Executive Summary / Key Takeaways

• Atmos Energy ($ATO) is a regulated natural gas utility focused on safety, reliability, and system modernization, primarily serving growing markets in Texas and surrounding states.
• The company is executing a substantial capital investment plan, targeting $3.7 billion in fiscal year 2025 and $24 billion through fiscal year 2029, with over 80% dedicated to safety and reliability enhancements and system growth.
• Recent financial performance reflects the success of this strategy, with fiscal year-to-date Q2 2025 net income increasing to $837.4 million ($5.26 per diluted share), driven by positive rate outcomes and customer growth.
• Management has raised fiscal year 2025 EPS guidance to $7.20 - $7.30, signaling confidence in continued execution and the strength of its pipeline and storage segment.
• The long-term outlook anticipates 6-8% annual EPS and dividend growth through fiscal year 2029, supported by rate base expansion (projected to double to $37 billion) and a balanced financing strategy.

A Foundation of Reliability and Growth

Atmos Energy Corporation, a regulated natural gas distribution and pipeline company, traces its roots as an independent entity back approximately 40 years. From its founding, the company has been guided by principles emphasizing honesty, integrity, and service, which have shaped its enduring strategy focused on the safe and reliable delivery of natural gas. Operating primarily across eight states, with a significant presence in the economically vibrant and growing Texas market, Atmos Energy serves over 3.4 million customers.

The company's core strategy revolves around continuous system modernization and expansion to meet the increasing energy demands of its service territories. This is particularly evident in Texas, where robust employment trends and population growth are driving significant additions of residential, commercial, and industrial customers. In the 12 months ended March 31, 2025, Atmos Energy added nearly 59,000 new customers, with approximately 46,000 located in Texas. Industrial demand is also strong, with 20 new industrial customers added fiscal year-to-date Q2 2025, expected to add 11 Bcf of annual load, equivalent volumetrically to adding over 204,000 residential customers. This growth underscores the vital role natural gas plays in regional economic development.

Within the competitive landscape, Atmos Energy operates within the regulated utility sector, facing direct competition from other natural gas distributors like CenterPoint Energy (CNP), NiSource (NI), and ONE Gas (OGS). While precise market share figures vary by region, ATO holds a significant position, particularly in its core Texas markets. Competition also comes from indirect sources, including providers of alternative energy solutions like renewables and electrification technologies. Barriers to entry in the regulated utility sector are high due to extensive infrastructure requirements and complex regulatory processes, providing a degree of insulation for established players like Atmos Energy.

Atmos Energy's operational technology, while not a single product like a solar panel, serves as a key differentiator in enhancing safety and reliability. The company invests heavily in system monitoring, pipeline inspection, and leak detection technologies, such as its Advanced Mobile Leak Detection (AMLD) units, which are deployed across its service states for closer system monitoring. Initiatives like increased line locating activities, particularly in high-growth areas, are crucial for protecting assets during concurrent infrastructure development. The company is also exploring innovative approaches to cost management, such as capitalizing cloud computing costs as fixed assets in certain jurisdictions, treating them as capital expenditures rather than operational expenses. These technological and process-driven investments contribute to improved system integrity, reduced failure rates, and enhanced compliance with safety regulations, reinforcing the company's competitive position based on reliable service delivery.

Financial Performance Reflecting Strategic Execution

Atmos Energy's financial performance in the first half of fiscal year 2025 demonstrates the positive impact of its strategic investments and regulatory success. For the six months ended March 31, 2025, the company reported net income of $837.4 million, or $5.26 per diluted share, a notable increase from $743.3 million, or $4.93 per diluted share, in the prior year period. Consolidated operating income grew by 14.6% over the same period.

The Distribution segment saw operating revenues increase by 11.2% and operating income by 13.2% for the six months ended March 31, 2025. These gains were primarily driven by $137.1 million in rate adjustments, largely in the Mid-Tex Division, and a $14.4 million increase from residential customer growth and increased industrial load. These positive factors were partially offset by higher operating expenses, including increased depreciation, property taxes associated with capital investments, and employee-related costs due to headcount increases supporting growth. Bad debt expense also increased, influenced by a regulatory change in Mississippi in the prior fiscal year.

The Pipeline and Storage segment experienced even stronger growth, with operating revenues up 18.3% and operating income up 18.6% for the six months ended March 31, 2025. Key drivers included $48.2 million in rate adjustments from GRIP and the new System Safety and Integrity Rider (SSIR), an $11.4 million increase from APT's through-system activities driven by higher volumes and wider spreads, and an $8.2 million increase from higher contracted capacity by tariff-based customers. These gains were partially offset by increased depreciation, property taxes, and compliance-related expenses. The strength of APT's through-system business in the first half of fiscal 2025, influenced by market conditions like capacity constraints, was a significant contributor to overall performance.

Overall operating and maintenance (O&M) expenses increased, reflecting higher employee costs due to growth-related headcount and overtime, increased system monitoring, line locating, and compliance activities. However, the company's regulatory mechanisms, such as the SSI mechanism at APT, allow for the recovery of certain compliance costs, mitigating their impact on operating income.

Atmos Energy maintains a strong financial position to support its capital program. As of March 31, 2025, the company reported approximately $5.3 billion in total liquidity, including cash and cash equivalents, funds available through equity forward sales agreements, and undrawn capacity under credit facilities. The company's equity capitalization stood at 60.9%, and its total-debt-to-total-capitalization ratio was 40.0%, well within its covenant limits. Recent financing activities include a $650 million senior notes offering in October 2024 and utilizing its ATM equity sales program, which had $1.7 billion in available proceeds from outstanding forward sale agreements as of March 31, 2025, expected to cover equity needs through fiscal year 2026.

