Atmos Energy Corporation — Form 10-Q Summary
Business context and period. This is the fiscal first quarter of 2015, the three months ended December 31, 2014, compared with the three months ended December 31, 2013. Atmos distributes natural gas to approximately 3.1 million customers and operates regulated pipeline and storage businesses, alongside nonregulated natural gas operations. Results are seasonal; management cautions that the quarter is not indicative of full-year results.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $1,258.8 million | $1,243.9 million | +1.2% |
| Gross profit | $423.3 million | $389.0 million | +8.8% |
| Operating income | $187.7 million | $170.7 million | +10.0% |
| Net income | $97.6 million | $87.0 million | +12.2% |
| Diluted EPS | $0.96 | $0.95 | +$0.01 |
| Cash dividends per share | $0.39 | $0.37 | +5.4% |
| Operating cash flow | $27.4 million | $34.3 million | −$6.9 million |
| Capital expenditures | $261.3 million | $180.6 million | +$80.7 million |
Gross, operating and net margins were approximately 33.6%, 14.9% and 7.8%, respectively, compared with 31.3%, 13.7% and 7.0% a year earlier. Regulated operations generated 96% of current-quarter net income: distribution contributed $71.4 million, pipeline $22.0 million and nonregulated operations $4.2 million.
Operating cash flow did not cover investment spending. Investing activities used $262.1 million; financing provided $316.2 million, including a $350.6 million net increase in short-term debt and proceeds from long-term debt issuance. Cash ended the quarter at $123.8 million, up from $42.3 million at September 30, 2014.
Balance sheet, debt and liquidity
- Total assets were $9.12 billion at December 31, 2014, up from $8.59 billion at September 30, 2014. Shareholders’ equity was $3.06 billion, down from $3.09 billion.
- Long-term debt was $2.46 billion and short-term debt was $550.9 million, versus $196.7 million of short-term debt at fiscal year-end. Total debt including short-term borrowings was about $3.01 billion.
- Debt as a share of capitalization including short-term debt was 49.5%, versus 46.2% at September 30, 2014. The covenant-defined debt-to-capitalization ratio was 51%, below the 70% maximum; the company reported covenant compliance.
- Credit facilities provided approximately $1.3 billion of working-capital funding; $759.3 million was available after letters of credit at quarter-end. Ratings were investment grade, with stable outlooks from S&P and Moody’s and a positive outlook from Fitch.
Material changes and management commentary
- Net income increased $10.6 million, primarily reflecting rate increases received in regulated operations during fiscal 2014. Diluted EPS increased only one cent; weighted-average basic shares rose to 101.6 million from 91.8 million.
- Regulated distribution income increased 14%, with a $24.6 million gross-profit increase, mainly from rate adjustments. Warmer weather reduced sales volumes 12%; transportation volumes increased 13%.
- Pipeline net income increased 13%, primarily on higher rates from the approved 2014 infrastructure filing, partly offset by increased maintenance and depreciation expenses.
- Nonregulated net income declined $0.6 million. Gross profit fell $2.5 million, including a $2.8 million reduction in unrealized margins.
- Management said approximately 80% of first-quarter capital spending supported distribution and transportation system safety and reliability. It cited reduced regulatory recovery lag through infrastructure and other rate mechanisms.
Outlook, contingencies and risks
- Management expected fiscal 2015 capital expenditures of $900 million to $1 billion and described annual spending of $900 million to $1.1 billion through fiscal 2018. Planned funding sources include operating cash flow and debt and equity securities, with a target debt-to-capitalization range of 50% to 55%.
- Three regulatory proceedings completed during the quarter provided a stated $5.3 million increase in annual operating income. Seven ratemaking efforts were in progress seeking $54.1 million annually. The filing also reports subsequent decisions in certain proceedings, including a February 3, 2015 Mississippi order approving a $4.4 million annual increase.
- The company issued $500 million of 4.125% 30-year senior notes in October 2014 and used the net proceeds to repay $500 million of 4.95% notes at maturity.
- Other comprehensive loss was $81.8 million, largely reflecting changes in interest-rate and commodity cash-flow hedges; accumulated other comprehensive loss increased to $94.2 million. Hedge ineffectiveness and nonregulated mark-to-market results can create earnings volatility.
- Management anticipated no required fiscal 2015 contribution to defined-benefit pension plans, but expected $20 million to $25 million of contributions to other postretirement plans. Updated mortality assumptions were expected to increase reported benefit liabilities by less than 5% in future periods.
- Management said existing litigation and environmental matters were not expected to have a material adverse effect; no material status changes were reported. Natural gas purchase commitments, regulation, weather, commodity prices, access to capital markets, pension costs, operating safety, environmental requirements and cyber risks remain relevant uncertainties.
- The interim statements were reviewed by Ernst & Young, not audited. Management stated disclosure controls were effective and reported no material changes in internal control during the quarter.
Investor verification priorities
- Track whether the $54.1 million of requested annual rate increases are approved, modified or delayed, and how much is ultimately reflected in earnings.
- Compare capital spending and operating cash generation with the fiscal 2015 plan; assess the resulting need for short-term borrowing or external financing.
- Monitor short-term debt, available credit capacity and debt-to-capitalization ratios, especially through winter working-capital peaks.
- Separate recurring regulated earnings growth from weather effects, nonregulated unrealized margins, hedge valuation changes and share-count growth.
- Assess the effect of pension assumptions, postretirement contributions, safety and environmental obligations, and regulatory or market risks on future costs and liquidity.