Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2011; comparisons are with the three months ended December 31, 2010 unless noted. Atmos is primarily a regulated natural-gas distributor and pipeline operator, with nonregulated gas marketing and asset-optimization activities. The interim financial statements were reviewed, not audited. Management cautions that seasonal results are not indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $1,101.2 million | $1,133.3 million | Down 2.8% |
| Gross profit | $362.9 million | $364.7 million | Down 0.5% |
| Operating income | $144.4 million | $155.3 million | Down 7.0% |
| Income from continuing operations | $65.8 million | $71.1 million | Down 7.5% |
| Net income | $68.5 million | $74.0 million | Down 7.4% |
| Diluted EPS | $0.75 | $0.81 | Down $0.06 |
| Cash dividends per share | $0.345 | $0.340 | Up $0.005 |
- Operating expenses increased to $218.5 million from $209.4 million, including higher depreciation, property taxes, legal and administrative costs.
- Operating cash flow was negative $15.3 million, versus positive $45.8 million. Capital expenditures were $154.4 million, compared with $123.2 million; cash declined $46.3 million to $85.2 million.
- Financing provided $124.5 million, including a $173.9 million net increase in short-term debt. Short-term debt was $390.0 million at quarter-end, versus $206.4 million at September 30, 2011.
- Long-term debt was $2.21 billion. Total debt as a percentage of total capitalization, including short-term debt, was 53.4%; the separate covenant-defined ratio was 56%, against a 70% maximum. The company reported compliance with its covenants.
- Available borrowing capacity under credit facilities, net of letters of credit, was $499.2 million. Cash plus this reported capacity indicates liquidity sources, but seasonal working-capital needs are substantial.
Comparative changes and segment results
- Regulated operations generated $61.3 million of continuing income, down $3.2 million. Distribution gross profit was essentially flat at $291.1 million, but operating expenses rose $11.2 million and operating income fell $11.0 million. Management cited higher depreciation, property taxes, legal and administrative costs; rate adjustments partly offset unfavorable Mid-Tex weather-normalization effects.
- Regulated transmission and storage income increased to $13.4 million from $10.1 million. Gross profit rose $7.8 million, driven by rate-design changes and approximately 5% higher pipeline throughput; maintenance and depreciation costs also increased.
- Nonregulated income declined to $4.5 million from $6.6 million. Gross profit fell $9.8 million: realized margins shifted from $24.7 million to negative $6.3 million, partly offset by unrealized margins increasing to $21.7 million from $0.5 million. Warm weather, high storage inventories, low price volatility and compressed spreads weighed on realized results. The company injected a net 15.7 Bcf into storage, expecting some associated margins to be realized in later fiscal quarters.
- Discontinued operations, comprising Missouri, Illinois and Iowa distribution operations, contributed $2.7 million of net income versus $2.9 million. The planned sale to an Algonquin affiliate, for approximately $124 million cash subject to customary adjustments and approvals, was expected to close in fiscal 2012; the operations serve about 84,000 customers.
Outlook, risks and unusual items
- Management expected fiscal 2012 capital expenditures of $680–$700 million. It expected to contribute $25–$30 million to pension plans and $20–$25 million to postretirement plans during the fiscal year.
- Management anticipated continued low gas prices, limited volatility and compressed spreads in the second quarter, with nonregulated per-unit and asset-optimization margins more consistent with fiscal 2011’s reduced levels than earlier years. It expected a substantial portion of incremental storage-related margins captured in Q1 to be realized in Q3 and Q4. No consolidated EPS guidance was provided in the supplied filing text.
- The company intended to refinance $250 million of 5.125% notes maturing in January 2013, with plans to issue $350 million of 30-year notes. It had three Treasury locks outstanding related to the planned financing.
- In a Kentucky case, a jury awarded $3.8 million in compensatory damages and punitive damages later reduced to $24.7 million. Atmos appealed, had accrued less than the verdict, reported no insurance coverage, and stated it believed the final outcome would not materially adversely affect its financial condition, results or cash flows.
- The company resolved a FERC investigation in December 2011, paying approximately $6.4 million in civil penalties and $5.6 million in disgorgement plus interest. It said the resolution did not materially adversely affect results and that customers were not charged.
- Other risks identified include weather, gas-price and market volatility, regulatory decisions and cost recovery, pension funding, access to credit, customer demand and collections, safety and environmental regulation, and litigation. The filing also noted uncertainty over the cost and reporting effects of Dodd-Frank implementation.
Investor verification points
- Track operating cash conversion and seasonal borrowing as gas purchases, storage injections and customer collections affect working capital.
- Assess nonregulated earnings quality by separating realized from unrealized margins and monitoring when stored-gas spreads are actually realized.
- Verify regulatory approvals, closing timing and final proceeds for the Missouri, Illinois and Iowa sale.
- Monitor the Kentucky appeal, the related indemnification claim, and any change in the accrual or potential exposure.
- Check capital-spending execution, pension contributions, rate-case outcomes and progress on the Mid-Tex steel service-line replacement program.