Atmos Energy

Atmos Energy reported 2026 fiscal third-quarter operating earnings of $1.43 per share, up from $1.16 in the same year ago period.

Why it matters: Regulatory rate adjustments tied to growth investments at both Distribution and Pipeline and Storage continued to support results, a trend we expect to continue. Deferral costs related to infrastructure spending as detailed in Rule 7.7102, strong underlying demand and customer growth also aided results. Partially offsetting these benefits were higher operating costs. Management maintained its full-year $8.40-$8.50 EPS expectation, in line with our estimate. Atmos increased the dividend 15% this year. We expect future dividend growth in line with our earnings growth estimate.

The bottom line: We are maintaining our $170 fair value estimate and narrow moat for Atmos. We continue to expect earnings growth at the high end of management's 6%-8% annual earnings growth target, which management reaffirmed through 2030. Atmos' 3% year-to-date return is in line with the Morningstar US Utilities Index return. Atmos trades in line with our fair value estimate, consistent with our view of the utilities sector as of Aug. 6.

Long view: We expect Atmos to invest $27 billion from 2026-30, supporting our 8% annual earnings growth estimate. Atmos is on track to invest $4.2 billion for 2026. Texas remains a significant growth driver, continuing its record of increasing both residential and industrial customers. We expect above-average growth in Texas to continue. Atmos is working on achieving regulatory approval for over $730 million of annualized revenue increases. It has implemented $396 million already. Most of the remaining rate increases are set to be implemented in the first quarter of next year. These rate increases are a large step up from prior years as Atmos accelerates investment across its system. Regulatory support for investment remains strong, which both supports growth and safety across Atmos' system.

Our fair value estimate is $170 per share after incorporating year-to-date financial and regulatory updates.

We lowered our cost of capital assumption to reflect modest adjustments to our risk-free rate assumptions. Our assessment of the company's business risk is unchanged.

We forecast $27 billion of capital expenditures during the next five years. We expect over 90% of these infrastructure investments to be for pipeline replacement and other safety-related projects.

We have a high level of confidence that Atmos' planned projects will receive regulatory support. We expect our investment forecast to result in average annual 8% EPS growth, at the high end management’s 6%-8% target.

We use a 5.8% cost of capital assumption.

We assign Atmos Energy a narrow moat rating. Atmos' businesses are almost 100% regulated. Although regulated utilities' service territory monopolies and efficient scale dynamics remain, we are giving more consideration to utilities' ability to achieve and maintain a positive spread between earned returns on capital and costs of capital in the long run based on the fundamentals of its regulatory environment, operating history, and forecast shareholder returns.

Atmos' capital investment is focused on its regulated natural gas distribution and transmission businesses. The company is concentrating its growth expenditures in jurisdictions with favorable regulatory frameworks where utility rates provide a return of and on investment in six months or less. We don't foresee any changes to the constructive regulatory mechanisms that Atmos currently enjoys, given its recent history, particularly in Texas. This gives us confidence that Atmos can earn more than its cost of capital for at least the next 10 years, supporting our narrow moat rating.

Service territory monopolies and efficient scale advantages are the primary moat sources for regulated utilities such as Atmos. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and of the capital they invest to build, operate, and maintain their distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities like Atmos to achieve at least their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

Constructive regulation allows Atmos to adjust customer rates within six months for 90% of capital investments. This reduces regulatory lag and, combined with customer growth, allows Atmos to earn returns at or above allowed returns.

Atmos' regulated utilities operations are distributed across numerous states and several jurisdictions in Texas, insulating profitability from individual negative regulatory decisions.

Atmos has consistently increased its dividend for 42 straight years. We forecast approximately 8% annual increases over the next five years.

Dividend-paying stocks like Atmos are sensitive to interest rates. As interest rates go up, dividend-paying stocks often underperform the broader market.

While Atmos has strong near-term growth supported by regulators, long-term growth could slow as policymakers look to transition away from natural gas.

Atmos has been able to increase its capital expenditures without a significant impact on customer rates due to low natural gas prices and customer growth. If customer growth slows and/or natural gas prices increase, Atmos might need to slow its investments.