Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. The interim financial statements are unaudited; the auditor performed a review, not an audit. Atmos operates regulated natural gas distribution and pipeline and storage businesses. It completed the sale of its nonregulated Atmos Energy Marketing (AEM) business in January 2017, which is reported as discontinued operations.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue, 2017 / 2016 | $526.5m / $456.2m | $2,294.9m / $2,021.0m |
| Operating income, 2017 / 2016 | $140.7m / $128.4m | $635.8m / $572.8m |
| Income from continuing operations, 2017 / 2016 | $70.8m / $66.1m | $346.9m / $310.7m |
| Net income, 2017 / 2016 | $70.8m / $71.2m | $360.6m / $315.9m |
| Diluted EPS, 2017 / 2016 | $0.67 / $0.69 | $3.40 / $3.06 |
| Cash dividends per share, 2017 / 2016 | $0.45 / $0.42 | $1.35 / $1.26 |
- Gross profit: The company’s non-GAAP measure, operating revenue less purchased gas cost, was $412.3m for the quarter versus $391.6m, and $1,441.9m for the nine months versus $1,338.7m. Gas costs are generally passed through to customers.
- Cash flow and investment: Nine-month operating cash flow was $745.6m, compared with $629.9m. Capital expenditures were $812.1m, versus $789.7m; operating cash flow did not cover capital expenditures. Cash ended at $69.8m.
- Debt and liquidity: Long-term debt was $3,066.7m and short-term debt $258.6m at June 30. Approximately $1.3bn was available under credit facilities, net of commercial paper and letters of credit. The covenant-defined debt-to-capitalization ratio was 47%; the company reported compliance with covenants.
- Balance sheet: Total assets were $10.50bn and shareholders’ equity $3.90bn at June 30, 2017.
Material changes versus comparable periods
- Quarterly continuing-operations income rose 7% and diluted continuing-operations EPS increased to $0.67 from $0.64. Consolidated net income nevertheless fell slightly because the prior-year quarter included $5.1m of AEM discontinued-operations income.
- Nine-month continuing-operations income increased 12%; consolidated net income rose 14%. The 2017 period included $13.7m of discontinued-operations income, including a $2.7m after-tax gain on the AEM sale.
- Distribution-segment income increased $6.2m for the quarter and $33.6m for the nine months, mainly from rate increases and customer growth. Management noted the nine-month period had lower distribution sales volumes, while transportation volumes increased.
- Pipeline and storage income decreased $1.5m for the quarter but increased $2.5m for the nine months. EnLink Pipeline acquisition-related throughput contributed to quarterly revenue; higher operating costs partly offset segment gains.
- Atmos issued $750m of senior notes in June, used proceeds in part to repay $250m of 6.35% notes at maturity and reduce short-term borrowings. It also issued shares through its ATM program, receiving $98.8m net proceeds for the nine months.
Outlook, management commentary and risks
- Fiscal 2017 capital expenditures were expected to be $1.1bn–$1.25bn; management cited a longer-term annual range of $1bn–$1.4bn through fiscal 2020. Approximately 82% of nine-month capital spending supported distribution and transportation system safety and reliability.
- Management attributed continuing-earnings growth to favorable rate outcomes and customer growth, despite weather 30% warmer than normal and 12% warmer than the prior-year quarter. It reported 17 completed distribution regulatory proceedings that increased annual operating income by $85.0m, and four pending distribution efforts seeking $17.1m.
- After quarter-end, an August 1, 2017 final order in the Atmos Pipeline–Texas rate case provided a $13.0m increase in annual operating income, below the $63.6m sought in the filing.
- Key risks identified include regulatory decisions and recovery timing, access to capital markets, weather, natural-gas supply and price volatility, customer collections, operating and pipeline safety, environmental requirements, pension costs, and cyber or natural-disaster events. The company stated that ordinary-course litigation and environmental matters were not expected to have a material adverse effect.
- Management said the new revenue-recognition standard was not expected to have a material effect based on its assessment to date, though evaluation continued. The company also highlighted pending regulatory matters and potential added compliance costs from Dodd-Frank rulemaking.
Important facts for investors to verify
- How the $85.0m of completed distribution rate increases and the pending proceedings translate into realized earnings and cash flow, including any rates subject to refund.
- The outcome and timing of the APT rate case and the effect of the $13.0m annual operating-income order and deferred GRIP filing.
- Capital-spending delivery against the $1.1bn–$1.25bn fiscal 2017 outlook, and the resulting funding needs given nine-month capital expenditures exceeded operating cash flow.
- Debt maturity, interest-rate and refinancing exposure following the 2017 debt issuance, and continued covenant compliance and credit-facility availability.
- Final AEM sale proceeds and escrow settlement: the filing reports $147.3m total cash consideration, including working capital, $140.3m of sale proceeds in cash flows, and $7.0m held in escrow subject to potential claims.