Business context and reporting period
Atmos Energy Corporation’s Form 10-K reports the fiscal year ended September 30, 2010; it is an annual filing, not a standalone fourth-quarter report. The company distributes natural gas to more than 3 million customers in 12 states and operates regulated Texas pipeline and storage assets, alongside nonregulated gas marketing and storage businesses. Results are seasonal, with earnings typically concentrated in the winter heating season.
For fourth-quarter context, the unaudited quarter ended September 30, 2010 generated revenue of $786.3 million and net income of $1.5 million, compared with $650.6 million and a $16.0 million net loss, respectively, in the prior-year quarter. Diluted EPS was $0.02 versus a loss of $0.17.
Financial results and condition
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Operating revenue | $4,789.7 million | $4,969.1 million | Down 3.6% |
| Gross profit | $1,364.9 million | $1,346.7 million | Up 1.4% |
| Operating income | $489.4 million | $447.4 million | Up 9.4% |
| Net income | $205.8 million | $191.0 million | Up 7.8% |
| Diluted EPS | $2.20 | $2.07 | Up 6.3% |
| Operating cash flow | $726.5 million | $919.2 million | Down 21.0% |
| Capital expenditures | $542.6 million | $509.5 million | Up 6.5% |
Gross margin was approximately 28.5% of revenue, versus 27.1% in FY 2009; operating margin was approximately 10.2%, versus 9.0%. Management attributes the revenue decline chiefly to lower gas costs and lower marketing revenue, while emphasizing gross profit as a more useful measure because regulated purchased-gas costs are generally passed through to customers. The gross-profit increase reflected improved regulated distribution results, partly offset by weaker transmission and storage gross profit.
- Regulated operations produced $167.4 million of net income, up from $157.9 million; nonregulated operations produced $38.4 million, up from $33.1 million. Regulated operations represented 81% of consolidated net income.
- Distribution net income rose to $125.9 million from $116.8 million, supported by colder-than-normal weather and favorable rate actions. Distribution throughput increased 11%.
- Regulated transmission and storage net income was nearly flat at $41.5 million; consolidated transportation volumes fell 19%, with lower third-party activity and narrower basis spreads among the factors.
- Marketing net income rose to $27.7 million from $20.2 million, mainly due to better unrealized margins, although realized gross profit declined and delivered-gas margins weakened.
- Cash and equivalents were $132.0 million. Working capital was negative $290.9 million, compared with positive $91.5 million a year earlier; the company reported $360.1 million of current long-term debt maturities and $126.1 million of short-term debt.
- Total debt was approximately $2.30 billion, and debt was 51.3% of total capitalization including short-term debt, compared with 50.7% in FY 2009. The company reported $834.8 million available under credit facilities, net of outstanding letters of credit, and was in compliance with debt covenants.
Material changes, outlook, and risks
- FY 2010 net income included a $4.6 million state sales-tax refund, or about $0.05 per diluted share. FY 2009 included net favorable one-time items of $17.1 million, or about $0.19 per diluted share, including tax and estimate adjustments; the periods are therefore not fully comparable.
- Cash from operations decreased largely because of timing and working-capital effects related to gas-cost recovery. FY 2009 benefited from recovery of previously high gas costs as prices fell.
- A $100 million accelerated share repurchase began in July 2010; 2.96 million shares had been received by year-end. The repurchase added approximately $0.01 to FY 2010 EPS, with the program scheduled to conclude in March 2011.
- Management expected FY 2011 liquidity, operating cash flow, senior notes and committed facilities to fund working capital and capital spending. Capital expenditures were expected to rise significantly over the following two years. The Mid-Tex steel-service-line program targets about 100,000 replacements by September 2012 at projected capital cost of $80–$120 million; associated return, depreciation and taxes had been approved for recovery under the cited settlement.
- The company planned to refinance $350 million of 7.375% senior notes maturing in May 2011 and anticipated further long-term note issuance to support capital spending. These were plans, not completed financings. Management also expected pension and postretirement costs to increase in FY 2011 and anticipated approximately $13 million of postretirement-plan contributions.
- AEM’s estimated asset-optimization potential gross loss was $4.8 million at year-end, versus potential gross profit of $24.9 million a year earlier. This non-GAAP estimate depends on planned storage and hedge execution; management cautioned that it may not be realized.
- Key risks include credit-market access and refinancing, higher gas prices and customer collections, regulatory lag and rate decisions, increased pipeline-safety regulation and capital requirements, Texas concentration, pension and health-care costs, commodity and interest-rate exposure, counterparty performance, and increased competition.
- The company disclosed an ongoing FERC investigation into possible violations of posting and competitive-bidding rules for released pipeline capacity. It was cooperating but could not predict the outcome or financial impact. Management did not expect ordinary-course litigation or identified environmental matters to have a material adverse effect.
- Atmos reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls. Kim R. Cocklin became CEO effective October 1, 2010, succeeding Robert W. Best, who became Executive Chairman.
Investor verification priorities
- Reconcile the FY 2010 earnings increase for the $4.6 million tax refund and compare it with FY 2009’s $17.1 million of favorable one-time items.
- Review the working-capital decline, seasonal borrowing needs, available committed capacity, and refinancing of the $350 million May 2011 maturity.
- Track execution and regulatory cost recovery for the $80–$120 million Mid-Tex service-line replacement program and other planned capital spending.
- Follow the FERC investigation and any subsequent findings, penalties, or disclosures.
- Assess whether marketing-segment realized margins and storage-optimization economics recover, given the negative year-end potential gross profit estimate and volatility in reported hedge margins.
- Monitor pension funding, postretirement costs, and the effect of lower discount rates on future expense and cash contributions.