Greetings, and welcome to the Atmos Energy's Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Dan Meziere, Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Thank you, Diego. Good morning, everyone, and thank you for joining our fiscal 2022 second 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?

Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy. Last night, we reported fiscal '22 second quarter net income of $325 million or $2.37 per diluted share compared to $297 million or $2.30 per diluted share in the prior year quarter. Year-to-date, earnings were $574 million or $4.24 per diluted share compared with earnings of $514 million or $4.01 per diluted share in the prior year period. Consolidated operating income decreased to $661 million for the 6 months ended March 31. As a reminder, beginning in the second quarter of fiscal '21 and through the end of last fiscal year, we reached agreement with regulators in various states to begin refunding excess deferred tax liabilities, generally over a 3- to 5-year period. These refunds reduced revenues throughout the fiscal year when those revenues are billed. The corresponding reduction in our interim annual effective income tax rate was recognized in the prior year when those agreements were completed. In fiscal '22, the corresponding reduction in the effective tax rate was recognized at the beginning of the fiscal year. Therefore, period-over-period changes in revenues and income tax expense may not offset with [ the minimum ] periods. However, they will substantially offset by the end of the fiscal year. Excluding the impact of these refunds, operating income for the 6 months ended March 31, increased $62 million or 9% to $743 million. Slides 4 and 5 summarize the key performance drivers for each of our operating segments, the 3 and 6 months ended March 31. I will focus on some of the key drivers underlying our year-to-date performance. Rate increases in both of our operating segments driven by increased safety and reliability capital spending totaled $120 million with approximately 77% coming from our…

Thank you, Chris, and good morning, everyone. As you heard, the first 6 months of the fiscal year were in line with our expectations, which leaves us well positioned for another successful fiscal year. This performance reflects a commitment, dedication, focus and effort of all 4,700 Atmos Energy employees, as we continue to successfully modernize our natural gas distribution, transmission and storage systems, while safely providing reliable natural gas service to our 3.4 million customers across 1,400 communities in 8 states. During the first half of the fiscal year, we continue to experience strong customer growth, as you just heard from Chris. For example, for the 12 months ended March 31, 2022, we added over 57,000 new customers which represents a 1.8% increase. We added nearly 1,800 commercial customers during the first 6 months of this fiscal year. And we added 15 new industrial customers that we anticipate using nearly 5 Bcf of natural gas annually when at full capacity. On a volumetric basis, that 5 Bcf of annual industrial customer usage is equivalent to adding nearly 85,000 residential customers to our system. We're very proud of our efforts for these new customers coming on our system. As Chris mentioned, our capital spending has increased about $344 million over the prior year period, and we remain on track to achieve our capital spending target of $2.4 billion to $2.5 billion. Through our system modernization efforts, we are on track to replace 800 to 1,000 miles of pipe and 20,000 to 30,000 steel service lines, all of which supports our goal of reducing methane emissions 50% by 2035 from 2017 levels for EPA reported distribution and maintenance services. That also includes APT's integrity work on projects like our Line X Phase 2 replacement, which is under construction and includes 63 miles…

[Operator Instructions] Our first question comes from Nicholas Campanella with Crédit Suisse.

So a lot of detail. Thanks for the update. Just on the financing side of things, your cost of equity has improved since the start of your fiscal year. And I know you're largely set on '22 equity needs now and you gave us a lot of detail around the forward program. But just any thoughts on why not do more now and take this off the table for kind of future years? And is it just that you guys are being just fairly formulaic? And how you execute here? And just any thoughts on out your equity?

Yes. A couple of things there, Nick. First, we are under our ATM program for a number of quarters now, have been executing forward arrangements. So we may very well take advantage of the current pricing environment to establish pricing for our fiscal '23 and beyond. As I indicated, fiscal '22 is fully priced for the remainder of our fiscal year. So that's an opportunity that we'll take a look at here in the third and the fourth quarter to take advantage of the pricing -- the current pricing environment to build on what we've already established with our fiscal '23 work that we executed through the end of March.

All right. Great. No, that's helpful. And then, I guess, just a broader question on inflation. Everyone is dealing with it. Just on the gas side, just every day we look at the strip, it's up. And how is that kind of translating to broader customer bills? Do you kind of feel comfortable if we remain at these levels? And if we're at a structurally higher kind of commodity environment through your 5-year plan, just confidence level in executing on this rate base trajectory?

