remain on track to meet our 6% to 8% earnings per share growth target.

And yesterday, we reaffirmed our fiscal 2019 earnings per share guidance range of $4.20 to $4.35 per diluted share. I will now turn the call over to Mike, for some closing remarks..

Well, thank you, Chris, for the update on the quarter. And it was a very good quarter, and thank you, for those of you, who are joining us this morning. As you can see from our fiscal first quarter results, we're off to a very good start to the year. We remain on track to meet our investor -- investment spending goals and our earnings growth targets.

The 8.7% increase in capital spending during the first quarter demonstrates our team's consistent, predictable execution of our safety investment strategy.

In order to sustain this strategy for the long term, which includes increasing our capital spending from $9 billion, over the past 10 years, to go in $9 billion to $10 billion over the next 5 years, our team is constantly looking for ways to improve.

In the first quarter, we began rolling out new advanced asset data collection technology to field employees and contractors. During construction, crews will collect GPS locations, material, construction methods, operator qualification data for newly constructed pipeline.

This will transform the process of asset data collection, data verification, project closings and the transfer of that key data to back-end systems that are used to support operations, maintenance, damage prevention, integrity management and our compliance programs.

With thousands of capital projects completed each year, innovations like this that lie at the intersection of emerging technology, business process change and most importantly, our employees, are certainly game changers on our safety journey. This rollout will continue through this year 2019 and also through 2020.

This transformational technology is the one example of the many initiatives underway inside the company to scale our capabilities, capture efficiencies and enable our very talented employees to do what they do best, which is investing in safety and serving our customers and members of the community exceptionally well.

We're also taking huge steps forward in methods of communicating with key stakeholders.

In the first quarter, we implemented interactive project maps for all of our service areas that are displayed on our company's website and show current and recently completed pipe replacement projects, giving our customers and other stakeholders' access to status updates about projects in their communities right down to the street level.

For larger projects, we now develop customized websites, conduct door-to-door visits, send out mailings and use other channels, as needed, to most effectively reach our customers. And we're beginning to publish annual operating reports for our regulators and also community leaders.

And we meet with officials in the cities we serve to keep them informed of our pipe replacement activity. In December, we issued our first corporate responsibility report under the title of an Integrated Annual Report. We also published our first methane emissions report.

Keeping key stakeholders informed, the company actions supporting our long-term commitments to good governance, our employees, customers, the 1,400 communities we serve and the environment. I want to share some of the highlights from these reports. We adhere to strong corporate governance practices including a focus on thought diversity at the board.

Women now hold more than 20% of our board seats, and 3 or 4 directors who joined the board since 2016 are female or minorities. And this year, the board will further strengthen corporate governance by forming a new board committee to oversee the company's corporate responsibility and sustainability.

And our pursuit to be the safest provider of natural gas services, we know that equipping employees with the training tools and support they need to operate safely and contribute at the highest level essential to our success.

Employees received more than 53,000 hours of safety training last year and more than 73,000 hours of hands-on technical training in the state-of-the-art Charles K. Vaughan training center in Plano, which is a site of more than 850,000 hours of training since its opening.

In part due to this training, the OSHA rate of recordable employee injuries has decreased 23% since 2013. Over the past five years, employees also benefited from more than $1 million in higher education assistance received through the company's Robert W. Best Education Assistance Program.

Employees continue to reach new heights in delivering exceptional customer service giving customers more options and convenience when initiating service, calling about a bill or making a payment arrangement.

A new Spanish language account center was implemented in the past quarter as well as intelligent call routing technology that anticipates customers' needs and connects them with the most qualified agents. And our customers tell us they like what they see.

96% of our customers are satisfied or very satisfied with their interactions with our contact center agents and 97% are satisfied or very satisfied with our on-site technicians.

The company contributed $6.1 million to charitable organizations last year and that includes $2.7 million that went to help customers in need to our Energy Assistance Program. We're also working with 400 community support organizations to give low income families access to federal home energy assistance funds.

But I am particularly proud of the contributions our Atmos Energy employees make in the communities, in which they operate. Last year, employees contributed $700,000 during our week of giving campaign and volunteered more than 35,000 hours of their own time to help their community.

Also highlighted in the report is the work our team does to protect the environment, which has always been important to our company, our employees, our customers and the communities. As a founding member of the EPA's Natural Gas STAR Methane Challenge Program, we work proactively to improve efficiency and reduce methane emissions.

Since 2012, we've replaced over 3,500 miles of pipe, and we've decreased total emissions due to the use and loss with natural gas by 13.7% in our system.

