Atmos Energy Corporation — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015; comparison is the three months ended December 31, 2014. Atmos primarily operates regulated natural gas distribution and pipeline businesses, alongside nonregulated gas activities. It serves approximately 3.2 million meters across eight states. Interim financial statements are unaudited and seasonality means this quarter is not indicative of full-year results.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Operating revenue | $906.2 million | $1,258.8 million | Down 28.0% |
| Gross profit | $443.8 million | $423.3 million | Up $20.5 million |
| Operating income | $196.2 million | $187.7 million | Up 4.5% |
| Net income | $102.9 million | $97.6 million | Up 5.4% |
| Diluted EPS | $1.00 | $0.96 | Up $0.04 |
| Cash dividend per share | $0.42 | $0.39 | Up 7.7% |
- Revenue fell primarily with lower natural gas costs and lower distribution sales volumes; gas costs are generally passed through to regulated customers. Management identifies gross profit as a more useful performance indicator than revenue.
- Regulated operations generated $98.8 million, or 96% of consolidated net income, versus $93.4 million in the prior-year quarter. Distribution net income rose to $73.3 million; pipeline net income rose to $25.6 million. Nonregulated net income was $4.0 million, compared with $4.2 million.
- Gross profit increased in distribution by $9.6 million and pipeline by $11.1 million, while nonregulated gross profit declined $0.3 million. Distribution benefited from $13.5 million in net rate adjustments; pipeline benefited from a $10.1 million increase related to the approved 2015 GRIP filing.
- Reported operating cash flow was $70.5 million, up from $27.4 million, primarily due to timing of customer collections and vendor payments. Investing cash outflow was $290.6 million, including $291.7 million of capital expenditures; financing cash inflow was $270.4 million.
- Cash and equivalents were $78.9 million at quarter-end. Short-term debt was $763.2 million and long-term debt was $2.455 billion. Total debt was approximately $3.219 billion. The company reported $0.6 billion of available credit-facility capacity, net of letters of credit, and was compliant with debt covenants. Its debt-to-capitalization covenant ratio was 51%, versus a 70% maximum.
- Total assets were $9.555 billion and shareholders’ equity was $3.272 billion at December 31, 2015. Working-capital balances are seasonal; current assets were $863.3 million and current liabilities were $1.515 billion.
Changes, outlook and management commentary
- Distribution sales volumes declined 21%; management said weather was 29% warmer than the prior-year quarter before weather-normalization adjustments. Weather-normalization mechanisms applied to approximately 97% of residential and commercial meters.
- Capital expenditures were up from $261.3 million a year earlier, including increased pipeline spending to improve two storage fields. Approximately 83% of current-quarter spending was directed to distribution and transportation safety and reliability.
- Management expects fiscal 2016 capital expenditures of $1.0–$1.1 billion and annual capital spending in that range through fiscal 2018. No earnings or EPS guidance is provided in the filing.
- Four completed regulatory proceedings resulted in a $13.3 million increase in annual operating income. Ratemaking efforts in progress sought a further $27.4 million in annual operating income; requested amounts remain subject to regulatory decisions.
- The board increased the quarterly dividend by 7.7% for fiscal 2016. Management cited regulated earnings and cash-flow stability, ongoing infrastructure investment, and efforts to reduce regulatory lag.
- Nonregulated results include unrealized commodity margins and hedge ineffectiveness. Hedge ineffectiveness produced a reported $7.9 million gain in the quarter versus a $2.2 million loss a year earlier; the filing cautions that derivative-only results do not represent economic gross profit on the related physical transactions.
Risks, contingencies and unusual items
- Key risks identified include access to credit markets, regulatory outcomes and recovery timing, adverse weather, natural-gas price and availability changes, commodity and interest-rate volatility, counterparty performance, pension and healthcare costs, safety and environmental regulation, cyber threats, and operational hazards. A significant ratings deterioration could restrict financing access or increase borrowing costs.
- Rate cases were in progress in Colorado, Kansas and Kentucky; formula rate filings were in progress in Colorado, Kansas, Louisiana and West Texas. Litigation and environmental matters had no material status changes, and management did not expect their outcomes to materially adversely affect financial condition, results or cash flows.
- For fiscal 2016, the company anticipated no required minimum contribution to defined-benefit pension plans and no pension contribution for the remainder of the year; it expected $15–$25 million of contributions to other postretirement plans.
- The independent accountant performed a review of interim financial information, not a full audit, and reported no material modifications it believed necessary for GAAP conformity.
Important facts for investors to verify
- Whether requested rate increases are approved, when they take effect, and how much operating income is ultimately recovered.
- Whether the $1.0–$1.1 billion capital-spending plan is funded while preserving liquidity, credit ratings and the targeted capital structure.
- How much of nonregulated earnings reflects realized operating margins versus volatile unrealized marks and hedge ineffectiveness.
- Whether warmer weather, lower throughput or customer collection trends affect future cash flow despite weather-normalization and gas-cost recovery mechanisms.
- The continued availability and terms of credit facilities and compliance with debt covenants, particularly as seasonal borrowing needs rise.