|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
INTRODUCTION
The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended
September 30, 2015
.
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: our ability to continue to access the credit and capital markets to satisfy our liquidity requirements; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; the impact of adverse economic conditions on our customers; the effects of inflation and changes in the availability and price of natural gas; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty creditworthiness or performance and interest rate risk; the concentration of our distribution, pipeline and storage operations in Texas; increased competition from energy suppliers and alternative forms of energy; adverse weather conditions; the capital-intensive nature of our regulated distribution business; increased costs of providing health care benefits along with pension and postretirement health care benefits and increased funding requirements; the inability to continue to hire, train and retain appropriate personnel; possible increased federal, state and local regulation of the safety of our operations; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the impact of climate changes or related additional legislation or regulation in the future; the inherent hazards and risks involved in operating our distribution and pipeline and storage businesses; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.
OVERVIEW
Atmos Energy and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers throughout our six regulated distribution divisions, which at
June 30, 2016
covered service areas located in eight states. In addition, we transport natural gas for others through our regulated distribution and pipeline systems.
Through our nonregulated businesses, we provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast and natural gas transmission and storage services to certain of our regulated distribution divisions and to third parties.
As discussed in Note 3, we operate the Company through the following three segments:
|
|
•
|
the
regulated distribution segment
, which includes our regulated natural gas distribution and related sales operations,
|
|
|
•
|
the
regulated pipeline segment
, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division and
|
|
|
•
|
the
nonregulated segment
, which includes our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.
|
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results may differ from such estimates.
Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2015
and include the following:
|
|
•
|
Pension and other postretirement plans
|
|
|
•
|
Financial instruments and hedging activities
|
|
|
•
|
Fair value measurements
|
Our critical accounting policies are reviewed periodically by the Audit Committee of our Board of Directors. There were no significant changes to these critical accounting policies during the
nine months ended June 30, 2016
.
RESULTS OF OPERATIONS
Executive Summary
Atmos Energy strives to operate its businesses safely and reliably while delivering superior shareholder value. To achieve this objective, we are investing in our infrastructure and seeking to achieve positive rate outcomes that benefit both our customers and the Company.
During the first nine months of fiscal
2016
, we earned
$315.9 million
, or
$3.06
per diluted share, an eight percent increase period over period. Regulated operations generated 88 and 95 percent of our consolidated net income for the three and nine months ended
June 30, 2016
. The following tables reflect the segregation of our consolidated net income and diluted earnings per share between our regulated and nonregulated operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, except per share data)
|
Regulated operations
|
$
|
62,986
|
|
|
$
|
51,032
|
|
|
$
|
11,954
|
|
Nonregulated operations
|
8,207
|
|
|
5,249
|
|
|
2,958
|
|
Net income
|
$
|
71,193
|
|
|
$
|
56,281
|
|
|
$
|
14,912
|
|
|
|
|
|
|
|
Diluted EPS from regulated operations
|
$
|
0.61
|
|
|
$
|
0.50
|
|
|
$
|
0.11
|
|
Diluted EPS from nonregulated operations
|
0.08
|
|
|
0.05
|
|
|
0.03
|
|
Consolidated diluted EPS
|
$
|
0.69
|
|
|
$
|
0.55
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, except per share data)
|
Regulated operations
|
$
|
301,324
|
|
|
$
|
273,989
|
|
|
$
|
27,335
|
|
Nonregulated operations
|
14,540
|
|
|
17,571
|
|
|
(3,031
|
)
|
Net income
|
$
|
315,864
|
|
|
$
|
291,560
|
|
|
$
|
24,304
|
|
|
|
|
|
|
|
Diluted EPS from regulated operations
|
$
|
2.92
|
|
|
$
|
2.69
|
|
|
$
|
0.23
|
|
Diluted EPS from nonregulated operations
|
0.14
|
|
|
0.17
|
|
|
(0.03
|
)
|
Consolidated diluted EPS
|
$
|
3.06
|
|
|
$
|
2.86
|
|
|
$
|
0.20
|
|
Positive rate outcomes achieved in our regulated businesses offset the effect of weather that was 25 percent warmer than the prior-year period. As of
June 30, 2016
, we had completed 16 regulatory proceedings resulting in an increase in annual operating income of $104.4 million and had five ratemaking efforts in progress seeking
$24.5 million
of additional annual operating income. Our nonregulated results in the current-year period reflect larger losses on the settlement of financial positions during a period of falling gas prices.
Capital expenditures for the first
nine
months of fiscal
2016
were
$796.0 million
. Approximately
83 percent
was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce lag to six months or less. We expect
our capital expenditures to range between $1 billion and $1.1 billion for fiscal
2016
. We funded our capital expenditure program primarily through operating cash flows of
$624.6 million
, net short-term borrowings and the issuance of common stock. On March 28, 2016, we entered into an at-the-market (ATM) equity distribution agreement under which we may issue and sell, shares of our common stock, up to an aggregate offering price of $200 million. During the third fiscal quarter of 2016, we issued 1.4 million shares of common stock and received $98.7 million in net proceeds under the ATM program.
On May 13, 2016, Standard & Poor’s Corporation upgraded our senior unsecured debt rating to A from A- and upgraded our short-term debt rating to A-1 from A-2, with a ratings outlook of stable, citing strong financial performance largely due to our ability to timely recover capital investments.
As a result of the continued contribution and stability of our regulated earnings, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 7.7 percent for fiscal 2016.
Regulated Distribution Segment
The primary factors that impact the results of our regulated distribution operations are our ability to earn our authorized rates of return, the cost of natural gas, competitive factors in the energy industry and economic conditions in our service areas.
Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and, ultimately, separating the recovery of our approved margins from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions.
Seasonal weather patterns can also affect our regulated distribution operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which has been approved by state regulatory commissions for approximately 97 percent of our residential and commercial meters in the following states for the following time periods:
|
|
|
|
|
Kansas, West Texas
|
October — May
|
Tennessee
|
October — April
|
Kentucky, Mississippi, Mid-Tex
|
November — April
|
Louisiana
|
December — March
|
Virginia
|
January — December
|
Our regulated distribution operations are also affected by the cost of natural gas. The cost of gas is passed through to our customers without markup. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe gross profit is a better indicator of our financial performance than revenues. However, gross profit in
our Texas and Mississippi service areas includes franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income. Although changes in these revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income.
As discussed above, the cost of gas typically does not have a direct impact on our gross profit. However, higher gas costs mean higher bills for our customers, which may adversely impact our accounts receivable collections, resulting in higher bad debt expense and may require us to increase borrowings under our credit facilities resulting in higher interest expense. In addition, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. However, gas cost risk has been mitigated in recent years through improvements in rate design that allow us to collect from our customers the gas cost portion of our bad debt expense on approximately 75 percent of our residential and commercial margins.
