Ladies and gentlemen, thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Atmos Energy Corporation Fiscal Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Dan Meziere. Dan, please go ahead..

Thank you, Aaron. Good morning, everyone, and thank you for joining our fiscal 2023 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 34 and are more fully described in our SEC filings. With that, I will turn the call over to Chris Forsythe, our Senior Vice President and CFO.

Chris?.

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Yesterday, we announced fiscal year-to-date diluted earnings per share of $5.33 compared to $5.12 per diluted share in the prior year period.

Our third quarter and fiscal year-to-date financial results were in line with our expectations and continue to be driven by three key themes. Regulatory outcomes reflecting increased safety and reliability spending, continued strong customer growth and higher O&M spending.

Fiscal '22 and '23 regulatory outcomes in both of our segments increased operating income by approximately $204 million. And higher consumption, residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $27 million.

These increases were partially offset by a $70 million increase in consolidated O&M. Year-to-date, distribution O&M increased $48 million or 12.6%. However, during the third fiscal quarter, the rate of O&M increase in this segment moderated somewhat with O&M increasing approximately 3.5% quarter-over-quarter.

The higher levels of O&M spending continues to be largely driven higher levels of service orders to support growing service territory, primarily in Texas. Fiscal year-to-date, we experienced an 8% increase in the number of [indiscernible] located in Texas and we continue to see higher labor costs for these third-party services.

Additionally, service orders increased 10%, largely driven by customer growth and increased collection activities. The remaining $22 million fiscal year-to-date increase in consolidated O&M incurred in our Pipeline and Storage segment, primarily driven by the timing of in-line inspection work for this segment.

In the prior fiscal year, most network was concentrated in the fourth quarter. In this fiscal year, this work was incurred more regularly throughout the fiscal year. Consolidated capital spending increased 21% or $358 million to $2.1 billion with 86% dedicated to improving the safety and reliability of our system.

This increase primarily reflects higher spending of APT for Line S-2 and Line PC projects designed to enhance the safety, reliability, versatility and supply diversification of our system. Spending in our distribution segment has increased due to higher safety reliability spending and higher spending to support customer growth.

During our third fiscal quarter, we implemented $122 million of annualized regulatory outcomes.

Year-to-date, we have now completed $263 million in annualized regulatory outcomes and we currently have an additional $263 million in annualized outcomes in progress, including $107 million related to our APT general rate case that we filed in May of this year. We currently expect to finalize that case in December of 2023.

Our financial position continues to remain strong. We finished our third fiscal quarter with an equity capitalization of 61.8%, approximately $3.1 billion of liquidity.

This amount includes $590 million of net proceeds available under existing foreign sales agreement that will fully satisfy our anticipated fiscal '23 equity needs in a significant portion of our anticipated fiscal '24 needs.

Additionally, during our third fiscal quarter, we completed our $95 million securitization process in Kansas, again including securitization charge on customer bills effective July 1.

As I previously mentioned, our third quarter and fiscal year-to-date results were in line with our expectations, which gives us the confidence to reaffirm our fiscal '23 guidance in the range of $6 to $6.10.

Additionally, we now expect capital spending to approximate $2.8 billion, largely reflecting higher spending per system expansion in our distribution segment. Thank you for your time today, and I'll 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. Our fiscal year performance reflects the continued dedication of our 4,800 Atmos Energy employees in executing our proven safety and reliability investment strategy.

Through their commitment, focus and effort, we are modernizing our natural gas distribution, transmission and storage systems while safely providing reliable natural gas service to our 3.4 million customers in 1,400 communities across our eight states.

We continue to experience strong customer growth, driven by robust employment trends, particularly in Texas. For the 12 months ended June 30, we added nearly 64,000 new customers with just over 48,000 of those new customers located here in Texas. And according to the Texas Workforce Commission, the State continued its streak of record employment.

For the 12 months ended May 31, the number of employed reached a new record high at nearly 14.4 million, leading the country in number and percentage of jobs added.

Additionally, according to a study by Site Selection Group, the Dallas-Fort Worth Metroplex is projected to add one million people by 2028 to reach nearly 8.5 million people here in the Metroplex. Industrial demand for natural gas in our service territory also remained strong.

During the third quarter, we added 10 new industrial customers with an anticipated annual load of approximately 8 Bcf once they're fully operational. Fiscal year-to-date, we've added 41 new industrial customers with an anticipated annual load of approximately 16 Bcf once they are fully operational.

On a volumetric basis, that 16 Bcf of anticipated load is equivalent to adding nearly 294,000 residential customers. Finally we continued our outreach efforts to energy assistance agencies and customers.

During the first nine months of fiscal year, our Customer Advocacy team and customer support agents helped over 55,000 customers receive about $23 million in funding assistance.

Our continued focus on long-term sustainability, combined with executing our proven investment, regulatory and financing strategy has us positioned well for another successful year in fiscal 2023, and reflects the vital role we play in every community, providing safe, reliable and efficient natural gas service to homes, businesses and industries to fuel our energy needs now and in the future.

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

[Operator Instructions] Our first question is going to come from the line of Richard Sunderland with JPMorgan. Richard, please go ahead..

Hi, good morning.

Can you hear me?.

Yes, good morning..

Yes, we can..

