Greetings, and welcome to Atmos Energy's Third Quarter 2022 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Meziere, Vice President of Investor Relations and Treasurer. Please go ahead..

Thank you, Brock. Good morning, everyone, and thank you for joining our fiscal 2022 third quarter earnings call. With me today are Kevin Akers, President and Chief Executive Officer; and Chris Forsythe, Senior Vice President and Chief Financial Officer.

Our earnings release and conference call slide presentation, which we will reference in our prepared remarks, are available at atmosenergy.com under the Investor Relations tab.

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 33 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsythe, our Senior VP and CFO.

Chris?.

Thanks, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy.

Fiscal '22 third quarter net income increased $129 million or $0.92 per diluted share -- $102 million, sorry, $0.78 per diluted share in the prior year quarter and fiscal year-to-date net income was $703 million or $5.12 per diluted share compared with net income of $617 million or $4.77 per diluted share in the prior year period.

Slides 5 and 6 provide operating income highlights for each of our segments for the 3 and 9 months ended June 30. I will focus on some of the more significant drivers underlying our fiscal year-to-date performance.

Rate increases in both our operating segments totaled $172 million, primarily driven by increased safety and reliability spending and system expansion. Approximately 71% of these rate adjustments were recognized in our distribution segment.

We continue to see robust customer growth in our distribution segment, which increased operating income by an additional $13 million. This growth offset a $13 million decrease in consumption, most of which occurred during assessed in the second fiscal quarter.

We did not see the same trend continuing in the third fiscal quarter as consumption increased by about $3 million quarter-over-quarter.

Additionally, we experienced a $25 million increase in consolidated O&M expense primarily driven by increased pipeline maintenance activities and employee-related costs compared with the prior year, partially offset by lower bad debt expense.

Finally, reductions in fiscal '22 revenue associated with the refund of excess deferred tax liabilities reduced operating income by $103 million. This reduction was substantially offset by lower income tax expense.

Consolidated capital spending increased 27% or $368 million to $1.7 billion, with 87% dedicated to improving the safety and reliability of our system. This increase primarily reflects increased system modernization, system integrity and system expansion spending to meet the growing natural gas demand in our service territories.

We remain on track to spend $2.4 billion to $2.5 billion in capital expenditures this fiscal year. On the regulatory front, we have completed approximately $216 million of annualized regulatory outcomes excluding refunds of excess deferred tax liabilities.

Of this amount, we have implemented $202 million, and we implemented the remainder on September 1. Additionally, we had about $127 million in progress. Slides 15 through 32 provide additional detail around the regulatory activities. Our fiscal third quarter financing activities were focused on pricing our fiscal '23 equity needs.

During the quarter, we executed 4 sales agreements under our ATM program for approximately 2.9 million shares for $337 million. And we sold agreements on 731,000 shares for approximately $81 million in net proceeds.

As of June 30, we have approximately $700 million of net proceeds available under existing forward sale agreement, which satisfies substantially all of our anticipated equity needs through fiscal '23.

We finished the third quarter with an equity capitalization of 61.7%, excluding the $2.2 billion of interim winter storm financing and with total liquidity of approximately $3.5 billion. Additional details for our financing activities, including our equity forward arrangements as well as our financial profile on Slides 8 through 11.

Turning now to securitization. During the third quarter, we continued to make progress on that front. In Texas, the Texas Public Financing Authority continues its work on the statewide securitization program, and we believe it is on track to be completed within the next few months.

As a reminder, once we receive the securitization funds, we will fully retire the $2.2 billion in interim Winter Storm financing. In Kansas, during the third quarter, we filed our application for a financing order. Based on the approved procedural schedule, we anticipate receiving the financing order during our fiscal '23 first quarter.

In closing, our fiscal year-to-date performance was in line with our expectations and supports the reaffirmation of our fiscal '22 earnings per share guidance in the range of $5.50 to $5.60 per diluted share. Slides 13 and 14 provide additional details around our guidance. The ranges included in those pages have not changed since the last quarter.

However, we do anticipate our O&M interest expense to be at the higher end of the ranges provided. Thank you for your time today. I'll now turn the call over to Kevin for his update and some closing remarks.

Kevin?.

Thank you, Chris. Good morning, everyone, and thank you for joining us today. The fiscal year-to-date results, Chris just shared reflect the continued focus on our vision of being the safest provider of natural gas services.

And supporting that vision of our 4,700 dedicated employees executing our safety and reliability investment strategy and our prudent regulatory and financing strategies. These strategies, combined with a strong portfolio of assets will continue to support our ability to grow earnings per share and dividends 6% to 8% annually through fiscal 2026.

We continue to see robust growth in demand for natural gas in our service territories. During the 12-month period ended June 30, 2022, we added nearly 59,000 new residential customers which represents a 1.8% increase.

And during the third quarter of this year, we added 13 new industrial customers that have an expected annual natural gas usage of 5 Bcf when they are fully operational. Fiscal year-to-date, we have added 28 new industrial customers that have an expected annual natural gas usage of 10 Bcf when they are fully operational.

As you heard me say before, on a volumetric basis, that 10 Bcf of annual industrial customer usage is equivalent to adding 170,000 residential customers.

Last month, we released our most recent corporate responsibility and sustainability report, which illustrates our environmental, social and governance strategy focused on reducing our Scope 1, 2 and 3 emissions and environmental impact from operations in the 5 key areas of operations, fleet, facilities, gas supply and customers.

The report also summarizes the commitments as well as the progress made towards executing that strategy during fiscal 2021 and early fiscal 2022. I wanted to comment on one of the exciting highlights in the corporate responsibility report. That is our Zero Net Energy Homes initiative.

By partnering with local Habitat for Humanity organizations in each of our 8 states, we are providing families with Zero Net Energy Homes that use high-efficiency natural gas appliances, rooftop solar panels and insulation to produce more energy than they consume over the course of the year all in a cost-effective manner.

Again, as you've heard us mention before, we've completed our first Zero Net Energy Home in Evans, Colorado in September of 2021. And during the third quarter of this year, we completed a second Zero Net Energy Home in Taylor, Texas located just north of Austin.

Construction is underway on 3 additional Zero Net Energy Homes in Dallas, one in Jackson, Mississippi, one in Owensboro, Kentucky, and all these are scheduled for completion by November of this year.

Additionally, groundbreaking is scheduled later this calendar year for an additional 5 Zero Net Energy homes, one in Dublin, Virginia, one in Colombia, Tennessee and 3 in Lubbock, Texas.

These homes provide families with a comfortable natural gas home that demonstrates the value and vital role natural gas plays in helping customers reduce their carbon footprint in a cost-effective manner.

Our fiscal year performance and participation in community projects such as these as our Zero Net Energy homes, reflect the commitment, dedication, focus and effort of our 4,700 Atmos Energy employees as they see a vital role in our 1,400 communities by safely delivering reliable, efficient and abundant natural gas to homes, businesses and industries to fuel our energy needs now and in the future.

We appreciate your time this morning, and now we'll open the call for questions..

[Operator Instructions]. Our first question today is from Julien Dumoulin-Smith of Bank of America..

It's Kody Clark on for Julien. So first, wondering if you can walk us through the main drivers for the remainder of the year. It seems like you're well ahead based on year-to-date results, rate increases for the remainder of the year and your updated expectations on O&M and interest.

I guess I'm just trying to get a better understanding of your expectations within that $550 million to $560 million range..

You muted there a little bit.

But if I'm understanding correctly, you're looking for the main drivers for the remainder of the fiscal year to try to give you some color around where we might fall within the guidance range?.

That's right. I'm sorry about that. Hopefully, you can hear me better now..

Yes, much better now. Thank you. Yes. I mean, you've touched on a couple of them. The main drivers again on the O&M front, we have some compliance work that we're doing some additional system integrity work. The timing may shift between September or in October, just based on when the work is performed. We're also monitoring our bad debt expense levels.

This is our kind of our big collection season, although the bad debt expense is down year-over-year. Typically, the fourth quarter -- our fourth fiscal quarter is a time where we have increased collection activities, we're kind of monitoring that as well.

And then finally, on the interest expense front, we do have the floating rate note as a component of the interim Winter Storm financing and prices have increased somewhat over the last fiscal year, which is driving our interest expense a little bit higher.

And that could potentially tick up once the rates have reset later here in the fourth fiscal quarter. So those are some of the things that we're monitoring in terms of the guidance range.

I would say at this point, where we ended the fiscal quarter or on a year-to-date basis, we were in line with our expectations, and we stand behind the guidance that we put out today..

Understood. Okay. And as we look toward FY '23, curious if you can opine on how you see inflation cascading through your O&M budget and capital plan.

What sort of trends are you expecting into next year? And any mitigating measures that you're thinking about?.

Yes. Kody, I'll start off, and then Chris can jump in there. As we've talked about before, a lot of our contracts that we have in place have been refreshed recently with our contractors and our vendors. A lot of our large projects we do, whether they're on the med tech side or the APT side, our bid projects there.

We feel good about how those have been coming in. As Chris said, we continue to work on our integrity management and compliance projects. We think those are all in good standing.

And on the procurement front, we -- as we talked about before, we try to run well ahead to make sure we have enough inventory on hand to complete and stay ahead of our compliance and pipeline replacement work. Our team tries to keep about a 6-month inventory on hand and may even be looking to push that out towards the 9-month level.

We have all the pipe either in the ground or on the ground to complete our 2022 projects. We have the pipe in the works right now for '23 and are looking for material out into the '24 period.