Three Months Ended June 30, 2016
compared with
Three Months Ended June 30, 2015
Financial and operational highlights for our regulated distribution segment for the three months ended
June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Gross profit
|
$
|
275,381
|
|
|
$
|
267,019
|
|
|
$
|
8,362
|
|
Operating expenses
|
212,152
|
|
|
210,219
|
|
|
1,933
|
|
Operating income
|
63,229
|
|
|
56,800
|
|
|
6,429
|
|
Miscellaneous income
|
1,111
|
|
|
1,045
|
|
|
66
|
|
Interest charges
|
18,968
|
|
|
19,961
|
|
|
(993
|
)
|
Income before income taxes
|
45,372
|
|
|
37,884
|
|
|
7,488
|
|
Income tax expense
|
15,516
|
|
|
15,420
|
|
|
96
|
|
Net income
|
$
|
29,856
|
|
|
$
|
22,464
|
|
|
$
|
7,392
|
|
Consolidated regulated distribution sales volumes — MMcf
|
34,983
|
|
|
36,126
|
|
|
(1,143
|
)
|
Consolidated regulated distribution transportation volumes — MMcf
|
30,416
|
|
|
30,134
|
|
|
282
|
|
Total consolidated regulated distribution throughput — MMcf
|
65,399
|
|
|
66,260
|
|
|
(861
|
)
|
Consolidated regulated distribution average cost of gas per Mcf sold
|
$
|
3.97
|
|
|
$
|
4.15
|
|
|
$
|
(0.18
|
)
|
Income for our regulated distribution segment increased 33 percent, primarily due to an
$8.4 million
increase in gross profit, partially offset with a
$1.9 million
increase in operating expenses. The quarter-over-quarter increase in gross profit primarily reflects:
|
|
•
|
a $6.5 million net increase in rate adjustments, primarily in our Mississippi, Louisiana, West Texas and Kentucky/Mid-States Divisions.
|
|
|
•
|
Customer growth, primarily in our Mid-Tex, Louisiana and Tennessee service areas, which contributed an incremental $1.5 million.
|
The increase in operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, was primarily due to higher levels of system maintenance and higher depreciation expense associated with increased capital investments.
Net income for the three months ended June 30, 2016 includes a $1.6 million income tax benefit for equity awards that vested during the current-year quarter as a result of adopting the new stock-based accounting guidance.
The following table shows our operating income by regulated distribution division, in order of total rate base, for the three months ended
June 30, 2016
and
2015
. The presentation of our regulated distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands)
|
Mid-Tex
|
$
|
33,818
|
|
|
$
|
33,473
|
|
|
$
|
345
|
|
Kentucky/Mid-States
|
6,955
|
|
|
10,104
|
|
|
(3,149
|
)
|
Louisiana
|
9,288
|
|
|
6,561
|
|
|
2,727
|
|
West Texas
|
5,709
|
|
|
5,018
|
|
|
691
|
|
Mississippi
|
3,959
|
|
|
1,546
|
|
|
2,413
|
|
Colorado-Kansas
|
3,152
|
|
|
1,872
|
|
|
1,280
|
|
Other
|
348
|
|
|
(1,774
|
)
|
|
2,122
|
|
Total
|
$
|
63,229
|
|
|
$
|
56,800
|
|
|
$
|
6,429
|
|
Nine Months Ended June 30, 2016
compared with
Nine Months Ended June 30, 2015
Financial and operational highlights for our regulated distribution segment for the
nine
months ended
June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Gross profit
|
$
|
1,017,984
|
|
|
$
|
997,066
|
|
|
$
|
20,918
|
|
Operating expenses
|
617,625
|
|
|
617,451
|
|
|
174
|
|
Operating income
|
400,359
|
|
|
379,615
|
|
|
20,744
|
|
Miscellaneous income (expense)
|
209
|
|
|
(1,221
|
)
|
|
1,430
|
|
Interest charges
|
58,390
|
|
|
60,914
|
|
|
(2,524
|
)
|
Income before income taxes
|
342,178
|
|
|
317,480
|
|
|
24,698
|
|
Income tax expense
|
124,755
|
|
|
121,776
|
|
|
2,979
|
|
Net income
|
$
|
217,423
|
|
|
$
|
195,704
|
|
|
$
|
21,719
|
|
Consolidated regulated distribution sales volumes — MMcf
|
215,632
|
|
|
265,503
|
|
|
(49,871
|
)
|
Consolidated regulated distribution transportation volumes — MMcf
|
103,304
|
|
|
107,205
|
|
|
(3,901
|
)
|
Total consolidated regulated distribution throughput — MMcf
|
318,936
|
|
|
372,708
|
|
|
(53,772
|
)
|
Consolidated regulated distribution average cost of gas per Mcf sold
|
$
|
4.10
|
|
|
$
|
5.26
|
|
|
$
|
(1.16
|
)
|
Income for our regulated distribution segment increased 11 percent, primarily due to a
$20.9 million
increase in gross profit. The year-over-year increase in gross profit primarily reflects:
|
|
•
|
a $37.2 million net increase in rate adjustments. Our Mid-Tex Division accounted for $16.3 million of this increase. We also experienced increases in our Mississippi and West Texas Divisions.
|
|
|
•
|
The impact of weather that was 25 percent warmer than the prior-year period, before adjusting for weather normalization mechanisms. Therefore, although sales volumes declined 19 percent, gross margin experienced just a $3.6 million decline from lower consumption. Warmer weather also contributed to a $2.5 million decrease in service and other revenues.
|
|
|
•
|
Customer growth, primarily in our Mid-Tex, Louisiana and Tennessee service areas, which contributed an incremental $4.9 million.
|
|
|
•
|
a
$14.5 million
decrease in revenue-related taxes primarily in our Mid-Tex and West Texas Divisions, offset by a corresponding
$15.4 million
decrease in the related tax expense.
|
Net income for the nine months ended June 30, 2016 includes a $4.9 million income tax benefit for equity awards that vested during the current-year period as a result of adopting the new stock-based accounting guidance.
