Atmos Energy - Earnings Call - Q3 2025

Executive Summary

• Atmos Energy delivered a steady Q3 FY25 with modest beats: EPS $1.16 vs $1.146 consensus and revenue $838.8M vs $823.0M consensus, helped by regulatory outcomes, customer growth, and stable APT throughput; management raised FY25 EPS guidance to $7.35–$7.45 from $7.20–$7.30, citing a ~$0.10 uplift from new Texas legislation (HB 4384) effective June 20, 2025.*
• Year-to-date, EPS reached $6.40 on $1.0B net income; capex YTD $2.6B (≈86% on safety/reliability); equity capitalization ~60% and liquidity ~$5.5B, underscoring a strong balance sheet to fund ~$3.7B FY25 capex.
• Regulatory momentum continues: ~$170M in annualized regulatory outcomes implemented in Q3 and $351M YTD (press release cited $321.8M YTD), with ~$229M in progress; timing favors continued 2025–26 earnings visibility.
• Long-term algorithm intact: management reiterated 6–8% annual EPS growth and sees improved cash flow benefiting financing flexibility; $1.7B in existing equity forward proceeds largely covers FY25–26 equity needs.
• Key near-term stock catalysts: the HB 4384 deferral benefit realization into Q4, the Abilene data center load ramp (APT rider revenue share), and continued rate implementations into FY26.

What Went Well and What Went Wrong

What Went Well

• Guidance lifted again: FY25 EPS guidance raised to $7.35–$7.45 (from $7.20–$7.30 in Q2 and $7.05–$7.25 in Q1), driven by TX legislation benefits, APT through-system expectations for Q4, and improved collections.
• Demand and growth: YTD added ~58k new residential customers (~45k in Texas) and 22 new industrial customers (anticipated ~3.4 Bcf annual load when fully operational), reinforcing structural growth in Texas and across LDCs.
• Capital and liquidity: ~$5.5B liquidity, $1.7B forward equity capacity pre-funded, recent $500M 10-year notes at 5.2%, and weighted average debt cost ~4.17% with ~17-year average maturity support the capex plan.

Quoted: “Our third quarter results reflect the hard work and dedication… while safely and reliably operating our natural gas distribution, transmission, and storage systems” — Kevin Akers, CEO.

What Went Wrong

• O&M inflationary pressures: Consolidated O&M up ~$85M YTD from higher labor, line locate, pipeline inspection, system monitoring, and bad debt; management still targets FY25 O&M ex-bad debt of $860–$880M, implying tighter Q4 control.
• APT through-system normalization: After strong 1H, management expects FY25 through-system contribution roughly in line with FY24 and a more “normal” environment for FY26, limiting upside from spreads/volumes.
• Data inconsistency on YTD regulatory outcomes: The press release cited $321.8M implemented YTD vs CFO’s $351M on the call; though both signal solid rate momentum, the discrepancy may require follow-up for modeling precision.

Transcript

Speaker 6

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's Atmos Energy Corporation Fiscal 2025 Third 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. Once again, star one. If you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Dan Meziere, Vice President of Investor Relations and Treasurer. Dan?

Speaker 4

Thank you, Greg. Good morning, everyone, and thank you for joining our Fiscal 2025 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 32 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?

Speaker 1

Thank you, Dan. Good morning, everyone, and thank you for joining us today. Yesterday, we reported year-to-date Fiscal 2025 net income of $1 billion or $6.40 per diluted share. We updated our Fiscal 2025 earnings per share guidance to a range of $7.35 to $7.45. This performance continues to reflect the commitment, dedication, focus, and effort of all Atmos Energy employees to successfully modernize our natural gas distribution, transmission, and storage systems, while safely providing reliable natural gas service to 3.4 million customers in 1,400 communities across eight states. The Texas Workforce Commission reported in July that the seasonally adjusted number of employed reached 14.3 million. Texas again added jobs at a faster rate than the nation over the last 12 months ending June, adding over 198,000 jobs, representing a 1.4% annual growth rate.

We also continue to see the value and vital role that natural gas plays in economic development across our service territories. For the 12 months ending June 30, 2025, we added nearly 58,000 new residential customers, with almost 45,000 of those new customers located here in Texas. Commercial customer growth remains solid as well, with approximately 575 new customers connecting to the system during the second quarter and over 2,500 new customers connecting to the system fiscal year to date. Industrial demand for natural gas in our service territories also remains strong. During the third quarter, we added three new industrial customers, and fiscal year to date, we've added 22 new industrial customers with an anticipated annual load of approximately 3.4 BCF once they're fully operational. On a volumetric basis, this load is comparable to adding approximately 67,000 residential customers.

