Atmos Energy Corporation Reports Earnings for Fiscal 2018; Initiates Fiscal 2019 Guidance; Raises Dividend 8.2 Percent

Atmos Energy Corporation (NYSE: ATO) today reported consolidated results for its 2018 fiscal year and fourth quarter ended September 30, 2018.

• Fiscal 2018 consolidated net income was $603.1 million or $5.43 per diluted share, compared with consolidated net income of $396.4 million, or $3.73 per diluted share for the same period last year.
• Adjusted income from continuing operations for fiscal 2018, which excludes a one-time income tax benefit related to the Tax Cuts and Jobs Act of 2017 (the TCJA) of $158.8 million, or $1.43 per diluted share, was $444.3 million, or $4.00 per diluted share, compared with adjusted income from continuing operations of $382.7 million, or $3.60 per diluted share in the prior year.
• Capital expenditures were $1.47 billion for the year ended September 30, 2018, with approximately 85 percent of that spending related to system safety and reliability investments.
• Atmos Energy expects fiscal 2019 earnings to be in the range of $4.20 to $4.35 per diluted share. Capital expenditures are expected to be in the range of $1.65 billion to $1.75 billion in fiscal 2019.
• The company's Board of Directors has declared a quarterly dividend of $0.525 per common share. The indicated annual dividend for fiscal 2019 is $2.10, which represents an 8.2% increase over fiscal 2018.

Fiscal 2018 fourth quarter adjusted income from continuing operations was $45.5 million, or $0.41 per diluted share, compared with adjusted income from continuing operations of $35.9 million, or $0.34 per diluted share in the prior-year quarter.

"We delivered another year of solid results as we invested nearly $1.5 billion to continue to improve the safety and reliability of our system,” said Mike Haefner, President and Chief Executive Officer of Atmos Energy Corporation. "I am proud of the work our employees do every day to deliver value to our customers, communities, and investors. The continued execution of our strategy has allowed us to increase the investment in our infrastructure while delivering an attractive return to shareholders. We remain well-positioned to continue delivering annual earnings per share growth in the six to eight percent range,” Haefner concluded.

Results for the Fiscal Year Ended September 30, 2018

Operating income decreased $4.4 million to $723.1 million for the year ended September 30, 2018, compared to $727.5 million in the prior year. Positive rate outcomes, higher transportation margins and stronger customer consumption were more than offset by reduced revenues as a result of the partial implementation of the TCJA and higher operating expenses.

Distribution contribution margin increased $63.5 million to $1,443.2 million for the year ended September 30, 2018, compared with $1,379.7 million in the prior year. Contribution margin reflects a net $70.7 million increase in rates. In addition, net consumption increased $12.2 million, primarily due to weather that was 36 percent colder than the prior-year period. Transportation contribution margin increased $8.9 million year over year primarily due to the addition of new industrial customers. Customer growth, primarily in the Mid-Tex Division, contributed an additional $8.4 million compared to the prior-year period. These increases were partially offset by a decrease of $51.3 million as a result of incorporating the lower statutory tax rate in revenues due to the TCJA.

Pipeline and storage contribution margin increased $51.2 million to $505.7 million for the year ended September 30, 2018, compared with $454.5 million in the prior year. This increase is primarily attributable to a $74.3 million increase in revenue from the Atmos Pipeline–Texas rate case completed in fiscal 2017 and two Gas Reliability Infrastructure Program (GRIP) filings implemented in fiscal 2018, partially offset by a decrease of $24.1 million as a result of the partial implementation of the TCJA.

Continuing operation and maintenance expense for the year ended September 30, 2018 was $599.6 million, compared with $546.8 million in the prior year. This increase was primarily driven by expenses incurred as a result of a planned outage experienced in the Mid-Tex Division in March 2018, increased maintenance activities in the distribution segment in the current year and higher employee-related expenses.

Capital expenditures increased $330.5 million to $1,467.6 million for the year ended September 30, 2018, compared with $1,137.1 million in the prior year, due to continued spending for infrastructure replacements and enhancements.

For the year ended September 30, 2018, the company generated operating cash flow of $1,124.7 million, a $257.6 million increase compared with the year ended September 30, 2017. The period-over-period increase primarily reflects successful rate case outcomes achieved in fiscal 2017 due to increases in safety spending and changes in working capital, primarily as a result of the timing of gas cost recoveries under purchased gas cost mechanisms.

The equity capitalization ratio at September 30, 2018 was 56.7%, compared with 52.6% at September 30, 2017. On November 28, 2017, Atmos Energy completed the public offering of 4,558,404 shares of common stock for gross proceeds of approximately $400 million. Atmos Energy used the net proceeds of $395.1 million from this offering to repay short-term debt under its commercial paper program, to fund capital spending and for general corporate purposes.

Results for the Quarter Ended September 30, 2018

Operating income decreased $2.2 million to $89.6 million for the three months ended September 30, 2018, from $91.8 million in the prior-year quarter. Positive rate outcomes were more than offset by reduced revenues as a result of the partial implementation of the TCJA as well as higher operating expenses.