The following table shows our operating income by regulated distribution division, in order of total rate base, for the
nine
months ended
June 30, 2016
and
2015
. The presentation of our regulated distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands)
|
Mid-Tex
|
$
|
182,594
|
|
|
$
|
166,586
|
|
|
$
|
16,008
|
|
Kentucky/Mid-States
|
56,334
|
|
|
59,256
|
|
|
(2,922
|
)
|
Louisiana
|
48,082
|
|
|
47,380
|
|
|
702
|
|
West Texas
|
38,937
|
|
|
33,820
|
|
|
5,117
|
|
Mississippi
|
40,491
|
|
|
37,356
|
|
|
3,135
|
|
Colorado-Kansas
|
31,308
|
|
|
29,129
|
|
|
2,179
|
|
Other
|
2,613
|
|
|
6,088
|
|
|
(3,475
|
)
|
Total
|
$
|
400,359
|
|
|
$
|
379,615
|
|
|
$
|
20,744
|
|
Recent Ratemaking Developments
The amounts described in the following sections represent the operating income that was requested or received in each rate filing, which may not necessarily reflect the stated amount referenced in the final order, as certain operating costs may have changed as a result of a commission’s or other governmental authority’s final ruling. During the first
nine
months of fiscal
2016
, we completed 15 regulatory proceedings, resulting in a
$63.7 million
increase in annual operating income as summarized below:
|
|
|
|
|
|
Rate Action
|
|
Annual Increase to
Operating Income
|
|
|
(In thousands)
|
Annual formula rate mechanisms
|
|
$
|
59,414
|
|
Rate case filings
|
|
4,456
|
|
Other rate activity
|
|
(183
|
)
|
|
|
$
|
63,687
|
|
Additionally, the following ratemaking efforts seeking
$24.5 million
in annual operating income were in progress as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Division
|
|
Rate Action
|
|
Jurisdiction
|
|
Operating Income
Requested
|
|
|
|
|
|
|
(In thousands)
|
Kentucky/Mid-States
|
|
Rate Case
(1)
|
|
Kentucky
|
|
$
|
5,531
|
|
Kentucky/Mid-States
|
|
Expedited Rate Filing
(2)
|
|
Virginia
|
|
537
|
|
Louisiana
|
|
Formula Rate Mechanism
(2)
|
|
Trans LA
|
|
6,216
|
|
Louisiana
|
|
Formula Rate Mechanism
(2)
|
|
LGS
|
|
8,686
|
|
Mississippi
|
|
Infrastructure Mechanism
|
|
Mississippi
|
|
3,519
|
|
|
|
|
|
|
|
$
|
24,489
|
|
|
|
(1)
|
The parties filed a unanimous settlement that, if accepted by the Kentucky Pubic Service Commission, will result in an increase to operating revenue of $2.7 million on August 15, 2016.
|
|
|
(2)
|
The proposed increase for Virginia and Louisiana customers was implemented on April 1, 2016 (Trans LA & Virginia) and July 1, 2016 (LGS), subject to refund.
|
Annual Formula Rate Mechanisms
As an instrument to reduce regulatory lag, formula rate mechanisms allow us to refresh our rates on an annual periodic basis without filing a formal rate case. However, these filings still involve discovery by the appropriate regulatory authorities prior to the final determination of rates under these mechanisms. We currently have formula rate mechanisms in our Louisiana, Mississippi and Tennessee operations and in substantially all of our Texas divisions. Additionally, we have specific
infrastructure programs in substantially all of our distribution divisions with tariffs in place to permit the investment associated with these programs to have their surcharge rate adjusted annually to recover approved capital costs incurred in a prior test-year period. The following table summarizes our annual formula rate mechanisms by state.
|
|
|
|
|
|
|
|
Annual Formula Rate Mechanisms
|
State
|
|
Infrastructure Programs
|
|
Formula Rate Mechanisms
|
|
|
|
|
|
Colorado
|
|
System Safety and Integrity Rider (SSIR)
|
|
—
|
Kansas
|
|
Gas System Reliability Surcharge (GSRS)
|
|
—
|
Kentucky
|
|
Pipeline Replacement Program (PRP)
|
|
—
|
Louisiana
|
|
(1)
|
|
Rate Stabilization Clause (RSC)
|
Mississippi
|
|
System Integrity Rider (SIR)
|
|
Stable Rate Filing (SRF), Supplemental Growth Filing (SGR)
|
Tennessee
|
|
—
|
|
Annual Rate Mechanism (ARM)
|
Texas
|
|
Gas Reliability Infrastructure Program (GRIP), (1)
|
|
Dallas Annual Rate Review (DARR), Rate Review Mechanism (RRM)
|
Virginia
|
|
Steps to Advance Virginia Energy (SAVE)
|
|
—
|
|
|
(1)
|
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all expenses associated with capital expenditures incurred pursuant to these rules, which primarily consists of interest, depreciation and other taxes, until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
|
The following annual formula rate mechanisms were approved during the
nine months ended June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Division
|
|
Jurisdiction
|
|
Test Year
Ended
|
|
Increase in
Annual
Operating
Income
|
|
Effective
Date
|
|
|
|
|
(In thousands)
|
2016 Filings:
|
|
|
|
|
|
|
|
|
Kentucky/Mid-States
|
|
Tennessee
|
|
05/31/2017
|
|
$
|
4,888
|
|
|
06/01/2016
|
Mid-Tex
|
|
Mid-Tex Cities RRM
|
|
12/31/2015
|
|
25,816
|
|
|
06/01/2016
|
Mid-Tex
|
|
Mid-Tex DARR
|
|
09/30/2015
|
|
5,429
|
|
|
06/01/2016
|
Mid-Tex
|
|
Mid-Tex Environs
|
|
12/31/2015
|
|
1,325
|
|
|
05/03/2016
|
West Texas
|
|
West Texas Environs
|
|
12/31/2015
|
|
646
|
|
|
05/03/2016
|
West Texas
|
|
West Texas ALDC
|
|
12/31/2015
|
|
3,484
|
|
|
04/26/2016
|
Colorado-Kansas
|
|
Colorado
|
|
12/31/2016
|
|
764
|
|
|
01/01/2016
|
Mississippi
|
|
Mississippi-SRF
(1)
|
|
10/31/2016
|
|
9,192
|
|
|
01/01/2016
|
Mississippi
|
|
Mississippi-SGR
(2)
|
|
10/31/2016
|
|
250
|
|
|
12/01/2015
|
Kentucky/Mid-States
|
|
Kentucky-PRP
|
|
09/30/2016
|
|
3,786
|
|
|
10/01/2015
|
Kentucky/Mid-States
|
|
Virginia-SAVE
|
|
09/30/2016
|
|
118
|
|
|
10/01/2015
|
West Texas
|
|
West Texas Cities
|
|
09/30/2015
|
|
3,716
|
|
|
10/01/2015
|
Total 2016 Filings
|
|
|
|
|
|
$
|
59,414
|
|
|
|
|
|
(1)
|
The commission issued a final order approving a $9.2 million increase in annual operating income on December 21, 2015 with an effective date of January 1, 2016.
|
|
|
(2)
|
The Mississippi Supplemental Growth Rider permits the Company to pursue up to $5.0 million of eligible industrial growth projects beyond the Division’s normal main extension policies. This is the third year of the SGR program.
