Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2016, the second quarter of fiscal 2016. Comparisons are with the corresponding 2015 periods unless stated otherwise. Atmos primarily operates regulated natural-gas distribution, pipeline and storage businesses, alongside a smaller nonregulated gas business, serving approximately 3 million customers.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $1.132 billion; down 26.5% | $2.039 billion; down 27.2% |
| Gross profit | $517.8 million; down 0.6% | $961.6 million; up 1.9% |
| Operating income | $250.0 million; essentially unchanged | $446.2 million; up 1.9% |
| Net income | $141.8 million; up 3.0% | $244.7 million; up 4.0% |
| Diluted EPS | $1.38, versus $1.35 | $2.38, versus $2.31 |
| Cash dividends per share | $0.42, versus $0.39 | $0.84, versus $0.78 |
Revenue fell largely with lower natural-gas prices and reduced gas sales; gas costs are generally passed through to regulated customers, so gross profit is more informative than revenue for assessing operating performance. Six-month regulated operations generated $238.3 million of net income, while nonregulated operations generated $6.3 million, down from $12.3 million. Management attributed the nonregulated decline mainly to losses on settled financial positions during falling gas prices.
- Cash flow and investment: Six-month operating cash flow was $455.8 million, down from $540.8 million, primarily reflecting timing of deferred gas-cost recoveries. Capital expenditures were $538.2 million, up from $441.6 million, leaving operating cash flow below investment spending by $82.5 million. Cash increased to $47.9 million from $28.7 million at September 30, 2015.
- Debt and liquidity: At March 31, short-term debt was $626.9 million and long-term debt was $2.456 billion. Short-term debt rose $169.0 million from fiscal year-end. The filing reports $0.7 billion available under credit facilities, net of commercial paper and letters of credit. The debt-to-capitalization ratio under credit agreements was 49%, below the 70% covenant limit; the company reported compliance with all covenants.
- Balance sheet: Total assets were $9.544 billion and shareholders’ equity was $3.345 billion. Current assets were $652.9 million versus current liabilities of $1.227 billion; short-term borrowing is seasonal and supports working capital and capital spending.
- Margins: Gross profit increased despite substantially lower revenue; operating income was nearly flat in the quarter and increased modestly for six months. Revenue-based margin comparisons are affected by gas-cost pass-throughs and should be interpreted cautiously.
Material changes and management commentary
- Unusually warm weather reduced regulated distribution sales volumes by 21% for both the quarter and six-month period; management said weather was 25% warmer in the quarter and 26% warmer for six months than in the respective prior-year periods. Weather normalization mechanisms cover approximately 97% of residential and commercial meters.
- Regulated distribution six-month net income increased $14.3 million, principally from $12.6 million of higher gross profit, including $30.6 million in net rate adjustments, partly offset by lower consumption and warmer weather.
- Regulated pipeline six-month net income rose $1.1 million. Higher rates and excess-retention-gas sales were partly offset by lower volumes, warmer weather, and increased maintenance and depreciation costs. Quarter net income declined $2.5 million, largely as operating expenses rose.
- Nonregulated six-month net income fell $6.0 million. Realized margins declined $12.2 million, largely from greater losses on settled long financial positions as gas prices fell; higher unrealized margins partly offset the decline.
- Capital expenditures were focused on safety and reliability; approximately 83% of first-half spending supported distribution and transportation system improvements. Management expects fiscal 2016 capital expenditures of $1.0–$1.1 billion and describes annual spending in the $1.0–$1.1 billion range through fiscal 2020.
- The board increased the fiscal 2016 quarterly dividend by 7.7%. A new at-the-market equity program permits up to $200 million of common-stock sales through March 2019; no shares were sold under it in the second quarter. Proceeds, if raised, are expected primarily to repay short-term debt and support capital spending and general purposes.
Outlook, contingencies and unusual items
- During the first six months, nine regulatory proceedings were completed, producing a reported $22.1 million increase in annual operating income. Regulatory filings remained in progress. The overview cites 12 efforts seeking $109.0 million in additional annual operating income, while the detailed table lists 11 proceedings totaling $68.3 million; the filing text does not clearly reconcile these figures.
- After quarter-end, the filing reports approval of a $40.7 million annual operating-income increase for Atmos Pipeline–Texas, effective May 3, 2016, and other rate actions. These subsequent approvals should not be confused with results already recognized in the reporting period.
- Atmos uses commodity and interest-rate derivatives. It reported a $185.8 million net regulated-distribution risk-management liability after collateral and netting, and $16.1 million of net nonregulated derivative liabilities before related collateral presentation. Hedge ineffectiveness and commodity-price changes can affect reported earnings and collateral needs.
- Atmos adopted new share-based-payment accounting early, recording a $3.3 million income-tax benefit in current-period earnings and a $14.5 million cumulative increase to retained earnings. Goodwill was assessed and found not impaired.
- Management said there were no material changes in previously disclosed litigation, environmental matters, or purchase commitments, and did not expect ordinary-course claims to materially adversely affect financial condition, results, or cash flows. Regulatory proceedings, gas-price volatility, weather, credit access, pension costs, safety, environmental regulation, cyber threats, and operational hazards remain identified risks.
- Management cautions that interim results are seasonal and are not indicative of full-year results. The independent accountant performed a review of interim financial statements, not a full audit.
Most important facts for investors to verify
- Reconcile the filing’s $109.0 million overview estimate for pending rate efforts with the detailed $68.3 million table, and distinguish requested amounts from approved and realized rate increases.
- Track whether planned $1.0–$1.1 billion fiscal 2016 capital spending is funded through operating cash flow, commercial paper, debt, or ATM equity sales, and monitor short-term debt and available borrowing capacity.
- Assess whether regulated earnings growth and rate mechanisms can offset persistently warm weather, lower throughput, and rising maintenance and depreciation expenses.
- Monitor nonregulated margins, derivative settlements, mark-to-market effects, and collateral requirements amid natural-gas price movements.
- Confirm subsequent rate-case outcomes and the timing of recovery, and review any changes to credit ratings, covenant headroom, pension funding, or disclosed contingencies.