Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2019, within fiscal 2019. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Atmos operates regulated natural gas distribution and pipeline and storage businesses, serving more than three million customers across eight states.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2019 | Six months ended Mar. 31, 2019 | Prior comparable period |
|---|---|---|---|
| Operating revenue | $1.095 billion | $1.972 billion | $1.219 billion / $2.109 billion |
| Contribution margin (non-GAAP) | $623.7 million | $1.159 billion | $592.8 million / $1.115 billion |
| Operating income | $297.7 million | $534.1 million | $270.9 million / $513.0 million |
| Net income | $214.9 million | $372.5 million | $179.0 million / $493.1 million |
| Diluted EPS | $1.82 | $3.21 | $1.60 / $4.47 |
| Cash dividends per share | $0.525 | $1.05 | $0.485 / $0.97 |
For the six-month periods, revenue fell 6% while contribution margin rose about 4%. The company reported operating cash flow of $560.8 million, capital expenditures of $777.6 million, and cash of $108.4 million at March 31. Long-term debt was $3.654 billion including current maturities; shareholders’ equity was $5.508 billion. Debt was 39.9% of capitalization, under the company’s stated 50%–60% desired equity-to-capitalization range. No commercial paper borrowings were outstanding at quarter-end; approximately $1.5 billion of committed revolving credit availability supported the commercial paper program. The company reported covenant compliance and a 41% debt-to-capitalization ratio under its credit agreements.
Changes versus prior periods
- Second-quarter net income increased $35.9 million year over year. Six-month GAAP net income decreased $120.6 million, primarily because the prior-year period included a $165.7 million noncash tax benefit from the Tax Cuts and Jobs Act (TCJA). Excluding that benefit, six-month adjusted net income rose $45.1 million, or 14%, and adjusted diluted EPS increased from $2.97 to $3.21.
- Distribution contribution margin increased $19.4 million for the six months, reflecting rate adjustments and customer growth. Distribution throughput increased to 328.2 Bcf from 304.3 Bcf.
- Pipeline and storage contribution margin increased $24.5 million for the six months, driven by rate adjustments and favorable Permian Basin supply-demand dynamics and spreads. Higher operating costs partly offset the improvement.
- Operating cash flow declined $190.5 million year over year, attributed primarily to net income and working-capital timing, including natural-gas payments and deferred gas-cost recoveries. Capital spending rose 12%.
- Debt and equity financing increased to support capital investment and refinance obligations. The company issued $600 million of 4.30% senior notes and $450 million of 4.125% senior notes, and completed a $500 million common-stock offering. It repaid $450 million of 8.50% notes due March 2019.
Outlook, commentary, risks, and unusual items
- Management forecast fiscal 2019 capital expenditures of $1.65 billion–$1.75 billion and stated that available liquidity was expected to fund working capital and capital needs for the remainder of fiscal 2019 and beyond. More than 80% of first-half capital spending was directed to system safety and reliability.
- Management cited rate outcomes, customer growth, pipeline margins, and the lower TCJA-era tax rate as drivers of adjusted earnings growth. The board increased the fiscal 2019 quarterly dividend by 8.2%.
- Thirteen ratemaking efforts were described in the executive summary as in progress, seeking $159.3 million of annual operating-income increases. The detailed table of proceedings in progress at March 31 instead totals approximately $110.1 million; several proceedings were subsequently updated. This difference warrants verification.
- Regulatory recovery, rate decisions, safety and operational risks, weather, gas-supply availability and cost, access to capital markets, interest rates, and the concentration of operations in Texas are identified risks. The company stated that regulatory mechanisms substantially reduce weather exposure and pass through most gas costs.
- The NTSB and other agencies were investigating the February 2018 Dallas residential gas incident, which caused one fatality and injuries to four people. A related civil action sought more than $1 million in damages. Management stated that litigation and other claims were not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
- The $90.1 million settlement of interest-rate swaps associated with the 2019 notes was recorded as a deferred loss in accumulated other comprehensive income and is to be amortized to interest expense over the debt’s term. The company also reported $736.6 million of regulatory excess deferred-tax liabilities, with customer-return timing still being determined in some jurisdictions.
Important facts for investors to verify
- Reconcile the $159.3 million ratemaking pipeline cited in the executive summary with the detailed $110.1 million table and subsequent rate-case outcomes.
- Track operating cash flow against the $1.65 billion–$1.75 billion fiscal-year capital-spending plan and the need for additional debt or equity financing.
- Review the timing and amounts of TCJA-related customer refunds and excess deferred-tax recovery across jurisdictions.
- Monitor outcomes of the Dallas incident investigation and related litigation, along with ongoing pipeline safety and maintenance obligations.
- Assess the September 2019 maturity of the $125 million term loan, refinancing plans, and continued covenant and credit-rating headroom.