Atmos Energy Corporation (ATO) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; comparative periods ended June 30, 2020. Atmos is a regulated natural gas distribution and pipeline and storage company serving more than three million customers in eight states. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Nine months ended June 30, 2021 | Nine months ended June 30, 2020 |
|---|---|---|---|---|
| Operating revenue | $605.6 million | $493.0 million | $2,839.1 million | $2,346.2 million |
| Operating income | $133.4 million | $139.0 million | $814.0 million | $723.3 million |
| Net income | $102.4 million | $117.8 million | $616.8 million | $536.1 million |
| Diluted EPS | $0.78 | $0.96 | $4.77 | $4.37 |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1,358.0 million | $1,405.7 million |
Quarterly operating margin was approximately 22.0%, compared with 28.2% a year earlier; nine-month operating margin was approximately 28.7%, compared with 30.8%. These ratios use reported revenue, which includes gas-cost pass-through effects.
The prior-year nine-month comparison included a $21.0 million non-cash tax benefit. Excluding it, nine-month 2020 adjusted net income was $515.1 million and adjusted diluted EPS was $4.20; 2021 adjusted net income increased about 20%, and adjusted diluted EPS increased $0.57. For the quarter, adjusted diluted EPS was $0.78 versus $0.79 in 2020 after excluding the prior-year tax benefit.
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $1,158.5 million, versus positive $895.5 million in 2020, principally reflecting Winter Storm Uri gas purchases and the timing of customer collections.
- Investing cash use was $1,352.3 million, including $1,358.0 million of capital expenditures. Management said more than 85% of current-period capital spending went to distribution and transmission safety and reliability.
- Financing cash provided $3,014.6 million, including proceeds from debt and equity financing. Cash at June 30 was $524.6 million, up from $20.8 million at September 30, 2020.
- Long-term debt was $7,128.5 million on the balance sheet, up from $4,531.8 million at September 30, 2020. The company issued $2.2 billion of notes in March to fund Uri-related gas costs.
- Equity represented 51.5% of capitalization at June 30; excluding the Uri-related $2.2 billion financing, management reported an equity capitalization ratio of 60.2%. Debt-to-capitalization for covenant purposes was 50%, and the company reported compliance with covenants.
- Management reported approximately $3.2 billion of total liquidity, including cash and proceeds available under equity forward sales agreements. Separately, the company had $2.5 billion of committed revolving credit facilities and no commercial-paper or revolving-facility borrowings at June 30.
Material changes and operating drivers
- Distribution operating income rose 17% to $580.9 million for the nine months, driven mainly by $128.1 million of net rate increases and customer growth. Higher bad-debt expense, lower service-order revenue, and increased depreciation and property taxes partly offset gains.
- Pipeline and storage operating income increased 3% to $233.1 million for the nine months. Rate adjustments contributed, while lower through-system activity, customer tax refunds, and higher depreciation and property taxes were offsets. Quarterly segment operating income fell 15% to $65.3 million, including a $10.0 million revenue reduction to refund excess deferred taxes and higher maintenance costs.
- Rate actions implemented during the first nine months were reported as adding $139.6 million in annual operating income across listed proceedings; the executive summary cites $183.5 million including additional activity. Rate efforts in progress at June 30 sought $69.5 million in annual operating income, subject to regulatory outcomes.
- The quarterly dividend was $0.625 per share, up from $0.575 a year earlier. Management said the board increased the fiscal 2021 dividend rate by 8.7%.
Outlook, risks and unusual items
- Winter Storm Uri resulted in approximately $2.3 billion of gas purchases in February 2021. At June 30, the company recorded a $2.1 billion regulatory asset for extraordinary costs and carrying costs, subject to prudency review and possible adjustment.
- Kansas securitization legislation was effective, and Atmos said it planned to apply to securitize its Kansas Uri costs. On July 30, 2021, after quarter-end, it applied in Texas to securitize $2.0 billion of extraordinary costs, including estimated carrying and administrative costs. Recovery timing and final regulatory approval remain uncertain.
- Following the Uri debt issuance, S&P lowered the company’s long- and short-term ratings one notch to A-/A-2 and Moody’s affirmed its ratings; both assigned negative outlooks. Both ratings remained investment grade at June 30.
- Management expects available liquidity to fund working-capital needs and the fiscal 2021 capital program and expects to continue accessing financing on reasonable terms. The filing provides no specific earnings or revenue guidance. Management cautions that nine-month results are not indicative of the full fiscal year due to seasonality.
- Other risks include regulation and rate recovery, pipeline safety and integrity, weather and natural disasters, gas supply and price volatility, customer collections, access to capital markets, cyber threats, and COVID-19-related economic effects.
- Atmos recognized a $9.0 million pension settlement charge in the quarter following certain executive retirements. The filing also describes an NTSB investigation of a June 28, 2021 worksite accident in Texas involving two fatalities and two injuries, and a civil action filed July 16, 2021. Separately, the RRC pursued $1.6 million in administrative penalties relating to a 2018 Dallas incident; Atmos was working to resolve the alleged violations.
Most important facts for investors to verify
- Whether Texas and Kansas regulators approve Uri cost recovery and securitization, and the resulting recovery schedule and carrying-cost treatment.
- How the Uri-related regulatory asset, customer collections, and financing affect operating cash flow, leverage, and credit ratings.
- Progress on pending rate cases and infrastructure mechanisms, including the difference between the filing’s $139.6 million detailed rate-action total and its $183.5 million executive-summary figure.
- Future bad-debt expense and collections as customer disconnections and collection activity resume.
- Developments in the NTSB investigation, civil litigation, and RRC enforcement matters, including potential costs beyond recorded accruals.