Atmos Energy Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; this is an annual report, not a standalone Q4 filing. The unaudited September-quarter results are noted below. Atmos is a regulated natural gas distributor and pipeline operator serving more than three million customers in eight states. Its former natural gas marketing business was sold in January 2017 and is reported as discontinued operations.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Operating revenue | $3.116 billion | $2.760 billion | +12.9% |
| Contribution margin (non-GAAP) | $1.948 billion | $1.834 billion | +6.2% |
| Operating income | $723.1 million | $727.5 million | -0.6% |
| Income from continuing operations | $603.1 million | $382.7 million | +57.6% |
| Adjusted income from continuing operations (excluding TCJA benefit; non-GAAP) | $444.3 million | $382.7 million | +16.1% |
| Diluted EPS from continuing operations | $5.43 | $3.60 | Adjusted EPS: $4.00 vs. $3.60 |
| Operating cash flow | $1.125 billion | $867.1 million | +$257.6 million |
| Capital expenditures | $1.468 billion | $1.137 billion | +$330.5 million |
Revenue growth largely reflects higher purchased-gas costs passed through to customers; management considers contribution margin a more useful performance measure. Adjusted EPS increased 11.1%. Management attributed core earnings growth principally to rate increases tied to safety and reliability investment, weather 36% colder than the prior year, customer growth, and the lower tax rate, partly offset by tax-reform-related reductions in customer revenues. Operating expenses rose $117.9 million, including costs associated with a planned Northwest Dallas system outage and replacement affecting about 2,400 homes; related assistance and other costs were approximately $24 million.
FY2018 operating cash flow funded most, but not all, of the capital program. Investing cash outflow was $1.464 billion and financing cash inflow was $326.3 million. Cash ended the year at $13.8 million. The company issued $400 million of common stock during FY2018 and paid dividends of $1.94 per share, up from $1.80.
Debt and liquidity
At September 30, 2018, short-term debt was $575.8 million and total long-term debt, including current maturities, was $3.085 billion. Shareholders’ equity was $4.770 billion; equity represented 56.7% of capitalization including short-term debt. The company reported investment-grade ratings (S&P A; Moody’s A2) with stable outlooks and compliance with debt covenants. It had $13.8 million of cash and access to a $1.5 billion commercial-paper program supported by a $1.5 billion committed credit facility, plus smaller facilities. These facilities are subject to agreement conditions and are not additive sources of committed capacity.
A $575 million senior-note maturity was due in March 2019. After year-end, on October 4, 2018, Atmos issued $600 million of 4.30% senior notes due 2048; net proceeds of approximately $591 million were used to repay commercial-paper borrowings. The filing says the company expected to fund fiscal 2019 and later needs through operating cash flow and external financing, while targeting an equity-to-total-capitalization ratio of 50%–60%.
Material changes, outlook and risks
- Tax reform: The TCJA reduced the federal statutory rate to 21%. FY2018 includes a one-time, non-cash $158.8 million tax benefit; adjusted results exclude it. A further $744.9 million excess-deferred-tax regulatory liability and $22.5 million cost-of-service regulatory liability were recorded at year-end. Customer refunds and rate adjustments remain subject to regulatory orders; the timing of returns varies by jurisdiction.
- Rates and investment: Ratemaking actions effective in FY2018 increased annual operating income by $80.1 million, versus $104.2 million in FY2017. At year-end, pending proceedings sought $52.8 million in annual operating income. Several filings were approved after year-end, including a $17.6 million Mid-Tex Cities increase effective October 1, 2018 and a $7.0 million Mississippi settlement effective November 1, 2018.
- Capital program: Capital expenditures were $1.468 billion, with over 80% directed to distribution and transmission safety and reliability. The continuing program depends on timely rate recovery and ongoing access to debt and equity markets.
- Dividend: The board increased the quarterly dividend 8.2% for FY2019, according to management; future dividends remain subject to board discretion and financial needs.
- Safety and litigation: The NTSB, Texas Railroad Commission and PHMSA were investigating a February 23, 2018 Dallas residential incident that caused one fatality and injuries to four residents. A related civil action sought more than $1.0 million. Management stated excess losses beyond accrued amounts were possible but not reasonably estimable and did not expect litigation to materially affect results; the investigation and claims remain important uncertainties.
- Other principal risks: Regulatory decisions and lag; pipeline accidents and stricter safety rules; Texas concentration (about 70% of consolidated operations); extreme weather and gas-supply or transportation disruptions; rising interest rates and constrained capital-market access; competition from electricity and other pipelines; cyberattacks, environmental obligations, and pension and healthcare cost assumptions.
Q4 reference: For the quarter ended September 30, 2018, revenue was $444.7 million, operating income $89.6 million, net income $38.7 million and earnings per share $0.35.
Most important facts for investors to verify
- Reconcile reported FY2018 EPS of $5.43 with adjusted EPS of $4.00 and assess the nonrecurring $158.8 million tax benefit.
- Track regulator decisions, customer refund timing, and actual rate recovery against the $52.8 million of annual operating income requested at year-end.
- Review refinancing and liquidity after the $575 million March 2019 maturity and the post-year-end $600 million note issuance.
- Monitor capital spending, operating cash flow, and equity issuance needs as the infrastructure program continues.
- Follow the Dallas incident investigation, related litigation, and any resulting safety, remediation, insurance, or regulatory costs.