Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. Atmos is primarily a regulated natural gas distributor and pipeline operator, with nonregulated gas management and marketing activities. It served approximately 3 million customers in eight states. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial results
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 | Comparison with prior year |
|---|---|---|---|
| Operating revenue | $1.964 billion | $3.219 billion | Up 50.1% and 37.4%, respectively |
| Gross profit | $496.3 million | $885.2 million | Up 14.7% and 11.3% |
| Operating income | $250.1 million | $420.8 million | Up 19.0% and 15.3% |
| Income from continuing operations | $133.4 million | $220.4 million | Up 18.7% and 16.2% |
| Net income | $133.4 million | $220.4 million | Up 14.6% and 11.9%; prior-year results included Georgia discontinued operations |
| Diluted EPS from continuing operations | $1.38 | $2.34 | Versus $1.23 and $2.07 |
| Operating cash flow | Not separately reported for the quarter | $491.0 million | Versus $376.3 million |
| Capital expenditures | Not separately reported for the quarter | $359.0 million | Versus $389.1 million |
Revenue growth substantially reflects higher natural gas prices and volumes; gas costs are generally passed through to distribution customers. Management identifies gross profit as a more useful performance measure for distribution than revenue. For the six-month period, gross profit rose $90.1 million while operating expenses increased $34.4 million. Cash dividends were $0.37 per share for the quarter and $0.74 for six months, compared with $0.35 and $0.70, respectively.
Liquidity, debt and capital
- Cash was $136.7 million at March 31, 2014, up from $66.2 million at September 30, 2013. Current assets were $1.059 billion and current liabilities $1.363 billion.
- Long-term debt was $1.956 billion, including $500 million classified as current maturities; short-term debt was zero at quarter-end. Total debt including current maturities was approximately $2.456 billion, down from approximately $2.824 billion including short-term debt at September 30, 2013.
- Management reported a 44% debt-to-capitalization ratio and more than $1 billion of available short-term facility capacity; credit facilities had $1.013 billion available net of letters of credit. The company was in compliance with debt covenants, including a maximum 70% debt-to-capitalization covenant.
- A February 2014 common-stock offering of 9.2 million shares generated $390.2 million net proceeds, used to repay commercial paper, support infrastructure investment and for general corporate purposes. The issuance increased shares outstanding.
Material changes and operating drivers
- Management attributed the six-month increase in continuing income to rate outcomes and weather 25% colder than the prior-year period. Rate increases added $29.4 million to regulated gross profit; colder weather increased regulated gross profit by $18.9 million. Nonregulated realized gross margin increased $22.6 million, primarily from storage optimization and trading gains during the colder, more volatile second quarter.
- All three segments reported higher six-month net income: natural gas distribution $151.5 million (up $12.2 million), regulated transmission and storage $43.6 million (up $10.9 million), and nonregulated $25.3 million (up $7.6 million).
- Operating cash flow increased by $114.6 million, which management attributed to stronger operating results and timing of customer collections and vendor payments. Investing cash use was $363.9 million; financing used $56.5 million, compared with $17.8 million provided in the prior-year period.
- Georgia distribution operations were sold on April 1, 2013 for approximately $153 million cash. Prior-year comparative income includes the Georgia business as discontinued operations; current-period income does not.
Outlook, commentary and risks
- Fiscal 2014 capital expenditures are expected to be $830 million to $850 million, mainly for safety, reliability and infrastructure. Management plans to fund growth through operating cash flow and debt and equity securities while maintaining a balanced capital structure; its stated target debt-to-capitalization range is 50% to 55%.
- A $500 million, 4.95% senior note matures in October 2014. Atmos plans to issue replacement senior notes and had entered into interest-rate swaps to fix the Treasury yield component at 3.129%.
- Atmos reported seven completed regulatory proceedings producing $18.2 million of additional annual operating income. The filing’s executive summary says nine ratemaking efforts seek $124.1 million of additional annual operating income, while the detailed table lists eight proceedings seeking $78.5 million. Reconcile the different disclosures. Subsequent to quarter-end, Kentucky regulators authorized a $5.8 million increase, West Texas implemented an $8.4 million increase, and on May 6 the Texas pipeline regulator approved a GRIP filing for $45.6 million of annual operating income.
- The company cautions that weather, regulatory decisions and cost recovery, natural gas prices and volatility, customer collections, credit-market access, interest rates, counterparty creditworthiness, pension costs, safety, environmental rules and cyber incidents could affect results. Six-month results are seasonal and are not necessarily indicative of full-year performance.
- In the Kentucky litigation, the appellate decision became final in February 2014, overturning most of the prior jury award; Atmos reversed its accrual in the second fiscal quarter. A trespass claim and a request concerning punitive damages remained pending at quarter-end. In a separate Tennessee business-tax dispute, the company and state agreed on May 2, 2014 to a $6.2 million settlement, subject to court approval; the filing reports a cumulative assessment of approximately $12 million.
Important facts for investors to verify
- Whether future rate-case and infrastructure-program approvals deliver the requested returns, and how to reconcile the filing’s $124.1 million and $78.5 million totals for pending ratemaking efforts.
- How much earnings growth depends on unusually cold weather and volatile-market nonregulated storage and trading gains, including potential reversals or timing effects.
- Plans and market terms for refinancing the October 2014 $500 million maturity, and the effects of capital spending and equity issuance on leverage and per-share results.
- Final resolution and accounting for the remaining Kentucky claim and Tennessee tax settlement, plus progress against the $830 million to $850 million fiscal-year capital expenditure outlook.