Atmos Energy Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended March 31, 2013, in Atmos Energy’s fiscal year ending September 30. Atmos primarily operates regulated natural-gas distribution, transmission and storage businesses, alongside nonregulated gas marketing and related activities. It serves approximately 3 million distribution customers. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Operating revenue | $1,309.0 million, up 6.8% | $2,343.2 million, up 1.5% |
| Gross profit | $432.8 million, up 1.6% | $795.1 million, up 1.8% |
| Operating income | $210.2 million, up 3.8% | $365.1 million, up 6.8% |
| Income from continuing operations | $112.3 million, up 10.0% | $189.7 million, up 15.3% |
| Net income | $116.4 million, up 6.7% | $196.9 million, up 10.8% |
| Diluted EPS | $1.27, versus $1.20 | $2.15, versus $1.94 |
Gross profit was approximately 33.1% of revenue for the quarter (34.7% in 2012) and 33.9% for the six months (33.8% in 2012). Revenue includes substantial gas costs passed through to customers, so management says gross profit is a more useful performance measure than revenue.
- Cash flow: Six-month operating cash flow was $376.3 million, versus $360.7 million. Capital expenditures were $389.1 million, versus $311.1 million; operating cash flow less capital expenditures was negative $12.8 million. Cash ended at $65.5 million.
- Balance sheet and debt: At March 31, total assets were $7.95 billion, shareholders’ equity $2.54 billion, long-term debt $2.46 billion and short-term debt $233.0 million. Total debt, including short-term debt, was approximately $2.69 billion and 51.4% of total capitalization, compared with 51.7% at September 30, 2012.
- Liquidity: The company reported $787.1 million available under credit facilities, net of letters of credit, and approximately $1 billion of working-capital funding capacity. It was in compliance with debt covenants; its agreement-defined debt-to-capitalization ratio was 53%, against a maximum of 70%.
Material changes versus prior comparable periods
- Quarterly continuing income rose, but natural-gas distribution segment income fell $8.3 million. The Mid-Tex and West Texas rate-design changes reduced distribution gross profit; distribution operating income declined $22.9 million overall. Management said the new design shifts more recovery toward customer base charges and should make earnings less dependent on usage.
- For the six months, regulated transmission and storage income increased $4.6 million, mainly reflecting previously approved pipeline rate increases. Nonregulated income improved to $17.8 million from a $2.5 million loss, driven by higher realized and unrealized asset-optimization margins. Management cautioned that unrealized margins fluctuate with market prices and physical positions.
- On January 11, Atmos issued $500 million of 4.15% 30-year notes. Proceeds repaid a $260 million short-term facility and reduced commercial paper borrowings. A $66.6 million Treasury-lock settlement loss was recorded in accumulated other comprehensive income and is being amortized to interest expense over the notes’ 30-year life.
- Capital expenditures increased by $78.0 million year over year, primarily for distribution infrastructure and the Line W and Line WX pipeline expansion projects.
- Comparisons of discontinued operations are not directly like-for-like: 2013 results include Georgia, while 2012 results also include the Missouri, Illinois and Iowa operations sold in 2012.
Outlook, risks and unusual items
- Atmos completed the sale of its Georgia distribution assets on April 1, 2013, after quarter-end, for approximately $155 million cash, subject to closing adjustments. It expects an after-tax gain of approximately $6 million, also subject to adjustment. Georgia served about 64,000 customers.
- Fiscal 2013 capital expenditures were expected to total $770–$790 million. Management said available liquidity, credit facilities and operating cash flow should fund working capital and the capital program for the rest of the year.
- Ten regulatory proceedings completed in the first six months were expected to add $66.4 million to annual operating income. A further $26.7 million annual increase was requested for Atmos Pipeline–Texas; other filings were also pending. Management expected the third- and fourth-quarter benefits of the new distribution rate design to more than offset the near-term earnings decline.
- Management emphasized seasonality: the six-month results are not indicative of full-year results, and the second fiscal quarter has historically been the most important earnings quarter. It expects the new rate design to make earnings more evenly distributed through the year.
- Key stated risks include access to credit markets, regulatory outcomes and cost recovery, weather, natural-gas prices and volatility, pension and healthcare costs, counterparty credit, competition, operational and safety hazards, environmental regulation, and cyber threats. The company also noted additional swap-related compliance requirements under Dodd-Frank.
- In a Kentucky lawsuit, an appeals court overturned most of a $28.5 million jury award against Atmos and subsidiaries, leaving a $10,000 trespass award and remanding a punitive-damages issue. Plaintiffs sought further review; Atmos maintained reserves and said it did not expect a material adverse effect.
- Atmos expected to contribute $30–$40 million to defined-benefit plans and $25–$30 million to postretirement medical plans in fiscal 2013. It had contributed $13.4 million and $13.2 million, respectively, during the first six months.
Important facts for investors to verify
- Whether the expected $6 million Georgia-sale gain and final cash proceeds are affected by post-closing adjustments.
- Whether the expected earnings benefits from rate changes and the $66.4 million of annualized rate increases are realized, including the timing and outcome of pending rate filings.
- How much of nonregulated earnings growth reflects unrealized valuation changes, and how those margins convert to realized results and cash flow.
- Whether the $770–$790 million capital program is completed as planned and how it is funded alongside dividends and debt service.
- Changes in debt, seasonal borrowing needs, credit ratings and available facility capacity, as well as pension funding and the status of the Kentucky litigation.