During the third quarter, Atmos Pipeline–Texas entered into a contract to transport natural gas to a customer that will generate on-site power to serve a data center in the Abilene area. The data center is expected to be fully operational by the end of the calendar year. At that time, we anticipate Atmos Pipeline–Texas will provide approximately 30 BCF of gas annually to support this data center. As a reminder, revenues earned from this contract are included in Atmos Pipeline–Texas's write-or-read mechanism. Therefore, 75% of this revenue will benefit Atmos Pipeline–Texas's LDC customers. Our consistent performance reflects the vital role we play in every community that is safely delivering reliable and efficient natural gas to homes, businesses, and industries to fuel our energy needs now and in the future.

During the third quarter, our customer support associates and service technicians received a 97% satisfaction rating from our customers, reflecting once again the exceptional customer service they provide each and every day. Our customer advocacy team and customer support agents continued their outreach efforts to energy assistance agencies and customers during the first nine months of the fiscal year. Through those efforts, the team helped over 48,000 customers receive nearly $17.5 million in funding assistance. Additionally, Atmos Energy has been named 2025's most trusted brand by data analytics and advisory firm Escalent. Escalent surveyed residential natural gas customers, electric, and combination customers of the 148 largest U.S. utility companies. Atmos Energy placed first among all 40 utilities in the South Region and received the highest score by any utility in any region nationwide.

Before turning the call over to Chris, I want to briefly comment on recent Texas legislation, House Bill 4384, that became effective on June 20, 2025. At a high level, this legislation authorizes a gas utility to defer for future recovery as a regulatory asset post in-service carrying costs, depreciation, and ad valorem taxes associated with the unrecovered gas gross plant for non-eligible H209 capital investments, such as new customer growth and system expansion. This legislation also instructs the Railroad Commission to adopt rules to implement Section 104.302 of the Utilities Code as added by this Act no later than the 270th day after the effective date of this Act. Before the passage of this legislation, approximately 45% of our total capital spending qualified for Rule 8.209 treatment. Applying the language of this legislation means that approximately 80% of our capital spending is eligible for Texas deferral treatment.

We believe most of the new capital covered by this legislation is associated with Atmos Pipeline–Texas. We are currently in the process of updating our Fiscal 2026 Capital Budget in a five-year plan, and we will provide a full update to the five-year plan during our fourth quarter earnings call in November. As I turn the call over to Chris, I want to share that our hearts and prayers continue to be with our teammates, families, and neighbors in the San Angelo, Kerrville, Ingram, Burnet, and other communities that were tragically impacted by the floods. No words can fully comfort you and the community for your loss. Please know that we as your teammates, friends, and neighbors stand alongside you in support and are here to lend a helping hand. Chris, over to you.

Speaker 2

Thank you, Kevin, and good morning, everyone. Yesterday, we announced fiscal year-to-date diluted earnings per share of $6.40 compared to $6.00 per diluted share in the prior year period. Our third quarter and fiscal year-to-date financial results continue to be driven by regulatory outcomes reflecting increased safety and reliability spending, customer growth, and strong through system revenues at Atmos Pipeline–Texas. Regulatory outcomes in both of our segments increased operating income by $322 million. Residential customer growth and rising industrial load in our distribution segment increased operating income by an additional $22 million. Revenues in our pipeline and storage segment increased $12.5 million, primarily due to increased throughput. Approximately $11 million of this increase was recognized during the first six months of the fiscal year.

As we discussed during our second quarter call, we expected the contribution from Atmos Pipeline–Texas's through system business in Fiscal 2025 to be comparable to what we experienced in Fiscal 2024, with most of this contribution realized during the first half of the fiscal year. Atmos Pipeline–Texas's third quarter was in line with our expectations, and we continue to believe the contribution of Atmos Pipeline–Texas's through system business in Fiscal 2025 will be in line with Fiscal 2024. Atmos Pipeline–Texas also experienced a $12.5 million increase due to higher capacity contracted by tariff-based customers due to their increased peak day demand. Consolidated O&M increased $85 million. This increase is primarily due to higher employee-related costs, increases in line locate, pipeline inspection, and system monitoring activities, and higher bad debt expense.

