Atmos Energy Corporation — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended June 30, 2014; fiscal year ends September 30. The company operates regulated natural gas distribution, regulated transmission and storage, and nonregulated natural gas businesses, serving approximately three million distribution customers in eight states. Results are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance and position
- Quarter: Revenue was $942.7 million, up 9.9% year over year; gross profit was $359.5 million versus $316.5 million. Operating income increased to $106.6 million from $86.4 million. Continuing net income was $45.7 million versus $33.5 million, and diluted continuing EPS was $0.45 versus $0.36. The prior-year quarter included $5.3 million of after-tax discontinued-operation sale gains.
- Nine months: Revenue was $4.162 billion versus $3.201 billion; gross profit was $1.245 billion versus $1.112 billion. Continuing net income rose 19% to $266.1 million from $223.2 million, and diluted continuing EPS increased to $2.76 from $2.43. Prior-year net income included $12.5 million from discontinued operations.
- Cash flow and investment: Operating cash flow was $630.2 million, compared with $509.6 million. Capital expenditures were $552.6 million, down from $582.5 million. Cash declined by $14.8 million during the nine months to $51.4 million.
- Balance sheet and liquidity: Shareholders’ equity was $3.117 billion. Debt, including the $500 million current maturity, totaled approximately $2.456 billion; no short-term borrowings were outstanding at June 30. Debt was 44.1% of capitalization, versus 52.2% at September 30, 2013. Available capacity under short-term facilities, net of letters of credit, was $1.031 billion. The company reported compliance with covenants, including a 70% maximum debt-to-capitalization covenant.
- Shareholder returns: Nine-month dividends were $1.11 per share, up from $1.05. A February equity offering of 9.2 million shares generated $390.2 million net proceeds and contributed to the increase in outstanding shares.
Changes, drivers and management commentary
- Management attributed stronger year-to-date continuing earnings to rate increases and weather 20% colder than the prior-year period. Rate increases in regulated segments added $50.8 million to gross profit; colder weather increased regulated gross profit and drove higher demand and volatility in nonregulated markets.
- Quarterly nonregulated results improved from a loss to $2.3 million of income, including improved realized and unrealized margins. Year-to-date nonregulated realized margins benefited from physical withdrawals shifted into the colder, more volatile second quarter; these results are exposed to commodity-price movements and hedge timing.
- Management expects fiscal 2014 capital expenditures of $830 million to $850 million, funded through operating cash flow and debt and equity securities. No earnings or EPS guidance is provided in the supplied filing text.
- The $500 million 4.95% senior notes mature in October 2014. Atmos plans to issue replacement senior notes and entered interest-rate swaps to fix the Treasury yield component at 3.129%. Moody’s upgraded the company’s senior unsecured rating to A2 and commercial-paper rating to P-1 in January 2014; the agencies’ outlooks were stable.
- Rate activity remains important: the filing’s executive summary reports 14 completed proceedings and $86.0 million in annual operating-income increases, while the detailed nine-month ratemaking discussion reports 13 completed proceedings and $40.4 million. Six efforts seeking $49.6 million in annual operating income were described as in progress; some rates were pending, subject to refund, or under appeal.
Risks, contingencies and unusual items
- Key risks include regulatory decisions and rate recovery, weather, natural-gas prices and volatility, access to credit markets, customer collections, pension costs, safety and operating incidents, environmental regulation, cybersecurity, and counterparty creditworthiness. The business is capital intensive and seasonal; borrowings typically peak in winter.
- The Kentucky landowner litigation was fully resolved in May 2014, and the related accrual was reversed. A separate indemnification suit against the third-party producer remained pending: Atmos filed a partial-summary-judgment motion in July 2014, with trial scheduled for October 6, 2014.
- A Tennessee business-tax dispute was settled for $6.2 million, resolving liabilities through September 2014. The filing states other ordinary-course litigation and environmental matters are not expected to have a material adverse effect.
- Natural-gas purchase commitments include 105.2 Bcf under indexed contracts due within one year and 10.0 Bcf under fixed-price contracts due within one year. Rate cases and infrastructure filings were also in progress in several jurisdictions.
Important facts for investors to verify
- Reconcile the executive-summary ratemaking totals with the detailed nine-month figures, and track outcomes of pending rate cases, appeals and filings.
- Monitor refinancing of the October 2014 $500 million maturity, borrowing costs, liquidity availability and covenant headroom.
- Assess whether earnings gains from colder weather, rate increases and nonregulated trading margins persist; distinguish recurring results from volatile hedge and timing effects.
- Track capital spending against the $830 million–$850 million fiscal-year outlook, and evaluate funding needs and dilution following the equity offering.
- Review the pending indemnification litigation, natural-gas purchase commitments and exposure to seasonal working-capital needs.