|
Rate Case Filings
A rate case is a formal request from Atmos Energy to a regulatory authority to increase rates that are charged to our customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a “show cause” action. Adequate rates are intended to provide for recovery of the Company’s costs as well as a fair rate of return and ensure that we continue to deliver reliable, reasonably priced natural gas service safely to our customers. The following table summarizes the rate cases that were completed during the
nine months ended June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division
|
|
State
|
|
Increase in Annual
Operating Income
|
|
Effective
Date
|
|
|
(In thousands)
|
2016 Rate Case Filings:
|
|
|
|
|
|
|
Colorado-Kansas
|
|
Kansas
|
|
$
|
2,372
|
|
|
03/17/2016
|
Colorado-Kansas
|
|
Colorado
|
|
2,084
|
|
|
01/01/2016
|
Total 2016 Rate Case Filings
|
|
|
|
$
|
4,456
|
|
|
|
Other Ratemaking Activity
The following table summarizes other ratemaking activity during the
nine months ended June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Division
|
|
Jurisdiction
|
|
Rate Activity
|
|
Additional
Annual
Operating
Income
|
|
Effective
Date
|
|
|
|
|
(In thousands)
|
2016 Other Rate Activity:
|
|
|
|
|
|
|
|
|
Colorado-Kansas
|
|
Kansas
|
|
Ad-Valorem
(1)
|
|
$
|
(183
|
)
|
|
02/01/2016
|
Total 2016 Other Rate Activity
|
|
|
|
|
|
$
|
(183
|
)
|
|
|
|
|
(1)
|
The Ad Valorem filing relates to a collection of property taxes in excess of the amount included in our Kansas service area's base rates.
|
Regulated Pipeline Segment
Our regulated pipeline segment consists of the pipeline and storage operations of the Atmos Pipeline–Texas Division. The Atmos Pipeline–Texas Division transports and stores natural gas for our Mid-Tex Division and third party local distribution companies and manages five underground storage facilities in Texas. We also provide interruptible transportation, storage and ancillary services to electric generation and industrial customers as well as producers, marketers and other shippers.
Our regulated pipeline segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Mid-Tex service area. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the markets that we serve, which may influence the level of throughput we may be able to transport on our pipeline. Further, natural gas price differences between the various hubs that we serve could influence the volumes of gas transported for shippers through our pipeline system and the rates for such transportation.
The results of Atmos Pipeline — Texas Division are also significantly impacted by the natural gas requirements of the Mid-Tex Division because it is the primary transporter of natural gas for our Mid-Tex Division.
Finally, as a regulated pipeline, the operations of the Atmos Pipeline — Texas Division may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs. Additionally, the Atmos Pipeline–Texas Division annually uses GRIP to recover capital costs incurred in the prior calendar year.
Three Months Ended
June 30, 2016
compared with Three Months Ended
June 30, 2015
Financial and operational highlights for our regulated pipeline segment for the three months ended
June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Mid-Tex transportation
|
$
|
83,503
|
|
|
$
|
71,989
|
|
|
$
|
11,514
|
|
Third-party transportation
|
22,715
|
|
|
22,724
|
|
|
(9
|
)
|
Storage and park and lend services
|
931
|
|
|
664
|
|
|
267
|
|
Other
|
2,100
|
|
|
1,631
|
|
|
469
|
|
Gross profit
|
109,249
|
|
|
97,008
|
|
|
12,241
|
|
Operating expenses
|
48,712
|
|
|
44,581
|
|
|
4,131
|
|
Operating income
|
60,537
|
|
|
52,427
|
|
|
8,110
|
|
Miscellaneous expense
|
(359
|
)
|
|
(211
|
)
|
|
(148
|
)
|
Interest charges
|
9,002
|
|
|
8,299
|
|
|
703
|
|
Income before income taxes
|
51,176
|
|
|
43,917
|
|
|
7,259
|
|
Income tax expense
|
18,046
|
|
|
15,349
|
|
|
2,697
|
|
Net income
|
$
|
33,130
|
|
|
$
|
28,568
|
|
|
$
|
4,562
|
|
Gross pipeline transportation volumes — MMcf
|
156,489
|
|
|
165,898
|
|
|
(9,409
|
)
|
Consolidated pipeline transportation volumes — MMcf
|
128,801
|
|
|
134,823
|
|
|
(6,022
|
)
|
Net income for our regulated pipeline segment increased 16 percent, primarily due to a
$12.2 million
increase in gross profit, offset by a
$4.1 million
increase in operating expenses. The increase in gross profit primarily reflects an $11.3 million increase in rates from the GRIP filings approved in fiscal 2015 and 2016.
Operating expenses increased
$4.1 million
, primarily due to increased levels of pipeline maintenance activities and higher depreciation expense associated with increased capital investments.
On May 3, 2016, a GRIP filing was approved by the Railroad Commission of Texas for $40.7 million of additional annual operating income, effective with bills rendered on and after May 3, 2016.
Nine Months Ended
June 30, 2016
compared with
Nine Months Ended
June 30, 2015
Financial and operational highlights for our regulated pipeline segment for the
nine months ended
June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Mid-Tex transportation
|
$
|
224,662
|
|
|
$
|
192,734
|
|
|
$
|
31,928
|
|
Third-party transportation
|
63,597
|
|
|
71,203
|
|
|
(7,606
|
)
|
Storage and park and lend services
|
2,495
|
|
|
2,737
|
|
|
(242
|
)
|
Other
|
8,875
|
|
|
5,631
|
|
|
3,244
|
|
Gross profit
|
299,629
|
|
|
272,305
|
|
|
27,324
|
|
Operating expenses
|
141,189
|
|
|
125,270
|
|
|
15,919
|
|
Operating income
|
158,440
|
|
|
147,035
|
|
|
11,405
|
|
Miscellaneous expense
|
(1,164
|
)
|
|
(842
|
)
|
|
(322
|
)
|
Interest charges
|
27,294
|
|
|
25,014
|
|
|
2,280
|
|
Income before income taxes
|
129,982
|
|
|
121,179
|
|
|
8,803
|
|
Income tax expense
|
46,081
|
|
|
42,894
|
|
|
3,187
|
|
Net income
|
$
|
83,901
|
|
|
$
|
78,285
|
|
|
$
|
5,616
|
|
Gross pipeline transportation volumes — MMcf
|
520,233
|
|
|
567,906
|
|
|
(47,673
|
)
|
Consolidated pipeline transportation volumes — MMcf
|
373,000
|
|
|
381,828
|
|
|
(8,828
|
)
|
Net income for our regulated pipeline segment increased seven percent, primarily due to a
$27.3 million
increase in gross profit, partially offset by a
$15.9 million
increase in operating expenses. The increase in gross profit primarily reflects a $28.4 million increase in rates from the GRIP filings approved in fiscal 2015 and 2016 and a $3.6 million increase from the sale of excess retention gas. These increases were partially offset by a $4.0 million decrease in through-system volumes and lower storage and blending fees due to warmer weather in the current-year period compared to the prior-year period.
Operating expenses increased
$15.9 million
, primarily due to increased levels of pipeline maintenance activities to improve the safety and reliability of our system and increased property taxes and depreciation expense associated with increased capital investments.
Nonregulated Segment
Our nonregulated operations are conducted through Atmos Energy Holdings, Inc. (AEH), a wholly-owned subsidiary of Atmos Energy Corporation and, historically, have represented approximately five percent of our consolidated net income.
