Atmos Energy Corp Q2 FY2026 Earnings Call

Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I'd like to welcome everyone to the Atmos Energy Corporation Fiscal 2026 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star in one. I would now like to turn the call over to Jennifer Wernicke, Director of Investor Relations and Assistant Treasurer. You may begin.

Thank you, Kayla. Good morning, everyone, and thank you for joining our fiscal 2026 second quarter earnings call. With me today are Kevin Akers, President and Chief Executive Officer, and Chris Forsyth, 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 29 and are more fully described in our SEC filings with that I will turn the call over to Kevin Akers our president and CEO Kevin thank you Jennifer and good morning everyone we appreciate your interest in Atmos energy yesterday we reported year-to-date fiscal 26 net income of nine hundred eighty five million dollars or five dollars ninety two cents per diluted share for shared guidance range to eight dollars forty cents to eight dollars fifty cents our capital Expenditures for the first half of the fiscal year totaled $2 billion, with over 89% of those investments focused on enhancing the safety and reliability of our distribution, transmission, and underground storage service territories. We continue to see steady customer growth for the 12 months ending March 31st, 2026. We added over 51,000 new customers, with over 39,000 of those new customers located here in Texas. And during the second quarter, we added over 800 commercial customers and four new industrial customers. This continued demand from all customer classes demonstrates the value and vital role natural gas plays in economic development across our service territory. In APT, we continue to work to enhance the safety, reliability, versatility, and supply diversification of our system, system, as well as support the continued growth we are seeing in the local distribution companies behind APT's system. During the second quarter, we completed Phase 2 of the Line WA project, approximately 44 miles of 36-inch pipeline in this area of the DFW Metroplex. Additionally, APT enhanced supply optionality, reliability, and system versatility with the completion of five interconnect projects and adding nearly 100,000 MCF a day of additional natural gas supply to the APT system. These investments further enhance APT's ability to serve the LDC customers behind their city gates. These LDC customers also benefit from APT's Rider Rev Tariff which shares approximately 75% of APT's other revenue build that is above a specified benchmark. As a reminder, these revenues vary from year to year based upon available capacity on our pipeline and natural gas pricing dynamics in Texas. Over the last three years, these customers have received approximately $150 million in total as credit from the Rider-Rev Terrace. In a few minutes, natural gas pricing dynamics have positively impacted APT's other revenue build in the first half of fiscal 2026 and are expected to favorably impact our financial results for the remainder of the fiscal year. Our customer support associates and service technicians continue to provide exceptional customer service, achieving customer satisfaction ratings of 97% for the first six months of the fiscal year. Truly outstanding work by this team. Additionally, during the first half of the fiscal year, our customer advocacy team helped over 33,000 customers receive approximately $9.5 million in funding assistance. And recently, we were named to the Forbes list of America's Best Large Employers, ranking as one of the top 100 employers overall and placing second among all utilities. This is the sixth consecutive year Atmos Energy has been named to this list. This recognition reflects the continued dedication, focus, and effort of all Atmos Energy employees to safely deliver reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. Their commitment has us well positioned for the remainder of the fiscal year. Now I'll turn the call over to Chris for his update.

