Atmos Energy Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013; comparisons are primarily with FY2012. Atmos is a regulated natural-gas distributor and pipeline operator, with a smaller nonregulated marketing business. It served more than three million customers in eight states. Results reflect the April 2013 sale of its Georgia distribution operations and the 2012 sale of operations in Missouri, Illinois and Iowa; those activities are reported as discontinued operations.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Operating revenue | $3.886 billion | $3.438 billion | +13.0% |
| Gross profit | $1.412 billion | $1.324 billion | +6.7% |
| Operating income | $501.9 million | $446.2 million | +12.5% |
| Income from continuing operations | $230.7 million | $192.2 million | +20.0% |
| Net income | $243.2 million | $216.7 million | +12.2% |
| Diluted EPS | $2.64 | $2.37 | +11.4% |
| Operating cash flow | $613.1 million | $586.9 million | +$26.2 million |
| Capital expenditures | $845.0 million | $732.9 million | +$112.1 million |
- Gross profit less purchased gas costs is a more informative operating measure than revenue, since most distribution gas costs are passed through to customers. Gross profit increased $88.3 million year over year.
- Operating margin was approximately 12.9% of revenue, compared with 13.0% in FY2012; revenue includes substantial gas-cost pass-throughs and is affected by business mix.
- Cash and cash equivalents were $66.2 million; current assets were $683.3 million and current liabilities $978.5 million. Capital spending exceeded operating cash flow by approximately $231.9 million (calculated).
- At year-end, short-term debt was $368.0 million and long-term debt was $2.456 billion. Total debt was 52.2% of capitalization, within management’s 50%–55% target range. Shareholders’ equity was $2.580 billion.
- Committed and other revolving facilities provided approximately $1 billion of working-capital funding; the principal $950 million facility was extended to August 2018. The company reported compliance with debt covenants.
- Dividends paid were $1.40 per share, up from $1.38. The board’s future dividend decisions remain subject to financial condition, results, capital needs and other factors.
Material changes and drivers
- Continuing-operations diluted EPS rose to $2.50 from $2.10. Management attributed improvement principally to rate-design changes and rate increases, along with 2% higher distribution throughput associated with colder weather.
- Distribution-segment gross profit increased $58.5 million, including $25.7 million from Mid-Tex and West Texas rate-design changes, $16.1 million from rate increases in other divisions, and $7.5 million from colder weather.
- Regulated transmission and storage net income increased to $68.3 million from $63.1 million. GRIP infrastructure rate filings contributed $19.7 million to the segment’s year-over-year gross-profit increase.
- Nonregulated continuing income increased to $11.6 million from $5.3 million. Gross profit rose $8.2 million, helped by a $17.0 million favorable year-over-year swing in unrealized margins, despite lower realized margins and increased competition.
- FY2013 net income included a $5.3 million after-tax gain on the Georgia sale and a $5.3 million after-tax benefit from unrealized nonregulated gains. Discontinued operations contributed $12.5 million, versus $24.5 million in FY2012.
- Capital expenditures increased to $845.0 million, primarily reflecting pipeline expansion projects and increased system-safety and reliability investment. Net property, plant and equipment rose to $6.031 billion from $5.476 billion.
Outlook, risks and unusual items
- Management expected FY2014 capital spending to remain more consistent with FY2013 levels and said operating cash flows and credit facilities should be sufficient to fund working capital and the capital program. No specific FY2014 earnings or EPS guidance is provided in the filing text.
- A $500 million senior-note maturity was due in October 2014; management planned to refinance it with new senior notes. Forward-starting swaps fixed the Treasury-yield component at 3.129% for the anticipated issuance.
- Atmos issued $500 million of 4.15% 30-year senior notes in January 2013. Net proceeds were used in part to repay short-term borrowings and for general corporate purposes. S&P upgraded the senior unsecured rating to A- in October 2013, with a stable outlook; Moody’s and Fitch ratings were Baa1 and A-, respectively.
- Key exposures include regulatory decisions and recovery timing, dependence on capital markets, Texas operating concentration, weather and customer collection patterns, rising operating and benefit costs, competition, pipeline safety and environmental obligations, and commodity, interest-rate and counterparty risks. Management noted that rate mechanisms mitigate much of the regulated business’s gas-price and weather exposure.
- FY2013 pension and postretirement benefit costs totaled $78.5 million, up from $69.2 million. Management expected pension cost to decrease by less than 5% in FY2014, with planned pension contributions of $15–$25 million and postretirement contributions of $25–$30 million.
- Notable contingencies include a Kentucky lawsuit: an appeals court overturned most of a prior $28.5 million jury award, leaving a $10,000 compensatory award and a remand on possible punitive damages; further appellate review was pending. A Tennessee business-tax dispute involved assessments of $6.1 million plus $3.7 million in penalties and interest; the company said it had accrued an adequate reserve and did not expect a material adverse outcome.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Important facts for investors to verify
- How much of earnings growth is supported by recurring regulated rate recovery versus weather, divestiture gains and nonregulated unrealized margins.
- Whether the expected FY2014 rate actions, capital-spending plans and refinancing of the October 2014 debt maturity proceed on schedule and on acceptable terms.
- How elevated capital spending, negative operating-cash-flow-minus-capex, seasonal borrowing and customer collections affect liquidity and leverage.
- The resolution and reserve adequacy of the Kentucky litigation and Tennessee tax dispute, plus the recoverability of regulatory assets and deferred costs.
- Whether benefit-plan assumptions, funding requirements, infrastructure replacement costs and safety or environmental regulation create material costs beyond those anticipated.