Business Context and Reporting Period
Company: Atmos Energy Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: Atmos Energy operates primarily in regulated natural gas distribution and transmission/storage, as well as nonregulated natural gas marketing and pipeline services. The company serves over 3 million customers across 12 states through four segments: Natural Gas Distribution, Regulated Transmission and Storage, Natural Gas Marketing, and Pipeline, Storage and Other.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2010 (Ended Dec 31, 2009) | Q1 2009 (Ended Dec 31, 2008) |
|---|---|---|
| Operating Revenues | $1,292,852 | $1,716,332 |
| Gross Profit | $410,849 | $395,212 |
| Operating Income | $190,596 | $163,194 |
| Net Income | $93,330 | $75,963 |
| Diluted EPS | $1.00 | $0.83 |
| Cash Flow from Operations | $95,156 | $150,715 |
| Cash and Cash Equivalents (End of Period) | $174,829 | $69,799 |
| Total Debt (Short-term + Long-term) | $2,349,312 | $2,481,260 |
| Debt-to-Capitalization Ratio | 51.0% | 54.4% |
Material Changes vs. Prior Period
- Net Income Increase: Net income rose 23% to $93.3 million, driven primarily by a significant increase in unrealized margins in the Natural Gas Marketing segment due to narrowing spreads between cash and forward natural gas prices and the deferral of storage withdrawal gains.
- Revenue Decline: Consolidated operating revenues decreased 25% to $1.29 billion. This was largely due to lower natural gas commodity prices and a 29% decline in throughput in the Regulated Transmission and Storage segment caused by reduced industrial production and drilling activity.
- Segment Performance:
- Natural Gas Marketing: Net income surged to $29.0 million (from $10.6 million) due to a $62.7 million increase in unrealized margins, offsetting a $33.0 million decrease in realized margins.
- Regulated Transmission: Net income increased slightly to $8.5 million despite a 29% drop in system throughput, aided by lower operating expenses.
- Pipeline, Storage and Other: Net income declined to $4.4 million (from $7.6 million) due to lower margins from asset management plans and basis gains.
- Operating Cash Flow: Decreased to $95.2 million from $150.7 million, reflecting the recovery of lower gas costs in the current period compared to the recovery of high gas costs in the prior year.
Guidance, Outlook, and Risks
- Capital Expenditures: Expected to range between $520 million and $535 million for fiscal 2010. Q1 spending was $115.4 million, including costs for relocating the IT data center.
- Asset Optimization: Management elected to defer storage withdrawal gains to future quarters to maximize economic value. A significant portion of unrealized gains recorded in Q1 is anticipated to be realized in the second fiscal quarter of 2010.
- Liquidity: The company maintains a $566.7 million commercial paper program and approximately $1.2 billion in committed revolving credit facilities. As of December 31, 2009, approximately $863 million was available under these facilities.
- Regulatory Matters: Rate cases are in progress in Dallas, Colorado, Kentucky, Missouri, and Georgia. The company is cooperating with the Federal Energy Regulatory Commission (FERC) regarding an investigation into pre-arranged released firm capacity; management believes the outcome will not be materially adverse.
- Risks: Key risks include volatility in natural gas prices, adverse weather conditions, regulatory lag in rate recovery, and the impact of economic conditions on customer demand.
Investor Verification Checklist
- Unrealized Gains Realization: Verify the realization of the $62.7 million in unrealized marketing margins in Q2 2010 as projected by management.
- Regulatory Outcomes: Monitor the final rulings on pending rate cases in Dallas, Colorado, Kentucky, Missouri, and Georgia, which could impact future operating income.
- FERC Investigation: Track the resolution of the FERC investigation regarding pipeline capacity regulations to assess potential penalties or operational changes.
- Debt Covenants: Confirm continued compliance with the 70% debt-to-capitalization covenant and other financial covenants, especially given seasonal borrowing patterns.
- Gas Price Volatility: Assess the impact of future natural gas price fluctuations on the marketing segment's realized margins and working capital requirements.