AEH's primary business is to buy, sell and deliver natural gas at competitive prices to approximately 1,000 customers located primarily in the Midwest and Southeast areas of the United States. AEH accomplishes this objective by aggregating and purchasing gas supply, arranging transportation and storage logistics and effectively managing commodity price risk.
AEH also earns storage and transportation demand fees primarily from our regulated distribution operations in Louisiana and Kentucky. These demand fees are subject to regulatory oversight and are renewed periodically.
Our nonregulated activities are significantly influenced by competitive factors in the industry and general economic conditions. Therefore, the margins earned from these activities are dependent upon our ability to attract and retain customers and to minimize the cost of buying, selling and delivering natural gas to offer more competitive pricing to those customers.
Natural gas prices can influence:
•
The demand for natural gas. Higher prices may cause customers to conserve or use alternative energy sources.
Conversely, lower prices could cause customers such as electric power generators to switch from alternative energy
sources to natural gas.
|
|
•
|
The collection of accounts receivable from customers, which could affect the level of bad debt expense recognized by this segment.
|
|
|
•
|
The level of borrowings under our credit facilities, which affects the level of interest expense recognized by this
|
segment.
Natural gas price volatility can also influence our nonregulated business in the following ways:
|
|
•
|
Price volatility influences basis differentials, which provide opportunities to profit from identifying the lowest cost
|
alternative among the natural gas supplies, transportation and markets to which we have access.
|
|
•
|
Increased or decreased volatility impacts the amounts of unrealized margins recorded in our gross profit and could
|
impact the amount of cash required to collateralize our risk management liabilities.
Our nonregulated segment manages its exposure to natural gas commodity price risk through a combination of physical storage and financial instruments. Therefore, results for this segment include unrealized gains or losses on its net physical gas position and the related financial instruments used to manage commodity price risk. These margins fluctuate based upon changes in the spreads between the physical and forward natural gas prices. The magnitude of the unrealized gains and losses is also contingent upon the levels of our net physical position at the end of the reporting period.
Three Months Ended
June 30, 2016
compared with Three Months Ended
June 30, 2015
Financial and operating highlights for our nonregulated segment for the three months ended
June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Realized margins
|
|
|
|
|
|
Gas delivery and related services
|
$
|
8,899
|
|
|
$
|
10,648
|
|
|
$
|
(1,749
|
)
|
Storage and transportation services
|
3,616
|
|
|
3,607
|
|
|
9
|
|
Other
|
6,047
|
|
|
1,508
|
|
|
4,539
|
|
Total realized margins
|
18,562
|
|
|
15,763
|
|
|
2,799
|
|
Unrealized margins
|
4,252
|
|
|
2,016
|
|
|
2,236
|
|
Gross profit
|
22,814
|
|
|
17,779
|
|
|
5,035
|
|
Operating expenses
|
9,416
|
|
|
9,399
|
|
|
17
|
|
Operating income
|
13,398
|
|
|
8,380
|
|
|
5,018
|
|
Miscellaneous income
|
574
|
|
|
345
|
|
|
229
|
|
Interest charges
|
221
|
|
|
240
|
|
|
(19
|
)
|
Income before income taxes
|
13,751
|
|
|
8,485
|
|
|
5,266
|
|
Income tax expense
|
5,544
|
|
|
3,236
|
|
|
2,308
|
|
Net income
|
$
|
8,207
|
|
|
$
|
5,249
|
|
|
$
|
2,958
|
|
Gross nonregulated delivered gas sales volumes — MMcf
|
88,472
|
|
|
89,052
|
|
|
(580
|
)
|
Consolidated nonregulated delivered gas sales volumes — MMcf
|
76,798
|
|
|
75,929
|
|
|
869
|
|
Net physical position (Bcf)
|
30.6
|
|
|
22.1
|
|
|
8.5
|
|
The
$5.0 million
quarter-over-quarter increase in gross profit reflects a
$2.8 million
increase in realized margins, combined with a
$2.2 million
increase in unrealized margins. The following were the key drivers for the
$2.8 million
increase in realized margins:
|
|
•
|
Other realized margins increased
$4.5 million
. The increase primarily
reflects larger settlement gains on short financial positions established during the first and second quarter of fiscal 2016.
|
|
|
•
|
Margins from gas delivery and related services margins decreased
$1.7 million
, primarily due to a decrease in per-unit margins from
12 cents
to
10 cents
per Mcf, primarily due to increased demand from low-margin power generation and marketing customers due to warmer weather.
|
Unrealized margins increased
$2.2 million
, primarily due to the period-over-period favorable movement of the physical mark on the fair value of natural gas inventory hedged positions.
Nine Months Ended
June 30, 2016
compared with
Nine Months Ended
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands, unless otherwise noted)
|
Realized margins
|
|
|
|
|
|
Gas delivery and related services
|
$
|
37,454
|
|
|
$
|
39,280
|
|
|
$
|
(1,826
|
)
|
Storage and transportation services
|
10,143
|
|
|
10,273
|
|
|
(130
|
)
|
Other
|
(8,718
|
)
|
|
(1,322
|
)
|
|
(7,396
|
)
|
Total realized margins
|
38,879
|
|
|
48,231
|
|
|
(9,352
|
)
|
Unrealized margins
|
12,792
|
|
|
8,493
|
|
|
4,299
|
|
Gross profit
|
51,671
|
|
|
56,724
|
|
|
(5,053
|
)
|
Operating expenses
|
27,085
|
|
|
27,832
|
|
|
(747
|
)
|
Operating income
|
24,586
|
|
|
28,892
|
|
|
(4,306
|
)
|
Miscellaneous income
|
1,245
|
|
|
897
|
|
|
348
|
|
Interest charges
|
1,408
|
|
|
706
|
|
|
702
|
|
Income before income taxes
|
24,423
|
|
|
29,083
|
|
|
(4,660
|
)
|
Income tax expense
|
9,883
|
|
|
11,512
|
|
|
(1,629
|
)
|
Net income
|
$
|
14,540
|
|
|
$
|
17,571
|
|
|
$
|
(3,031
|
)
|
Gross nonregulated delivered gas sales volumes — MMcf
|
292,619
|
|
|
319,423
|
|
|
(26,804
|
)
|
Consolidated nonregulated delivered gas sales volumes — MMcf
|
257,733
|
|
|
272,260
|
|
|
(14,527
|
)
|
Net physical position (Bcf)
|
30.6
|
|
|
22.1
|
|
|
8.5
|
|
The
$5.1 million
year-over-year decrease in gross profit reflects a
$9.4 million
decrease in realized margins, partially offset by a
$4.3 million
increase in unrealized margins. The following were the key drivers for the
$9.4 million
decrease in realized margins:
|
|
•
|
Margins from gas delivery and related services decreased
$1.8 million
year-over-year. Consolidated sales volumes decreased
five percent
due to warmer weather. However, lower net transportation costs and other variable costs driven by fewer deliveries resulted in an increase in per-unit margins from
12 cents
to
13 cents
per Mcf, which partially offset the effect of reduced sales volumes.
|
|
|
•
|
Other realized margins decreased
$7.4 million
. The decrease primarily reflects higher realized losses incurred during the first six months of fiscal 2016 on the settlement of long financial positions during a period of falling prices. Additionally, storage fees rose primarily due to increased park and loan activity. The aforementioned settlement gains realized during the third quarter partially offset these period over period decreases.
|
Unrealized margins increased
$4.3 million
, primarily due to the period-over-period favorable movement of the physical mark on the fair value of natural gas inventory hedged positions.
Liquidity and Capital Resources
The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a variety of sources including internally generated funds and borrowings under our commercial paper program and bank credit facilities. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis. Finally, from time to time, we raise funds from the public debt and equity capital markets to fund our liquidity needs.
We regularly evaluate our funding strategy and capital structure to ensure that we (i) have sufficient liquidity for our short-term and long-term needs in a cost-effective manner and (ii) maintain a balanced capital structure with a debt-to-capitalization ratio in a target range of 45 to 55 percent. We also evaluate the levels of committed borrowing capacity that we require. We currently have over $1 billion of capacity under our short-term facilities.
We plan to continue to fund our growth through the use of operating cash flows, debt and equity securities while maintaining a balanced capital structure. To support our capital market activities, we filed a registration statement with the SEC on March 28, 2016 to issue, from time to time, up to
$2.5 billion
in common stock and/or debt securities, which replaced our registration statement that expired on March 28, 2016. On March 28, 2016, we entered into an at-the-market (ATM) equity distribution agreement under which we may issue and sell, shares of our common stock, up to an aggregate offering price of
$200 million. The shares will be issued under our shelf registration statement. Proceeds from the ATM program will be used primarily to repay short-term debt outstanding under our $1.25 billion commercial paper program, to fund capital spending primarily to enhance the safety and reliability of our system and for general corporate purposes. During the third fiscal quarter of 2016, we issued 1.4 million shares of common stock and received $98.7 million in net proceeds under the ATM program. At
June 30, 2016
, $2.4 billion of securities remain available for issuance under the shelf registration statement.
The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as of
June 30, 2016
,
September 30, 2015
and
June 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
June 30, 2015
|
|
(In thousands, except percentages)
|
Short-term debt
|
$
|
670,466
|
|
|
10.2
|
%
|
|
$
|
457,927
|
|
|
7.5
|
%
|
|
$
|
251,977
|
|
|
4.2
|
%
|
Long-term debt
(1)
|
2,455,645
|
|
|
37.2
|
%
|
|
2,455,388
|
|
|
40.2
|
%
|
|
2,455,303
|
|
|
41.3
|
%
|
Shareholders’ equity
|
3,466,724
|
|
|
52.6
|
%
|
|
3,194,797
|
|
|
52.3
|
%
|
|
3,238,255
|
|
|
54.5
|
%
|
Total
|
$
|
6,592,835
|
|
|
100.0
|
%
|
|
$
|
6,108,112
|
|
|
100.0
|
%
|
|
$
|
5,945,535
|
|
|
100.0
|
%
|
(1)
In June 2017, $250 million of long-term debt will mature. We plan to issue new senior notes to replace this maturing debt. We have executed forward starting interest rate swaps to effectively fix the Treasury yield component associated with this anticipated issuance at 3.37%.
Cash Flows
Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, prices for our products and services, demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.
Cash flows from operating, investing and financing activities for the
nine months ended June 30, 2016
and
2015
are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30
|
|
2016
|
|
2015
|
|
Change
|
|
(In thousands)
|
Total cash provided by (used in)
|
|
|
|
|
|
Operating activities
|
$
|
624,598
|
|
|
$
|
717,582
|
|
|
$
|
(92,984
|
)
|
Investing activities
|
(794,381
|
)
|
|
(668,602
|
)
|
|
(125,779
|
)
|
Financing activities
|
207,336
|
|
|
(48,085
|
)
|
|
255,421
|
|
Change in cash and cash equivalents
|
37,553
|
|
|
895
|
|
|
36,658
|
|
Cash and cash equivalents at beginning of period
|
28,653
|
|
|
42,258
|
|
|
(13,605
|
)
|
Cash and cash equivalents at end of period
|
$
|
66,206
|
|
|
$
|
43,153
|
|
|
$
|
23,053
|
|
Cash flows from operating activities
Period-over-period changes in our operating cash flows are primarily attributable to changes in net income and working capital changes, particularly within our regulated distribution segment resulting from changes in the price of natural gas and the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries.
For the
nine months ended June 30, 2016
, we generated cash flow of
$624.6 million
from operating activities compared with
$717.6 million
for the
nine months ended June 30, 2015
. The
$93.0 million
decrease in operating cash flows primarily reflects the timing of deferred gas cost recoveries.
Cash flows from investing activities
In executing our regulatory strategy, we target our capital spending on regulatory mechanisms that permit us to earn an adequate return timely on our investment without compromising the safety or reliability of our system. Substantially all of our regulated jurisdictions have rate tariffs that provide the opportunity to include in their rate base approved capital costs on a periodic basis without being required to file a rate case.
In recent years, a substantial portion of our cash resources has been used to fund our ongoing construction program, which enables us to enhance the safety and reliability of the systems used to provide regulated distribution services to our
existing customer base, expand our natural gas distribution services into new markets, enhance the integrity of our pipelines and, more recently, expand our intrastate pipeline network. Over the last three fiscal years, approximately 80 percent of our capital spending has been committed to improving the safety and reliability of our system. We anticipate our annual capital spending will be in the range of $1 billion to $1.4 billion through fiscal 2020.
For the
nine months ended June 30, 2016
, capital expenditures were
$796.0 million
, compared with
$667.5 million
in the prior-year period. The
$128.5 million
increase primarily reflects an increase in capital spending in our regulated pipeline segment, primarily related to the enhancement and fortification of two storage fields to ensure the reliability of gas service to our Mid-Tex Division combined with a planned increase in spending in our regulated distribution operations.
Cash flows from financing activities
For the
nine months ended June 30, 2016
, our financing activities generated
$207.3 million
of cash compared with
$48.1 million
of cash used in the prior-year period. The
$255.4 million
increase of cash generated is primarily due to higher net short-term debt borrowings due to increased capital expenditures and period-over-period changes in working capital funding needs compared to the prior year, as well as proceeds received from the issuance of common stock under our ATM program in the third fiscal quarter of 2016.
The following table summarizes our share issuances for the
nine months ended June 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
Nine Months Ended
June 30
|
|
2016
|
|
2015
|
Shares issued:
|
|
|
|
Direct Stock Purchase Plan
|
107,736
|
|
|
137,049
|
|
1998 Long-Term Incentive Plan
|
597,470
|
|
|
664,074
|
|
Retirement Savings Plan and Trust
|
282,578
|
|
|
296,067
|
|
At-the-Market (ATM) Equity Sales Program
|
1,360,756
|
|
|
—
|
|
Total shares issued
|
2,348,540
|
|
|
1,097,190
|
|
The year-over-year increase in the number of shares issued primarily reflects shares issued under the ATM Program. For the nine months ended June 30, 2016, we did not cancel and retire any shares attributable to federal income tax withholdings on equity awards. For the nine months ended June 30, 2015, we canceled and retired 148,464 such shares.
