Atmos Energy Corporation — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended June 30, 2019; fiscal year ends September 30. Atmos operates regulated natural gas distribution and pipeline and storage businesses, serving more than three million customers across eight states. Interim statements were reviewed, not audited.
Financial performance
Amounts are in millions of dollars except per-share data. Contribution margin is a non-GAAP measure defined as revenue less purchased gas cost.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $485.7 | $562.2 | $2,458.2 | $2,670.8 |
| Operating income | $122.2 | $124.3 | $656.3 | $637.3 |
| Net income | $80.5 | $71.2 | $453.0 | $564.3 |
| Diluted EPS | $0.68 | $0.64 | $3.88 | $5.09 |
| Contribution margin | $454.7 | $431.7 | $1,613.9 | $1,547.0 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $808.9 | $1,035.3 |
| Capital expenditures | $421.6 | $394.5 | $1,199.2 | $1,088.5 |
Changes and key financial position
- Q3 revenue fell 13.6%, largely reflecting lower gas costs passed through to customers and lower distribution sales volumes. Q3 net income increased 13.0%, while operating income declined modestly. Distribution contribution margin was nearly flat at $305.4 million; pipeline and storage margin rose to $149.3 million from $127.1 million.
- Nine-month GAAP net income declined from the prior year, which included a $165.5 million one-time, non-cash tax benefit related to the Tax Cuts and Jobs Act. Excluding that benefit, adjusted net income increased to $453.0 million from $398.8 million, and adjusted diluted EPS rose to $3.88 from $3.60.
- Nine-month operating cash flow decreased $226.4 million, primarily from working-capital timing, including natural gas purchase payments and deferred gas cost recoveries. Capital spending exceeded operating cash flow by approximately $390 million.
- At June 30, cash was $46.2 million; short-term debt was $74.9 million and long-term debt, net of issuance costs and current maturities, was $3.529 billion. Shareholders’ equity was $5.642 billion. Management reported a 41% debt-to-capitalization ratio under credit-agreement definitions and compliance with debt covenants.
- The company reported $1.5 billion commercial-paper and committed revolving-credit capacity. Its quarterly dividend was $0.525 per share, up from $0.485; the board increased the fiscal 2019 dividend rate by 8.2%.
Outlook, commentary and risks
- Management forecast fiscal 2019 capital expenditures of $1.65–$1.75 billion, with more than 80% of spending through June directed toward system safety and reliability. Management said available funding sources should meet working-capital and capital-program needs.
- Management attributed adjusted earnings growth to rate outcomes, distribution customer growth, stronger pipeline and storage conditions in the Permian Basin, and the lower effective tax rate. It cited timely cost recovery, execution of the capital program, and access to capital markets as key performance drivers.
- Seven ratemaking efforts seeking approximately $79.9 million in annual operating income were in progress at June 30. The filing also reports that regulatory actions implemented during the first nine months increased annual operating income by $53.7 million, while its executive summary cites $102.9 million. These reported totals are not reconciled in the supplied filing text and merit verification.
- A $125 million floating-rate term loan was due in September 2019; the company said it planned to refinance it. The company had issued $1.05 billion of senior notes and completed substantial equity and forward-sale financing during the period. Forward-sale agreements represented potential proceeds of approximately $409.5 million at June 30, subject to settlement.
- The NTSB continued investigating a February 2018 Dallas gas incident that caused one fatality and injuries to four people. A related civil action was resolved in May 2019, subject to the company’s $1 million self-insured retention. Management stated that other litigation and environmental matters were not expected to have a material adverse effect, while noting outcomes remain uncertain.
- Other risks include regulatory decisions and cost recovery, gas supply and price volatility, weather, operational and pipeline safety hazards, capital-market access, Texas operating concentration, pension costs, and cybersecurity. The company expected adoption of the lease accounting standard in fiscal 2020 to affect its balance sheet; the amount was not reasonably estimable.
Important facts for investors to verify
- Reconcile the $53.7 million versus $102.9 million descriptions of annual operating-income increases from regulatory actions, and assess the outcome and timing of pending rate proceedings.
- Track capital spending against the $1.65–$1.75 billion fiscal 2019 plan, cash generation, refinancing needs, and potential dilution from outstanding forward-sale agreements.
- Review the NTSB investigation and any subsequent disclosures regarding the Dallas incident, insurance recovery, or litigation exposure.
- Monitor the recovery and customer-return schedules for the $731.8 million regulatory liability for excess deferred taxes, as well as the effects of the lower tax rate on earnings and rates.
- Assess seasonal working-capital requirements, the September 2019 term-loan refinancing, and the eventual balance-sheet impact of lease accounting adoption.