Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparison is the three months ended December 31, 2015, unless noted. Atmos primarily operates regulated natural gas distribution and pipeline and storage businesses, serving approximately 3.2 million meters in eight states. The interim financial statements were reviewed, not audited. Management cautions that seasonal results are not indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Continuing operating revenue | $780.2 million | $674.8 million | Up 15.6% |
| Gross profit | $468.9 million | $434.4 million | Up 7.9% |
| Operating income | $209.9 million | $192.7 million | Up 8.9% |
| Income from continuing operations | $114.0 million | $101.5 million | Up 12.3% |
| Net income, including discontinued operations | $125.0 million | $102.9 million | Up 21.6% |
| Diluted EPS, continuing operations | $1.08 | $0.99 | Up $0.09 |
| Diluted EPS, total | $1.19 | $1.00 | Up $0.19 |
| Operating cash flow | $117.0 million | $70.1 million | Up $46.8 million |
| Capital expenditures | $298.0 million | $290.4 million | Up $7.6 million |
Continuing operating margin was approximately 26.9% of revenue, compared with 28.6% a year earlier; gross profit was approximately 60.1% of continuing revenue versus 64.4%. These ratios reflect the reported continuing-operations revenue base. Discontinued natural gas marketing separately reported $303.5 million of revenue and $11.0 million of net income in the quarter.
- Cash flow: Investing activities used $392.1 million, including the $85.7 million EnLink Pipeline acquisition. Financing activities provided $272.3 million. Cash decreased $2.9 million to $44.6 million.
- Liquidity: Current assets were $979.4 million and current liabilities $1.950 billion at quarter-end. The company reported $0.6 billion available under credit facilities, net of commercial paper and letters of credit.
- Debt and capitalization: Short-term debt was $940.7 million; long-term debt including current maturities was $2.564 billion. The company’s covenant-defined debt-to-capitalization ratio was 50%, against a 70% maximum; it reported compliance with all covenants.
- Dividends: Quarterly dividends were $0.45 per share, compared with $0.42 a year earlier; cash dividends paid totaled $47.7 million.
Material changes and management commentary
- Continuing-operations income increased mainly on distribution rate outcomes and customer growth. Distribution net income rose $11.4 million; pipeline and storage net income rose $1.1 million.
- Distribution gross profit increased $23.9 million, including $15.9 million from rate adjustments and $1.7 million from customer growth. Higher maintenance, depreciation, and property taxes partly offset the improvement.
- Pipeline and storage gross profit increased $10.6 million, primarily from rates under prior-year GRIP filings; higher maintenance and depreciation costs limited net income growth.
- Operating cash flow improved mainly due to favorable deferred-gas-cost recoveries and higher sales volumes. Approximately 78% of quarterly capital expenditures supported distribution and transportation system safety and reliability.
- Atmos sold all equity interests in Atmos Energy Marketing (AEM), effective January 1, 2017, with closing on January 3. The company says it has exited nonregulated gas marketing and classified the business as discontinued operations. The sale-related hedge accounting change produced a $10.6 million pretax gain in discontinued operations, contributing to its year-over-year earnings increase.
- Atmos acquired EnLink North Texas Pipeline for $85.7 million, including estimated working capital. Purchase price allocation and working-capital true-up remained subject to completion.
- Other comprehensive income was $95.4 million, largely reflecting gains on interest-rate agreements. This increased the value of equity but is not equivalent to operating earnings or cash generation.
Outlook, risks, and contingencies
- Management expected fiscal 2017 capital expenditures of $1.1 billion to $1.25 billion. It also described anticipated annual capital spending of $1.0 billion to $1.4 billion through fiscal 2020.
- Atmos expected a net gain of $0.03 per diluted share from the AEM sale in fiscal Q2 2017. Sale consideration is described differently in the filing: the transaction note gives $141.5 million total estimated cash consideration, including $7.0 million held in escrow, while the executive summary refers to $134.5 million received.
- Atmos Pipeline-Texas filed a statement of intent on January 6, 2017, seeking $55.2 million of additional annual operating income. A final order was pending, and the filing says the usual annual GRIP filing would not be submitted in Q2 until that order is issued.
- Distribution ratemaking efforts in progress at December 31 sought $28.9 million of additional annual operating income; some listed proceedings subsequently received approvals effective in 2017.
- Management identified risks including regulatory decisions and rate recovery, access to capital markets, weather, natural gas prices and supply, customer collections, interest rates, pension costs, operating and pipeline safety, environmental rules, cyber threats, and concentration of operations in Texas. No material change in previously disclosed litigation or environmental matters was reported; management did not expect their outcomes to materially adversely affect the company.
- Atmos anticipated $10 million to $20 million of fiscal 2017 contributions to postretirement plans. It reported no minimum defined-benefit pension contribution requirement for the year, though voluntary contributions remained under consideration.
Most important facts for investors to verify
- Reconcile the AEM sale cash figures ($141.5 million estimated consideration versus $134.5 million described as received), escrow, working-capital true-up, and expected gain.
- Track regulatory decisions and timing of recovery, particularly the $55.2 million APT filing and distribution rate proceedings.
- Assess funding for the $1.1 billion to $1.25 billion fiscal 2017 capital plan, including commercial paper usage, debt maturities, equity issuance, and remaining credit availability.
- Separate recurring continuing-operations earnings from discontinued AEM earnings and the one-time $10.6 million hedge-related gain.
- Monitor capital spending, operating cash conversion, maintenance costs, and the effects of seasonal working-capital requirements.
- Review the company’s investment-grade ratings, covenant headroom, pension assumptions, and material operational, regulatory, and market risks.