Thank you, Kevin, and thank you to everyone for joining us this morning. As Kevin mentioned, earnings to share for the first six months of the fiscal year was $5.92, which represents a 12.5% increase over the prior year period. Our year-to-date results include $94 million, or 43 cents, from the impact of Texas House Bill 4384. Of this amount, $44 million was recognized in our distribution segment, and the remaining $50 million was recognized at APT. During the second quarter, the Texas Railroad Commission completed its final rulemaking to codified Texas House Bill 4384 into Rule 77102. As you know, this rulemaking reduces lag in Texas by permitting gas utilities to defer post and service carrying costs, depreciation, and ad-alarm taxes associated with non-eligible Rule 8209 capital investments, such as new customer growth and system expansion. Since adopting Rule 77102 in late Fiscal 25, we have been presenting the deferral as a reduction to interest expense, consistent with Texas Rule 8209. With the new rule now final, we have determined it is most appropriate to present the deferral of post-in service carrying costs in the income statement line items where the incur costs are classified. O&M, in this updated presentation, has been reflected in our fiscal second quarter and fiscal year-to-date results, which reduced reported O&M for the first six months of the fiscal year by $41 million. dollars our unit date performance was influenced by several additional factors rate increases in both of our operating segments total 171 million dollars operating income increased by an additional 32 million dollars due to residential commercial customer growth and increased customer load finally APT through system revenues net of rider rev increased about 16 million dollars or eight cents substantially all of this increase reflected higher spreads realized during fiscal 26 and compared with Fiscal 25. During the first six months of Fiscal 26, the spreads we captured averaged $4.35 compared to $1.80 in the prior year period, reflecting rising associated with gas reduction, constrained takeaway capacity, and lower demand due to unseasonally warm weather during this past winter heating season. Excluding the impact of Rule 77102 deferrals, consolidated O&M increased $27 million, reflecting higher employee compliance and safety-related spending in our distribution segments and higher maintenance spending at APT. From a regulatory perspective, since the beginning of the fiscal year, we have implemented $136 million in annualized operating income increases in our distribution segments. Currently, we have 13 seeking nearly $600 million in annualized operating income increases. Approximately 40% of this amount, primarily during our third, the largest filing we expect to implement during the second half of the fiscal year, APT's grit filing seeking $112 million in annualized operating income increases, is scheduled to be considered by the Texas Rural Commission next Tuesday, May 12th. Our equity capitalization as of March 31st was 61%, and we did not have any short-term debt outstanding. That provides $3.1 billion in total liquidity. At quarter end, we had $4.1 billion in available liquidity to support our operations. This amount includes approximately $890 million in net proceeds available under existing forward sale agreements, which is expected to satisfy the remainder of our anticipated fiscal 26 equity needs and a portion of our anticipated equity needs. As we reported last night, we have increased our fiscal 26 earned $8.15 to $8.35 to a new range of $8.40 to $8.50. We expect the remaining contribution to Fiscal 26 earnings per share to recognize somewhat evenly by quarter in the back half of the fiscal year. Two key items are driving the increase in our Fiscal 26 guidance. First, our guidance reflects our expectations for the performance of APTs through system business for the second half of the fiscal year. As we've mentioned before, going into a fiscal year, we base our assumptions for this line of APT's business, assuming revenues in line with Oracle norms for available capacity on our system and pricing. Although we have recently seen some modest improvement at Waha, we anticipate natural gas pricing in the Permian will remain challenging for the remainder of our fiscal year. As I mentioned earlier, this part of ATT's business added $0.08 period over period. We currently anticipate that ATT's through-system business will add an additional $0.08 to $0.12 for our Fiscal 26 results during the second half of the fiscal year. Secondly, with final rulemaking completed and improved visibility into the timing of capital spending in Texas for remainder of the fiscal year, we believe the impact of implementing Rule 77102 will be higher than originally planned. We estimate this impact will range from $155 million to $165 million for the entire fiscal year, including the deferral of incurred post-in-service caring costs, or O&M to be in the range of $865 million to $885 million. We have reflected the estimated impact of rule 77102 deferrals on in our O&M guidance however we anticipate this decrease be substantially offset by higher system monitoring compliance employee costs since being in a new range of 155 million to 160 million dollars this increase is solely due to the reclassific of interest into O&M that I mentioned earlier finally we remain on track to spend approximately 4.2 billion dollars in capital expenditures for fiscal 26 we appreciate your time this morning and your interest in Madness Energy. We'll now open up the call.

At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. Your first question comes from the line of Julian Demolian-Smith with Jeffries. Your line is open.

Hi, good morning team. It's Paul Zimbardo on for Julian. Thanks for taking the time.

Good morning.

You know, thank you. The first I had was Just on the dividend increase, like roughly 15 percent, again, quite impressive and better than where you've been trending in the past. Just any thoughts on kind of how is sustainable? Do you intend to kind of keep increasing above trend or just overall thoughts on the dividend perspective would be useful?

Yeah, I think we've stated for a while now that we're going to grow the earnings per share at a 6% to 8% range and commensurally grow the dividend. And that's where we're going to continue to go as we move forward.

Yeah, as a reminder, that 15% year over year is reflective of the dividend being rebased in addition to rebasing the earnings per share because of the expected impact from Texas Rule 77102.

Okay, so kind of converging back to where you were before. after the rebase okay yeah yeah and and then the other was just uh could you unpack a little bit more i know you give some detail on the kind of the shift between o m and interest expense um if you could give a little more details and just confirming that is kind of a basically a one-for-one change not a net earnings impact there correct it is not a net earnings impact Act is a reclassification in how we present the deferral of the post and the incurred post and service at the end of the day.

So originally we had all of that in the interest expense line item, final rulemaking. We looked at the proper classification of that, you know, incurred post and service carrying costs reflects all costs associated with the gas plant investment that has been that's subject to the rulemaking that has not yet been collected in rates that includes O&M interest and other costs to be elected and to present that deferral in the line under the income statement where the costs were originally incurred.

Okay, no, that does make sense. And then if I can sneak in the last one quick, you mentioned that there's been a pretty dramatic move in Waha. Just any way that you would frame that kind of beyond 2026 for customers?

No, I mean, obviously, we don't have a crystal ball out there. We'll continue to watch what happens over the next six months. We're not even into the real heat here in Texas, hadn't kicked in yet as well. Some moderation from some of the historic hives at Waha and the basis differential. So we're going to continue to monitor as we go through the next six months. We'll keep you updated on these calls as we move forward.

Thank you very much, Tim.

Thank you.

And your next question comes from the line of Richard Sunderland with Truist Securities. Your line is open.

Hey, good morning. Thank you for the time today.

Good morning. How are you?

