Atmos Energy Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; year-over-year comparisons are with the three months ended December 31, 2018. Atmos Energy operates regulated natural gas distribution, pipeline and storage businesses, serving more than three million customers. Management cautions that seasonal results are not indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Operating revenue | $875.6 million | $877.8 million | Down 0.3% |
| Operating income | $252.8 million | $236.5 million | Up 6.9% |
| Net income | $178.7 million | $157.6 million | Up 13.3% |
| Diluted EPS | $1.47 | $1.38 | Up 6.5% |
| Operating margin | 28.9% | 26.9% | Approximate |
| Net cash from operations | $172.4 million | $164.7 million | Up $7.8 million |
| Capital expenditures | $529.2 million | $416.4 million | Up 27% |
Distribution operating income rose $10.8 million to $180.3 million; pipeline and storage operating income rose $5.5 million to $72.5 million. Consolidated operating revenue was nearly flat as lower distribution gas costs and lower distribution volumes offset higher pipeline revenue. Net income growth primarily reflected favorable distribution rate outcomes and customer growth. Quarterly dividends were $0.575 per share, versus $0.525.
Balance sheet, debt and liquidity
- At December 31, cash and cash equivalents were $189.3 million, compared with $24.6 million at September 30, 2019. Current assets were $812.1 million and current liabilities were $845.2 million.
- Long-term debt, net of discounts and issuance costs, was $4.324 billion; short-term debt was zero. The company issued $800 million of senior notes in October, with $791.7 million of net proceeds used for general corporate purposes, including repayment of commercial paper borrowings.
- Shareholders’ equity was $6.128 billion. Debt was 41.4% of capitalization and equity 58.6%; the covenant-defined total-debt-to-total-capitalization ratio was 42%, versus a 70% maximum. The company reported compliance with all debt covenants.
- Funding sources include a $1.5 billion commercial paper program and approximately $1.5 billion of committed revolving credit facilities. Management said available liquidity was expected to fund working capital and the fiscal 2020 capital program.
- Operating cash flow less capital expenditures was negative $356.7 million for the quarter. Financing cash flow was $520.5 million, including debt and equity proceeds.
Material changes, outlook and management commentary
- Six regulatory proceedings implemented during the quarter increased annual operating income by $56.7 million. Five proceedings were in progress at quarter-end, seeking a net $6.6 million annual increase.
- Fiscal 2020 capital expenditures were expected to be $1.85–$1.95 billion. More than 80% of first-quarter spending was directed to distribution and transportation system safety and reliability.
- The board increased the fiscal 2020 quarterly dividend by 9.5%. Moody’s upgraded senior unsecured debt to A1 with a stable outlook; S&P maintained a stable outlook. Both agencies’ ratings were investment grade.
- Distribution sales volumes declined about 2.6%, and total distribution throughput declined about 2.2%. Management cited warmer weather than the prior-year quarter, partly offset by rate increases and customer growth.
- Pipeline and storage revenue increased $13.7 million, mainly from rate adjustments; higher depreciation and maintenance costs partly offset the increase. Pipeline transportation volumes declined.
- The company adopted the new lease accounting standard on October 1, 2019, recognizing $231.3 million of right-of-use assets and lease liabilities at adoption; management reported no material income-statement or cash-flow impact.
Risks, contingencies and unusual items
- The NTSB is investigating a February 2018 Dallas residential gas incident that caused one fatality and injuries to four residents. Atmos is cooperating with the investigation. Management stated that existing litigation and environmental matters were not expected to have a material adverse effect, though outcomes remain uncertain.
- Key risks identified include regulatory decisions and recovery timing, pipeline integrity and safety costs, access to capital markets, natural-gas supply and price volatility, adverse weather, concentration in Texas, cyber threats, climate-related regulation, and pension and postretirement costs.
- Atmos reported net realized losses of $113.7 million in accumulated other comprehensive income related to settled interest-rate agreements, to be amortized to interest expense over the related debt terms, extending through fiscal 2049.
- The company anticipated hedging approximately 49% of 2019–2020 winter flowing gas requirements in jurisdictions permitting financial instruments; purchased-gas adjustment mechanisms generally pass gas costs through to customers.
Important facts for investors to verify
- Whether the $1.85–$1.95 billion capital-spending plan and timely regulatory recovery remain on track.
- Progress and outcomes of the five pending rate proceedings, including requested increases and effective dates.
- Cash funding needs, future debt and equity issuance, and the effect of share issuance and forward sales on per-share results.
- Developments in the Dallas incident investigation and any resulting claims, costs or regulatory action.
- Whether operating cash generation and credit access continue to support the capital program while maintaining covenant and rating metrics.