Atmos Energy Corporation — Form 10-Q Summary
Business context and reporting period
Atmos Energy’s fiscal first quarter ended December 31, 2010; results are compared with the three months ended December 31, 2009. The company serves more than three million customers across 12 states through regulated natural gas distribution, regulated pipeline and storage, and nonregulated businesses. Management cautions that seasonality means this quarter is not indicative of full-year results. The interim financial statements were reviewed, not audited.
Effective December 1, 2010, following the new CEO’s appointment, Atmos changed its reportable segments by combining its two nonregulated segments. Prior-period segment figures were restated for comparability.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Revenue | $1,157.0 million | $1,292.9 million |
| Gross profit | $373.6 million | $410.8 million |
| Operating income | $160.1 million | $190.6 million |
| Net income | $74.0 million | $93.3 million |
| Diluted EPS | $0.81 | $1.00 |
| Operating cash flow | $45.8 million | $95.2 million |
| Capital expenditures | $123.2 million | $115.4 million |
- Gross profit margin was approximately 32.3%, versus 31.8%; operating margin was approximately 13.8%, versus 14.7%. These percentages are calculated from reported figures.
- Cash and cash equivalents were $129.9 million at December 31, 2010. Current assets were $1,263.3 million and current liabilities were $1,460.4 million.
- Short-term debt was $248.0 million; long-term debt, including current maturities, was approximately $2.16 billion. Total debt to capitalization, including short-term debt, was 51.4%. The company reported compliance with debt covenants; its defined covenant ratio was 54%, against a 70% maximum.
- Committed credit facilities and the commercial paper program provided approximately $1.0 billion of working-capital funding; reported available facility capacity, net of letters of credit, was approximately $656 million. Investment-grade debt ratings were BBB+ (S&P), Baa2 (Moody’s) and BBB+ (Fitch).
- The quarterly dividend was $0.340 per share, versus $0.335 a year earlier.
Material changes versus the prior comparable period
- Revenue declined about 10.5%, while net income fell about 20.7%. Lower gas costs and reduced volumes contributed to lower revenue; Atmos states that gas costs are generally passed through to customers.
- Regulated earnings improved: natural gas distribution net income rose to $57.3 million from $51.4 million, and regulated transmission and storage net income rose to $10.1 million from $8.5 million. Distribution gross profit benefited from $14.1 million of higher rate adjustments, partly offset by 10% lower throughput, mainly due to warmer weather.
- Nonregulated net income fell to $6.6 million from $33.4 million. Unrealized margins were only $0.5 million, versus $43.9 million in the prior-year quarter; realized asset-optimization margins also declined $2.0 million amid low natural-gas price volatility. Delivered gas volumes increased 8%.
- Operating cash flow decreased $49.3 million, primarily because of the timing of customer collections and vendor payments. Investing outflows increased, principally reflecting capital spending.
- Shareholders’ equity increased to $2,274.9 million from $2,178.3 million at September 30, 2010. Total assets rose to $7,221.6 million from $6,763.8 million.
Outlook, management commentary, risks and unusual items
- Management expects fiscal 2011 capital expenditures of $580 million to $595 million. It believes operating cash flows and committed facilities will be sufficient to fund working capital and the capital program for the rest of the fiscal year.
- Atmos intends to refinance $350 million of 7.375% senior notes maturing in May 2011 with 30-year notes planned for June 2011, and anticipates issuing a further $250 million of 30-year notes in November 2011 to fund capital expenditures.
- The Mid-Tex accelerated steel service-line replacement program began in the quarter: 8,079 lines were replaced at a cost of $10.0 million. The plan calls for 100,000 replacements over two years, with completion targeted for September 2012.
- A Kentucky jury returned a December 2010 verdict awarding $3.8 million in compensatory and $27.5 million in punitive damages against Atmos and two subsidiaries. Atmos said it had accrued what it considered adequate, but did not disclose the amount; the accrual was below the verdict. The company planned post-trial motions and appeal, believed the verdict would likely be overturned, and stated it had no insurance coverage for the matter.
- The company expects less than $2 million in pension contributions by September 15, 2011 and approximately $11 million in contributions to other postretirement plans during fiscal 2011. A pension-plan change is expected to reduce net periodic pension cost by about $1.8 million for the rest of the fiscal year.
- Atmos cited risks including access to credit markets, adverse weather and economic conditions, commodity-price volatility and counterparty creditworthiness, regulation and rate proceedings, pension and healthcare costs, and operational and environmental hazards. It also warned that Dodd-Frank implementation could increase hedging and compliance costs.
- The Fort Necessity salt-dome storage project option was terminated after the developer declined to proceed; Atmos said it was evaluating strategic alternatives.
Most important facts for investors to verify
- Progress and final terms of the planned May 2011 debt refinancing and November 2011 debt issuance, and renewal of the $566.7 million credit facility expiring in December 2011.
- Subsequent court rulings, appeal status, and the actual accrual and potential financial exposure for the Kentucky verdict.
- Whether the $580 million to $595 million capital-spending plan and steel-line replacement schedule remain on track, and how the program is recovered through rates.
- How much of the decline in nonregulated earnings reflects temporary unrealized-margin comparisons versus ongoing realized-margin and volatility conditions.
- Cash-flow and working-capital trends, available borrowing capacity, and the effect of seasonal gas purchases on debt and liquidity.
- Outcomes of pending rate proceedings and the expected timing and sufficiency of approved rate recovery.