Atmos Energy Corporation — FY2014 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2013; comparable period is the three months ended December 31, 2012. The interim financial statements are unaudited and were reviewed by the independent accountant, not audited. Atmos Energy is principally a regulated natural gas distribution, transmission and storage business, with a nonregulated gas marketing segment. Management cautions that seasonal results are not indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Operating revenue | $1,255.1 million | $1,034.2 million |
| Gross profit | $389.0 million | $362.4 million |
| Operating income | $170.7 million | $154.9 million |
| Income from continuing operations | $87.0 million | $77.3 million |
| Net income | $87.0 million | $80.5 million |
| Diluted EPS | $0.95 | $0.88 |
| Operating cash flow | $34.3 million | $29.9 million |
| Capital expenditures | $180.6 million | $190.0 million |
Revenue rose 21%, while continuing-operations income increased 12.5% and diluted EPS from continuing operations rose from $0.85 to $0.95. Gross profit increased 7.3%. Revenue includes substantial pass-through gas costs, so revenue growth alone is not a measure of underlying performance. Operating income was about 13.6% of revenue, compared with 15.0% in the prior-year quarter.
Regulated operations generated $82.2 million, or 94%, of continuing-operations income, up from $69.2 million. Natural gas distribution income rose to $62.8 million from $53.1 million; regulated transmission and storage income rose to $19.4 million from $16.1 million. Nonregulated income declined to $4.8 million from $8.2 million, principally reflecting lower unrealized margins.
Balance sheet, debt and liquidity
- At December 31, 2013, cash was $194.6 million, total assets $8.62 billion and shareholders’ equity $2.66 billion.
- Short-term debt was $689.8 million; long-term debt, including $500 million classified as current maturities, totaled $2.46 billion. Total debt including short-term borrowings was approximately $3.15 billion.
- Debt to total capitalization, including short-term debt, was 54.2%, within management’s 50–55% target range; the debt covenant limit was 70%, and the company reported compliance.
- Current assets were $1.30 billion and current liabilities $2.01 billion (current ratio approximately 0.65). Short-term borrowing is seasonal and typically peaks in winter.
- The company reported over $1 billion of short-term facility capacity; separately, net availability under credit facilities after letters of credit was $304.7 million at quarter-end. Commercial paper outstanding was $689.8 million.
- Cash dividends were $0.37 per share, versus $0.35 a year earlier. The board increased the quarterly dividend by 5.7% during the quarter.
Cash flow and material changes
Operating cash flow increased $4.4 million year over year, with management attributing the change mainly to timing of customer collections and vendor payments, including gas purchases. Investing cash use was $186.4 million, including capital expenditures of $180.6 million. Financing provided $280.5 million, mainly reflecting a $320.8 million net increase in short-term debt; cash increased $128.4 million to $194.6 million.
Management attributed stronger results to positive rate outcomes and throughput across all segments amid weather 30% colder than the prior-year quarter. Distribution throughput from continuing operations increased to 130,485 MMcf from 111,642 MMcf. The prior-year quarter included $3.1 million of income from discontinued Georgia operations; Atmos sold those operations in April 2013. The nonregulated segment’s unrealized margins fell $12.4 million year over year, while its realized margins improved $8.5 million.
Outlook, management commentary and risks
- Management expects FY2014 capital expenditures of $830–$850 million, primarily for safety, reliability and infrastructure investment. Planned funding sources include operating cash flow and debt and equity securities.
- A $500 million 4.95% senior note matures in October 2014. The company plans to issue replacement senior notes and had fixed the Treasury-yield component using forward-starting swaps at 3.129%.
- Four completed regulatory proceedings added approximately $16.0 million of annual operating income. Rate proceedings seeking approximately $37.3 million of annual operating income were in progress at quarter-end; subsequent updates included settlements or decisions in certain cases.
- Management reported Moody’s upgraded the senior unsecured rating from Baa1 to A2 and commercial paper rating from P-2 to P-1 on January 30, 2014. The company’s other reported ratings were investment grade with stable outlooks as of quarter-end.
- Management estimated FY2014 contributions of $15–$20 million to defined benefit pension plans and $20–$25 million to postretirement medical plans. A $4.5 million executive pension settlement loss was recognized in October 2013; a related $16.8 million benefit payment was made.
- Risks discussed include weather and natural-gas price volatility, collection and working-capital needs, access to credit markets, rate-case outcomes and regulatory lag, pension funding, operational and safety events, environmental rules, cyber threats, and counterparty and hedge risks. Nonregulated unrealized margins and hedge ineffectiveness can make reported results volatile.
- In Kentucky litigation, an appeals court overturned most of a prior jury award; a $10,000 trespass award remained and the case was remanded on possible punitive damages. In a Tennessee business-tax dispute, the cumulative assessment was estimated at about $11 million; the company maintained a reserve and stated it did not expect a material adverse effect.
Important facts for investors to verify
- Whether FY2014 capital spending and rate-case outcomes support the stated earnings and financing plans.
- How the October 2014 $500 million debt maturity is refinanced and whether debt remains within the 50–55% target range.
- Whether colder weather materially contributed to the quarter’s growth and how results perform under more typical weather conditions.
- Movement in nonregulated realized and unrealized margins, working-capital needs, and available borrowing capacity.
- Developments in Kentucky and Tennessee matters, pension funding, and other regulatory proceedings.