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ATO > SEC Filings for ATO > Form 10-K on 13-Nov-2012All Recent SEC Filings

Show all filings for ATMOS ENERGY CORP

Form 10-K for ATMOS ENERGY CORP


13-Nov-2012

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

This section provides management's discussion of the financial condition, changes in financial condition and results of operations of Atmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management's interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto.

Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, "Risk Factors". They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.

Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995

The statements contained in this Annual Report on Form 10-K may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words "anticipate", "believe", "estimate", "expect", "forecast", "goal", "intend", "objective", "plan", "projection", "seek", "strategy" or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: our ability to continue to access the credit markets to satisfy our liquidity requirements; the impact of adverse economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements along with increased costs of health care benefits; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; possible increased federal, state and local regulation of the safety of our operations; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the impact of possible future additional regulatory and financial risks associated with global warming and climate change on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems; the inherent hazards and risks involved in operating our gas distribution business, natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from estimates.


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Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. The accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult, subjective or complex accounting estimates. Accordingly, these critical accounting policies are reviewed periodically by the Audit Committee of the Board of Directors.

Regulation - Our natural gas distribution and regulated transmission and storage operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. We meet the criteria established within accounting principles generally accepted in the United States of a cost-based, rate-regulated entity, which requires us to reflect the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions in our financial statements in accordance with applicable authoritative accounting standards. We apply the provisions of this standard to our regulated operations and record regulatory assets for costs that have been deferred for which future recovery through customer rates is considered probable and regulatory liabilities when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. As a result, certain costs that would normally be expensed under accounting principles generally accepted in the United States are permitted to be capitalized or deferred on the balance sheet because it is probable they can be recovered through rates. Discontinuing the application of this method of accounting for regulatory assets and liabilities could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations. The impact of regulation on our regulated operations may be affected by decisions of the regulatory authorities or the issuance of new regulations.

Unbilled Revenue - Sales of natural gas to our natural gas distribution customers are billed on a monthly basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for natural gas distribution segment revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.

On occasion, we are permitted to implement new rates that have not been formally approved by our regulatory authorities, which are subject to refund. We recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented.

Financial instruments and hedging activities - We use financial instruments to mitigate commodity price risk and interest rate risk. The objectives for using financial instruments have been tailored to meet the needs of our regulated and nonregulated businesses. These objectives are more fully described in Note 4 to the consolidated financial statements.

We record all of our financial instruments on the balance sheet at fair value as required by accounting principles generally accepted in the United States, with changes in fair value ultimately recorded in the income statement. Market value changes result in a change in the fair value of these financial instruments. The recognition of the changes in fair value of these financial instruments are recorded in the income statement is contingent upon whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment.

We have elected to treat forward gas supply contracts used in our regulated operations to deliver gas as normal purchases and normal sales. Financial instruments used to manage commodity price risk in our natural gas distribution segment do not impact this segment's results of operations as the realized gains and losses are ultimately recovered from ratepayers through our rates.

Our nonregulated segment also utilizes financial instruments to manage commodity price risk. We have designated the natural gas inventory held by this operating segment as the hedged item in a fair-value hedge. The financial instruments associated with this natural gas inventory have been designated as fair-value hedges. Changes in the fair value of the inventory and designated hedges are recognized in purchased gas cost in the period of change.


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Additionally, we have elected to treat fixed-price forward contracts used in our nonregulated segment to deliver gas as normal purchases and normal sales. Financial instruments used to mitigate the commodity price risk associated with these contracts have been designated as cash flow hedges of anticipated purchases and sales at indexed prices. Accordingly, unrealized gains and losses on open financial instruments are recorded as a component of accumulated other comprehensive income (loss) and are recognized as a component of revenue when the hedged volumes are sold.

Our nonregulated segment also uses storage swaps and futures that have not been designated as hedges. Accordingly, changes in the fair value of the inventory and designated hedges are recognized in revenue in the period of change.

Finally, financial instruments used to mitigate interest rate risk are designated as cash flow hedges. Accordingly, unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) and are recognized as a component of interest expense over the life of the related financing arrangement.

