Atmos Energy Corporation — Form 10-Q Summary
Business context and reporting period
Atmos Energy operates regulated natural gas distribution and pipeline and storage businesses, serving more than 3 million customers in eight states. This filing covers the fiscal second quarter and six months ended March 31, 2018; the comparable periods are the three and six months ended March 31, 2017. The interim statements are unaudited, and management cautions that seasonal results are not indicative of the full fiscal year.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Year-over-year |
|---|---|---|
| Operating revenue | $1.219 billion | Up from $988.2 million |
| Contribution margin (revenue less purchased gas cost) | $592.8 million | Up from $560.7 million |
| Operating income | $269.0 million | Down from $285.2 million |
| Income from continuing operations | $179.0 million; $1.60 per diluted share | Up from $162.0 million; $1.52 per share |
| Adjusted income from continuing operations, excluding TCJA benefit | $175.2 million; adjusted EPS $1.57 | Compared with $162.0 million; $1.52 per share |
For the six months, revenue was $2.109 billion, contribution margin $1.115 billion, and operating income $510.5 million. Continuing-operations income was $493.1 million ($4.47 per share), including a $165.7 million one-time, non-cash tax benefit from the Tax Cuts and Jobs Act (TCJA). Excluding that benefit, adjusted income was $327.4 million and adjusted EPS was $2.97, versus $276.1 million and $2.61 in the prior-year period. Management attributed the adjusted improvement chiefly to rate outcomes, colder weather, customer growth and a lower effective tax rate, partly offset by TCJA-related rate reductions.
Six-month operating cash flow was $751.4 million, capital expenditures were $694.0 million, and cash increased $44.7 million to $71.1 million. Cash dividends paid were $105.9 million. At March 31, total debt was approximately $3.20 billion, including $450 million of long-term debt classified as current maturity; shareholders’ equity was $4.72 billion. Short-term debt was $129.6 million, down from $447.7 million at September 30, 2017. The company reported a 41% debt-to-total-capitalization ratio under its credit agreements and compliance with covenants. It had approximately $1.5 billion of committed credit facilities and investment-grade ratings with stable outlooks.
Material changes versus prior comparable periods
- Second-quarter revenue rose substantially, largely reflecting higher gas costs passed through to customers and higher volumes; this did not translate into higher operating income. Quarterly operating income declined as operating expenses rose.
- Six-month adjusted diluted EPS increased to $2.97 from $2.61. The reported GAAP increase was substantially amplified by the TCJA’s one-time tax benefit.
- Six-month capital spending rose to $694.0 million from $559.4 million. The company issued 4.56 million shares for $400 million gross proceeds ($395.1 million net), primarily to support investment and reduce short-term borrowing.
- TCJA remeasurement reduced the net deferred tax liability by $903.5 million: $737.8 million was recorded as a regulatory liability to be returned to customers, and $165.7 million was recognized as a one-time tax benefit. Lower tax rates in regulated cost-of-service rates also reduced revenue beginning in the second quarter.
- The company had sold its natural gas marketing business in January 2017; prior-year results include discontinued-operation income and a sale gain, limiting direct comparability.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $1.4 billion, with more than 80% of first-half spending directed to distribution and transmission safety and reliability.
- Management estimated a fiscal 2018 effective tax rate of 26%–28%, before the effects of returning excess deferred taxes to customers and the one-time tax benefit. It anticipated $500–$600 million of external financing through fiscal 2022 to offset TCJA-related operating cash-flow reductions while maintaining its target equity-to-capitalization range of 50%–60%.
- Management reported that colder weather was 33% colder than the prior year. Weather normalization mechanisms cover approximately 97% of residential and commercial meters for specified periods.
- A planned outage and replacement of part of the Northwest Dallas distribution system followed a sudden increase in leaks. The outage affected approximately 2,400 homes; the system was returned to service by March 31, and the company reported about $23 million in related costs and resident assistance. An NTSB investigation followed a February gas incident that caused one fatality and injuries to four residents. A civil action sought more than $1 million in damages; the company’s stated self-insured retention is $1 million per incident. Management said outcomes beyond recorded accruals were not reasonably estimable and did not expect litigation matters to have a material adverse effect.
- Rate proceedings are material to earnings and customer refunds. The filing’s executive summary describes ten completed proceedings producing $47.4 million of annual operating-income increases and ten ongoing efforts seeking $65.3 million, while the detailed ratemaking discussion reports nine completed proceedings producing $18.4 million and pending efforts seeking $23.1 million as of March 31. Investors should reconcile these differing disclosures.
- Other risks identified include regulatory decisions, access to capital markets, gas supply and price volatility, adverse weather, safety and environmental regulation, operational hazards, pension costs, cybersecurity and concentration of operations in Texas. Management stated that liquidity sources were expected to fund fiscal 2018 working capital and capital needs.
Important facts for investors to verify
- Reconcile the conflicting summary and detailed disclosures of completed and pending ratemaking proceedings, requested increases and effective dates.
- Track final regulatory determinations on TCJA-related customer refunds, revenue reductions and the timing of the $737.8 million regulatory liability’s return.
- Assess the Dallas incident investigation, any resulting claims or costs beyond the approximately $23 million reported, and the potential effects on safety spending and operations.
- Monitor delivery of the approximately $1.4 billion fiscal 2018 capital program, financing needs, the March 2019 $450 million debt maturity and progress toward management’s capital-structure targets.
- Distinguish recurring earnings from the $165.7 million one-time tax benefit and account for weather, rate changes, gas-cost pass-throughs and discontinued operations when comparing periods.