Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended December 31, 2017, the first quarter of fiscal 2018. Atmos Energy operates regulated natural gas distribution and pipeline and storage businesses, serving more than three million customers across eight states. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. The company cautions that seasonal results are not indicative of the full fiscal year.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Operating revenue | $889.2 million | $780.2 million |
| Operating income | $241.6 million | $209.9 million |
| Income from continuing operations | $314.1 million | $114.0 million |
| Diluted EPS from continuing operations | $2.89 | $1.08 |
| Adjusted income from continuing operations | $152.2 million | $114.0 million |
| Adjusted diluted EPS | $1.40 | $1.08 |
| Operating cash flow | $173.2 million | $117.0 million |
| Capital expenditures | $383.2 million | $298.0 million |
Management’s adjusted measures exclude a $161.9 million one-time, non-cash income tax benefit. Reported net income was $314.1 million, versus $125.0 million a year earlier; the prior-year figure included $11.0 million from discontinued operations. Operating margin was approximately 27.2% of revenue, compared with 26.9%.
Distribution gross profit was $397.0 million, up $37.7 million, chiefly reflecting rate increases, higher residential and commercial consumption, and customer growth. Pipeline and storage gross profit was $125.6 million, up $16.0 million, primarily from approved rate changes and increased transportation activity.
Cash used in investing activities was $381.4 million, while financing activities provided $236.5 million. Capital expenditures exceeded operating cash flow by approximately $210.0 million. Cash and equivalents were $54.8 million at quarter-end. Long-term debt was $3.07 billion and short-term debt was $336.8 million. Shareholders’ equity was $4.56 billion; the company reported a 44% debt-to-capitalization ratio under its credit agreements and compliance with debt covenants. The quarterly dividend was $0.485 per share.
Material changes versus the prior period
- Revenue increased 14.0%; operating income rose 15.1%. Adjusted income from continuing operations increased 33.5%, to $152.2 million, and adjusted diluted EPS rose from $1.08 to $1.40.
- The Tax Cuts and Jobs Act (TCJA) reduced the federal corporate tax rate. Remeasurement lowered the company’s net deferred tax liability by $908.1 million: $746.2 million was recorded as a regulatory liability for return to customers, and $161.9 million was recognized as a one-time tax benefit.
- Capital expenditures increased $85.3 million year over year. The company issued 4.56 million shares for $400 million gross proceeds ($395.1 million net), primarily to reduce commercial paper borrowings and fund capital spending.
- Short-term debt declined from $447.7 million at September 30, 2017 to $336.8 million at December 31, 2017. Total shareholder equity rose, including the effect of the stock offering.
- Atmos had sold its natural gas marketing business in January 2017; accordingly, that business’s prior-year results are reported as discontinued operations.
Outlook, management commentary, and risks
- Management expects fiscal 2018 capital expenditures of $1.3 billion to $1.4 billion; approximately 82% of first-quarter spending supported distribution and transmission system safety and reliability.
- Management anticipates a fiscal 2018 effective income tax rate of 26%–28%, before the effect of returning excess deferred taxes and the one-time tax benefit. The federal statutory rate for Atmos is 24.5% in fiscal 2018 and is scheduled to become 21% on October 1, 2018.
- Regulatory actions to pass tax-reform benefits to customers are expected to reduce revenues beginning in the second quarter of fiscal 2018. The timing and amount depend on regulatory decisions across the company’s jurisdictions.
- Atmos anticipates $500 million to $600 million of external financing through fiscal 2022, primarily to address expected cash-flow reductions from lower tax collections and customer refunds. It intends to maintain an equity capitalization ratio of 50%–60%.
- Seven regulatory proceedings were completed during the quarter, resulting in a reported $46.1 million increase in annual operating income in the executive summary; the detailed rate-activity discussion describes six completed proceedings and a $17.1 million increase from formula mechanisms. The filing’s differing summaries should be reconciled. Seven ratemaking efforts were in progress seeking $13.3 million of annual operating income.
- Key risks include regulatory outcomes and rate recovery, access to capital markets, weather, gas supply and price volatility, customer collections, operational and pipeline safety, environmental regulation, pension obligations, and cyber threats. The company reported no material changes in previously disclosed litigation matters and does not expect their outcomes to materially affect its financial condition, results, or cash flows.
Most important facts for investors to verify
- Separate recurring earnings growth from the $161.9 million non-cash tax benefit; assess the company’s adjusted earnings calculation.
- Track the scope, timing, and rate impact of regulatory orders returning TCJA-related tax savings to customers.
- Reconcile the filing’s differing count and annual-income impact of completed regulatory proceedings.
- Monitor delivery of the $1.3 billion–$1.4 billion capital program, its recovery through rates, and the resulting funding needs.
- Review the expected $500 million–$600 million external financing requirement through fiscal 2022, leverage, and the company’s ability to preserve investment-grade credit ratings.