Over the next 5 years, we plan to replace between 5,000 and 6,000 miles of pipeline including all remaining cast iron by 2021, 2 years earlier than originally planned and between 200,000 and 300,000 field service lines. This will reduce methane emissions another 10% to 15%.

As we continue to replace infrastructure, we set a goal to reduce our system's methane emissions by 50% by 2035. In addition to pipeline replacement, we're protecting the environment in other ways. In 2018, we completed our 9th LEED-certified service center and we have 4 more underway.

Over 40% of our customers has signed up for electronic billing, one of the highest percentages in the industry, resulting in savings of approximately 152,000 pounds of paper every year. And we partner with municipal solid waste landfill gas producers to transport renewable natural gas to market.

And for safety and to best serve our customers, we review and incorporate state-of-the-art equipment for leaks detection, monitoring and leak repair prioritization, including the use of 11 advanced mobile leak production technology units that are 1,000x more sensitive than traditional technologies.

In closing, as always, I'd like to thank our employees for their outstanding efforts. They strive to find ways to improve every day to deliver safe, reliable, affordable and exceptional natural gas service for the nearly $3.3 million customers 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, closely monitoring and maintaining our system and executing our capital spending program. We appreciate your time this morning. We're off to a good start for the year. And now we'll take any questions you may have..

[Operator Instructions]. Our first question is from Christopher Turnure with JP Morgan..

It was helpful that you quantify the impact of wider basis spreads at APT on the quarter. Certainly, good to see that number.

It's difficult to do, but could you maybe take a crack at talking about how sustainable that might be throughout 2019 and maybe into 2020?.

Chris, good morning, by the way, and thanks for being on and for your question. As we've said in the past, it's difficult to predict really beyond the current quarter. We do know that there is additional pipeline capacity expected to come on into service at the end of calendar year.

And so we would expect that, that would normalize pricing a little bit. And as you know and a lot of our transport opportunities are opportunistic, as we serve primarily our firm supply customers, which would be the LDCs in our -- on system industrials.

And as we get into the summer months, as we saw in the last -- or summer -- last summer, we do an awful lot of maintenance on the pipeline when we're in the off-peak season. So we're not going to get into the prediction for the rest of the year. We're happy we gotten off to a good start and had this opportunity.

And again, as you know and others know, that three quarters of any benefits beyond the Rider REV benchmark flow back to our care of customers, which is -- creates yet another opportunity to keep customers' bills low..

Okay.

So at least for the first quarter, fair to say, that you're running a little bit ahead of maybe the plan that you had introduced back in November?.

Yes..

Yes..

Okay. And then switching gears. I believe, legislation was introduced or at least was being discussed in Texas, to increase oversight of the Railroad Commission.

Could you give us any thoughts you have on that, maybe probability of success there, what that might entail or any other legislation that you're keeping your eyes on this session?.

Yes. Chris, there is -- each legislative session, there is legislation that is advanced. And we engage with those legislators, as we are here in Texas. I think, in Texas, this time, it's gotten a little more publicity.

But, I mean, the starting point is we all share the same objective, which is pipeline safety and also further acceleration or acceleration of our infrastructure modernization and aging infrastructure replacement.

So we don't -- we expect -- we're in discussions right now, trying to find good solutions that are supportive of our strategy and also meet the interest of all other parties. But, again, the general theme is focused on accelerated replacement of infrastructure, which we have been doing and certainly continue to.

And then also more visibility and transparency around leak, as leaks appear and mapping of those leaks in Texas, as you may know, we refile every 6 months a leak report with the Railroad Commission and it provides an awful lot of that information. But I think the net of it is, it's very early in the session right now.

And, I mean, we're pretty confident at this point in time that things will progress under normal pace and not have any significant impact to it..

Our next question is from Charles Fishman with Morningstar Incorporated..

Two questions. First, and it's probably my misunderstanding. I thought, in the Dallas settlement, you had agreed to a 50% equity cap. And yet I notice on Slide 12, you're requesting the 60%.

Is that just -- was that just for that 1 settlement last year? Or I guess, my understanding was that what you were going to use going forward, but, obviously, that's not the case.

Can you talk about that?.

Sure, Charles. This is Chris. Yes. When we reached at the settlement with the City of Dallas last February, we agreed to reduce our ROE down to 9.8% and increase the equity cap up to 58%. So that's where we are. We also had a similar cap with our Mid-Tex and West Texas RRM mechanisms in Texas that we established about a year ago at this time.

So at this point -- and we do have a 15% of our customers, as I mentioned, where we have a stated intent in progress, they're currently at 10.5% and 55% ROE. We are currently preparing to go to Austin, in the first step part of March to have that case heard out at this point. But -- and settlement discussions are still ongoing.

