Atmos Energy Corporation — Fiscal 2013 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2012, compared with the three months ended December 31, 2011. Atmos Energy is primarily a regulated natural gas distributor and pipeline operator, with nonregulated gas businesses. It served more than three million distribution customers across nine states; the planned Georgia sale would reduce its footprint to eight states. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Operating revenue | $1,034.2 million | $1,084.0 million | Down 4.6% |
| Gross profit | $362.4 million | $355.4 million | Up 2.0% |
| Operating income | $154.9 million | $139.5 million | Up 11.1% |
| Income from continuing operations | $77.3 million | $62.4 million | Up 24.0% |
| Net income | $80.5 million | $68.5 million | Up 17.5% |
| Diluted EPS | $0.88 | $0.75 | Up $0.13 |
| Cash dividends per share | $0.350 | $0.345 | Up $0.005 |
Revenue fell mainly with lower nonregulated sales and volumes; because gas costs are generally passed through to distribution customers, management identifies gross profit as a more useful performance measure than revenue. Operating expenses declined to $207.4 million from $215.9 million. Management attributed the improvement in continuing earnings to rate increases, improved nonregulated asset-optimization margins, lower operating and maintenance expense, and lower interest expense. Regulated operations generated 90% of net income.
- Cash flow: Operating activities provided $29.9 million, versus $15.3 million used in the prior-year quarter. Investing activities used $191.3 million, including $190.0 million of capital expenditures (prior year: $154.4 million). Financing activities provided $221.8 million, primarily reflecting short-term borrowing. Cash ended at $124.6 million. Operating cash flow less capital expenditures was negative $160.2 million.
- Debt and equity: At December 31, long-term debt was $1.956 billion and short-term debt was $830.9 million. Short-term debt increased from $570.9 million at September 30; cash increased from $64.2 million. Shareholders’ equity was $2.424 billion. Management reported a 53.5% total-debt-to-capitalization ratio and a 50%–55% target range; the ratio under credit-agreement covenant definitions was 55%, versus a 70% maximum.
- Liquidity: Approximately $446.6 million was available under credit facilities, net of letters of credit, at December 31. The company reported more than $1 billion of working-capital funding capacity across facilities. Current assets were $1.165 billion and current liabilities $1.645 billion.
Material changes and segment performance
- Distribution net income, including discontinued operations, rose to $56.2 million from $50.6 million. Continuing-operations gross profit declined $4.0 million, partly because of rate-design changes and lower revenue-related taxes; lower expenses and interest charges more than offset that decline. Continuing distribution sales volumes fell 5.5% to 78,753 MMcf, while transportation volumes increased.
- Regulated transmission and storage net income increased to $16.1 million from $13.4 million. Higher transportation revenue, including the effect of a prior-year pipeline infrastructure rate increase, was the main contributor.
- Nonregulated net income rose to $8.2 million from $4.5 million, supported by smaller realized asset-optimization losses and higher unrealized margins. Management cautioned that market conditions remained unfavorable and that margins could remain closer to fiscal 2012 levels.
- Discontinued operations contributed $3.1 million of net income, down from $6.1 million. The prior-year comparison also included Missouri, Illinois and Iowa operations sold in August 2012.
Outlook, transactions, risks and unusual items
- Seven completed regulatory proceedings were expected to add approximately $63.7 million to annual operating income. The company anticipated a more even distribution of earnings through the year after rate-design changes, with lower first- and second-quarter and higher third- and fourth-quarter operating income relative to prior patterns.
- Fiscal 2013 capital expenditures were forecast at $770 million–$790 million. Management said available liquidity, credit facilities and operating cash flows should fund working-capital requirements and the capital program for the remainder of the fiscal year. The filing cautions that seasonal results for this quarter are not indicative of the full fiscal year.
- The planned sale of substantially all Georgia distribution assets, serving approximately 64,000 customers, was for about $141 million in cash, subject to customary adjustments and regulatory approvals. Closing was anticipated in Q3 FY2013. Georgia results were reported as discontinued operations.
- On January 11, 2013, after quarter-end, Atmos issued $500 million of 4.15% 30-year senior notes. Net proceeds of about $494 million were used to repay a $260 million short-term financing facility, partially repay commercial paper and for general corporate purposes. The company also amended its principal revolving facility, increasing capacity from $750 million to $950 million, with an accordion feature up to $1.2 billion.
- Nonregulated performance is exposed to commodity-price spreads, volatility, storage economics and derivative valuation. Management expected high storage levels, low prices, compressed basis differentials and low spot-to-forward volatility to persist in the near term. Derivative hedge ineffectiveness can materially affect reported results.
- In a Kentucky lawsuit, the state appeals court overturned most of a prior $28.5 million jury verdict against Atmos entities, leaving a $10,000 trespass award and remanding the possibility of punitive damages on that claim. Further appellate review remained possible; the company said it would retain legal reserves pending completion of the process and did not expect a material adverse effect.
- Other cited risks include access to credit markets, weather, regulation and rate recovery, pension costs, commodity and counterparty risks, environmental and safety requirements, competition, and operational or cyber disruptions. The interim financial statements were reviewed by Ernst & Young, not audited; the reviewer reported no material modifications identified.
Important facts for investors to verify
- Progress, final consideration and regulatory approval for the Georgia asset sale, and how its completion affects the ongoing earnings base.
- Whether the $63.7 million of annualized rate increases are realized as expected, including the timing and earnings effects of the new rate design.
- Execution of the $770 million–$790 million capital program, operating cash generation, seasonal borrowing needs and remaining committed liquidity.
- Nonregulated realized versus unrealized margins, commodity-market conditions, derivative exposures and any resulting cash-collateral requirements.
- Developments in the Kentucky litigation and any change in legal reserves or other contingencies.
- Pension funding and costs, including expected FY2013 contributions of $30 million–$40 million to pension plans and $25 million–$30 million to other postretirement plans.