So as you can see, we're taking advantage when we can to make sure we've got the best pricing that our materials are available, and we can continue to move forward at the best and most efficient manner..

Yes. And Kevin, I'll add to that. I mean you spot on with just the keeping up annually with the increases on the O&M front. But I'll also comment on the treasury side as well.

I mean our team has done an excellent job trying to get ahead of rising interest rates, with the exception of the interim Winter Storm financing, which we will take out once the securitization funds are received that we have no floating rate debt.

We have executed nearly $2 billion in forward starting interest rate swaps on future planned debt issuances beyond fiscal 2022 at very attractive rates, and we've done that here over the last year or so. And we're really well positioned.

When you look at our overall weighted average cost of debt today, it's at 3.8%, which is very beneficial for our customers. And finally, we don't have any significant near-term refinancing needs. Our most -- I guess the most current one that's out there right now is about $500 million due in 2027.

So from a balance sheet and financing perspective, we're also have taken advantage over the last year or so, we're trying to lock in some of the lower rates for the benefit of the customers, which also helps mitigate the impact on the customer bill..

Yes. Kody, just to finish that off. And again, some of the same things, tools that we had in our toolkit, if you will, as we were entering and coming through the pandemic are still there for us. We haven't started back a lot of travel. We're going to the most sense of urgency meetings, those sort of things still taking advantage of teams.

So everything that we had in our toolkit during the pandemic, we continue to have today as well as I'll just again mention our ability to move projects forward and back because we are not a just-in-time compliance company. We try and run ahead of that. So that gives us some flexibility as well..

The next question is from Insoo Kim of Goldman Sachs..

First question, Kevin, you were talking about the industrial customers and the additions this quarter and for the year.

First, can you just give a little bit more color on the mix of the types of the industrial customers? And from a pace perspective of these additions? Is this a little bit faster than what you had baked in? Just trying to get a sense of which industries are -- you're seeing most growth and what type of potential capital opportunities may exist in the future for you guys?.

Yes. Sure. Just before we get into that, again, our service story is extremely blessed. We have exceptional leadership at the city, the state level there, great chambers of commerce, great economic development partners in each of our states. And so we have a well-diversified industrial footprint out there.

For example, in a couple of our divisions, we've seen the addition of hydroponic greenhouse facilities, which are large consumers of natural gas. We've seen the location of the distilling industry, both new facilities and expansion of distilling facilities out there. We've seen an EV battery manufacturing plant located on our facilities.

We've seen concrete and asphalt facilities, expansions of colleges and universities. So as well as some metals, aluminum, steel, smaller plants and then expansions of some existing ones as well. So as you can see there, it's a variety of everything across the board there, which is good for a local economy.

And the thing that comes along with these expansions or new additions, as you know, is the jobs, the amount of jobs that this supports and brings in the community, which means rooftops and commercial load as well..

Got it. That's definitely good color. Second one, The Inflation Reduction Act, obviously, for the electric industry, a lot of initial thoughts there. Just for you, as it relates to that bill, just curious on your overall thoughts on what potential opportunities or challenges could exist.

For example, I'm thinking of the RNG side, obviously, you're not in the upstream side of things, but how does that fit takes place? How has that changed? Your thinking there and then just from a -- curious from a messing tax perspective, does that impact your pipeline business at all?.

Okay. Yes. There's a lot packed into that question. So let me first start with, we're still reviewing, going through all of the detail that's laid out in the bill. And as you know, the bill still got a long way to go through the legislative process. And could be altered one way or the other as it makes its way through.

But we're going to stay very close to the process and stay close to the details to see what potential upside exist for us out there. However, I will say it is good to see Senator Manchin's comments that this bill is not arbitrarily shut off abundant fossil fuels, I think, is his quote.

Then in a recent article I saw some time from last year, Senator Manchin indicated that natural gas must be included in any clean energy program.

So for me, it's good to see and hear that because it's going to take all forms of energy, right? A diversified energy portfolio, as we've been saying for a long time, including natural gas, our nearly 3 million miles of pipeline infrastructure in our underground storage fields, which we have about 120 Bcf here at Atmos Energy.

All that's going to be required to meet the growing demand going forward. And again, it's good to see that realization, the conversation at that level being taken place because a one-sized energy solution, I don't think provides the security viability and affordability that this country needs to meet the growing energy demand that's out there.

So we look forward to continuing to see how the bill evolves. We think we are a good operator, a prudent operator. As you've seen through our pipeline replacement projects, we tightened up our system, we've got a good environmental strategy out there.

So I think we can operate in this legislation, but we're going to continue to monitor and see what the details show as this thing moves forward..

There are no additional questions at this time. I'd like to turn the call back to Dan Meziere for closing remarks..

We appreciate your interest in Atmos Energy, and thank you again for joining us. A recording of this call is available for replay on our website through September 30. Have a great day..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..