Atmos Energy Corporation (NYSE: ATO) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. The company operates regulated natural gas distribution, pipeline and storage businesses, serving more than three million customers across eight states. Interim results are unaudited and are subject to seasonal variation.
Financial performance
| Metric | Three months ended June 30, 2022 | Year-over-year change | Nine months ended June 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $816.4 million | +$210.9 million (+34.8%) | $3.479 billion | +$639.9 million (+22.5%) |
| Operating income | $154.6 million | +$21.2 million (+15.9%) | $815.6 million | +$1.5 million (+0.2%) |
| Net income | $128.5 million | +$26.1 million (+25.5%) | $702.8 million | +$85.9 million (+13.9%) |
| Diluted EPS | $0.92 | +$0.14 | $5.12 | +$0.35 |
| Cash dividends per share | $0.68 | +$0.055 | $2.04 | +$0.165 |
Consolidated operating margin, calculated as operating income divided by revenue, was approximately 18.9% in the quarter versus 22.0% a year earlier, and 23.4% for the nine months versus 28.7%. Higher purchased gas costs materially increased reported revenue; the company generally recovers gas costs through customer mechanisms, so revenue-based margins are affected by pass-through costs.
- Cash flow: Nine-month operating cash flow was $929.3 million, versus cash used of $1.158 billion in the prior year, which included substantial Winter Storm Uri gas payments. Excluding the prior-year Uri outflow, operating cash flow was down about $0.8 million, principally reflecting customer refunds of excess deferred taxes, partly offset by timing of gas-cost recoveries and rate outcomes.
- Capital spending: $1.726 billion in the nine months, up $368.1 million year over year; more than 85% was directed to safety and reliability investments.
- Debt and capitalization: Long-term debt on the balance sheet was $5.759 billion, with $2.201 billion of current maturities. Debt instruments and finance leases totaled $8.012 billion before discounts, issuance costs and current maturities. Debt represented 46.2% of capitalization and equity 53.8%; excluding $2.2 billion of Uri-related financing, the company reported an equity capitalization ratio of 61.7%. The covenant-defined debt-to-capitalization ratio was 47%, and covenants were satisfied.
- Liquidity: Cash was $328.1 million; the company reported approximately $3.5 billion of total liquidity, including cash, $700.9 million available from forward equity sales and $2.494 billion of undrawn credit capacity. No commercial paper or revolving credit borrowings were outstanding at June 30.
Material changes and management commentary
- Nine-month net income rose 14%, mainly from favorable distribution rate outcomes and customer growth, partly offset by higher operating and maintenance costs. Rate actions implemented or approved during the period were reported as adding $76.1 million in annual operating income, or $127.1 million excluding the effect of excess deferred tax refunds. Rate requests totaling $132.6 million in annual operating income remained in progress at June 30.
- Distribution segment operating income declined 2% for the nine months, as rate increases were more than offset by tax-refund effects, lower weather-normalized consumption, and higher depreciation, property taxes and system maintenance.
- Pipeline and storage segment operating income increased 6% for the nine months, primarily from rate adjustments linked to safety and reliability investment; lower throughput and increased maintenance, depreciation and property taxes partly offset the gain.
- The quarterly dividend was increased 8.8% for fiscal 2022. The company states that available liquidity should fund working capital and its capital program for the remainder of fiscal 2022, and that it expects to obtain financing on reasonable terms as needed.
Outlook, risks and unusual items
- Winter Storm Uri: A $2.1 billion regulatory asset remained recorded at June 30 for extraordinary gas costs and carrying costs. Texas authorities authorized securitization of approved costs over a period of up to 30 years; proceeds are intended to repay the $2.2 billion of public notes issued to finance the costs. Kansas securitization proceedings were also underway. Timing and completion of bond issuance remain important to monitor.
- Regulatory exposure: The business depends on rate approvals and timely cost recovery. Rate proceedings were pending in several jurisdictions; the filing also notes refunds of excess deferred tax liabilities that reduced reported operating income and effective tax rates.
- Safety and litigation: The company is working with Texas regulators to resolve four alleged violations related to a 2018 Dallas incident, for which the RRC initiated an enforcement proceeding seeking $1.6 million in administrative penalties. It is also involved in investigations and three civil actions concerning a 2021 Farmersville worksite accident that caused two fatalities and injuries. Management believes excess losses in legal matters are not reasonably estimable and would not materially affect results, but outcomes remain uncertain.
- Financing and market risks: S&P rated senior unsecured debt A- with a negative outlook; Moody’s rated it A1 with a stable outlook. The company cited risks including access to capital markets, interest rates, gas supply and prices, adverse weather, regulation, pipeline safety, cybersecurity, climate-related requirements and operating costs.
- The company hedged approximately 42% of anticipated winter flowing gas requirements for the 2021–2022 heating season in jurisdictions where permitted. Management said goodwill was not impaired in its annual assessment. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress, timing and customer-bill effects of Texas and Kansas Uri securitization, including whether bond proceeds repay the related financing.
- Final outcomes and effective dates of pending rate proceedings, and how rate increases compare with tax-refund effects and rising operating costs.
- Execution and funding of the $1.7 billion nine-month capital program, future equity issuance and forward-sale settlements, and preservation of the stated liquidity and capitalization targets.
- Developments in the Dallas enforcement proceeding and Farmersville litigation, including any material change in potential liabilities.
- Whether the negative S&P outlook changes and how financing costs, credit access and regulatory recovery evolve.
Management reported effective disclosure controls as of June 30, 2022. The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity.