Atmos Energy Corporation — FY2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2012; the fourth quarter ended on that date. Atmos is principally a regulated natural-gas distributor and also operates regulated pipeline and storage assets and a smaller nonregulated marketing business. It served more than three million customers. In August 2012, it completed the sale of its Missouri, Illinois and Iowa distribution operations and agreed to sell its Georgia operations, which remained pending at year-end.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Operating revenue | $3,438.5 million | $4,286.4 million | Down 19.8%; lower gas costs, lower nonregulated activity and discontinued operations affected comparison |
| Gross profit | $1,323.7 million | $1,300.8 million | Up 1.8%; management considers gross profit more informative than revenue because gas costs are generally passed through |
| Operating income | $446.2 million | $426.0 million | Up 4.8% |
| Income from continuing operations | $192.2 million | $189.6 million | Up 1.4%; diluted EPS was $2.10 versus $2.07 |
| Net income | $216.7 million | $207.6 million | Up 4.4%; diluted EPS was $2.37 versus $2.27 |
| Operating cash flow | $586.9 million | $582.8 million | Up $4.1 million |
| Capital expenditures | $732.9 million | $623.0 million | Up $109.9 million; exceeded operating cash flow |
| Cash at year-end | $64.2 million | $131.4 million | Down $67.2 million |
| Total debt, including short-term debt | $2,527.4 million | $2,414.9 million | Debt was 51.7% of capitalization at both year-ends; short-term debt rose to $570.9 million |
| Quarter ended September 30, 2012 | Net income $8.0 million; diluted EPS $0.09 | Quarter ended September 30, 2011: net income $2.0 million; diluted EPS $0.02 | FY2012 Q4 included a $6.3 million after-tax gain on the completed divestiture |
Natural-gas distribution operating income declined to $304.5 million from $322.1 million, while regulated transmission and storage income rose to $128.8 million from $108.3 million. Nonregulated operations returned to $5.3 million of net income from a $7.5 million loss, but delivered-gas volumes and realized margins fell. The fiscal 2012 net-income comparison also included a favorable $13.6 million deferred-tax adjustment, an unfavorable $6.3 million after-tax donor-advised-fund contribution, the $6.3 million after-tax sale gain, and a $3.3 million after-tax nonregulated impairment charge.
Current assets were $828.0 million against current liabilities of $1,276.0 million. The company reported approximately $989 million of working-capital funding capacity, including its commercial-paper backup and committed facilities. It redeemed $250 million of 5.125% notes in August 2012, using commercial paper and then a $260 million short-term facility; the filing expected repayment with a planned $350 million 30-year note issue in January 2013. The company reported compliance with debt covenants and investment-grade ratings.
Material changes versus the prior year
- Consolidated distribution throughput from continuing operations fell 7.1%, principally attributed to warmer weather and lower customer usage; weather-normalization mechanisms covered about 97% of residential and commercial margins.
- Distribution gross profit increased modestly as rate adjustments offset lower throughput and revenue-related taxes. Distribution operating expenses rose $22.4 million, including higher legal, employee and depreciation costs.
- Pipeline and storage gross profit increased $28.0 million, primarily reflecting rate-case and infrastructure-program increases; segment net income rose $10.6 million.
- Nonregulated realized margins fell to $63.1 million from $75.4 million amid lower sales volumes, narrower basis differentials and weaker per-unit margins. A $5.3 million noncash impairment was recorded on Kentucky gathering assets; the prior year included $30.3 million of impairments.
- Capital spending accelerated, including the Mid-Tex steel-service-line replacement program: 98,675 lines had been replaced for $116.3 million by year-end. Net property, plant and equipment increased to $5.48 billion.
- The annual dividend increased to $1.38 per share from $1.36. Cash dividends paid were $125.8 million; the company also repurchased $12.5 million of common stock during the year.
Outlook, risks and contingencies
- Management expected fiscal 2013 capital expenditures to remain elevated but did not provide a total forecast in the supplied filing text. It said operating cash flows, senior notes and committed credit facilities were expected to fund fiscal 2013 working-capital and capital needs.
- Management expected nonregulated margins to remain closer to the preceding two years, citing persistently compressed basis differentials and low spot-to-forward volatility. It anticipated the Georgia sale would close in late fiscal 2013, subject to regulatory approvals.
- Rate recovery remained important: the company cited regulatory lag, pending rate proceedings and the need for continuing infrastructure investment. After year-end, the West Texas rate case was approved for a $6.6 million annual operating-income increase; a Tennessee settlement was approved for $7.5 million.
- Key risks include access to credit markets, higher borrowing costs, customer payment and bad-debt pressure, pension and postretirement costs, commodity-price and counterparty risks in nonregulated operations, regulatory and safety requirements, environmental obligations, Texas concentration, competition, severe weather, cyber incidents and pipeline operating hazards.
- A Kentucky jury had awarded $3.8 million in compensatory damages and $24.7 million in punitive damages in litigation involving the Park City gathering project; the appeal remained pending. Atmos said it had accrued an amount it considered adequate, below the verdict, and believed the outcome would not materially adversely affect results. The company also disclosed former manufactured-gas-plant environmental matters and said it did not expect a material adverse effect.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of September 30, 2012.
Most important facts for investors to verify
- Whether the Georgia divestiture closed as anticipated, its final proceeds and the effect of the reduced customer base on earnings and cash flow.
- Actual fiscal 2013 capital spending, rate recovery and financing for the infrastructure program, including the planned $350 million note issuance and repayment of the $260 million facility.
- Underlying earnings excluding the identified tax adjustment, charitable contribution, divestiture gain and impairment, and the durability of regulated-segment earnings growth.
- Subsequent trends in short-term debt, liquidity availability, pension funding and benefit costs, and compliance with credit-facility covenants.
- The outcome and financial exposure from the Kentucky litigation, and whether compressed nonregulated margins and low market volatility persist.