Atmos Energy Corp (ATO)

• Atmos Energy continues to see steady inquiries from large industrial customers across various sectors—including metals, healthcare, and distilling—driving growth on the industrial side. -
• There is potential upside from new large customers, such as a potential 2.3 gigawatt combined cycle plant in Northern Louisiana, which is not yet included in their plan, indicating possible additional growth opportunities. -
• The company plans to invest an incremental $15 billion over the next 5 years, with a balanced financing approach of 50% equity and 50% long-term debt, aiming to maintain the strength of their balance sheet while supporting their increased capital expenditure program. -

• Uncertainty in securing large new customers: Executives could not provide specifics about a potential large 2.3 gigawatt combined cycle natural gas customer in Northern Louisiana, indicating possible delays or challenges in securing new large-scale industrial clients. - , -
• Increased operating expenses: The projected increase in O&M expenses from 3.5% to 4% annually is driven by higher compliance-related spending, system monitoring, and employee costs, which could pressure profit margins. - , -
• Potential rise in bad debt expenses: Although the company anticipates bad debt expenses to remain flat over the next five years, there is an acknowledgment that bad debt expense may rise as a function of revenue, posing a risk if economic conditions worsen. -

1. CapEx Increase
   Q: What's driving the higher CapEx plan?
   A: The company is experiencing robust growth with nearly 60,000 new customers added this past fiscal year, consistent with recent years. - This strong growth across residential, commercial, and industrial segments necessitates increased investment to stay ahead of demand. - Additionally, risk models indicate the need for accelerated pipe replacement programs to maintain safety and reliability. - Significant projects on the APT system, including completing Line S-2, WA Loop, and Bethel to Groesbeck, as well as storage enhancements, also contribute to higher capital expenditure. -

2. Financing Strategy
   Q: How will you finance the higher capital plan?
   A: Over the next five years, we have an incremental $15 billion financing assumption. - We'll maintain a strong balance sheet by funding approximately 50% with equity and 50% with long-term debt, spread evenly over the period. - Equity needs will be slightly lower in fiscal '25 and will ramp up in '26 and beyond. - We believe we'll meet our equity requirements through the ATM program and continued issuance of long-term debt. -

3. EPS Growth vs. Rate Base
   Q: Why is EPS growth not matching rate base growth?
   A: While we're projecting 13% to 15% rate base growth, our 6% to 8% EPS growth guidance accounts for factors like equity dilution and increased operating expenses. - We've also raised the O&M CAGR from 3.5% to 4%, which moderates the EPS growth relative to rate base growth. - We approach our plan conservatively, considering global uncertainties, and feel comfortable within this range. -

4. O&M Expense Increase
   Q: What's causing the higher O&M growth to 4%?
   A: Between '24 and '25, there's a step-up due to the SSI rider, with flow-through increasing from roughly $6–7 million in fiscal '24 to $20–25 million in 2025. - We're planning for increased compliance-related spending, including system surveys and real-time monitoring with 16 AMLD units across eight states, as well as additional employee costs to service our growing customer base. - The growth in line locates, driven by infrastructure expansion in Texas, also contributes to higher O&M expenses. -

5. Impact of Waha Spread
   Q: How will the Waha spread affect next year's earnings?
   A: We have a new rider revenue benchmark of approximately $107 million for this year. - While spreads have moderated since the summer, we expect them to normalize moving forward. - Most demand on APT is for LDC customers, so any additional activities will be during off-peak periods. - We'll continue to monitor weather impacts but are planning based on normalized conditions. -

6. Interest Expense Guidance
   Q: Why is interest expense decreasing despite higher debt?
   A: The decrease is due to higher AFUDC (Allowance for Funds Used During Construction) or capitalized interest as our spending increases. - This raises the portion of capitalized interest, reducing net interest expense. - Our all-in weighted average cost of debt remains relatively flat at 4.1%, ticking up very slightly year-over-year. -

7. Potential Large Customer
   Q: Any details on the large Louisiana customer?
   A: We can't share specifics about the potential 2.3 GW combined cycle customer in Northern Louisiana at this time. - We generally don't discuss such projects until we have certainty around contractual obligations. - However, we continue to see steady inquiries from various industrial sectors across our territory. -

8. Bad Debt Expense Assumptions
   Q: What's your assumption for bad debt expense?
   A: We're anticipating bad debt expense to be fairly flat year-over-year in the five-year plan. - After adjusting for changes in recording uncollectible accounts in Mississippi, we're normalizing to pre-pandemic levels. - While it may rise slightly with revenue growth, our comprehensive collection strategies should mitigate significant increases. -

9. Customer Growth in Texas
   Q: What's assumed for Texas customer growth?
   A: We've assumed a growth rate consistent with recent trends over the past few years. - Continued residential growth, along with the subsequent commercial impact, is expected to persist in our five-year plan. -

10. O&M Expense Timing
    Q: Is the 4% O&M growth lumpy over time?
    A: Year-over-year, the 4% O&M growth is expected to be fairly steady. - There might be some quarterly variations as we adjust work schedules to address system needs, but overall, we anticipate consistent annual growth. -

Annual guidance for FY 2025:

• Earnings Per Share (EPS): $7.05 to $7.25 - (raised from $6.70 to $6.80 - )
• Capital Spending: Approximately $3.7 billion - (raised from approximately $3.1 billion - )
• Annual Dividend: $3.48 - (no prior guidance)
• O&M Expense: $840 million to $860 million - (raised from $800 million to $820 million - )
• 5-Year Plan to Fiscal 2029: Approximately $24 billion of capital investment - (no prior guidance)
• Long-term Financing Plan: Approximately $15 billion - (no prior guidance)