As a reminder, we recognized a $14 million non-recurring reduction in bad debt expense in the first quarter of Fiscal 2024, resulting from a regulatory change in how we recover our bad debt expense in Mississippi. As expected, O&M in the third fiscal quarter trended higher than the prior year quarter, but we still expect Fiscal 2025 O&M, excluding bad debt expense, to be in the range of $860 million to $880 million. Assuming the midpoint of this range, we anticipate O&M in our fourth fiscal quarter will trend approximately $10 million lower than the prior year's fourth quarter. Consolidated capital spending increased 22% to $2.6 billion, with 86% dedicated to improving the safety and reliability of our system. This increase reflects higher safety and reliability spending and higher spending to support customer growth in both of our segments.

We remain on track to expand approximately $3.7 billion this fiscal year. During our third fiscal quarter, we implemented approximately $170 million in annualized regulatory outcomes, including the West Texas General Rate Case, APT's annual grid filing, annual filings for the City of Dallas and Tennessee, and the Kentucky General Rate Case. Fiscal year to date, we have implemented $351 million in annualized regulatory outcomes, and currently, we have $229 million in annualized outcomes in progress. Of this amount, approximately $205 million is associated with our annual RRM filing in Mid-Tex and a General Rate Case in Mississippi. We anticipate implementing new rates from these filings in the first quarter of Fiscal 2026. Our financial position continues to remain strong. We finished our third fiscal quarter with an equity capitalization of 60% and approximately $5.5 billion of liquidity.

This amount includes $1.7 billion in net proceeds available under existing forward sale agreements that fully satisfy our anticipated Fiscal 2025 and Fiscal 2026 equity needs and a portion of our Fiscal 2027 equity needs. In June, we issued $500 million in 10-year notes with a coupon of 5.2%. As a result, our overall weighted average cost of debt as of June 30 stands at 4.17%, and our debt profile remains very manageable with a weighted average maturity of approximately 17 years. Turning now to our guidance, we anticipate the impact of adopting the new Texas legislation will increase our expected earnings per share in the fourth quarter of Fiscal 2025 by approximately $0.10. Additionally, our updated guidance range includes our expectations for APT's through system business during the fourth quarter and an improvement in our past due collections experience.

Therefore, as we reported last night, we have updated our Fiscal 2025 earnings per share guidance to a new range of $7.35 to $7.45 from the prior range of $7.20 to $7.30. Looking forward to 2026, as Kevin mentioned, we are still working through our five-year plan. As of today, we believe earnings per share will continue to grow in a range of 6% to 8% annually. We will continue to provide a full update to our Fiscal 2026 earnings per share guidance and a full update to a five-year plan for our fiscal fourth quarter earnings call in November. We appreciate your time this morning, and we will now open up the call to questions.

Speaker 6

Great. Thank you so much. At this time, I would like to remind everyone again, in order to ask a question, press star, then the number one on your telephone keypad. Once again, star one. We will pause just a moment to compile the Q&A roster. All right. Looks like our first question today comes from the line of Richard Sunderland with JPMorgan. Richard, please go ahead.

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

Speaker 3

Good morning.

I just want to start with that $0.10 increase from the Texas legislation that you called out. Is that essentially a half year's impact of the legislation that you're booking all in 4Q, or how do we think about that $0.10 relative to the total uplift potential from the legislation?

It'd be a distress. The $0.10 reflects the impact of the legislation beginning June 20th when the legislation became effective through the end of Fiscal 2025, so effectively one quarter.

Okay, understood. That's helpful. I wanted to parse the through system commentary a little bit more. I know you'd said flat to 2024 levels. Could you remind us what you'd originally expected in 2025 on that front? I guess I'm just trying to think of the puts and takes of the Texas benefit relative to the through system activities and how that might impact growth at 2026. Thank you.

As we think about, you know, on the through system business, we really didn't, as we talked about a year ago, we had anticipated spreads that were probably more in line with historical norms. Obviously, in the first quarter, quarter and a half of this fiscal year, with some of the takeaway capacity that had been delayed into late last year into early this year, that drove spreads. We also saw some volumes. As we think about Fiscal 2026, as we sit here today, we're anticipating probably a more normal operating environment, both from a throughput and a spread perspective. We'll adjust as we move through the fiscal year based upon what happens with the market.