Distribution contribution margin decreased $5.4 million to $269.3 million for the three months ended September 30, 2018, compared with $274.7 million in the prior-year quarter. Contribution margin reflects a net $6.3 million increase in rates. An increase in customers, primarily in the Mid-Tex Division, contributed an additional $2.6 million compared to the prior-year quarter. These increases were partially offset by a decrease of $12.6 million as a result of incorporating the lower statutory tax rate reflected in revenues due to the TCJA.

Pipeline and storage contribution margin increased $15.0 million to $132.6 million for the three months ended September 30, 2018, compared with $117.6 million in the prior-year quarter. This increase is attributable to a $20.3 million increase in rates, due to the Atmos Pipeline–Texas rate case completed in fiscal 2017 and two GRIP filings approved in fiscal 2018, partially offset by a decrease of $8.0 million as a result of the partial implementation of the TCJA.

Continuing operation and maintenance expense for the three months ended September 30, 2018, was $163.9 million, compared with $160.9 million for the prior-year quarter. This $3.0 million increase was primarily driven by higher administrative and employee-related expenses in the current-year quarter.

Outlook

The leadership of Atmos Energy remains focused on enhancing system safety and reliability through infrastructure investment while delivering shareholder value and consistent earnings growth. Atmos Energy expects fiscal 2019 earnings to be in the range of $4.20 to $4.35 per diluted share. Capital expenditures for fiscal 2019 are expected to range between $1.65 billion and $1.75 billion.

Conference Call to be Webcast November 8, 2018

Atmos Energy will host a conference call with financial analysts to discuss the fiscal 2018 financial results on Thursday, November 8, 2018, at 10:00 a.m. Eastern Time. The domestic telephone number is 877-485-3107 and the international telephone number is 201-689-8427. Mike Haefner, President and Chief Executive Officer and Chris Forsythe, Senior Vice President and Chief Financial Officer will participate in the conference call. The conference call will be webcast live on the Atmos Energy website at www.atmosenergy.com. A playback of the call will be available on the website later that day.

Highlights and Recent Developments

On November 7, 2018, Atmos Energy announced that Kevin Akers, Senior Vice President, Safety and Enterprise Services, had been promoted to Executive Vice President, effective immediately.

On November 1, 2018, Atmos Energy announced that Sean Donohue and Diana J. Walters had been elected to our board of directors, effective November 1, 2018, with each of their terms expiring at the 2019 annual meeting of shareholders on February 6, 2019.

On October 4, 2018, Atmos Energy completed a public offering of $600 million of 4.30% senior notes due 2048, receiving net proceeds from the offering of approximately $591 million after all offering-related expenses.

Forward-Looking Statements

The matters discussed in this news release may contain "forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this news release are forward-looking statements made in good faith by the company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this news release or in any of the company's other documents or oral presentations, the words "anticipate,” "believe,” "estimate,” "expect,” "forecast,” "goal,” "intend,” "objective,” "plan,” "projection,” "seek,” "strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in this news release, including the risks and uncertainties relating to regulatory trends and decisions, the company's ability to continue to access the credit and capital markets and the other factors discussed in the company's reports filed with the Securities and Exchange Commission. These factors include the risks and uncertainties discussed in Item 1A of the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and in subsequent filings with the Securities and Exchange Commission.

Although the company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. The company undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

The historical financial information in this news release utilizes certain financial measures that are not presented in accordance with generally accepted accounting principles (GAAP). Specifically, the company uses contribution margin, defined as operating revenues less purchased gas cost, to discuss and analyze its financial performance. Its operations are affected by the cost of natural gas, which is passed through to its customers without markup and includes commodity price, transportation, storage, injection and withdrawal fees, along with hedging settlements. These costs are reflected in the income statement as purchased gas cost. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, the company believes contribution margin is a more useful and relevant measure to analyze its financial performance than operating revenues. The term contribution margin is not intended to represent operating income, the most comparable GAAP financial measure, as an indicator of operating performance, and is not necessarily comparable to similarly titled measures reported by other companies.

In addition, the enactment of the TCJA required the company to remeasure its deferred tax assets and liabilities at its new federal statutory income tax rate as of December 31, 2017, which resulted in the recognition of a non-cash income tax benefit during the year ended September 30, 2018. Due to the non-recurring nature of this benefit, the company believes that income from continuing operations and diluted earnings per share from continuing operations before the one-time, non-cash income tax benefit, provides a more useful and relevant measure to analyze its financial performance than income from continuing operations and consolidated diluted earnings per share from continuing operations in order to allow investors to better analyze the company's core results and allow the information to be presented on a comparative basis to the prior year. Accordingly, the discussion and analysis of the company's financial performance will reference adjusted income from continuing operations and diluted earnings per share, which is calculated as follows:

About Atmos Energy

Atmos Energy Corporation, headquartered in Dallas, is the country's largest fully-regulated, natural-gas-only distributor, serving over three million natural gas distribution customers in over 1,400 communities in eight states from the Blue Ridge Mountains in the East to the Rocky Mountains in the West. Atmos Energy also manages company-owned natural gas pipeline and storage assets, including one of the largest intrastate natural gas pipeline systems in Texas. For more information, visit www.atmosenergy.com.

This news release should be read in conjunction with the attached unaudited financial information.

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