Atmos Energy Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2012, the third quarter of Atmos Energy’s fiscal year; the filing also reports year-to-date results for the nine months ended June 30. Atmos operates regulated natural gas distribution, regulated transmission and storage, and nonregulated gas businesses, serving more than three million customers across 12 states. Results are seasonal, and management cautions that nine-month results do not indicate full-year performance.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Operating revenue | $585.8 million | $2,930.5 million |
| Gross profit | $298.8 million | $1,095.9 million |
| Operating income | $84.8 million | $437.6 million |
| Net income | $31.1 million | $208.8 million |
| Diluted EPS | $0.34 | $2.28 |
| Operating cash flow | Not presented for the quarter | $518.8 million |
| Capital expenditures | Not presented for the quarter | $497.4 million |
For the nine months, operating cash flow nearly matched the prior-year $519.6 million. Capital expenditures exceeded operating cash flow by approximately $21.4 million. Cash declined to $27.7 million from $131.4 million at September 30, 2011. At June 30, total current assets were $775.7 million and current liabilities were $1,110.2 million. Total debt, including short-term debt and current maturities, was approximately $2.42 billion; debt was 50.7% of total capitalization under the company’s presentation. The company reported $658.6 million available under credit facilities, net of letters of credit, and said it complied with debt covenants. The quarterly cash dividend was $0.345 per share.
Material changes versus comparable periods
- Third-quarter revenue fell 30.6% year over year, while gross profit rose 12.0% and operating income increased to $84.8 million from $34.1 million. Net income improved from a $0.6 million loss to $31.1 million. Lower gas prices and lower nonregulated sales contributed to the revenue decline; management notes that gross profit is a more useful performance measure because gas costs are generally passed through to customers.
- Third-quarter improvement reflected stronger regulated transmission and storage results, higher nonregulated asset-optimization margins, lower operating and maintenance costs, and no repeat of the prior-year $11.0 million nonregulated asset impairment. Natural gas distribution margins were lower.
- For nine months, revenue declined 17.6%, but gross profit increased 1.0%, operating income rose 9.2%, and net income increased 1.5%. Diluted EPS rose from $2.25 to $2.28. Prior-year results included one-time items totaling $6.5 million, or $0.07 per diluted share, and unrealized nonregulated margins; management’s adjusted comparisons indicate roughly level earnings per share.
- Warm weather reduced natural gas distribution throughput by 9% year to date. Regulated transmission and storage earnings benefited from rate-design changes and infrastructure recovery; nonregulated results faced weaker delivery margins and lower asset-optimization margins over the nine-month period.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2012 capital expenditures of $690 million to $710 million. It also announced approximately $160 million of pipeline expansion spending over the next two fiscal years.
- Management anticipated low natural-gas price volatility and compressed basis and spot-to-forward spreads to persist, with nonregulated per-unit delivery and asset-optimization margins below prior-year levels for the foreseeable future. It nevertheless expected nonregulated activities to remain profitable on a fiscal-year basis.
- Six distribution rate proceedings were in progress, seeking a total of $75.6 million in additional annual operating income. Management also reported a completed Atmos Pipeline–Texas annual filing expected to add $14.7 million in annual operating income.
- Atmos completed the sale of its Missouri, Illinois and Iowa distribution operations on August 1, 2012, after quarter-end, for approximately $129 million cash; it expected an approximately $6 million after-tax gain, subject to adjustments. On August 8, it announced an agreement to sell Georgia operations for approximately $141 million, subject to regulatory and other closing conditions; closing was anticipated in fiscal 2013.
- Atmos gave notice after quarter-end to redeem its $250 million 5.125% notes on August 28, 2012. It planned interim commercial-paper and short-term-facility funding, followed by anticipated new unsecured-note issuance in January 2013. A make-whole premium would be deferred and amortized under regulatory requirements.
- Pension costs and funding are material: the company contributed $40.3 million to defined-benefit plans and $15.4 million to postretirement medical plans in the first nine months. It expected further contributions of approximately $6 million and $5 million to $10 million, respectively, for the rest of fiscal 2012.
- A Kentucky jury had awarded $3.8 million in compensatory and $24.7 million in reduced punitive damages in a royalty-related case. Atmos appealed; the company had accrued less than the verdict, had no insurance coverage for the potential loss, and stated it believed the ultimate outcome would not materially adversely affect it.
- Key risks identified include weather and gas-price effects, regulatory outcomes and cost recovery, access to credit markets, pension funding, commodity and counterparty risks, safety and environmental regulation, and the concentration of operations in Texas. Management said ratings remained investment grade with stable outlooks.
Important facts for investors to verify
- Whether the Missouri, Illinois and Iowa sale closed on the disclosed terms and the final gain after post-closing adjustments.
- Whether the Georgia sale receives regulatory approval and closes on schedule, and how divestitures affect customer counts and future earnings.
- Progress and final outcomes of rate cases, infrastructure filings, and the planned pipeline expansion investment and recovery.
- Actual fiscal-year capital spending, pension contributions, liquidity and refinancing of the redeemed 5.125% notes.
- Future nonregulated margins, including the effects of storage spreads, basis differentials, gas-market volatility and unrealized hedge results.
- Developments in the Kentucky litigation and the amount ultimately payable, compared with the company’s accrual.