Business context and reporting period
Atmos Energy Corporation filed this unaudited Form 10-Q for the fiscal quarter ended June 30, 2011, and the nine months ended June 30, 2011; the fiscal year ends September 30. The company operates regulated natural gas distribution and pipeline/storage businesses, alongside nonregulated gas marketing, transportation, storage and asset optimization. Results are seasonal, and management cautions that nine-month results are not indicative of full-year results. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and liquidity
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Operating revenue | $843.6 million | $3,558.4 million | $761.3 million / $3,941.3 million |
| Gross profit | $266.8 million | $1,085.2 million | $247.7 million / $1,096.1 million |
| Operating income | $34.1 million | $400.6 million | $32.3 million / $438.6 million |
| Income from continuing operations | Loss of $1.5 million | $197.8 million | Loss of $4.2 million / $198.0 million |
| Net income (loss) | Loss of $0.6 million; diluted EPS loss of $0.01 | $205.6 million; diluted EPS of $2.25 | Loss of $3.2 million / $204.3 million; diluted EPS loss of $0.03 / $2.18 |
| Operating cash flow | Not presented separately | $519.6 million | $594.6 million |
| Capital expenditures | Not presented separately | $390.3 million | $362.3 million |
Quarterly revenue and gross profit increased year over year, while nine-month revenue and gross profit declined. Management said quarterly diluted EPS, excluding unrealized margins and one-time items, was $0.05 versus $0.09 a year earlier, mainly reflecting weaker nonregulated asset optimization margins, partly offset by rate increases. For the nine months, regulated operations’ net income rose to $199.2 million from $166.0 million, while nonregulated operations shifted to a $1.5 million loss from $32.0 million income.
Nine-month operating cash flow fell $75.0 million, primarily due to timing of gas-cost recoveries and other working-capital changes. Cash and equivalents were $117.4 million at June 30, versus $132.0 million at September 30, 2010. Total debt was approximately $2.209 billion, and debt was 48.6% of total capitalization. The company reported a 51% debt-to-capitalization ratio under its credit-facility covenant definition, against a 70% maximum.
Atmos reported $975 million of aggregate working-capital funding through its commercial paper program and committed facilities, with $900.2 million available net of letters of credit. No short-term debt borrowings were outstanding at June 30, though $173.8 million was drawn on an intercompany facility. The company paid $1.02 per share in dividends during the nine-month period.
Material changes and significant items
- In May 2011, Atmos agreed to sell its Missouri, Illinois and Iowa distribution operations, serving approximately 84,000 customers, for about $124 million cash, subject to customary conditions and regulatory approvals. The operations are reported as discontinued operations. The sale had not closed by the filing date.
- In June, Atmos issued $400 million of 5.50% senior notes due 2041, with an effective rate of 5.381%. Most net proceeds repaid commercial paper used to redeem $350 million of 7.375% notes at maturity. The company also unwound two Treasury locks, recognizing a $27.8 million pretax cash gain; settlement of separate Treasury locks for the June debt issuance generated $20.1 million in cash.
- Current-year results include $30.3 million of pretax noncash impairments: $19.3 million for the Fort Necessity storage project, whose development option ended, and $11.0 million for natural gas gathering assets. A $5.0 million tax benefit arose from an administrative settlement. Management reported a net positive after-tax impact of $6.5 million from these and the Treasury-lock gain.
- The third-quarter net loss included the gathering-asset impairment; management described its after-tax per-share impact as $0.06. Excluding unrealized margins and one-time items, quarterly diluted EPS declined year over year.
Outlook, commentary, risks and contingencies
- Management expected fiscal 2011 capital expenditures of $610 million to $625 million and said operating cash flow, debt and committed facilities should fund working-capital needs and the capital program for the rest of the fiscal year. No full-year earnings guidance is provided in the supplied filing text.
- Rate actions supported results: $28.1 million of annual operating-income increases became effective during the first nine months. A Texas pipeline rate order approved a $20.4 million annual operating-income increase, an 11.8% authorized return on equity and an $807.7 million rate base. Further rate proceedings were pending at June 30; certain subsequent July/August outcomes are described in the filing.
- Management cited weak natural-gas market fundamentals, reduced volatility and compressed price spreads as limiting asset optimization opportunities. Nonregulated asset optimization realized margins fell $47.0 million year over year for the nine months. The company’s non-GAAP potential gross profit measure was a $20.8 million loss at June 30, and management cautioned that this estimate may not be realized.
- A Kentucky jury awarded $3.8 million in compensatory and $27.5 million in punitive damages in litigation related to a gathering project; the court reduced punitive damages to $24.7 million. Atmos appealed, believed the judgment would probably be overturned, and had accrued an amount it considered adequate, not the full verdict. No insurance coverage was available. The company also filed a related indemnification suit against the producer.
- Other risks identified include regulatory outcomes and cost recovery, access to credit markets, natural-gas prices and volatility, counterparty creditworthiness, weather, pension costs, environmental and safety regulation, and operational hazards. Atmos said it was in compliance with debt covenants at June 30.
Important facts for investors to verify
- Whether and when the three-state distribution sale closes, its final proceeds and any closing adjustments.
- Underlying earnings trends after separating rate-driven regulated performance from impairments, Treasury-lock gains and nonregulated unrealized margins.
- Progress and actual costs of the $610–$625 million fiscal 2011 capital program, and the related impact on cash flow and borrowing needs.
- Current status and potential financial exposure from the Kentucky litigation and any recovery under the producer indemnity provisions.
- Whether pending rate proceedings and infrastructure surcharges deliver the expected recovery, and whether nonregulated asset optimization margins improve.