Atmos Energy Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2011; fiscal year ends September 30, 2011. The interim statements are unaudited and were reviewed, not audited. Atmos distributes gas to more than three million customers in 12 states and operates regulated transmission and storage and nonregulated gas businesses.
Financial performance
| Metric | Three months ended March 31, 2011 | Prior-year quarter | Six months ended March 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1,617.3 million | $1,940.3 million | $2,774.3 million | $3,233.1 million |
| Gross profit | $464.8 million | $454.3 million | $838.4 million | $865.2 million |
| Operating income | $217.9 million | $224.5 million | $378.0 million | $415.1 million |
| Net income | $132.2 million | $114.1 million | $206.2 million | $207.5 million |
| Diluted EPS | $1.45 | $1.22 | $2.26 | $2.22 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $438.5 million | $483.5 million |
- Second-quarter gross margin was approximately 28.7% of revenue, versus 23.4% a year earlier; six-month gross margin was approximately 30.2%, versus 26.8%. Gas costs are largely passed through to customers, so gross profit is a more useful performance measure than revenue, according to management.
- Six-month capital expenditures were $246.7 million, compared with $232.6 million. Operating cash flow less capital expenditures was approximately $191.8 million, a simple cash-flow measure before financing and other investing activity.
- At March 31, cash was $153.2 million. Long-term debt including current maturities was approximately $2.16 billion; reported debt-to-capitalization was 47.6%. No consolidated short-term debt borrowings were outstanding. The company reported $906 million of credit-facility availability at quarter-end and, after subsequent facility changes, $975 million of working-capital funding capacity.
- Cash dividends were $0.34 per share in the quarter and $0.68 per share for the six months.
Changes versus comparable periods
- Quarterly net income rose 15.8%, while six-month net income was nearly flat, down $1.3 million. Revenue fell in both periods, reflecting lower natural gas costs and lower distribution volumes.
- Distribution-segment throughput declined 11% in the quarter and six-month period, primarily from lower residential and commercial consumption and warmer weather. Rate adjustments partly offset the volume decline: distribution gross profit increased $4.8 million in the quarter and $9.9 million over six months.
- Nonregulated six-month net income fell to $2.4 million from $32.8 million. Realized asset-optimization margins declined $34.1 million, attributed to weaker market fundamentals, lower volatility and less favorable trading spreads. Regulated operations generated 99% of six-month net income.
- Quarterly reported EPS benefited from lower unrealized losses than in the prior-year quarter. Excluding unrealized margins and one-time items, management said diluted EPS declined to $1.35 from $1.44.
- Operating cash flow decreased $45.0 million, mainly due to timing of customer collections, vendor payments and gas-cost recovery. Capital spending increased, including work on the Mid-Tex steel service-line replacement program.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2011 capital expenditures of $580 million to $595 million and said available liquidity and operating cash flow should fund working capital and the capital program for the remainder of the year.
- The company intended to refinance $350 million of 7.375% senior notes maturing in May 2011 with a planned $300 million, 30-year senior-note issuance in June. A previously planned $250 million November 2011 debt issue was no longer considered necessary after stronger cash flows, partly associated with extended bonus depreciation.
- Unusual second-quarter items included a $27.8 million pretax cash gain from unwinding Treasury locks, a $19.3 million noncash impairment of the Fort Necessity storage project, and a $5.0 million tax benefit. Management said the items together increased second-quarter net income by $11.1 million, or $0.12 per diluted share.
- The Fort Necessity project option ended after the prospective developer declined to proceed; Atmos concluded expected returns did not meet its investment objectives and wrote off substantially all of its investment.
- In a Kentucky lawsuit, a jury awarded $3.8 million in compensatory and $27.5 million in punitive damages; the punitive award was reduced to $24.7 million. Atmos appealed and said it believed the judgment would be overturned. The company had accrued an amount it considered adequate, not the verdict amount, and stated it lacked insurance coverage for the matter.
- Other key risks include regulatory outcomes and rate recovery, weather and gas demand, commodity-price and hedge exposure, credit-market access, pension costs, environmental and safety regulation, and litigation. The company noted that interim results are seasonal and not indicative of full-year results.
- A Mid-Tex accelerated steel service-line replacement program covering 100,000 lines was underway, with 14,939 replacements costing $21.7 million completed by March 31; management reported it was on schedule for September 2012 completion. A Texas pipeline rate order issued April 18 approved a $20.4 million annual operating-income increase effective May 1.
Investor verification priorities
- Verify refinancing of the May 2011 notes, the planned June issuance, and the availability and terms of the updated credit facilities.
- Track distribution throughput, weather-normalized demand, rate-case recoveries and the sustainability of regulated profit growth.
- Assess nonregulated asset-optimization margins, unrealized gains and losses, and whether the reported potential gross loss of $7.4 million at March 31 is realized as planned; the filing cautions it is not assured.
- Follow the Kentucky appeal and compare any eventual resolution with the company’s accrual; review other regulatory, environmental and legal contingencies.
- Separate recurring earnings and cash generation from the Treasury-lock gain, tax settlement benefit, impairment and hedge-related volatility.
- Confirm progress against the fiscal-year capital-expenditure plan and evaluate pension funding needs; Atmos expected less than $2 million of pension contributions and approximately $11 million for other postretirement plans in fiscal 2011.