Atmos Energy Corporation — Q3 FY2020 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; comparative periods ended June 30, 2019. Atmos is a regulated natural gas distributor serving more than three million customers in eight states and operates pipeline and storage businesses. Interim results are unaudited and seasonal; management cautions that nine-month results are not indicative of the full fiscal year.
Financial highlights
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Operating revenue | $493.0 million | $485.7 million | $2,346.2 million | $2,458.2 million |
| Operating income | $139.0 million | $122.2 million | $723.3 million | $656.3 million |
| Net income | $117.8 million | $80.5 million | $536.1 million | $453.0 million |
| Diluted EPS | $0.96 | $0.68 | $4.37 | $3.88 |
| Adjusted net income / diluted EPS, excluding one-time tax benefit | $96.8 million / $0.79 | $80.5 million / $0.68 | $515.1 million / $4.20 | $453.0 million / $3.88 |
Quarterly operating margin was approximately 28.2% versus 25.2% a year earlier; nine-month operating margin was approximately 30.8% versus 26.7%. These percentages are calculated from reported operating income and revenue.
- Cash flow and investment: Nine-month operating cash flow was $895.5 million, compared with $808.9 million. Capital expenditures were $1.406 billion, up 17%; cash used in investing activities was $1.400 billion. Operating cash flow less capital expenditures was negative $510.2 million.
- Balance sheet and liquidity: At June 30, cash was $208.1 million; long-term debt was $4.531 billion and short-term debt was zero. Shareholders’ equity was $6.461 billion; the company reported a 58.8% equity share of capitalization. Management reported more than $2.9 billion of total liquidity, including cash and proceeds available from equity forward sales, alongside approximately $2.2 billion of committed credit facilities.
- Funding and dividends: Nine-month financing included $999.5 million of long-term debt issuance and $358.0 million of net equity-offering proceeds. Cash dividends paid were $210.7 million. Quarterly dividends were $0.575 per share, up from $0.525 in the comparable period.
Changes versus prior comparable periods
- Reported nine-month net income rose 18%; adjusted net income, excluding the one-time tax benefit, rose about 14%. Adjusted diluted EPS increased to $4.20 from $3.88.
- Nine-month revenue declined 5%, principally reflecting lower distribution gas sales and gas costs; lower gas costs largely pass through to customers. Distribution operating income rose 11% to $496.3 million, supported by rate increases and customer growth, partly offset by COVID-related volume and service-revenue declines and higher depreciation and property taxes.
- Pipeline and storage operating income increased 8% to $226.9 million for nine months, primarily from approved rate adjustments, partly offset by lower transportation activity and higher operating costs.
- Long-term debt increased by approximately $1.0 billion from September 30, 2019, while short-term debt fell from $464.9 million to zero. Capital spending and the share count also increased.
Outlook, commentary, and risks
- Tax item: Kansas legislation eliminating state income taxes on regulated utilities led to a $21.0 million noncash tax benefit in the quarter and nine-month period. Adjusted results exclude this benefit. The company also recorded a $12.1 million regulatory liability for excess deferred taxes to be returned to Kansas customers; the refund amortization period remained under discussion.
- Regulation and investment: Management emphasized system modernization and safety and reliability investment, with regulatory mechanisms intended to reduce recovery lag. It reported six ratemaking efforts in progress seeking $143.7 million of annual operating income. Rates for four Texas filings totaling $22.6 million were scheduled to take effect September 1, 2020. The filing also reports fifteen proceedings implemented during the first nine months with an $81.4 million annual operating-income increase; the executive overview separately cites $108.1 million of increase from regulatory actions, so the scope of those figures should be checked against the detailed rate disclosures.
- COVID-19: Management said residential revenue had not materially changed year over year, while nonresidential revenue declined 12%; lower operating expenses partly offset the decline. It warned that the pandemic could affect demand, collections and bad debts, workforce and suppliers, liquidity, financing access, and credit metrics. Regulatory orders in five states covering about 86% of distribution customers and all APT customers permitted deferral of extraordinary COVID-related expenses, but none had been recorded as regulatory assets at June 30.
- Funding and credit: Management expected available liquidity to fund working capital and the FY2020 capital program and anticipated continued access to financing on reasonable terms. Moody’s rated senior unsecured debt A1 with a stable outlook; S&P rated it A with a stable outlook. The company was in compliance with covenants; its defined total-debt-to-total-capitalization ratio was 43% against a 70% maximum.
- Contingencies and operations: The NTSB investigation of a February 2018 Dallas residential gas incident involving one fatality and four injuries remained ongoing. Management said it did not expect litigation and environmental matters to have a material adverse effect, while noting an excess loss above accruals was possible but not reasonably estimable. Key broader risks include pipeline safety and integrity costs, regulation, adverse economic conditions, weather, gas supply, capital-market access, interest and commodity risks, cyber threats, and climate-related regulation.
- No specific earnings guidance was provided. Management said the duration and effects of COVID-19 remained difficult to predict.
Important facts for investors to verify
- Reconcile the $21.0 million Kansas tax benefit with reported versus adjusted earnings and confirm the expected timing of customer refunds.
- Track outcomes, effective dates, and final allowed returns for pending rate filings, including the differing $81.4 million and $108.1 million summaries in the filing.
- Assess COVID-related nonresidential demand, customer collections, bad-debt exposure, and the extent to which deferred costs are ultimately recoverable in rates.
- Monitor capital spending, cash generation relative to investment, debt and equity financing needs, and continued covenant and credit-rating headroom.
- Follow the Dallas incident investigation and any resulting regulatory actions, claims, or material changes to the company’s disclosed contingencies.