Strategic Execution and Regulatory Framework

The cornerstone of Atmos Energy's strategy is its robust capital investment program, designed to enhance the safety and reliability of its infrastructure and support the significant customer growth in its service areas. The company invested $1.73 billion in capital expenditures during the first six months of fiscal year 2025, with approximately 85% directed towards safety and reliability projects. This is part of a larger plan to invest approximately $3.7 billion in fiscal year 2025 and a substantial $24 billion over the fiscal years 2025 through 2029. This level of investment is projected to drive rate base growth of 13% to 15% per year, potentially doubling the rate base from an estimated $19 billion today to approximately $37 billion by the end of fiscal year 2029.

A critical enabler of this investment strategy is Atmos Energy's proactive approach to regulation. The company operates in states with supportive regulatory frameworks, with 96% of its rate base located in states that have passed energy choice legislation. It relies on a consistent pace of approximately 20 rate filings annually, utilizing mechanisms like annual formula rates, the Gas Reliability Infrastructure Program (GRIP), and the new System Safety and Integrity (SSI) mechanism at APT. These mechanisms are designed to reduce regulatory lag and ensure the timely recovery of capital investments and associated operating costs.

Recent regulatory successes underscore the effectiveness of this strategy. During the first six months of fiscal year 2025, the company implemented regulatory actions resulting in $153 million in annualized operating income increases. As of March 31, 2025, additional ratemaking efforts were in progress, seeking a total increase in annual operating income of $389 million. Key pending rate cases include system-wide filings in West Texas and consolidated cases in the Mid-Tex division, which are addressing issues such as allowed return on equity, capital structure, and the capitalization of cloud computing costs. Management anticipates implementing a significant portion of these pending increases in fiscal year 2025, with the remainder expected in early fiscal year 2026.

This disciplined investment and regulatory strategy enhances Atmos Energy's competitive positioning. By consistently investing in system safety and reliability, as evidenced by its extensive pipeline replacement programs and use of advanced monitoring technologies, the company reinforces its reputation as a dependable energy provider. This focus on reliability serves as a competitive moat, particularly against rivals who may prioritize cost over infrastructure resilience. While competitors like CNP offer diversification into electric services and others like NI and OGS may emphasize different operational efficiencies, Atmos Energy's deep focus on natural gas infrastructure integrity and its ability to recover these costs through supportive regulatory frameworks provide a distinct advantage in its core markets. The company's strategic positioning is further strengthened by its ability to support the significant customer growth in its service areas, ensuring it can meet increasing demand where its rivals may face capacity constraints.

Outlook, Guidance, and Risks

Atmos Energy's performance and strategic momentum underpin a positive outlook. The company has raised its fiscal year 2025 diluted earnings per share guidance to a range of $7.20 to $7.30, up from the initial range of $7.05 to $7.25. This increase is largely attributed to the stronger-than-expected performance of APT's through-system business in the first half of the fiscal year. Management expects the remaining contribution to fiscal 2025 earnings to be recognized somewhat evenly in the back half of the year.

Looking further ahead, Atmos Energy anticipates delivering 6% to 8% annual earnings per share growth and commensurate annual dividend growth through fiscal year 2029. This projection is based on the successful execution of its $24 billion capital plan, which is expected to drive significant rate base expansion. Key assumptions supporting this long-term outlook include normal weather and market conditions, continued modest customer growth, and the assumption that APT's through-system business contribution will normalize closer to fiscal year 2024 levels over the planning period, following the addition of new takeaway capacity in the Permian Basin. The plan also incorporates an assumption of 4% annual O&M inflation, excluding bad debt expense, driven by increased compliance and employee costs. Importantly, the long-term outlook assumes no changes to existing regulatory mechanisms or allowed returns on equity.

Despite the positive outlook, several risks and challenges could impact performance. Regulatory risks are inherent in the utility business, including the potential for unfavorable outcomes in rate proceedings or changes in state or federal regulations, such as those related to greenhouse gas emissions or fossil fuels. Operational hazards, including pipeline integrity issues or incidents like those currently under NTSB investigation in Mississippi and Louisiana, could result in significant costs and liabilities. Adverse weather conditions, while partially mitigated by weather normalization adjustments, can still impact demand and operational costs. Commodity price volatility can affect purchased gas costs, potentially impacting accounts receivable collections and borrowing needs, although regulatory mechanisms help manage the direct earnings impact. Access to capital markets on favorable terms is crucial for financing the extensive capital plan, and changes in market conditions or credit ratings could increase borrowing costs. Competition, particularly from indirect sources like electrification and renewables, could pose a long-term challenge to natural gas demand growth. Management's strategy of prioritizing safety investments, utilizing timely cost recovery mechanisms, and maintaining a strong balance sheet is designed to mitigate many of these risks.

Conclusion

Atmos Energy presents a compelling investment thesis centered on its identity as a high-quality, regulated natural gas utility operating in favorable and growing markets. The company's strategic commitment to significant capital investment in system safety, reliability, and expansion, supported by effective regulatory mechanisms, forms the bedrock of its growth trajectory. Recent financial performance, marked by strong operating income growth in both segments and an upward revision to fiscal year 2025 guidance, validates the success of this strategy.

With a clear long-term plan projecting robust rate base expansion and consistent 6-8% annual EPS and dividend growth through fiscal year 2029, Atmos Energy offers investors exposure to a stable, infrastructure-focused business. While subject to typical utility risks and competitive pressures, particularly from the evolving energy landscape, the company's proactive investment in system integrity, its ability to recover costs through supportive regulation, and its strong financial profile position it well to navigate these challenges and continue delivering value. The focus on enhancing operational technology and efficiency, alongside traditional infrastructure upgrades, further strengthens its competitive standing and underpins the long-term reliability essential for its growing customer base.