The criteria used to determine if a financial instrument meets the definition of a derivative and qualifies for hedge accounting treatment are complex and require management to exercise professional judgment. Further, as more fully discussed below, significant changes in the fair value of these financial instruments could materially impact our financial position, results of operations or cash flows.

Fair Value Measurements - We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

Prices actively quoted on national exchanges are used to determine the fair value of most of our assets and liabilities recorded on our balance sheet at fair value. Within our nonregulated operations, we utilize a mid-market pricing convention (the mid-point between the bid and ask prices) for determining fair value measurement, as permitted under current accounting standards. Values derived from these sources reflect the market in which transactions involving these financial instruments are executed.

We utilize models and other valuation methods to determine fair value when external sources are not available. Values are adjusted to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then-current market conditions.

Fair-value estimates also consider our own creditworthiness and the creditworthiness of the counterparties involved. Our counterparties consist primarily of financial institutions and major energy companies. This concentration of counterparties may materially impact our exposure to credit risk resulting from market, economic or regulatory conditions. We seek to minimize counterparty credit risk through an evaluation of their financial condition and credit ratings and the use of collateral requirements under certain circumstances.

The fair value of our financial instruments is subject to potentially significant volatility based numerous considerations including, but not limited to changes in commodity prices, interest rates, maturity and settlement of these financial instruments, and our creditworthiness as well as the creditworthiness of our counterparties. We believe the market prices and models used to value these financial instruments represent the best information available with respect to closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts.

Impairment assessments - We review the carrying value of our long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstance indicate that such carrying values may not be recoverable, and at least annually for goodwill, as required by US accounting standards.

The evaluation of our goodwill balances and other long-lived assets or identifiable assets for which uncertainty exists regarding the recoverability of the carrying value of such assets involves the assessment of future cash flows and external market conditions and other subjective factors that could impact the estimation of future cash flows including, but not limited to the commodity prices, the amount and timing of future cash flows, future growth rates and the discount rate. Unforeseen events and changes in circumstances or market conditions could adversely affects these estimates, which could result in an impairment charge.


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Pension and other postretirement plans - Pension and other postretirement plan costs and liabilities are determined on an actuarial basis using a September 30 measurement date and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. The assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.

The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net periodic pension and postretirement benefit plan costs. When establishing our discount rate, we consider high quality corporate bond rates based on bonds available in the marketplace that are suitable for settling the obligations, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with currently available high quality corporate bonds.

The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of our annual pension and postretirement plan costs. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year's annual pension or postretirement plan costs are not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years.

The market-related value of our plan assets represents the fair market value of the plan assets, adjusted to smooth out short-term market fluctuations over a five-year period. The use of this calculation will delay the impact of current market fluctuations on the pension expense for the period.

We estimate the assumed health care cost trend rate used in determining our postretirement net expense based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date.

Actual changes in the fair market value of plan assets and differences between the actual and expected return on plan assets could have a material effect on the amount of pension costs ultimately recognized. A 0.25 percent change in our discount rate would impact our pension and postretirement costs by approximately $2.3 million. A 0.25 percent change in our expected rate of return would impact our pension and postretirement costs by approximately $0.8 million.

Contingencies - In the normal course of business, we are confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims made by third parties or the action of various regulatory agencies. For such matters, we record liabilities when they are considered probable and reasonably estimable, based on currently available facts and our estimates of the ultimate outcome or resolution of the liability in the future. Actual results may differ from estimates, depending on actual outcomes or changes in the facts or expectations surrounding each potential exposure. Changes in the estimates related to contingencies could have a negative impact on our consolidated results of operations, cash flows or financial position. Our contingencies are further discussed in Note 13 to our consolidated financial statements.

RESULTS OF OPERATIONS

Overview

Atmos Energy Corporation is involved in the distribution, marketing and transportation of natural gas. Accordingly, our results of operations are impacted by the demand for natural gas, particularly during the winter heating season, and the volatility of the natural gas markets. This generally results in higher operating revenues and net income during the period from October through March of each fiscal year and lower operating revenues and either lower net income or net losses during the period from April through September of each fiscal year. As


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a result of the seasonality of the natural gas industry, our second fiscal quarter has historically been our most critical earnings quarter with an average of approximately 56 percent of our consolidated net income having been earned in the second quarter during the three most recently completed fiscal years.

