01—Abstract
Summary
Summary of the 10-K filed December 22, 1997. Cited figures are marked; the original filing is the authoritative source.
Atmos Energy Corporation's fiscal 1997 10-K (year ended September 30, 1997) shows a year dominated by the July 31, 1997 merger with United Cities Gas Company (UCGC), accounted for as a pooling of interests.
Consolidated operating revenues rose about 2% to $906.8 milliona, but net income fell roughly 42% to $23.8 million, or $.81 per share, from $41.2 million ($1.42) in 1996. Excluding a $2.8 million management reorganization charge and a $12.6 million after-tax reserve for potential unrecovered merger and integration costs, earnings were $39.3 million, or $1.34 per share. Weather was warmer than normal in the winter, which cut gas throughput, and the effect of weather was roughly $.12 per share, so the underlying decline was driven mainly by these one-time charges and merger-related costs.
The company now operates five utility divisions across twelve states serving about 1.02 million customers, making it the 12th largest U.S. gas distribution utility by customer count. Roughly 89% of revenues come from rates set or approved by regulators, and purchased gas adjustment clauses pass through commodity cost changes, which helps protect gross profit from gas price swings. Gross profit rose about 2% to $329.7 millionb, supported by roughly $16.2 million of rate increases.
Management projects about $375 millionc of cumulative cost savings over ten years from the merger, though it also expects to remove about 635 positions by September 1998. The balance sheet became more leveraged. The debt-to-capitalization ratio rose to 57.2% from 53.4%, against a stated long-term target of 50% over three years.
Short-term notes payable increased, and the company planned capital expenditures of about $109.1 milliond for fiscal 1998. Investors should weigh the strategic logic of the merger and the regulatory cost-recovery support against the near-term earnings dilution, the elevated leverage, and the pending litigation, including a $15 million punitive damages verdict in Louisiana that management is appealing.
02—Key points
Key Highlights
- Net income fell about 42% to $23.8 million ($.81/share) from $41.2 million ($1.42/share), reflecting $15.4 million in after-tax non-recurring charges ($2.8 million reorganization and $12.6 million merger reserve).
- Excluding the non-recurring charges, net income was $39.3 million ($1.34/share), versus $41.2 million ($1.42/share) in fiscal 1996; normal weather would have added about $.12 per share.
- Operating revenues rose about 2% to $906.8 million, with average gas sales price up 13% to $5.11/Mcf while total volumes delivered fell 4.2% to 213.0 Bcf.
- The UCGC merger closed July 31, 1997 as a tax-free pooling of interests, adding about 306,000 gas customers and making Atmos the 12th largest U.S. gas utility by customers; total customers reached about 1.02 million.
- Management expects about $375 million of operating cost savings over ten years from the merger, with about $49 million of merger and integration costs (about $17 million transaction and $32 million separation) largely deferred as regulatory assets.
- Debt-to-capitalization rose to 57.2% from 53.4%, above the 50% target that management plans to reach over three years.
- Pending litigation includes a Louisiana jury award of $177,929 in actual damages plus $15 million in punitive damages (Heard case), which management is appealing and believes will not have a material adverse effect.
03—Questions
Frequently Asked Questions
Why did Atmos's net income drop sharply in fiscal 1997?
The decline was mainly due to two non-recurring after-tax charges: a $2.8 million ($.10/share) management reorganization charge and a $12.6 million ($.43/share) reserve for merger and integration costs that may not be recovered through rates. Warmer-than-normal winter weather also reduced gas volumes and propane sales, costing about $.12 per share relative to normal conditions.
Is the dividend safe, and how has it trended?
Cash dividends were $1.01 per share in fiscal 1997, up from $.98 in fiscal 1996, and the company has raised its dividend rate for ten consecutive years, including fiscal 1998. Dividends paid in fiscal 1997 totaled about $26.4 million against net income of $23.8 million, so the payout ratio was above 100% on reported earnings, though it was roughly 75% excluding the charges. The loan agreements contain covenants and dividend restrictions, and about $37.5 million of retained earnings was unrestricted at September 30, 1997.
How much of Atmos's revenue is protected from gas cost swings?
About 89% of fiscal 1997 revenues came from sales at rates set or approved by regulators. Most sales rates adjust for changes in purchased gas cost through purchased gas adjustment clauses, so gross profit (revenue less purchased gas cost) is generally insulated from commodity price changes. Weather normalization adjustments in Georgia and Tennessee, covering about 170,000 customers, offer further protection in those states. Weather risk in other jurisdictions remains largely unhedged.
What are the main risks to the investment case?
Key risks include weather sensitivity, since the company has no weather normalization in ten of its twelve states; leverage, with the debt-to-capitalization ratio at 57.2%; execution risk in integrating UCGC and cutting about 635 positions; the possibility that some merger and integration costs are not recovered through rates; and litigation, notably the Louisiana punitive damages verdict and the Colorado and Kentucky injury suits. The company also faces competition from alternative fuels and bypass by large industrial customers.
What growth opportunities does management identify?
Management aims to keep acquiring natural gas distribution systems and other businesses, a strategy it has pursued since 1983. It also plans to grow its non-utility businesses in gas marketing (through its 45% stake in Woodward Marketing) and propane, and to develop retail energy services. Major investment in the Customer Service Initiative, with about $41.5 million budgeted for completion in fiscal 1998, is intended to improve efficiency and customer service. Fiscal 1998 capital expenditures are budgeted at about $109.1 million.
04—Continue