Atmos Energy Corporation — Fiscal 2019 First Quarter
Reporting period: Three months ended December 31, 2018; comparison is with the three months ended December 31, 2017. Atmos is a regulated natural gas distribution and pipeline and storage company serving more than three million customers across eight states. The company cautions that seasonal results are not indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Operating revenue | $877.8 million | $889.2 million | Down 1.3% |
| Contribution margin (revenue less purchased gas cost; non-GAAP) | $535.6 million | $522.3 million | Up $13.3 million, or 2.6% |
| Operating income | $236.5 million | $242.1 million | Down 2.3% |
| Net income | $157.6 million | $314.1 million | Down $156.5 million |
| Diluted EPS | $1.38 | $2.89 | Down $1.51 |
| Adjusted net income / diluted EPS | $157.6 million / $1.38 | $152.2 million / $1.40 | Net income up $5.4 million; EPS down $0.02 |
| Operating cash flow | $164.7 million | $173.2 million | Down $8.6 million |
| Capital expenditures | $416.4 million | $383.2 million | Up 9% |
The prior-year results included a $161.9 million non-cash income tax benefit from the Tax Cuts and Jobs Act (TCJA), making reported net income and EPS comparisons less representative of underlying performance. Management’s adjusted comparison removes that benefit. Adjusted net income increased 4%, reflecting colder weather, pipeline and storage rate outcomes, and a lower effective tax rate, partly offset by lower revenues associated with TCJA implementation and higher share count.
Operating expenses rose to $299.2 million from $280.2 million, while operating margin—operating income divided by revenue—was approximately 26.9%, versus 27.2%. Cash dividends per share were $0.525, compared with $0.485.
Balance sheet, debt and liquidity
- At December 31, 2018, cash and cash equivalents were $218.2 million, versus $13.8 million at September 30, 2018.
- Total debt, including current maturities, was approximately $3.66 billion; short-term debt was zero. Shareholders’ equity was $5.35 billion. Debt was 40.6% of capitalization under the company’s presentation, and the debt-covenant ratio was 42%, below the 70% maximum.
- Current assets were $912.7 million and current liabilities were $1.46 billion. The company reported no commercial-paper borrowings at quarter end and had a $1.5 billion commercial paper program supported by a $1.5 billion revolving credit facility.
- Financing cash flow was $455.0 million, including net proceeds of approximately $590.6 million from issuing $600 million of 4.30% senior notes due 2048 and $494.7 million from a common-stock offering. The proceeds supported capital spending, repaid short-term borrowings, and funded general corporate purposes.
Material changes and operating developments
- Distribution contribution margin increased $4.1 million, but operating income fell $3.8 million as operating expenses increased. Distribution sales volumes rose 17.8%, and throughput increased 14.8%; management cited weather that was 20% colder than the prior-year period and customer growth.
- Pipeline and storage contribution margin rose $9.3 million, driven by approved rate increases and favorable supply-and-demand dynamics. Operating income nevertheless declined $1.8 million because operating expenses increased $11.1 million, including higher depreciation and maintenance.
- Capital spending was primarily directed to safety and reliability improvements. More than 80% of quarterly spending was invested in distribution and transmission system safety and reliability.
- Five regulatory proceedings implemented during the quarter increased annual operating income by $22.4 million. Ten additional ratemaking efforts were in progress at quarter end, seeking a net $20.9 million annual increase. Regulatory decisions and the timing of cost recovery remain important to results.
Outlook, risks and contingencies
- Management forecast fiscal 2019 capital expenditures of $1.65 billion to $1.75 billion and stated that available liquidity was expected to fund working capital and the capital program for the remainder of the fiscal year and beyond.
- A $450 million senior-note maturity was due in March 2019 and a $125 million term loan was due in September 2019; the company planned to refinance both. It had entered into forward-starting interest-rate swaps to fix the Treasury yield component for the anticipated $450 million issuance at 3.78%.
- The board increased the quarterly dividend by 8.2% for fiscal 2019. Moody’s affirmed the debt ratings and revised its outlook to positive; S&P’s outlook remained stable. Both agencies’ ratings were investment grade.
- TCJA-related excess deferred tax balances are being addressed with regulators and are expected to be returned to customers under applicable regulatory processes. The timing and treatment remain subject to jurisdictional decisions; approved provisional return periods range from 13 to 51 years in certain jurisdictions.
- The NTSB and other authorities were investigating a February 2018 Dallas-area incident involving one fatality and four injuries. A related civil action sought more than $1.0 million in damages. Management stated that litigation and environmental matters were not expected to have a material adverse effect, while noting outcomes are uncertain. The company generally retains the first $1.0 million of each insured incident.
- Key stated risks include regulatory outcomes and cost-recovery lag, natural-gas pipeline safety, access to capital markets, interest-rate and commodity risks, adverse weather, Texas operating concentration, and cybersecurity threats.
Important facts for investors to verify
- Whether the adjusted earnings comparison adequately reflects recurring operating performance, given the prior-year TCJA benefit and the current-year increase in shares outstanding.
- Progress and final outcomes of pending rate proceedings, including TCJA customer refunds and recovery of infrastructure investment.
- Whether planned capital spending, refinancing of 2019 maturities, and access to debt and equity markets proceed on expected terms.
- Developments in the Dallas incident investigation and related litigation, and any resulting operational, regulatory, or financial exposure.
- Execution of the $1.65 billion to $1.75 billion fiscal 2019 capital plan and the timing of associated rate recovery.
The interim financial statements were reviewed by the independent registered public accounting firm; the review was not an audit. The firm reported that it was not aware of material modifications needed for conformity with U.S. GAAP.