Detailed narrative
Texas Rule 7.7102 (HB 4384) — Regulatory Lag Reduction and FY26 Rebasing
The central story of the quarter is the finalization of Texas House Bill 4384, codified into Rule 7.7102, which reduces regulatory lag by permitting gas utilities to defer post-in-service carrying costs, depreciation and ad valorem taxes on non-Rule-8.209-eligible capital such as new customer growth and system expansion.
Year-to-date results include $94 million ($0.43) of HB 4384 benefit — $44M in Distribution and $50M at APT. With final rulemaking now complete, management elected to present the deferral of post-in-service carrying costs in the income-statement lines where the costs were originally incurred (O&M and interest), which reduced reported H1 O&M by $41 million.
Management estimates the full-year FY26 impact at $155M-$165M pretax, higher than originally budgeted, and characterizes FY26 as a one-time📎 rebasing year with no further rebasing expected into FY27.
APT Through-System Business and Waha/Permian Pricing
APT's through-system business was a key earnings driver, adding $16 million ($0.08) year-over-year in H1 FY26. Captured spreads averaged $4.35 in H1 FY26 versus $1.80 in the prior-year period, reflecting constrained takeaway capacity, rising associated gas production, and lower demand from an unseasonably warm winter heating season.
Management expects an additional $0.08-$0.12 contribution in H2 FY26, contemplating April Waha activity, while cautioning that Permian pricing will remain challenging for the remainder of the fiscal year despite modest recent moderation from historic highs. LDC customers behind APT benefit from the Rider REV tariff, which shares roughly 75% of APT's other revenue above a specified benchmark — approximately $150 million returned to customers over the last three years.
APT System Investment — Line WA and Interconnects
During Q2, APT completed Phase 2 of the Line WA project, installing approximately 44 miles of 36-inch pipeline to the west of Fort Worth to support growth in the DFW Metroplex. APT also completed 5 interconnect projects, adding nearly 100,000 Mcf per day of additional natural gas supply to the system.
These investments enhance supply optionality, reliability, versatility and diversification, and support the continued growth of the local distribution companies behind the APT city gate.
Customer Growth and Economic Development
Atmos added over 51,000 new customers for the 12 months ending March 31, 2026, with over 39,000 located in Texas. During Q2 alone the company added over 800 commercial customers and 4 new industrial customers, with continued industrial account additions across Kentucky, Tennessee, and the Virginia area.
Management pointed to broad-based residential, commercial and industrial demand as evidence of natural gas's role in regional economic development, with the Dallas-Fort Worth area highlighted as a particular area of strength.
Regulatory Filings and Recovery Cadence
Since the start of FY26, Atmos has implemented $136 million of annualized operating income increases in its Distribution segment. It currently has 13 filings in progress seeking nearly $600 million in annualized operating income increases, of which approximately 40% is expected to be implemented primarily in fiscal Q3.
The largest pending filing — APT's Rate filing seeking $112 million in annualized operating income increases — was scheduled for consideration by the Texas Railroad Commission on May 12, 2026, days after the call.
Balance Sheet, Liquidity and Equity Funding
Equity capitalization stood at 61% as of March 31, with no short-term debt outstanding. Atmos extended its four credit facilities providing $3.1 billion in total liquidity and had $4.1 billion in available liquidity at quarter end, including approximately $890 million in net proceeds available under existing forward sale agreements.
That forward amount is expected to satisfy the remainder of FY26 equity needs and a portion of FY27 needs. No ATM was priced during Q2 — management chose to 'keep our powder dry' given geopolitical and economic volatility, and will opportunistically advance FY27 equity funding.
Recognition and Customer Assistance
Atmos achieved customer satisfaction ratings of 97% for the first six months of the fiscal year. Its customer advocacy team helped over 33,000 customers receive approximately $9.5 million in funding assistance during H1. The company was named to the Forbes list of America's best large employers for the sixth consecutive year, ranking among the top 100 employers overall and second among all utilities.