Great. Thank you. Turning to the guidance raise, I know you parsed two different pieces there. How do you think about that as a base for growth going forward? Obviously, that um clarification on rule making for texas 77102 you know sounds like a new long-term view but is um you know that 840 to 850 a good clean base for the 68 percent yeah at this point we think that's a pretty good base uh to uh to think about fiscal 27 beyond as a launch point great thank you for that and then um on the atm i think if i'm reading the disclosures correctly didn't price anything on the quarter? I know you're a little bit ahead with having part of 27 address, but how are you thinking about activity there? Was there any hang up on the quarter specifically and just your timing overall of ATM activity?

No, on the ATM activity, you're correct. We didn't price anything during the second quarter. As you mentioned, we were fully priced for fiscal 26. Got a pretty good portion already established for fiscal 27. So we just wanted to kind of see what the market is doing. As you know, there's a lot of volatility in the second quarter with geopolitical events and economic news and whatnot. So we decided to keep our powder dry for the quarter, but we'll evaluate as we move forward pricing opportunities so we can get ahead, further ahead on fiscal 27's equity needs at the right time.

Great. Thanks for all that.

Thank you.

Again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Ryan Levine with Citi. Your line is open.

Good morning. Thanks for taking my questions. I appreciate the disclosure around the commodity price movements in Waha. If you were going to break out what the earnings contribution was this quarter and any early indications of what you were seeing last month?

Breaking out the earnings for the quarter on just the APT through system business?

Correct.

Well, as I said, I looked at more on a year-over-year basis because we really just look at our performance in totality on a full fiscal year basis. And that was $16 million for about $0.08 year-over-year.

Okay. And given what we saw last month with the monthly benefit be trending higher given some of the commodity spread movements that we've seen well as I mentioned kind of in wrapping up my comments around the guidance we're anticipating another 8 to 12 cents in the second half this fiscal year which contemplates the activity you saw in the month of April great and then lastly just in terms of the Dallas-Forthworth area growth dynamics, what are you seeing on the ground in terms of kind of just customer growth and expansion of volumes across your footprint?

Again, as we talked about in my opening remarks, of the 53,000 or so we added for the last 12 months ending March, about 39,000 plus or so of that was here in Texas. So, again, we continue to see good growth across all areas, good residential growth across Texas. And, again, on our opening remarks there, good commercial growth as well with what we've added year to date. And the industrial side continues to show good positive results as well across the footprint, adding new industrial accounts, Kentucky, Tennessee, Virginia area.

Appreciate the time.

Thank you.

And your next question comes from the line of Adita Gandhi with Wolf Research. Your line is open.

Hi. Good morning. Thank you for taking my questions. Good morning. I wanted to start on your comment about 840 to 850, the updated guidance range being a good base or launch back for 6% to 8% growth 2027 and beyond. Just can you maybe speak to how you're thinking about APD spreads, you know, maybe normalizing when you get back out to 2027 and how we should think about that impact in 27 and beyond? Is that sort of contemplated within circular 6 to 8 percent growth for you off of the updated guidance range?

Yeah, at this point, I would encourage us to let's get through the next six months and just see what the world brings. So again, we've seen where the spreads have been the previous six months. We've got a short window into what it looks like here in the next few weeks, but again, we haven't even gotten into the heating season yet here, so we're going to let the market move through the next six months.

We'll see what it presents itself, and as we get closer to the end of 26 and we're ready to talk about 27, we'll let you know what we think about the market and where the market currently stands and how we incorporate that into 27 and forward understood thank you and uh my second question is regarding um your comment about uh the benefit from the texas legislation uh now the final rule making being higher than originally planned um sort of in that 155 to 165 million range for uh fiscal year 26. can you one clarify is that a pre-tax or post-tax amount and and it seems uh significantly higher than um you know the the original sort of maybe 40 cent annual

run rate that you pointed to um how should we think about uh that benefit sort of beyond 26 should we see a similar maybe even growing benefit as your capital plan grows in the altos yeah so to clarify the 155 to 165 amount impact from 77102 for the full fiscal year is a pre-tax number um and as i mentioned earlier um you know kind of going into the fiscal year you know the rule was fairly new when we were establishing our budget and guidance uh there was certainly rule making that was going on that actually modified the rule a little bit from our original thinking so we've got a better handle on that going forward now also visibility and our spending as i mentioned so you know this is basically as we talked about at the beginning of the fiscal year a rebasing year because we're now layering in the impact of the new rule to all of APT spending and the remainder of the distribution spending in Texas that didn't qualify under Rule 8209. So going forward, we are still guiding in that 6 to 8 percent off of, as you mentioned earlier, a new range of 840 to 850. So the impact in our five-year guidance is reflective of that as well. So we feel confidence and we're not going to see another rebasing going into fiscal 27. It's going to be more steady state as we move forward.

Got it. Thank you for clarifying that.

And once again, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to see if any further questions enter the queue. And there are no further questions at this time. Jennifer Wernicke, I turn the call back over to you.

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 June 30, 2026. Have a good day.

And this concludes today's conference call. You may now disconnect.