Credit Facilities
Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business and the level of our capital expenditures. Changes in the price of natural gas, the amount of natural gas we need to supply to meet our customers’ needs and our capital spending activities could significantly affect our borrowing requirements. However, our short-term borrowings typically reach their highest levels in the winter months.
We finance our short-term borrowing requirements through a combination of a
$1.25 billion
commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility with third-party lenders that provide approximately
$1.3 billion
of working capital funding. As of
June 30, 2016
, the amount available to us under our credit facilities, net of commercial paper and outstanding letters of credit, was $0.6 billion.
Credit Ratings
Our credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities and funding status. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the quality of our management and business strategy, the risks associated with our regulated and nonregulated businesses and the regulatory structures that govern our rates in the states where we operate.
Our debt is rated by three rating agencies: Standard & Poor’s Corporation (S&P), Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch). On May 13, 2016, S&P upgraded our senior unsecured debt rating to A from A- and upgraded our short-term debt rating to A-1 from A-2, with a ratings outlook of stable, citing strong financial performance largely due to our ability to timely recover capital investments. As of
June 30, 2016
, all three rating agencies maintained a stable outlook. Our current debt ratings are all considered investment grade and are as follows:
|
|
|
|
|
|
|
|
|
|
|
S&P
|
|
Moody’s
|
|
Fitch
|
Senior unsecured long-term debt
|
A
|
|
A2
|
|
A
|
Short-term debt
|
A-1
|
|
P-1
|
|
F-2
|
A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the three credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings.
A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating is AAA for S&P, Aaa for Moody’s and AAA for Fitch. The lowest investment grade credit rating is BBB- for S&P, Baa3 for Moody’s and BBB- for Fitch. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independently of any other rating. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant.
Debt Covenants
We were in compliance with all of our debt covenants as of
June 30, 2016
. Our debt covenants are described in greater detail in Note
5
to the unaudited condensed consolidated financial statements.
Contractual Obligations and Commercial Commitments
Except as noted in Note
8
to the unaudited condensed consolidated financial statements, there were no significant changes in our contractual obligations and commercial commitments during the
nine months ended June 30, 2016
.
Risk Management Activities
We conduct risk management activities through our regulated distribution and nonregulated segments. In our regulated distribution segment, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
In our nonregulated segment, we manage our exposure to the risk of natural gas price changes and lock in our gross profit margin through a combination of storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. To the extent our inventory cost and actual sales and actual purchases do not correlate with the changes in the market indices we use in our hedges, we could experience ineffectiveness or the hedges may no longer meet the accounting requirements for hedge accounting, resulting in the financial instruments being treated as mark to market instruments through earnings.
The following table shows the components of the change in fair value of our regulated distribution segment’s financial instruments for the
three and nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Nine Months Ended
June 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Fair value of contracts at beginning of period
|
$
|
(187,864
|
)
|
|
$
|
(137,710
|
)
|
|
$
|
(119,361
|
)
|
|
$
|
14,284
|
|
Contracts realized/settled
|
(107
|
)
|
|
(48
|
)
|
|
(20,865
|
)
|
|
(33,859
|
)
|
Fair value of new contracts
|
2,377
|
|
|
1,514
|
|
|
2,434
|
|
|
1,365
|
|
Other changes in value
|
(59,709
|
)
|
|
85,993
|
|
|
(107,511
|
)
|
|
(32,041
|
)
|
Fair value of contracts at end of period
|
(245,303
|
)
|
|
(50,251
|
)
|
|
(245,303
|
)
|
|
(50,251
|
)
|
Netting of cash collateral
|
16,330
|
|
|
—
|
|
|
16,330
|
|
|
—
|
|
Cash collateral and fair value of contracts at period end
|
$
|
(228,973
|
)
|
|
$
|
(50,251
|
)
|
|
$
|
(228,973
|
)
|
|
$
|
(50,251
|
)
|
The fair value of our regulated distribution segment’s financial instruments at
June 30, 2016
is presented below by time period and fair value source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Contracts at June 30, 2016
|
|
Maturity in Years
|
|
|
Source of Fair Value
|
Less
Than 1
|
|
1-3
|
|
4-5
|
|
Greater
Than 5
|
|
Total
Fair
Value
|
|
(In thousands)
|
Prices actively quoted
|
$
|
(61,922
|
)
|
|
$
|
(183,381
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(245,303
|
)
|
Prices based on models and other valuation methods
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Fair Value
|
$
|
(61,922
|
)
|
|
$
|
(183,381
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(245,303
|
)
|
The following table shows the components of the change in fair value of our nonregulated segment’s financial instruments for the
three and nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Nine Months Ended
June 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Fair value of contracts at beginning of period
|
$
|
(16,085
|
)
|
|
$
|
(36,140
|
)
|
|
$
|
(34,620
|
)
|
|
$
|
(3,033
|
)
|
Contracts realized/settled
|
1,303
|
|
|
11,502
|
|
|
22,050
|
|
|
23,013
|
|
Fair value of new contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other changes in value
|
(3,000
|
)
|
|
4,121
|
|
|
(5,212
|
)
|
|
(40,497
|
)
|
Fair value of contracts at end of period
|
(17,782
|
)
|
|
(20,517
|
)
|
|
(17,782
|
)
|
|
(20,517
|
)
|
Netting of cash collateral
|
22,737
|
|
|
31,323
|
|
|
22,737
|
|
|
31,323
|
|
Cash collateral and fair value of contracts at period end
|
$
|
4,955
|
|
|
$
|
10,806
|
|
|
$
|
4,955
|
|
|
$
|
10,806
|
|
The fair value of our nonregulated segment’s financial instruments at
June 30, 2016
is presented below by time period and fair value source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Contracts at June 30, 2016
|
|
Maturity in Years
|
|
|
Source of Fair Value
|
Less
Than 1
|
|
1-3
|
|
4-5
|
|
Greater
Than 5
|
|
Total
Fair
Value
|
|
(In thousands)
|
Prices actively quoted
|
$
|
(18,691
|
)
|
|
$
|
621
|
|
|
$
|
288
|
|
|
$
|
—
|
|
|
$
|
(17,782
|
)
|
Prices based on models and other valuation methods
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Fair Value
|
$
|
(18,691
|
)
|
|
$
|
621
|
|
|
$
|
288
|
|
|
$
|
—
|
|
|
$
|
(17,782
|
)
|
Pension and Postretirement Benefits Obligations
For the
nine months ended June 30, 2016
and
2015
, our total net periodic pension and other benefits costs were
$34.5 million
and
$44.2 million
. A substantial portion of those costs relating to our regulated distribution operations are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
Our fiscal 2016 net periodic pension cost is approximately 20 percent lower than in fiscal 2015. The decrease is attributable to the net impact of changes in the various assumptions used to establish those costs as of September 30, 2015, our most recent measurement date. The most significant changes include:
|
|
•
|
An increase in the discount rate from 4.43 percent to 4.55 percent
|
|
|
•
|
A decrease in the expected return on plan assets from 7.25 percent to 7.00 percent
|
|
|
•
|
Utilization of updated mortality tables issued in October 2015 by the Society of Actuaries
|
The amount with which we fund our defined benefit plan is determined in accordance with the Pension Protection Act of 2006 (PPA) and are influenced by the funded position of the plan when the funding requirements are determined on January 1 of each year. Based upon the determination as of January 1, 2015, we are not required to make a minimum contribution to our
defined benefit plan during fiscal 2016. However, we made a voluntary contribution of $15.0 million during the third quarter of fiscal 2016.