Yes. Nick, it's Kevin. There's a couple of things in that -- in your question. Let me first start with, as you heard in my opening comments there, our team has and continues to stay very attuned to and keep affordability at the top of the mind and focused on how we can help. You heard the things that our customer service organization, our customer advocacy team are doing with outreach to energy assistance organizations, trying to find funds, get customers connected to that, find ways we can communicate proactively with customers. For example, during the last winter period, we sent out, think about 1.5 million notices, whether those were phone calls, where those were text, whether those were e-mails, those sort of things, trying to alert customers to pending colder than normal situations moving into the area. We're also sending them through those various channels, including social media as well, information on weather tips, energy efficiency, conservation, gas cost pricing, all those sort of things. So we're trying to stay very active with our customers, very up-to-date with our customers on the cost, but also find ways where we can help through our energy assistance LIHEAP programs, point them to the locations where they can receive assistance. But also, as you know, we're a very efficient operator. We work very hard at that. You've seen the things we've done over the last couple of years through Uri. Those sort of things will continue those efforts as we monitor the gas price over the next few months, and we'll continue to communicate with our customers where we can. And to the second part of your question there, I think where you were heading regarding our capital investment program over the 5-year horizon, I think as you can see in our slide deck right now, we run somewhere between 85% to 90% of our capital investments focused on safety and reliability. That needs to continue and will continue as we continue our strategy to modernize our system for safe delivery of natural gas as well as, as you just heard me mention that growth out there to support that high growth rate, particularly when we're adding 12 months ending March, 57,000 new customers out there and 15 new industrials. So we've got to continue to meet that growing positive and strong demand for natural gas across our service territory that we anticipate will continue going forward, as we talk to builders and developers out there. Even with interest rates at 5% right now, they're continuing to see strong demand as well. So that's what we're going to focus on, how we help the customer, how we can connect the customer to the right assistance organization, maintain our focus on O&M where we can and then continue to invest in our system.

Our next question comes from Insoo Kim with Goldman Sachs.

First, just more on detail for the quarter. I saw on the pipeline side, the O&M year-over-year was up a decent bid. On the distribution side, down year-over-year. Is this just more timing between the quarters? And I know from a guidance perspective for the year, it doesn't seem like much has changed. But just curious on some clarity there.

Insoo, this is Chris. Yes, certainly, it's timing on some of the -- just the timing of the work on the pipeline, those are longer lead time projects that need to be planned further out in advance. So just in timing around that. And on the distribution side, to stand a little bit, we had a slightly lower bad debt expense in our current year's fiscal second quarter compared to the prior year. So that's -- those are really kind of the 2 key drivers for those variances that you just described.

Okay. Got it. Second question, just more curious on your observations. We've talked probably over the past couple of years, just about the different changing narratives on the future of gas, and it seems like the latest narrative has changed maybe more to a positive for the sector just on energy, security and all that stuff. Have you seen that play out at all on the ground, whether it's customer growth or just demand for gas in your various jurisdictions, if there was ever really an impact from this narrative on the negative side over the past couple of years, just seeing -- I know you had mentioned customer growth or demand being stronger than expected. So I don't know if that would tied to any of that in your thoughts.

Yes. Thank you, Insoo, for your question. And -- as you know, we've continued to have strong growth. We're very proud of our service territories. We believe they are the best in the country. We're fortunate with the states and support politically, the economic development chambers and their hard work that bring these sort of customers into the communities we serve today. But we've seen strong support for natural gas for a long time throughout our history. And I think you could also see that through the customer advocacy, customer choice builds that we have in 6 of our 8 states out there, we get very good support from a regulatory perspective, the political perspective, the community perspective. So I think we've always been in strong supporting natural gas environment. . I think the thing that -- to get to the crux of your question, it's probably changed here lately is the conversation that the general public is now seeing and wanting to feel around energy security. Natural gas in our industry has always been there behind the scenes, delivering, transporting, storing natural gas to meet those winter demands, especially as you go back to Uri and how well some of our distribution and transmission systems performed during that piece of it. We've always kind of been out of sight, out of mind. But with the unfortunate geopolitics that are going on now, the war in Ukraine, energy has been thrust to the forefront. And I think those are the things we're hearing is people are wanting to know that natural gas is going to be there. It's a viable choice for them. It's abundant, and they're talking to us about national energy security and how they can have that in their community. So those are the sort of things we're hearing now. And as I said, we're very fortunate and blessed and appreciative of our jurisdictions and their support for natural gas.

