Atmos Energy Corporation — Form 10-Q
Business context and period: The filing covers the fiscal third quarter and nine months ended June 30, 2010; Atmos Energy’s fiscal year ends September 30. The company operates regulated natural gas distribution and transmission/storage businesses, alongside nonregulated gas marketing and pipeline/storage operations. It serves more than 3 million customers in 12 states. Interim financial statements are unaudited and seasonality limits the usefulness of nine-month results as a full-year indicator.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars. Per-share amounts are diluted.
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Nine months ended June 30, 2010 | Nine months ended June 30, 2009 |
|---|---|---|---|---|
| Revenue | $770.3 | $780.8 | $4,003.4 | $4,318.5 |
| Gross profit | $253.2 | $259.6 | $1,118.4 | $1,114.9 |
| Gross margin | 32.9% | 33.3% | 27.9% | 25.8% |
| Operating income | $34.1 | $43.7 | $449.2 | $433.4 |
| Net income (loss) | $(3.2) | $2.0 | $204.3 | $206.9 |
| Diluted EPS | $(0.03) | $0.02 | $2.18 | $2.25 |
| Operating cash flow | Not separately presented | Not separately presented | $594.6 | $824.6 |
| Capital expenditures | Not separately presented | Not separately presented | $362.3 | $342.3 |
- Quarter: Net loss was $3.2 million, compared with net income of $2.0 million. Operating income fell $9.6 million, while interest expense declined $4.2 million. The quarter included $11.1 million of noncash unrealized net losses, compared with $7.0 million of unrealized net gains in the prior-year quarter.
- Nine months: Revenue declined 7.3%, while gross profit increased modestly and operating income rose 3.7%. Net income decreased 1.3%; diluted EPS fell from $2.25 to $2.18. Current-period results included a $4.5 million state sales tax refund. Prior-year results included several one-time items with a net positive impact of $17.3 million, including a $11.3 million favorable tax item, a $7.8 million unbilled-revenue adjustment, a $7.0 million gas-cost accrual reversal, and a $5.4 million investment impairment charge.
- Cash flow and investment: Nine-month operating cash flow declined $230.0 million year over year, primarily reflecting gas-cost and working-capital timing. Capital expenditures increased $20.0 million, including spending on an IT data-center relocation and two service centers. Cash increased to $180.4 million from $111.2 million at September 30, 2009.
- Debt and liquidity: Long-term debt was $2,172.8 million, including $360.1 million classified as current maturities; no consolidated short-term borrowings were outstanding at June 30. Total debt to capitalization was 48.4%, versus 50.7% at September 30, 2009; the company targets 50%–55%. Approximately $951.3 million was available under credit facilities, net of letters of credit. The current ratio was approximately 0.87, compared with 1.12 at September 30, 2009.
- Dividends: Dividends were $0.335 per share for the quarter and $1.005 per share year to date, versus $0.330 and $0.990, respectively, in 2009.
Material changes and management commentary
- Distribution-segment nine-month net income increased $6.5 million, supported by rate adjustments and higher throughput; regulated transmission and storage net income fell $11.1 million, chiefly due to lower third-party throughput and narrower basis spreads. Natural gas marketing net income rose $8.4 million, while pipeline, storage and other net income fell $6.5 million.
- In the quarter, distribution results improved year over year, but regulated transmission and storage earnings declined with lower throughput and basis spreads. Marketing’s realized asset-optimization margins improved, but a $27.6 million year-over-year decrease in unrealized margins more than offset that improvement.
- Marketing asset optimization had negative economic value of $8.6 million at June 30, 2010, versus positive $42.0 million a year earlier. Management cited weak market fundamentals and narrow spot-to-forward spreads; it expected spreads to expand, but cautioned that the projected economic value and potential gross profit may not be realized.
- Management expects fiscal 2010 capital expenditures of $525 million–$540 million and says operating cash flow and committed facilities should fund remaining fiscal 2010 working-capital and capital needs. A $350 million senior note matures in May 2011; management was evaluating refinancing alternatives and believed it could replace the debt on reasonably economical terms.
- On July 1, 2010, after quarter-end, Atmos entered a $100 million accelerated share repurchase agreement. It received 2,958,580 shares after paying $100 million on July 7; the final share count depends on the average market price. The agreement is scheduled to end in March 2011. Management estimated a $0.01–$0.02 fiscal 2010 diluted EPS benefit.
Risks, contingencies, and unusual items
- Management identifies exposure to credit-market access, customer economic conditions, pension and postretirement costs, commodity-price volatility, counterparty creditworthiness, regulatory decisions, environmental requirements, weather, natural gas supply and prices, and operating hazards.
- An FERC investigation concerns possible violations of pipeline capacity posting and competitive-bidding rules. Atmos identified non-compliant transactions, reported its internal investigation, is cooperating with the Commission, and has accrued an amount it considers adequate; the filing does not state the accrued amount. Management does not expect a material adverse outcome.
- Rate cases, annual rate mechanisms, and infrastructure filings were in progress in several jurisdictions. Certain settlements remained subject to regulatory or local approval. The company also noted that the potential cost of a proposed Texas steel-service-line replacement rule could not yet be estimated.
- Atmos reported no material changes in previously disclosed litigation or environmental matters and did not expect them to materially adversely affect its financial condition, results, or cash flows. A third party had an option, extended through March 2011, to develop the proposed Fort Necessity salt-dome storage project; Atmos would retain a non-controlling interest if exercised.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective as of June 30, 2010 and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the $350 million May 2011 maturity is refinanced on acceptable terms, and how the company manages its debt and seasonal liquidity needs.
- Actual fiscal 2010 capital expenditures versus the $525 million–$540 million outlook, and cash generation relative to the prior-year working-capital comparison.
- Final regulatory outcomes and timing for pending rate proceedings, including the Mid-Tex rate-review mechanism and Texas infrastructure filings.
- Resolution and any financial consequences of the FERC investigation; the filing does not quantify the related accrual.
- Whether natural gas spreads and storage economics improve, and how unrealized trading and hedge results affect reported earnings and collateral needs.
- The final shares repurchased under the accelerated repurchase agreement and the realized EPS effect; the stated $0.01–$0.02 benefit is management’s estimate.