For the
nine months ended June 30, 2016
we contributed
$12.8 million
to our postretirement medical plans. We anticipate contributing between $15 million and $25 million to our postretirement plans during fiscal
2016
.
The projected pension liability, future funding requirements and the amount of pension expense or income recognized for the plans are subject to change, depending upon the actuarial value of plan assets in the plans and the determination of future benefit obligations as of each subsequent actuarial calculation date. These amounts will be determined by actual investment returns, changes in interest rates, values of assets in the plans and changes in the demographic composition of the participants in the plans.
OPERATING STATISTICS AND OTHER INFORMATION
The following tables present certain operating statistics for our regulated distribution, regulated pipeline and nonregulated segments for the
three and nine month
periods ended
June 30, 2016
and
2015
.
Regulated Distribution Sales and Statistical Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Nine Months Ended
June 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
METERS IN SERVICE, end of period
|
|
|
|
|
|
|
|
Residential
|
2,903,099
|
|
|
2,872,584
|
|
|
2,903,099
|
|
|
2,872,584
|
|
Commercial
|
266,435
|
|
|
262,353
|
|
|
266,435
|
|
|
262,353
|
|
Industrial
|
1,463
|
|
|
1,518
|
|
|
1,463
|
|
|
1,518
|
|
Public authority and other
|
8,377
|
|
|
8,419
|
|
|
8,377
|
|
|
8,419
|
|
Total meters
|
3,179,374
|
|
|
3,144,874
|
|
|
3,179,374
|
|
|
3,144,874
|
|
|
|
|
|
|
|
|
|
INVENTORY STORAGE BALANCE — Bcf
|
51.3
|
|
|
42.6
|
|
|
51.3
|
|
|
42.6
|
|
SALES VOLUMES — MMcf
(1)
|
|
|
|
|
|
|
|
Gas sales volumes
|
|
|
|
|
|
|
|
Residential
|
16,407
|
|
|
16,667
|
|
|
125,334
|
|
|
159,067
|
|
Commercial
|
14,718
|
|
|
15,216
|
|
|
73,990
|
|
|
87,852
|
|
Industrial
|
2,671
|
|
|
2,925
|
|
|
10,586
|
|
|
11,713
|
|
Public authority and other
|
1,187
|
|
|
1,318
|
|
|
5,722
|
|
|
6,871
|
|
Total gas sales volumes
|
34,983
|
|
|
36,126
|
|
|
215,632
|
|
|
265,503
|
|
Transportation volumes
|
33,367
|
|
|
33,743
|
|
|
112,477
|
|
|
117,019
|
|
Total throughput
|
68,350
|
|
|
69,869
|
|
|
328,109
|
|
|
382,522
|
|
OPERATING REVENUES (000’s)
(1)
|
|
|
|
|
|
|
|
Gas sales revenues
|
|
|
|
|
|
|
|
Residential
|
$
|
260,634
|
|
|
$
|
253,033
|
|
|
$
|
1,240,184
|
|
|
$
|
1,538,771
|
|
Commercial
|
113,075
|
|
|
114,942
|
|
|
507,580
|
|
|
666,220
|
|
Industrial
|
9,456
|
|
|
13,089
|
|
|
41,309
|
|
|
62,694
|
|
Public authority and other
|
7,309
|
|
|
8,465
|
|
|
34,402
|
|
|
46,355
|
|
Total gas sales revenues
|
390,474
|
|
|
389,529
|
|
|
1,823,475
|
|
|
2,314,040
|
|
Transportation revenues
|
18,097
|
|
|
16,506
|
|
|
60,202
|
|
|
57,635
|
|
Other gas revenues
|
5,655
|
|
|
10,759
|
|
|
18,836
|
|
|
22,504
|
|
Total operating revenues
|
$
|
414,226
|
|
|
$
|
416,794
|
|
|
$
|
1,902,513
|
|
|
$
|
2,394,179
|
|
Average cost of gas per Mcf sold
|
$
|
3.97
|
|
|
$
|
4.15
|
|
|
$
|
4.10
|
|
|
$
|
5.26
|
|
See footnote following these tables.
Regulated Pipeline and Nonregulated Operations Sales and Statistical Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Nine Months Ended
June 30
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
CUSTOMERS, end of period
|
|
|
|
|
|
|
|
Industrial
|
767
|
|
|
750
|
|
|
767
|
|
|
750
|
|
Municipal
|
133
|
|
|
129
|
|
|
133
|
|
|
129
|
|
Other
|
518
|
|
|
516
|
|
|
518
|
|
|
516
|
|
Total
|
1,418
|
|
|
1,395
|
|
|
1,418
|
|
|
1,395
|
|
NONREGULATED INVENTORY STORAGE
|
|
|
|
|
|
|
|
BALANCE — Bcf
|
40.9
|
|
|
28.2
|
|
|
40.9
|
|
|
28.2
|
|
REGULATED PIPELINE VOLUMES — MMcf
(1)
|
156,489
|
|
|
165,898
|
|
|
520,233
|
|
|
567,906
|
|
NONREGULATED DELIVERED GAS SALES
|
|
|
|
|
|
|
|
VOLUMES — MMcf
(1)
|
88,472
|
|
|
89,052
|
|
|
292,619
|
|
|
319,423
|
|
OPERATING REVENUES (000’s)
(1)
|
|
|
|
|
|
|
|
Regulated pipeline
|
$
|
109,249
|
|
|
$
|
97,008
|
|
|
$
|
299,629
|
|
|
$
|
272,305
|
|
Nonregulated
|
214,555
|
|
|
278,769
|
|
|
774,474
|
|
|
1,179,379
|
|
Total operating revenues
|
$
|
323,804
|
|
|
$
|
375,777
|
|
|
$
|
1,074,103
|
|
|
$
|
1,451,684
|
|
Note to preceding tables:
|
|
(1)
|
Sales volumes and revenues reflect segment operations, including intercompany sales and transportation amounts.
|
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the unaudited condensed consolidated financial statements.