But the lion share of the state, as we've said, at 98 -- 9.8% equity -- or ROE and 58% equity cap..

Okay. But maybe I'm still misunderstanding this. On Slide 12, if I look at the first two filings, one, the filings ones you intent to file. You show an authorized capital structure on the third bullet point on each one of 60% equity. So how does -- why is that 60%? And then it was 58% before..

Right. Yes. The requested capital structure is -- under the law, we had to file based on where we ended the test year-end. So we ended it right at 59.7% with all the financing activities that we had in the quarter. So that will just be a point of discussion when we go through the process.

And we're actually beginning to close the discovery process right now..

So it sounds like the 58% is not really a hard cap, it's subject to discussion at each round?.

Generally, we try to hear the terms, but given where we were at the end of -- at the test year-end, we had to file based on where our equity capitalization was. And remember, City of Dallas is on a 13-month average as well. So it looks a little bit different vis-à-vis at the test year-end of September 30.

So -- and we will get it worked out and the negotiations..

Okay. Second question, I noticed on the queue that regulatory excess deferred taxes, let's say, they were $740 million at the end of your '18 fiscal year. They are now at about $718 million, so a $22 million drop during the quarter. I realize Virginia is not in there yet and I realize every jurisdiction has little different amortization schedule.

But is that, from a modeling standpoint, as an analyst, that was $22 million, maybe $25 million per quarter is how we'll see that liability going down over the next few years? Is that reasonable?.

Yes, that sounds about right. I mean, if you go to Slide 20, if you want to try to get a little bit more details in terms of modeling, we have provided the provisional amortization periods by jurisdiction.

And if you wanted to get into approximation of the excess deferred taxes by jurisdiction, you can kind of do it somewhat pro rata based upon our rate base and then you can use the amortization periods, provided on Slide 20, to the deck, to help with the modeling on that.

Again, it's really difficult right now to -- it's being folded in jurisdiction by jurisdiction. For example, as I mentioned, Mississippi and Tennessee just started, the Tennessee was in mid-October, Mississippi was in the first of November, West Texas and Mid-Tex RRMs were in October, so I understand the modeling could be a little bit challenging.

But I think the information on Slide 20 is ought to give you a pretty good indication of how that's going to flow back. And at the end of the day with -- it's actually fully implemented and embraced, we expect our customers to benefit more than $125 million per year.

So that's inclusive of the 21% rate as well as the flow back of the excess deferred taxes..

I'm probably too lazy to do it jurisdiction by jurisdiction. I guess, I was looking for an easy way out.

But it sounds like if I do like $100 million per year realizing that once we get Virginian in there, that's probably close?.

And Virginia is very small. I -- so if you do the $740 million, it's about $25 million , that may be a good way to start, if you're doing some high-level model..

[Operator Instructions]. Our next question is from Ryan Levine with Citi..

Would you be able to comment on the current labor availability within your service territory? And that's -- how that's evolved over the last few quarters? And if there's any [indiscernible] governor to some of the acceleration of the CapEx programs?.

Yes, I mean, it's a good question and it's something that we've commented around before. We haven't seen a change in the labor market in the last year or so. But it is a constraint for us that we are growing and working with our contractors, so that they can grow their crews.

And big issue is not just finding people, but it's people with appropriate qualification to work on our system safely. I mean, we've kind of baked in what we think they're capable of doing in our estimates in terms of pipe replacement that we're able to complete each year, and that's something that we watch very closely.

But again, we haven't -- it is a constraint. We factored it into our plans. We believe, we have. And we haven't really seen a change in those mark conditions kind of year-over-year. So we're pretty comfortable right now with what we're seeing..

Okay.

And then second question, is there any update that you're able to communicate around the NTSB investigations and the time line for any type of conclusion?.

Really, there is nothing new for us. I mean, we initially expected the factual report, which would be the first piece that would come out to be somewhere in the end of this first calendar quarter or second calendar quarter. But with the government shutdown, we're not sure what the impact that will have on that.

I know they got pretty backed up and there were a number of other investigations that they've had to start up once they got back. So we really don't have any information either way. And -- but, again, the sequence is a factual report typically will come out and then sometime after that would be there safety recommendations..

Okay. So this is considered a nonessential government agency.

So this is safe to assume that no work was done during the shutdown?.

Yes..

There are no more questions at this time. I would like to... go head, Jenn..

Thank you, everyone, for joining us this morning. A recording of this call is available for a replay on our website through May 9, 2019. We appreciate your interest in Atmos Energy, and thank you for joining us. Goodbye..