Atmos Energy Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. This is an annual filing, not a standalone fourth-quarter report; selected unaudited quarterly data show Q4 net income of $2.0 million, or $0.02 per diluted share. Amounts below are in U.S. dollars.
Business context
Atmos distributes natural gas to more than three million customers and operates regulated pipeline and storage assets, alongside nonregulated gas marketing and related businesses. Its three reporting segments are natural gas distribution, regulated transmission and storage, and nonregulated operations. The business is seasonal, with winter heating demand driving a substantial portion of earnings.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Operating revenue | $4.348 billion | $4.720 billion |
| Gross profit | $1.327 billion | $1.338 billion |
| Operating income | $441.9 million | $477.2 million |
| Income from continuing operations | $198.9 million | $198.3 million |
| Net income | $207.6 million | $205.8 million |
| Diluted earnings per share | $2.27 | $2.20 |
| Cash flow from operations | $582.8 million | $726.5 million |
| Capital expenditures | $623.0 million | $542.6 million |
- Operating cash flow fell $143.6 million, primarily reflecting the absence of an $85 million tax refund received in FY2010 and timing of gas-cost recoveries and other working-capital movements. FY2011 operating cash flow was below capital expenditures.
- At year-end, cash was $131.4 million; working capital was $143.4 million, including assets held for sale. Short-term debt was $206.4 million and long-term debt, excluding current maturities, was $2.206 billion. Total debt was 51.7% of capitalization including short-term debt.
- Committed credit facilities and the commercial paper program provided $985 million of working-capital funding; reported availability under credit facilities, net of letters of credit, was $702.5 million. The company reported compliance with debt covenants and investment-grade ratings.
- Annual dividends were $1.36 per share, up from $1.34. The company reported more than 25 consecutive years of dividend increases.
Material changes versus FY2010
- Revenue declined 7.9%, mainly reflecting lower gas costs passed through to customers and lower distribution volumes. Since purchased gas costs are generally passed through without markup, gross profit is more informative than revenue for assessing underlying performance.
- Distribution gross profit rose $22.4 million, supported mainly by rate increases, but was partly offset by a 7% decline in continuing-operations throughput as weather was warmer than the prior year.
- Regulated transmission and storage net income increased to $52.4 million from $41.5 million, primarily reflecting a Texas pipeline rate order effective May 2011.
- Nonregulated operations swung to a $7.5 million net loss from $38.4 million of income. Realized asset-optimization margins fell $47.2 million amid weak gas-market fundamentals, and the segment recorded $30.3 million of noncash impairments.
- Overall net income rose 0.9%, while diluted EPS rose 3.2%, partly benefiting from the completed accelerated share repurchase, which management estimated added $0.08 per diluted share.
- Debt financing changed: Atmos issued $400 million of 5.50% senior notes due 2041, using most proceeds to repay commercial paper, and repaid $350 million of 7.375% notes at maturity. It also replaced a $566.7 million credit facility with a five-year $750 million facility.
Outlook, risks and unusual items
- Outlook: Management said available liquidity and operating cash flows should fund FY2012 working capital and capital spending. Capital expenditures were expected to remain elevated, including for the Mid-Tex steel-service-line replacement program; 35,852 lines had been replaced for $49.7 million, with completion targeted for September 2012. Management anticipated pension contributions of $25–$30 million and postretirement contributions of approximately $32 million in FY2012.
- Rates and weather: Annual or accelerated rate mechanisms covered approximately 84% of gross margin, and weather normalization applied to approximately 94%. These mechanisms reduce, but do not eliminate, regulatory-lag and weather exposure. The company cited warmer weather as a cause of lower distribution throughput.
- Portfolio sale: Atmos agreed to sell its Missouri, Illinois and Iowa distribution operations for approximately $124 million cash, subject to customary conditions and regulatory approvals. The businesses, serving approximately 84,000 customers, were reported as discontinued operations and held for sale at year-end; closing was not reported in this filing.
- Unusual items: FY2011 included a $27.8 million pretax cash gain from unwinding Treasury locks, a $30.3 million noncash asset impairment, and a $5.0 million income-tax benefit from settlement of tax positions. Management reported a combined net positive effect of approximately $3.2 million, or $0.03 per diluted share.
- Contingencies: A Kentucky jury awarded $3.8 million compensatory and $24.7 million punitive damages in litigation involving the Park City gathering project; Atmos appealed and stated it believed the verdict would be overturned. The company had accrued less than the verdict and said it believed the final outcome would not materially harm its financial condition, results or cash flows. Atmos also disclosed ongoing FERC settlement discussions concerning alleged pipeline-capacity posting and bidding violations; an adequate accrual was recorded, but the filing does not state the amount.
- Other risks: Management highlighted credit-market access, gas-price and counterparty risks in nonregulated operations, regulatory decisions, rising benefit costs, competition, pipeline safety and environmental obligations, and concentration of operations in Texas. The filing quantified a $6.7 million reported-net-income sensitivity to a $0.50 change in the spot/forward gas-price spread on the year-end physical position.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the Missouri, Illinois and Iowa sale received approvals and closed, and the final proceeds and accounting treatment.
- The status, potential financial exposure and recorded accruals for the FERC matter and Park City litigation.
- Whether FY2012 capital spending, steel-line replacement, pension contributions and refinancing plans were funded as expected.
- How much of the FY2011 earnings increase came from recurring regulated rate growth versus Treasury-lock and tax-settlement gains, share-count effects, and nonregulated market movements.
- Whether nonregulated asset-optimization margins, impairment exposure, collateral needs and counterparty credit quality improved or deteriorated after year-end.