Atmos Energy Corporation — Form 10-Q Summary
Business and reporting period. The filing covers the fiscal second quarter and six months ended March 31, 2021. Atmos Energy operates regulated natural gas distribution businesses in eight states and pipeline and storage operations, serving more than three million customers. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $1.319 billion, up 35% year over year | $2.234 billion, up 21% |
| Operating income | $381.8 million, up 15% | $680.6 million, up 17% |
| Net income | $296.8 million, up 24% | $514.4 million, up 23% |
| Diluted earnings per share | $2.30, versus $1.95 | $4.01, versus $3.42 |
| Cash dividends per share | $0.625, versus $0.575 | $1.25, versus $1.15 |
Quarterly revenue growth largely reflected higher gas costs passed through to customers during Winter Storm Uri; such costs generally do not directly affect operating income. For the six-month period, operating cash flow was negative $1.402 billion, compared with positive $633.8 million a year earlier, primarily because of Uri-related gas purchases and timing of customer collections and gas-cost recoveries. Capital expenditures were $845.7 million, down from $994.7 million.
At March 31, cash and equivalents were $865.3 million; long-term debt was $7.316 billion; shareholders’ equity was $7.821 billion. Management reported approximately $3.5 billion of total liquidity, including cash and funds available through equity forward sales agreements. The debt-to-total-capitalization ratio under credit agreements was 49%; reported equity capitalization was 51.7%, or 60.4% excluding the $2.2 billion Uri-related debt issuance. The company reported compliance with debt covenants.
Changes and management commentary
- Six-month net income increased 23%, supported mainly by rate increases, customer growth, lower certain operating and maintenance costs, and a lower effective tax rate. Management said the tax-rate benefit from returning excess deferred taxes to customers will be offset by lower revenues over the remainder of the fiscal year.
- Implemented rate actions increased annual operating income by $109.8 million during the first six months. Additional ratemaking efforts were in progress; the filing gives differing totals by context, including $69.8 million of listed proceedings and $113.8 million in the executive summary.
- Over 85% of six-month capital expenditures went toward system safety and reliability. Management expects liquidity to fund working capital and the capital program for the remainder of fiscal 2021, but provides no specific earnings guidance in this filing.
Uri, risks, and unusual items
- Winter Storm Uri led to approximately $2.3 billion of gas purchases in February. Atmos paid these costs by the end of March and recorded a $2.1 billion regulatory asset, including carrying costs, subject to prudency review and possible adjustment by regulators.
- The company issued $2.2 billion of debt in March to substantially fund the storm-related gas costs. S&P lowered its ratings one notch to A-/A-2 and both S&P and Moody’s placed ratings on negative outlook. The company remained investment grade and said the changes did not affect covenant compliance.
- Kansas securitization legislation became effective April 9, 2021; Texas legislation was still under consideration as of the filing. Recovery timing and customer-bill impacts therefore remained subject to regulatory and legislative outcomes.
- COVID-19-related suspension of customer disconnections and late fees contributed to higher bad-debt expense; the allowance for uncollectible accounts was $44.7 million at March 31.
- Following a fatal 2018 Dallas-area incident, the NTSB issued its final report and the Texas regulator initiated an enforcement proceeding alleging four violations and seeking $1.6 million in administrative penalties. Atmos said it was working with the regulator to resolve the matter.
- Other risks identified include regulatory decisions and cost recovery, pipeline safety and integrity, access to capital, weather, customer credit and collections, gas supply and price volatility, competition, cyber threats, and climate-related regulation. Management said the six-month results are not indicative of full-year results because of seasonal factors.
Investor verification priorities
- Track prudency reviews and recovery of the $2.1 billion Uri regulatory asset, including final Kansas and Texas securitization outcomes and their financing and customer-bill effects.
- Assess the impact of rating downgrades and negative outlooks, higher debt, refinancing needs, and the company’s stated liquidity and capital-structure targets.
- Verify progress on pending rate proceedings and whether authorized increases offset continued infrastructure investment and operating costs.
- Monitor customer collections, bad-debt expense, and the effect of ending pandemic-related collection suspensions.
- Follow the Texas enforcement proceeding and any developments in the 2018 Dallas incident litigation or safety requirements.