Atmos Energy Corporation — Form 10-Q Summary
Business context and reporting period
For the fiscal quarter and six months ended March 31, 2022 (fiscal Q2 and first half of FY2022). Atmos Energy operates regulated natural gas distribution businesses in eight states and pipeline and storage operations, serving more than three million customers. The interim financial statements are unaudited and were reviewed by the independent auditor; management cautions that seasonal results are not indicative of the full fiscal year.
Financial and operating performance
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Operating revenue | $1.650 billion, up 25.1% year over year | $2.663 billion, up 19.2% |
| Operating income | $385.1 million, up 0.9% | $661.0 million, down 2.9% |
| Net income | $325.0 million, up 9.5% | $574.2 million, up 11.6% |
| Diluted EPS | $2.37, versus $2.30 | $4.24, versus $4.01 |
| Cash dividends per share | $0.68, versus $0.625 | $1.36, versus $1.25 |
Operating margin (operating income divided by revenue) was approximately 23.3% for the quarter and 24.8% year to date, versus 28.9% and 30.5%, respectively, in the prior-year periods. Revenue growth largely reflects higher gas costs passed through to customers, as well as rate adjustments and customer growth; gas costs generally do not directly drive operating income. The effective income tax rate fell to 10.1% for the quarter and 8.3% year to date, from 17.2% and 19.8%, mainly because of increased refunds of excess deferred taxes to customers.
For the six months, operating cash flow was $640.5 million, versus cash used of $1.402 billion in the prior year. The prior-year comparison included approximately $2.1 billion of Winter Storm Uri gas costs; excluding that item, operating cash flow decreased $50.8 million, mainly due to tax refunds and the timing of gas-cost recoveries. Capital expenditures were $1.190 billion, up $344.3 million, with more than 85% directed to distribution and transportation safety and reliability. Cash ended the period at $582.5 million.
Debt, liquidity and capital
At March 31, 2022, long-term debt was $5.758 billion and current maturities were $2.201 billion, for approximately $7.959 billion of total debt. Shareholders’ equity was $8.983 billion; debt represented 47.0% and equity 53.0% of capitalization. Excluding the $2.2 billion of incremental financing related to Winter Storm Uri, the company reported an equity capitalization ratio of 60.9%.
Management reported approximately $3.5 billion of total liquidity: $582.5 million cash, $451.3 million available from executed equity forward sales, and $2.494 billion of undrawn credit-facility capacity. No commercial paper or revolving-credit borrowings were outstanding at quarter-end. The company issued $600 million of 2.85% notes due 2052 and $200 million of 2.625% notes due 2029; proceeds from the latter offering repaid a $200 million term loan. It also received $594.3 million from settling equity forward sales. Debt covenants were met, including a 48% debt-to-capitalization ratio against a maximum of 70%.
Material changes and management commentary
- Year-to-date net income rose 12%, while operating income declined. Management attributed the improvement in net income largely to favorable tax effects and positive rate outcomes, partly offset by higher operating and maintenance costs.
- Distribution-segment operating income declined 2% year to date, despite $92.1 million of higher rate adjustments; increased depreciation, property taxes, lower weather-normalized consumption, maintenance, and other costs offset those gains.
- Pipeline and storage operating income declined 5% year to date. Higher rates were offset by increased hydro-testing and other maintenance, depreciation and property taxes, and lower throughput-related activity.
- Implemented regulatory actions increased annual operating income by $28.9 million in the first six months. Excluding excess-tax refunds, management cited $72.5 million of rate outcomes. Pending ratemaking efforts totaled $91.0 million in distribution filings plus a $78.8 million Atmos Pipeline-Texas filing.
- The board increased the fiscal 2022 quarterly dividend by 8.8%. The company stated that available liquidity should fund working capital and the capital program for the rest of FY2022 and that it expects to continue accessing financing on reasonable terms.
Outlook, risks and unusual items
Atmos recorded a $2.1 billion regulatory asset for incremental Winter Storm Uri costs and carrying costs. Texas regulators authorized securitization of approved costs over a period of up to 30 years; bond proceeds are intended to repay the $2.2 billion of public notes issued to finance the storm-related gas purchases. Kansas regulators approved a settlement finding the costs prudent, while a financing order was still anticipated in the first fiscal quarter of 2023. Timing and recovery remain dependent on regulatory and financing processes and, in Texas, bond-market conditions.
Management cited regulatory decisions, pipeline safety and integrity costs, gas-supply access and price volatility, weather, competition, capital-market access, cybersecurity and technology risks, and economic conditions among factors that could affect results. S&P rated senior unsecured debt A- with a negative outlook; Moody’s rated it A1 with a stable outlook. In litigation matters, the Texas Railroad Commission pursued $1.6 million of administrative penalties relating to a 2018 incident. Three civil actions were filed after a 2021 Farmersville worksite accident that caused two fatalities; investigations were ongoing. Management did not expect the matters to have a material adverse effect, but outcomes are uncertain.
No specific earnings guidance was provided in the supplied filing text. Management emphasized that first-half results are seasonal and should not be taken as a full-year forecast.
Most important facts for investors to verify
- Progress, timing and final recoverability of the Texas and Kansas Winter Storm Uri securitizations, including repayment of storm-related debt.
- Whether pending rate proceedings deliver the requested returns and when approved increases become effective.
- Execution and financing of the elevated capital-spending program, and its impact on debt, liquidity and the targeted capital structure.
- Drivers of the lower effective tax rate and the duration and customer-refund effects of excess deferred-tax balances.
- Developments in the 2018 regulatory enforcement matter and 2021 accident litigation, plus any changes to credit-rating outlooks.