Atmos Energy Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; comparative figures are for the three months ended December 31, 2019. Atmos Energy operates regulated natural gas distribution and pipeline and storage businesses, serving more than three million customers. Management cautions that seasonal results are not indicative of full-year performance.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Operating revenue | $914.5 million | $875.6 million | +4.4% |
| Operating income | $298.8 million | $252.8 million | +18.2% |
| Net income | $217.7 million | $178.7 million | +21.8% |
| Diluted EPS | $1.71 | $1.47 | +$0.24 |
| Operating margin | 32.7% | 28.9% | +3.8 percentage points |
| Operating cash flow | $157.1 million | $172.4 million | −$15.4 million |
| Capital expenditures | $456.8 million | $529.2 million | −14% |
| Cash and cash equivalents, Dec. 31 | $457.6 million | $189.3 million | Year-over-year comparison |
Revenue increased despite lower distribution sales and transportation volumes. Distribution segment operating income rose to $209.6 million from $180.3 million; pipeline and storage operating income rose to $89.3 million from $72.5 million. More than 85% of quarterly capital spending went toward distribution and transmission system safety and reliability improvements.
Balance sheet, financing and liquidity
- Long-term debt was $5.125 billion at December 31, 2020, up from $4.532 billion at September 30, 2020. Shareholders’ equity was $7.213 billion; equity represented 58.5% of capitalization.
- The company issued $600 million of 1.50% senior notes due 2031, with $592.3 million net proceeds, and received $216.0 million from settling forward equity sales. Financing activities provided $733.3 million in cash.
- Management reported more than $2.9 billion in total liquidity, including cash and proceeds available under equity forward sales agreements. The company also had approximately $2.2 billion of committed revolving credit availability; no commercial paper borrowings were outstanding.
- The covenant-defined debt-to-capitalization ratio was 43%, against a maximum of 70%; the company reported compliance with its debt covenants. S&P and Moody’s ratings were A and A1 for senior unsecured long-term debt, respectively, with stable outlooks.
- Cash dividends paid were $0.625 per share, versus $0.575 in the prior-year quarter. The board increased the quarterly dividend rate by 8.7% for fiscal 2021.
Drivers, outlook and risks
- Management attributed higher earnings principally to favorable rate outcomes, distribution customer growth, and lower operation and maintenance costs due partly to timing. Distribution operating income also faced warmer weather, lower commercial sales, pandemic-related collection impacts, and higher depreciation and property taxes.
- During the quarter, regulatory actions increased annual operating income by $106.6 million. Rate efforts seeking a further $11.6 million annual increase were in progress at quarter-end; certain Colorado and Kansas approvals were received in January 2021.
- Management expected available liquidity to fund working capital and the fiscal 2021 capital program and expected continued access to financing on reasonable terms. The filing provides no quantified earnings or EPS guidance.
- COVID-19 measures included temporarily suspending customer disconnections for nonpayment and late fees. The allowance for uncollectible accounts increased to $35.1 million from $29.9 million at September 30, 2020; no COVID-related regulatory asset or liability had been recorded at quarter-end.
- The NTSB issued an abstract concerning the February 2018 Dallas residential gas incident that caused one fatality and injuries to four residents; its final report and safety recommendations were pending. Management said it did not expect litigation and environmental matters to materially adversely affect the company, while noting outcomes are uncertain.
- Key disclosed risks include regulatory outcomes, pipeline safety and integrity costs, weather, natural gas supply and price conditions, customer credit and economic conditions, access to capital markets, interest-rate and commodity risks, cyber threats, and COVID-19 effects.
Important facts for investors to verify
- Whether regulatory approvals and rate mechanisms deliver the expected revenue and earnings recovery, and how much regulatory lag remains.
- Capital spending, operating cash flow, and funding needs over the balance of FY2021; quarterly operating cash flow was below capital expenditures.
- Customer collections, bad-debt expense, and any change in COVID-related regulatory deferrals or disconnection policies.
- Developments in the Dallas incident investigation and any resulting litigation, remediation, or safety costs.
- Debt and equity financing plans, covenant headroom, credit ratings, and the extent to which share issuance affects per-share results.