Speaker 1

Yeah, I just add to that again. I think it's a little early to start trying to see out through a crystal ball what 2026 is going to be. I think if you look right now, we got to get through the rest of the summer cooling low, see where production continues to be at that point. We'll know more as we get closer to our updated five-year plan and what that may look like.

Great. Thank you for the time today.

Speaker 3

Thank you.

Thank you.

Speaker 6

Thanks, Richard. If you do have any questions today, star one on your telephone keypad. Once again, star one. All right. Looks like our next question comes from the line of Christopher Jeffrey with Mizuho Securities. Christopher, please go ahead.

Hi, good morning, everyone. Just wanted to follow up on the project discussed in the Abilene area with the data center. Just curious if you could kind of size up how big of a capital outlay that would be, whether you're seeing other potential projects like that throughout the system.

Speaker 1

As we said on our previous calls, we continue to get inquiries in almost every state that we have right now. They continue to go back and forth. Some of them are standalone, some of them are grouped together. We'll continue to report on those once we have signed contracts and agreements to deliver natural gas service. Inquiry continues to be strong across the service territory. It's a matter of when those projects actually are signed and ready to break ground on those. As we move into the rest of the calendar year and into next year, we'll see how the load continues to develop on those. That particular project there in Abilene, we may have a little bit more additional clarity on growth of that load as we finish up our five-year plan.

Great. Thank you, Kevin. Maybe just a point of clarification. You mentioned, I think, 45% total spending previously qualified for 209, and that moves up to 80%. Is that just in Texas, or are you talking about Atmos Energy Corporation as a whole entity?

Yeah, the 80% was Atmos Energy Corporation as a whole entity, if you will. As I said in my comments, we believe the majority of that increase is reflected through Atmos Pipeline–Texas's investment. Going back to the growth that we mentioned in the call and continue to mention quarter over quarter, that's showing up and requires system investment and expansion, as well as new supply points, expansion of storage, all those sort of investments on Atmos Pipeline–Texas's side to support the LDCs behind the system.

Got it. I guess just to follow up on that point, it seems like, you know, looking at the change in guidance on slide 13, most of the increase is coming from the distribution segment. Is the, should we think of the increase from the tax benefit at APT or at distribution?

Speaker 3

When you say the tax benefit, Chris, which benefit are you referring to?

Oh, sorry, the legislation benefit, Texas House Bill 4384.

I think right now it's roughly the way we're forecasting our fourth quarter assets placed into service. It's probably two-thirds distribution, one-third Atmos Pipeline–Texas for the fourth quarter.

Okay, great. Thanks, everyone.

Speaker 6

Thanks, Christopher. Our next question comes from the line of Nick Campanella with Barclays. Nick, please go ahead.

Speaker 3

Hi, good morning. This is Dave from Nick today, and thanks for taking the time. I just have a quick clarification on the $0.10. It sounds like we should annualize that. Just wondering, how should we think about that, lumping that into the 6% to 8% annual CAGR going into the long term? Thanks. Yeah, it may be a little bit too simple to lump, you know, just take $0.10, multiply by four because what's predicated on how the when the deferral start is when assets are placed into service. We have to think about what, you know, for each one of our projects, both in distribution and Atmos Pipeline–Texas, or the time of our closings, if you will, placing those assets in service, these are the ones that will be off and reflected into rates.

As we talked about, we're still modeling that impact going forward, which is why we have a full update on FY2026 as well for one-year plan and the five-year plan when we roll that update in November.

That's helpful. Maybe just to follow up, based off a stronger or more robust operating cash flow, how does that affect your thoughts on financing the future growth, and do you see any possibility to moderate external equity needs? I mean, understood you're mostly secured for 2025, 2026, but just wondering, how should we think about that? Thanks.

Yeah, Fei, we'll continue to finance the corporation or operating cash flow needs in a balanced fashion using a blended mix of equity and long-term debt. You see the increase in the operating cash flow. That was something we had anticipated in developing the five-year plan. When we established the financing targets in that five-year plan a year ago, that was contemplated.

Got it. Thanks for the color. Appreciate it.

Speaker 6

Thanks, Nick. The last call for questions. Again, star one on your telephone keypad. Star one. Going once. Going twice. Okay. There are no further questions, so I will now turn the call back over to Dan Meziere for closing remarks. Dan?

Speaker 4

We appreciate your interest in Atmos Energy, and thank you again for joining us this morning. The recording of this call is available for replay on our website. Have a good day.