Atmos Energy Corporation — Form 10-Q Summary
Business context and period: This filing covers the fiscal second quarter and six months ended March 31, 2017; the fiscal year ends September 30. Atmos operates regulated natural-gas distribution and pipeline and storage businesses, serving approximately 3.2 million meters across eight states. It completed the sale of its nonregulated natural-gas marketing business in January 2017, becoming a fully regulated company. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Operating revenue | $988.2 million, up 11.0% year over year | $1.768 billion, up 13.0% |
| Income from continuing operations | $162.0 million, up 13.3% | $276.1 million, up 12.9% |
| Net income | $164.7 million, versus $141.8 million | $289.8 million, versus $244.7 million |
| Basic and diluted EPS | $1.55, versus $1.38; continuing-operations EPS was $1.52 | $2.74, versus $2.38; continuing-operations EPS was $2.61 |
| Cash dividends per share | $0.45, versus $0.42 | $0.90, versus $0.84 |
Revenue growth partly reflects higher gas costs passed through to customers; management identifies gross profit (revenue less purchased gas cost) as a more useful performance measure. Second-quarter distribution gross profit rose $38.0 million to $449.4 million; pipeline and storage gross profit rose $10.0 million to $111.2 million. Higher rates and customer growth were key contributors, while warmer-than-normal weather reduced consumption. Operating income was $285.2 million for the quarter and $495.1 million for the six-month period. The filing does not provide a single consolidated operating-margin measure as a key performance indicator.
Cash flow and investment: Six-month operating cash flow was $552.0 million, versus $453.0 million. Capital expenditures were $559.4 million, compared with $536.0 million; investing cash outflow was $516.7 million, including $133.6 million of sale proceeds and the $85.7 million EnLink Pipeline acquisition. Financing used $37.5 million, versus $99.8 million provided in the prior-year period. Cash ended at $45.4 million.
Debt and liquidity: At March 31, short-term debt was $670.6 million, current maturities of long-term debt were $250.0 million, and long-term debt on the balance sheet was $2.315 billion. The reported debt-to-capitalization mix was 45.8% including short-term debt and current maturities; the covenant-defined ratio was 47%, against a maximum of 70%. Approximately $0.9 billion was available under credit facilities after commercial paper and letters of credit. The company was compliant with covenants and held investment-grade ratings with stable outlooks.
Material changes versus the prior period
- Six-month continuing-operations EPS increased 10%, from $2.38 to $2.61; continuing income rose $31.5 million.
- Distribution results benefited from $46.6 million of net rate increases and $4.2 million of customer-growth contribution for the six-month period. Distribution operating expenses also increased $18.6 million, largely reflecting employee costs, pipeline integrity and line-locate work, depreciation, and property taxes.
- Pipeline and storage six-month net income rose $4.0 million. Higher rates and EnLink-related throughput contributed; maintenance, integrity, depreciation, and property-tax expenses increased.
- Atmos sold AEM to CenterPoint Energy Services, completing the transaction effective January 1, 2017. AEM is presented as discontinued operations, with comparative periods recast. The sale generated a $2.7 million after-tax gain; discontinued results also included a $10.6 million pretax gain from ending hedge accounting.
- Shareholders’ equity increased to $3.835 billion from $3.463 billion at September 30, 2016. The company issued 690,812 shares through its at-the-market program for $49.4 million net proceeds.
Outlook, commentary, risks, and unusual items
- Management expects fiscal 2017 capital expenditures of $1.1 billion to $1.25 billion and described annual spending of $1 billion to $1.4 billion through fiscal 2020. Approximately 77% of first-half fiscal 2017 spending supported distribution and transportation system safety and reliability.
- Eleven distribution regulatory proceedings completed in the first half added $25.4 million of annual operating income. Proceedings then in progress sought $80.8 million of additional annual operating income. Separately, Atmos Pipeline-Texas filed for a $55.2 million annual operating-income increase; its usual annual GRIP filing was delayed pending a final order.
- Atmos plans to issue new senior notes to replace $250 million of debt maturing in June 2017; forward-starting swaps fixed the Treasury-yield component at 3.37%. The board increased the fiscal 2017 quarterly dividend by 7.1%.
- Management cautions that six-month results are not indicative of full-year results because of seasonality. It cited weather 29% warmer than normal for the six-month period and 34% warmer than normal for the quarter.
- Key risks include regulatory outcomes and recovery timing, access to capital markets, seasonal weather, natural-gas price and supply changes, customer collections, interest rates, pension costs, operational and pipeline safety, environmental regulation, cyber threats, and concentration of operations in Texas. The company said there were no material changes in previously disclosed litigation or environmental matters and did not expect them to materially affect results.
- Subsequent to quarter-end, Atmos completed a Texas use-tax audit for October 2011–June 2015, resulting in an $18.7 million refund; discussions to extend the audit through March 2017 were ongoing. The filing does not state whether or when the refund will be recognized in reported results.
Important facts for investors to verify
- Progress, final approved amounts, and timing of the $80.8 million of distribution rate requests and the separate $55.2 million APT filing.
- Refinancing terms and market access for the $250 million June 2017 maturity, and continued covenant and liquidity headroom.
- Final working-capital true-up and escrow treatment for the AEM sale, and final purchase-price allocation for the EnLink acquisition.
- Actual fiscal 2017 capital spending versus the $1.1–$1.25 billion outlook, and the extent to which spending is recovered through regulatory mechanisms.
- Effects of warmer weather, regulatory lag, pension assumptions, and the Texas tax refund on subsequent-period earnings and cash flows.