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Disciplined Capital Allocation Helps Atmos Energy Hike Dividend by 9%

Shauvik Haldar Nov 18, 2020

Atmos Energy Corp. (ATO) operates a regulated natural gas distribution and pipeline business in the United States. It is the largest pure-play local distribution company (LDC), with more than 3 million customers across eight states.

Being an LDC, ATO is engaged in the transportation of natural gas from various delivery points to its end-users via intrastate pipelines (extending more than 5,700 miles), which span several key shale gas formations in the United States.

At present, ATO derives approximately two-thirds of its net income via its distribution segment with the remaining coming from the pipeline and storage segment. Also, around two-thirds of its revenue comes from residential customers, with commercial customers contributing to the rest.

Conservative Balance Sheet and Smart Deployment of Capital Ensures Dividend Growth

By the time COVID-19 hit the U.S. economy, the company booked nearly 70% of its distribution revenue for the fiscal year ending September 30, 2020. ATO was quick to contain its operation and maintenance (O&M) expenses in anticipation of residential load loss.

Due to the timing of the fiscal year, the company experienced limited impact due to COVID-19. ATO saw a nearly 13% rise in operating income from its distribution segment – the larger of the two segments – due to rate increase and customer growth. Its pipeline and storage segment also witnessed a decent 7.5% growth in operating income in 2020 compared to that in 2019.

This helped the company report higher operating cash flow and net income in 2020 compared to its numbers in 2019.

Accordingly, the company continued its winning streak of increasing its quarterly dividend for the 37th tyear from 57.5 cents to 62.5 cents, payable to shareholders of record as of November 30, 2020.

Looking forward, the company expects to raise capital spending by about 7-8% every year, over the next five years. The idea is to continue modernizing and replacing existing systems so as to ensure a steady growth in rate base from around $11 billion by the end of fiscal year 2020 to around $20 billion by the end of fiscal year 2025.

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