Business context and reporting period
Atmos Energy Corporation is a regulated natural-gas distributor and pipeline and storage operator serving more than 3 million customers across eight states. This Form 10-Q covers the fiscal third quarter and nine months ended June 30, 2018; the fiscal year ends September 30.
Financial results and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $562.2 million, up 6.8% | $2.671 billion, up 16.4% |
| Operating income | $123.0 million, down 12.6% | $633.5 million, down 0.3% |
| Net income | $71.2 million vs. $70.8 million | $564.3 million vs. $360.6 million |
| Diluted EPS | $0.64 vs. $0.67 | $5.09 vs. $3.40 |
| Contribution margin | Not stated on a consolidated basis | $1.547 billion, up 7.3% |
| Operating cash flow | Not presented quarterly | $1.035 billion vs. $745.6 million |
| Capital expenditures | $394.5 million | $1.088 billion vs. $812.1 million |
Nine-month net income includes a $165.5 million non-cash, one-time income tax benefit from the Tax Cuts and Jobs Act (TCJA). Excluding it, adjusted income from continuing operations was $398.8 million, up 15%, and adjusted diluted EPS was $3.60 vs. $3.27. Operating cash flow less capital expenditures was approximately negative $53.2 million for the nine-month period.
At June 30, cash was $20.9 million; current assets were $452.9 million and current liabilities $1.466 billion. Short-term debt was $244.8 million, long-term debt including current maturities was approximately $3.068 billion, and shareholders’ equity was $4.760 billion. The company reported a 42% debt-to-capitalization ratio under its credit agreements and compliance with covenants. It had approximately $1.5 billion of committed revolving credit availability supporting its commercial paper program.
Material changes versus the prior comparable period
- For the first nine months, reported net income rose substantially because of the TCJA benefit; adjusted income and EPS also increased, reflecting rate outcomes, customer growth, colder weather and a lower effective tax rate.
- Nine-month operating income was nearly flat despite higher contribution margin, as operating expenses increased. Distribution operating income fell $14.3 million; pipeline and storage operating income rose $12.1 million.
- Capital expenditures increased 34% to $1.088 billion, primarily for distribution pipe replacement and pipeline reliability investments. Operating cash flow increased $289.7 million, partly reflecting working-capital timing and higher sales volumes.
- The company issued $400 million of common stock in November 2017, receiving $395.1 million net; no shares were sold under the ATM program during the nine months.
- Quarterly dividends were $0.485 per share, compared with $0.450; the company said its board increased the fiscal 2018 dividend rate by 7.8%.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $1.4 billion. It anticipated $500–$600 million of external financing through fiscal 2022, partly to offset TCJA-related reductions in operating cash flow, while targeting an equity-to-total-capitalization ratio of 50%–60%.
- Management cited safety and reliability investment, timely regulatory recovery and access to capital markets as key performance drivers. It reported 18 regulatory proceedings completed during the nine months, with an $82 million increase in annual operating income, and nine ratemaking efforts in progress seeking $36 million. The detailed ratemaking discussion separately describes 16 completed proceedings and a $10.8 million increase; the filing does not reconcile these figures clearly.
- The TCJA reduced the federal statutory tax rate. Of a $903.7 million reduction in the net deferred tax liability, $738.2 million was recorded as a regulatory liability for regulated operations and $165.5 million as the one-time income tax benefit. Customer rate adjustments and the timing of refunds remain subject to regulatory processes; some jurisdictions had not completed their review.
- In February 2018, a gas-related incident in Northwest Dallas caused one fatality and injuries to four residents. The NTSB investigation was ongoing. Atmos replaced a portion of the system following a planned outage affecting about 2,400 homes and reported approximately $24 million in related costs and resident assistance. A civil lawsuit sought more than $1 million; management stated that any amounts beyond recorded accruals were not expected to materially affect results, though outcomes remain uncertain.
- A $450 million senior note matures in March 2019; management planned to issue replacement senior notes and had swaps fixing the Treasury-yield component at 3.78%. Other principal risks cited include regulatory outcomes, weather, gas supply and prices, safety, capital-market access, pensions, environmental requirements and cybersecurity.
- The interim financial statements were reviewed by the independent auditor, not audited. Management said results for the nine-month period are not indicative of full-year results, in part because of seasonal factors.
Important facts for investors to verify
- Reconcile reported earnings with adjusted earnings, particularly the $165.5 million non-cash TCJA benefit and future tax-related rate changes.
- Track regulatory decisions on returning excess deferred taxes and lower-tax-rate benefits to customers, including unresolved jurisdictions and timing.
- Monitor the Dallas incident investigation, any additional claims or costs, and the related litigation and safety measures.
- Compare actual capital spending and financing needs with the $1.4 billion fiscal 2018 capex estimate and $500–$600 million financing outlook through fiscal 2022.
- Assess the 2019 note refinancing, short-term borrowing levels, covenant headroom and access to committed credit facilities.
- Clarify the filing’s differing summaries of completed regulatory proceedings and associated annual operating-income effects.