Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; filed August 5, 2015. The company distributes and transports natural gas, operates storage assets, and conducts nonregulated gas marketing and related activities. Its regulated businesses generated 94% of nine-month net income.
Financial performance
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 | Prior-year comparison |
|---|---|---|---|
| Operating revenue | $686.4 million | $3,485.2 million | Down 27% and 16%, respectively |
| Gross profit | $381.7 million | $1,325.7 million | Up 6% and 7%, respectively |
| Operating income | $117.6 million | $555.5 million | Up 10% and 5%, respectively |
| Net income | $56.3 million | $291.6 million | Up 23% and 10%, respectively |
| Diluted EPS | $0.55 | $2.86 | Compared with $0.45 and $2.76 |
| Cash dividends per share | $0.39 | $1.17 | Compared with $0.37 and $1.11 |
Revenue fell largely with lower natural gas costs and reduced nonregulated sales activity; management considers gross profit a more useful performance indicator because regulated gas costs are generally passed through to customers. Nine-month gross profit increased principally on rate adjustments and higher regulated pipeline margins. Operating expenses rose to $770.2 million from $717.4 million, including higher maintenance, depreciation and taxes.
Cash flow and investment: Nine-month operating cash flow was $717.6 million, versus $630.2 million. Capital expenditures were $667.5 million, up from $552.6 million; investing cash outflow was $668.6 million. Financing used $48.1 million. Cash ended at $43.2 million, up $0.9 million from fiscal year-end.
Balance sheet and liquidity: At June 30, total assets were $8.88 billion; shareholders’ equity was $3.24 billion. Long-term debt was $2.46 billion and short-term debt $252.0 million. The company reported $1.1 billion available under credit facilities, net of letters of credit. Its debt-to-total-capitalization covenant ratio was 47%, against a 70% maximum; the company reported compliance with all covenants.
Material changes and segment developments
- Regulated distribution: Nine-month net income rose $25.7 million to $195.7 million. Rate adjustments increased gross profit by $61.5 million, partly offset by lower consumption: sales volumes declined 8%, with weather 9% warmer than the prior-year period. Customer meters increased to 3.14 million from 3.01 million.
- Regulated pipeline: Nine-month net income increased $9.8 million to $78.3 million. Gross profit increased $40.2 million, primarily reflecting rate increases, while operating expenses rose $29.1 million, including maintenance and depreciation costs.
- Nonregulated: Nine-month net income declined $10.0 million to $17.6 million. Gross profit fell $14.2 million, mainly because lower natural gas price volatility reduced realized margins; delivered sales volumes declined 7%.
- Debt refinancing: In October 2014, Atmos issued $500 million of 4.125% 30-year senior notes and used proceeds toward repayment at maturity of $500 million of 4.95% notes.
- Capital and shareholder returns: The company issued no public equity in the period, compared with a $390.2 million net equity offering in the prior-year period. The board increased the quarterly dividend by 5.4% in fiscal 2015.
Outlook, risks and unusual items
- Management expected fiscal 2015 capital expenditures of $900 million to $1 billion and described a range of $900 million to $1.1 billion annually through fiscal 2018. About 80% of recent capital spending was directed to safety and reliability work.
- As of June 30, 16 regulatory proceedings had resulted in $113.1 million of annual operating income increases; three further proceedings were in progress seeking $7.1 million. A $1.3 million Louisiana increase took effect July 1. Fitch upgraded senior unsecured debt to A from A- on July 1, citing expected strong performance and regulated-business growth.
- Management cautioned that nine-month results are not indicative of full-year results because of seasonality. No specific earnings or EPS guidance was provided in the filing text.
- Key risks include regulatory decisions and cost-recovery timing, weather, natural gas price and market volatility, access to credit, pension and healthcare costs, safety and environmental regulation, cyber threats, and the company’s concentration in Texas. Commodity hedging and derivatives can create cash-collateral needs and earnings volatility; hedge ineffectiveness may materially affect reported results.
- Management reported no material change in previously disclosed litigation or environmental matters and did not expect those matters to materially affect financial condition, results or cash flows. The company had natural gas purchase commitments, including indexed and fixed-price contracts; see the filing for volume and term details.
- Updated mortality assumptions were expected to increase reported pension and postretirement liabilities by less than 5%. The annual goodwill impairment assessment found no impairment. Interim statements were reviewed by the independent accountant, not audited.
Investor facts to verify
- Whether regulatory proceedings and infrastructure mechanisms deliver the requested or approved returns on schedule, and how much regulatory lag remains.
- Whether planned capital spending is funded by operating cash flow and credit capacity without materially increasing leverage.
- How weather, customer usage and lower volatility affect regulated throughput and nonregulated margins in subsequent periods.
- Potential impacts from pension assumptions, derivative valuations and collateral requirements, and gas purchase commitments.
- Current credit ratings, available liquidity, covenant headroom and the timing of future debt maturities.