[Operator Instructions] Our next question comes from Julien Dumoulin-Smith with Bank of America.

Maybe just staying with this inflationary focus. I mean what's your view on inflation's impact on your CapEx budgets? How are you thinking about that just vis-a-vis some of the latest pressures we're seeing across the industry? What percentage of your CapEx is exposed to material labor for instance, obviously, that are perhaps disproportionately inflationary? And what's locked in contracted labor where perhaps you may not see that? But on balance, is there an upward bias in your CapEx budget on that alone effectively?

Yes, Julien, let me start here and Chris, certainly can add some color if he wants to get into percentages or not. But as we've talked about this before, I couldn't be any proud of our procurement team, our operations team, our engineering teams, all working collectively as we -- we're coming through the last year or so, the pandemic inflationary discussions were picking up. We were seeing some of the signs out there. They were very active. You heard us talk about going from a 3-month to 6-month inventory of materials and pipe. You've also heard us continue to talk about that we have 95% to 100% of our pipe on the ground for the remainder of this fiscal year's steel needs. And that we are already beginning identification and getting steel pipe to the mills for '23 and identifying cost as far out as '24 in those project needs. So all to say for us, our team has been very proactive about identifying the types of materials, whether it's pipe, valves, fittings, those sort of things, plastic, steel, increasing our inventory, increasing our lead time on that, so we're not just in time. And yes, we've seen some increases in pipe -- steel pipe, especially from a couple of years ago or 3 years ago. But we think we're doing everything we can to take advantage of current pricing now to lock that in, as I said, as we buy out into the future for those sort of things. Really, the only pressures we've seen right now from a supply chain perspective, we've seen a little bit on the technology side and occasionally on some meters, but it corrects itself over time as our team continues to work through our vendors and suppliers to get additional supplies into our warehouses. So I hope that helps answer your question. Chris, anything additional you'd like to add?

Yes. I think the same. Just really, Kevin, the other -- Julien, the other point to make is there are contract labors, they're executing on the capital projects. We've got contracts with them. We're currently -- we are in constant communication with them. Many of these contractors go back many, many years with us. So over the years, we have worked with them to manage their cost pressures and needs. And so we've been able to do this at a -- in a bite-size increment, if you will, rather than having to -- holding the cost really low for a long period of time and having to rush now to catch up to market. So those are long-term relationships with those contractors, have given us the ability to bleed in any higher cost over an extended period of time so as to mute the inflationary pressure on our capital spending.

Got it. But not ready to quantify in aggregate, but maybe you do see some of these inflationary pressures that could fall through. And maybe to clarify that further, even to the extent of which you do would you perhaps defer some of these investments in order to keep your budget flat? Or is there an argument that would just be made you move forward with the projects despite some modest inflation?

We haven't seen anything right now, Julien, that hadn't already been contemplated in the numbers that we've discussed here to date.

All right. Excellent. And so just one other -- please go for it.

No, that's all I had.

Okay. Excellent. And then just on the transportation and RNG front, you made some comments here. You talked about 30 projects here. It seems like -- or 30 opportunities sees your verbiage. Can you expand a little bit more about what that could amount to just from a sort of a capital opportunity perspective, if you will?

Yes, Julien, as you've heard us say before, we're not in the upstream side of that. We're not investing right capital upstream of the meter right now. So truly, all of our investment would be the sales meter, based -- whether they're digesters, they're landfills, biomass, sewer gas capture those sort of things. We're really receiving the processed gas and transporting on behalf of our customers. And right now, those evaluations are truly what is near system, what is close to systems. So any capital investment at this time would be modest and it would be to maybe extend a short distance to a facility. But really, we're not investing upstream at this point. We're really transporting that RNG on behalf of others.

Got it. Lots of projects lingering there, but largely sales element.

Correct. Helping our customers where we can reduce their carbon footprint and be the conduit. That's why we have the 72,000 miles of pipeline system we have today is to move that gas around it. And be part of that environmental equation to get that gas to the -- [ burn it here ].

And there are no further questions at this time. I'll turn the floor back to Dan Meziere for closing remarks.

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