Great. Thank you. Starting with the O&M trends, can you speak to the year-to-date trends relative to the implied 4Q outlook here? There's certainly a pretty stark reversal kind of embedded in the numbers. I know you referenced inspection work, but just curious if there are other timing factors at play.

Also if you've done work to derisk '24, and that's part of the outlook for the balance of the year as well..

Yes. Thank you, Rich. We'll start with '23. Again, a lot of the timing is related to the APT and line section work that I referenced just a couple of minutes ago, and again, more of that work was ratable this year in the first half year, the fiscal year primarily compared to last year. It was more concentrated in the fourth quarter.

As we look forward into fiscal '24, we're still pulling together that five-year plan that we are looking for opportunities to derisk that a little bit in terms of, on the distribution side.

Looking at how we might approach line locate the strategy there, as well as just trying to lock in some longer contracts and some of our service contracts that are third party by design. And so those are some things that we're looking at to try to mitigate some increases going forward..

Got it. Very helpful color there. And then shifting to the APT rate case, curious on any early thoughts on stakeholder engagement, what you're hearing locally.

What is the timing for settlement discussions just procedurally in that case? And any expectations around your ability to reach settlement?.

Yes, Richard, this is Kevin. I'll start out. We're right on pace with the procedural schedule as it's outlined there. We're still continuing to get data requests. We're responding to those.

So at this point, if you look at the procedural schedule, we feel like we're on track to get an order some time toward the end of the calendar year in that December time frame..

And then just high-level thoughts on ability to reach a settlement here? Is that something that's embedded in the plan? Anything you could say on that front would be helpful..

No. Again, we're still continuing to answer questions at this point. We'll see how we progress over the next few weeks or so. But at this point, again, I think we're on track with the outlined procedural schedule..

Great. I'll leave it there. Thank you for the time today..

Thank you..

Thank you..

[Operator Instructions] Our next question is from Ryan Levine with Citi. Ryan, please go ahead..

Hi, everybody. I guess a couple on O&M costs. I appreciate the comments already made, but on a go-forward basis, should we be expecting the seasonality of operating costs to be more like this year or prior years? And kind of what's driving some of the change in cadence..

Yes, Ryan. I think as you think about on a go forward, we certainly had anticipated going into '23, some of the inflationary costs. We knew we were going to have some growth. But if you look at the O&M was driven on a line locating, as Chris mentioned before. I would certainly anticipate that to continue.

But I think we've got a good outlook on that now on where we stand on number of locates, type of other O&M expenses. As Chris said, as we move to finalize our '24 plan and look forward from that..

Yes. The other thing, too, Ryan, I'll add is that a lot of this timing is just based upon the availability of the contractors to do the work. I've kind of talked about a little bit with APT work last year. We had a lot of work in the fourth quarter because the contractors are on site. They are working with us.

We decided to go ahead and move into the first and second quarter since they're already engaged with us rather than releasing them and have them come back six months later. So we also have to just work around the needs of the system, the timing of the system.

It depends on what we might do on construction work on certain segments of the system, which could influence the timing. I've also referenced service orders.

A lot of those are difficult to forecast, but service orders generally related to particularly this last year, more calling into the customer contact center because of high bills, given the higher prices we experienced back in the winter heating season.

Difficult to predict that, that will reoccur in the first or second quarter as well as some of our disconnection activities.

That's why we manage to a full fiscal year in terms of guidance because some of those operating conditions are difficult to predict, and we're just responding to the needs of the business with an eye towards accomplishing our fiscal earnings per share targets..

Yes. And I think that's the other point, Ryan, here, as our communities, as you've heard us say, are growing, expanding out where we're working with them on timing of their projects, whether they are infrastructure projects or current [indiscernible].

You've got fiber optic projects out there, you've got road relocations, new road construction, that sort of thing going on. Some of this just cycle throughout the full fiscal year period..

And how much is this change in seasonality of costs that was embedded in that response is really related to the spike in gas prices during this most recent winter opposed to some of the other drivers that you highlighted?.

Yes. I don't know that I would make that kind of direct correlation. I think what Chris was alluding to are some orders for reread, that sort of thing based on bills, but I don't think it's a meaningful percentage of the rest of the overall operational O&M per se..

Okay. And then one, I noticed in your -- with your guidance for the year, you're approaching year-end, at least your fiscal year-end and the effective tax rate this year is supposed to be higher than last year.

Is that from a longer-term planning perspective, are you anticipating that the current effective tax rate is appropriate for future time periods? Or any color you could share around how you're thinking about your tax position?.

Yes, Ryan. The effective tax rate that you see is roughly 11%. That's heavily influenced by the excess of -- the refunds of excess deferred tax liabilities from the TCJA. We're amortizing those over a three to five year period. So that's why we've included in our deck, kind of the marginal effective tax rate of roughly 22.5% to 23.5% per se.

So that you have an idea of really what true tax impacts are if you're modeling your O&M or other types of expenses or revenues. But we do anticipate the GAAP effective tax rate to increase as the excess deferred taxes wind down here over the next couple of years and revert back to that more traditional 22% to 23.5%..

Okay, great. Thank you..

[Operator Instructions] And at this point, it does look like we are good on the questions.

Dan, would you like me to turn it back over to you for closing remarks?.

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

Thank you, Dan. And ladies and gentlemen, that does conclude today's call. Thank you all for joining. You may now disconnect..