Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 3, 2016. The interim financial statements are unaudited. Atmos Energy operates regulated natural gas distribution, pipeline and storage businesses, plus nonregulated natural gas services, serving approximately 3.2 million distribution meters across eight states.
Financial performance
Amounts below are in millions of dollars except per-share data. Quarter comparisons are year over year; nine-month comparisons are against the same period in 2015.
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $632.9 | $686.4 | $2,671.4 | $3,485.2 |
| Gross profit | $407.3 | $381.7 | $1,368.9 | $1,325.7 |
| Operating income | $137.2 | $117.6 | $583.4 | $555.5 |
| Net income | $71.2 | $56.3 | $315.9 | $291.6 |
| Diluted EPS | $0.69 | $0.55 | $3.06 | $2.86 |
| Cash dividends per share | $0.42 | $0.39 | $1.26 | $1.17 |
- Quarterly revenue declined about 8%, while gross profit rose about 7%, operating income 17% and net income 26%. For nine months, revenue fell about 23%, but gross profit increased 3%, operating income 5% and net income 8%. Revenue fell mainly with lower natural gas costs and lower sales volumes; management considers gross profit a more useful performance measure because gas costs are generally passed through to regulated customers.
- Operating margin was approximately 21.7% for the quarter versus 17.1% a year earlier, and 21.8% for nine months versus 15.9%. These ratios are calculated from reported operating income and revenue.
- Regulated operations generated 88% of consolidated net income in the quarter and 95% for the nine-month period. Nine-month regulated distribution net income increased $21.7 million; nonregulated net income declined $3.0 million.
- Nine-month operating cash flow was $624.6 million, down $93.0 million, primarily due to the timing of deferred gas cost recoveries. Capital expenditures were $796.0 million, up $128.5 million. Cash was $66.2 million at June 30.
- At June 30, total debt was approximately $3.13 billion: $670.5 million short-term debt, $250.0 million current maturities and $2.21 billion long-term debt. Shareholders’ equity was $3.47 billion. Short-term debt increased from $457.9 million at September 30, 2015. The company reported a 49% debt-to-capitalization ratio under its credit agreements and compliance with covenants.
- Current assets were $648.9 million and current liabilities $1.53 billion. The company reported $0.6 billion available under credit facilities, net of commercial paper and letters of credit, and over $1 billion of short-term facility capacity. Liquidity also depends on access to commercial paper and capital markets.
Material changes and management commentary
- Management attributed stronger regulated results to rate increases and customer growth, which offset weather that was 25% warmer than the prior-year period. Distribution sales volumes fell 19% for the nine-month period; management said weather normalization mechanisms and rate design substantially limited the margin impact.
- Pipeline segment nine-month net income rose 7%, supported primarily by higher rates from infrastructure filings; maintenance, depreciation and property-tax costs increased. Nonregulated nine-month net income fell 17%, reflecting realized losses on settled financial positions during falling gas prices, partly offset by higher unrealized margins.
- Atmos issued 1.36 million shares through its at-the-market program during the quarter, receiving $98.7 million net proceeds. The program permits up to $200 million of sales. The board increased the fiscal 2016 quarterly dividend by 7.7%.
- S&P upgraded senior unsecured debt to A from A- and short-term debt to A-1 from A-2, with a stable outlook, citing financial performance and timely recovery of capital investments. S&P, Moody’s and Fitch all maintained stable outlooks.
- Hedge and mark-to-market results can affect reported earnings: management reported nonregulated hedge ineffectiveness gains of $18.1 million for nine months, while the segment’s realized margins were lower year over year. At June 30, accumulated other comprehensive loss was $178.2 million, largely related to interest-rate cash flow hedges.
Outlook, risks and contingencies
- Management expected fiscal 2016 capital expenditures of $1.0–$1.1 billion and described annual spending of $1.0–$1.4 billion through fiscal 2020. Approximately 83% of nine-month fiscal 2016 capital spending was directed to distribution and transportation system safety and reliability.
- The company planned to refinance $250 million of senior notes maturing in June 2017 and had forward-starting interest-rate swaps fixing the Treasury yield component at 3.37%. It also had swaps associated with an anticipated $450 million note issuance in fiscal 2019.
- As of June 30, ratemaking efforts in progress sought $24.5 million of additional annual operating income. Certain proposed Virginia and Louisiana increases had been implemented subject to refund; a Kentucky settlement was pending commission acceptance.
- Principal risks identified include regulatory decisions and rate recovery, access to credit markets, weather, natural gas price and customer demand changes, counterparty and hedge risks, pension costs, operational safety, environmental regulation, competition, and cyber or natural-disaster disruptions. Management said outstanding litigation and environmental matters were not expected to have a material adverse effect; no material changes to previously disclosed matters were reported.
- Management cautioned that nine-month results are not indicative of full-year results because of seasonality. Fiscal 2016 ends September 30, 2016; the filing did not provide earnings or EPS guidance.
Important facts for investors to verify
- Track whether rate proceedings and infrastructure mechanisms deliver the requested or approved returns, including amounts subject to refund.
- Assess funding of the capital program, rising short-term borrowings, available credit capacity and the planned 2017 debt refinancing.
- Separate recurring regulated earnings from nonregulated realized and unrealized trading, hedge and inventory valuation effects.
- Monitor weather-normalized distribution volumes, customer growth, maintenance costs and the pace of capital spending against management’s fiscal 2016 range.
- Reconcile the filing’s ratemaking summaries: the overview cites 16 completed proceedings and $104.4 million of annual operating-income increases, while the detailed distribution discussion cites 15 proceedings and $63.7 million; the pipeline discussion separately reports a $40.7 million GRIP increase.