Atmos Energy Corporation — Q2 FY2015 Form 10-Q
Business context and reporting period. The quarter ended March 31, 2015, was the second quarter of Atmos Energy’s fiscal year; the filing also reports the six months ended March 31. Atmos primarily operates regulated natural-gas distribution and pipeline businesses, alongside nonregulated gas marketing, transportation and storage. Regulated operations generated 94% of consolidated net income for the quarter and 95% for the six-month period.
Key financial results
| Metric | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 |
|---|---|---|
| Revenue | $1.540 billion, down 21.6% year over year | $2.799 billion, down 12.8% |
| Gross profit | $520.7 million, up 4.9% | $944.0 million, up 6.6% |
| Operating income | $250.2 million, essentially flat | $437.9 million, up 4.1% |
| Net income | $137.7 million, up 3.2% | $235.3 million, up 6.8% |
| Diluted EPS | $1.35 vs. $1.38 | $2.31 vs. $2.34 |
| Operating cash flow | Not separately reported for the quarter | $540.8 million vs. $491.0 million |
| Capital expenditures | Not separately reported for the quarter | $441.6 million vs. $359.0 million |
Lower natural-gas costs and nonregulated sales drove much of the revenue decline; gas costs are generally passed through to regulated customers, so management considers gross profit more indicative of performance than revenue. Quarterly gross profit improved, but nonregulated earnings weakened. The filing does not provide a single consolidated gross-margin percentage as a key performance measure.
At March 31, cash was $95.5 million; current assets were $817.6 million and current liabilities $1.019 billion. Long-term debt was $2.455 billion and short-term debt $225.0 million. Management reported total debt of 46.1% of capitalization, including short-term debt; the separate covenant-defined debt-to-capitalization ratio was 48%, against a 70% limit. Approximately $1.1 billion was available under credit facilities, net of letters of credit. Cash dividends were $0.39 per share for the quarter and $0.78 for the six months.
Changes versus prior comparable periods
- Six-month net income increased $14.9 million, as regulated distribution and pipeline earnings rose $21.7 million and $6.2 million, respectively, more than offsetting a $13.0 million decline in nonregulated earnings.
- Nonregulated six-month gross profit fell $17.2 million, reflecting lower realized and unrealized margins. Management attributed weaker realized margins primarily to lower natural-gas market volatility; the prior-year period offered unusual opportunities to capture margins during colder, more volatile conditions.
- Regulated distribution six-month gross profit increased $45.7 million, primarily from rate adjustments, partly offset by lower sales volumes. Weather was 8% warmer than the prior-year period, although 10% colder than normal.
- Pipeline six-month gross profit increased $30.3 million, primarily from approved rate increases, while operating expenses rose $23.4 million, including maintenance and depreciation costs and the absence of a prior-year tax-audit refund.
- Operating cash flow rose $49.9 million, primarily due to timing of gas-cost recoveries. Capital expenditures increased $82.6 million. The company issued $500 million of 4.125% senior notes to refinance $500 million of 4.95% notes that matured in October 2014.
Outlook, management commentary and risks
- Management forecast fiscal 2015 capital expenditures of $900 million to $1 billion, with annual spending of $900 million to $1.1 billion through fiscal 2018. About 80% of first-half 2015 capital spending was directed to distribution and transportation safety and reliability.
- Management said it plans to fund growth with operating cash flow and debt and equity securities while maintaining a balanced capital structure; its stated target debt-to-capitalization range is 50%–55%.
- Seven regulatory proceedings completed during the first half produced $14.4 million of annual operating-income increases. Rate filings and other proceedings remained in progress. A Mid-Tex rate matter included rates subject to refund; a proposal for decision received April 29, 2015 proposed an approximately $32.7 million annual increase. A separate Texas pipeline rate increase of $37.2 million annually was approved April 8, after quarter-end.
- Market risks include regulatory decisions and rate-recovery timing, weather, natural-gas price and volatility changes, counterparty credit, access to capital markets, pension costs, operational and safety events, environmental regulation and cyber threats. Commodity and interest-rate hedges can produce earnings volatility and collateral requirements; hedge ineffectiveness may materially affect reported results.
- Other comprehensive loss was $115.7 million for the six months, largely reflecting losses on interest-rate and commodity cash-flow hedges; accumulated other comprehensive loss increased to $128.1 million from $12.4 million at fiscal year-end.
- The company planned a voluntary $30–$35 million pension contribution in fiscal Q3 and expected $20–$25 million of contributions to other postretirement plans for fiscal 2015. Updated mortality assumptions were expected to increase reported benefit liabilities by less than 5%, subject to evaluation.
- Management reported no material change in previously disclosed litigation or environmental matters and did not expect their outcomes to materially adversely affect financial condition, results or cash flows. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- Final outcomes and timing of pending rate cases and infrastructure filings, including any refund exposure on rates already in effect.
- Whether regulated rate increases and infrastructure investment continue to offset lower usage and rising operating costs.
- Nonregulated margin recovery, given sensitivity to gas-price volatility, hedge timing and customer volumes.
- Funding needs and liquidity as planned capital spending rises; monitor debt, credit-facility availability and covenant headroom.
- Future pension and postretirement liabilities, contributions and the effects of updated mortality assumptions.
- Hedge-related AOCI balances, collateral needs and potential effects of market movements on earnings and cash flows.