ATMOS ENERGY CORP quarterly report, Q2 FY2012

Atmos Energy Corporation — Form 10-Q summary

Reporting period: Fiscal second quarter and six months ended March 31, 2012; comparative periods ended March 31, 2011. Atmos distributes natural gas to more than 3 million customers and operates regulated transmission and storage businesses, alongside nonregulated gas marketing and asset optimization. Interim results are seasonal and are not necessarily indicative of full-year results.

Financial performance

Metric	Three months 2012	Three months 2011	Six months 2012	Six months 2011
Revenue	$1,243.5 million	$1,581.5 million	$2,344.6 million	$2,714.8 million
Gross profit	$434.3 million	$453.7 million	$797.1 million	$818.4 million
Operating income	$208.4 million	$211.2 million	$352.8 million	$366.5 million
Net income	$109.1 million	$132.2 million	$177.6 million	$206.2 million
Diluted EPS	$1.20	$1.45	$1.94	$2.26

Revenue fell 21% in the quarter and 14% for six months, reflecting lower gas-related sales and nonregulated activity; revenue is affected by gas costs passed through to customers. Gross profit declined 4% and 3%, respectively.
Quarterly continuing-operations income was $105.9 million, versus $128.2 million; six-month continuing-operations income was $171.7 million, versus $199.3 million.
Operating cash flow was $360.7 million for six months, down from $438.5 million. Capital expenditures were $311.1 million, up from $246.7 million; operating cash flow less capital expenditures was $49.6 million.
Cash was $47.0 million at March 31, versus $131.4 million at September 30, 2011. Current assets were $893.8 million and current liabilities $1,108.1 million. The company reported $687.2 million available under credit facilities, net of letters of credit.
Long-term debt, including current maturities, was approximately $2.206 billion; short-term debt was $174.0 million. Total debt was 50.2% of capitalization under the company’s presentation, and the defined covenant ratio was 52%, against a 70% maximum. All covenants were met.
Cash dividends were $0.345 per share for the quarter and $0.690 for six months, compared with $0.340 and $0.680, respectively, in 2011.

Changes and operating drivers

Management attributed weaker earnings principally to unusually warm winter weather and abundant natural-gas supply. Six-month distribution throughput declined 10%; lower demand and compressed price spreads particularly hurt nonregulated results.
Nonregulated operations recorded a $2.5 million six-month net loss, versus $2.4 million income in 2011. Asset-optimization margins were pressured by gas injected into storage and losses on related financial settlements; management expected some captured storage value to be realized later in fiscal 2012.
Regulated transmission and storage net income was broadly unchanged for six months at $28.0 million. A redesigned tariff helped increase Mid-Tex transportation gross profit despite lower throughput. Distribution gross profit rose modestly, but higher operating expenses reduced operating income.
Prior-year comparisons included unusual benefits: a $27.8 million Treasury-lock unwinding gain and a $5.0 million income-tax settlement benefit, partly offset by a $19.3 million nonregulated asset impairment. Management said that after adjusting for these items and unrealized margins, six-month diluted EPS was $1.88 versus $2.16.

Outlook, risks and notable items

Fiscal 2012 capital expenditures were expected to be $690–$710 million. Management said operating cash flows, senior notes and committed facilities should fund working capital and the capital program for the remainder of the year.
The company planned to refinance its $250 million 5.125% notes maturing in January 2013, potentially with 30-year unsecured notes. Three Treasury-lock agreements were outstanding for the planned financing.
Management anticipated persistently high gas storage levels, compressed basis differentials and lower delivered-gas and asset-optimization margins than in prior years, while expecting nonregulated operations to remain profitable on a fiscal-year basis.
Atmos had initiated seven distribution rate proceedings seeking $68.7 million in annual operating income. Separately, a Texas pipeline rate filing approved in April was expected to add $14.7 million in annual operating income. The company also announced $150 million of pipeline expansion investment over the next two fiscal years.
The pending sale of Missouri, Illinois and Iowa distribution operations, serving about 84,000 customers, was expected to close during fiscal 2012, subject to customary approvals. Those operations were reported as discontinued operations; their six-month net income was $5.9 million, down from $6.9 million.
Pension funding increased: Atmos contributed $34.2 million to defined-benefit plans and $9.1 million to postretirement plans in the first half; it expected additional contributions of $12.4 million and $10–$15 million, respectively, during the rest of fiscal 2012.
A Kentucky lawsuit resulted in a jury award of $3.8 million compensatory and $24.7 million punitive damages after reduction. Atmos appealed, had no insurance for the matter, and stated its accrual was below the verdict; it believed the ultimate outcome would not materially harm results. The company also resolved a FERC investigation, paying about $6.4 million in civil penalties and $5.6 million in disgorgement plus interest.
Other disclosed risks include weather, regulation and rate recovery, commodity-market volatility and hedge ineffectiveness, pension costs, access to credit, environmental and safety requirements, and concentration of operations in Texas. The filing provides no specific full-year EPS guidance.

Investor verification priorities

Track the pending three-state sale, regulatory approvals, closing timing and final proceeds.
Assess the status and outcomes of rate cases and the realization of approved or requested rate increases.
Monitor nonregulated margins, storage spreads, unrealized derivative effects and whether stored gas generates the anticipated later-period value.
Verify capital-spending execution, available liquidity and refinancing plans for the January 2013 maturity.
Follow pension funding needs and developments in the Kentucky litigation, including appeal progress and adequacy of the recorded accrual.

The interim financial statements were reviewed by the independent accountant, not audited.