Additionally, the seasonality of our business impacts our working capital differently at various times during the year. Typically, our accounts receivable, accounts payable and short-term debt balances peak by the end of January and then start to decline, as customers begin to pay their winter heating bills. Gas stored underground, particularly in our natural gas distribution segment, typically peaks in November and declines as we utilize storage gas to serve our customers.

During fiscal 2012, we earned $216.7 million, or $2.37 per diluted share, which represents a four percent increase in net income and diluted net income per share over fiscal 2011. During fiscal 2012, recent improvements in rate designs in our natural gas distribution and regulated transmission and storage segments offset an eight percent year-over-year decline in consolidated natural gas distribution throughput due to warmer weather and a 21 percent decrease in nonregulated delivered gas sales due to a nine percent decrease in consolidated sales volumes as a result of warmer weather and a decrease in per-unit margins. Additionally, results for fiscal 2012 were influenced by several non-recurring items, which increased diluted earnings per share by $0.11.

On August 1, 2012, we completed the sale of substantially all of our natural gas distribution assets located in Missouri, Illinois and Iowa to Liberty Energy (Midstates) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $128 million, pursuant to an asset purchase agreement executed on May 12, 2011. In connection with the sale, we recognized a net of tax gain of approximately $6.3 million.

On August 8, 2012, we entered into an asset purchase agreement to sell all of our natural gas distribution assets located in Georgia to Liberty Energy (Georgia) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $141 million. The agreement contains terms and conditions customary for transactions of this type, including typical adjustments to the purchase price at closing, if applicable. The closing of the transaction is subject to the satisfaction of customary conditions including the receipt of applicable regulatory approvals. Due to the pending sales transaction, the results of operations for our Georgia service area are shown in discontinued operations.

Our Unsecured 5.125% Senior Notes were scheduled to mature in January 2013. On July 27, 2012 we issued a notice of early redemption of these notes on August 28, 2012. We initially funded the redemption through the issuance of commercial paper. On September 27, 2012, we entered into a $260 million short-term financing facility to repay the commercial paper borrowings utilized to redeem the notes. The facility bears interest at a one-month LIBOR based rate plus currently a margin of 0.875% which is based on the Company's credit rating. The short-term facility is expected to be repaid with the proceeds received from the issuance of new $350 million senior unsecured notes anticipated to occur in January 2013. In connection with the redemption, we paid a make-whole premium in accordance with the terms of the indenture and the Senior Notes and accrued interest at the time of redemption. In accordance with regulatory requirements, the premium will be deferred and will be recognized over the life of the new unsecured notes expected to be issued in January 2013.


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Consolidated Results

The following table presents our consolidated financial highlights for the
fiscal years ended September 30, 2012, 2011 and 2010.



                                                    For the Fiscal Year Ended September 30
                                                  2012                 2011              2010
                                                     (In thousands, except per share data)
Operating revenues                            $   3,438,483         $ 4,286,435       $ 4,661,060
Gross profit                                      1,323,739           1,300,820         1,314,136
Operating expenses                                  877,499             874,834           850,303
Operating income                                    446,240             425,986           463,833
Miscellaneous income (expense)                      (14,644 )            21,184              (591 )
Interest charges                                    141,174             150,763           154,188
Income from continuing operations before
income taxes                                        290,422             296,407           309,054
Income tax expense                                   98,226             106,819           119,203
Income from continuing operations                   192,196             189,588           189,851
Income from discontinued operations, net
of tax                                               18,172              18,013            15,988
Gain on sale of discontinued operations,
net of tax                                            6,349                   -                 -
Net income                                    $     216,717         $   207,601       $   205,839
Diluted net income per share from
continuing operations                         $        2.10         $      2.07       $      2.03
Diluted net income per share from
discontinued operations                       $        0.27         $      0.20       $      0.17
Diluted net income per share                  $        2.37         $      2.27       $      2.20

Regulated operations contributed 98 percent, 104 percent and 81 percent to our consolidated net income for fiscal years 2012, 2011 and 2010. Our consolidated net income during the last three fiscal years was earned across our business segments as follows:

                                                          For the Fiscal Year Ended September 30
                                                       2012                  2011               2010
                                                                      (In thousands)
Natural gas distribution segment                   $     148,369         $     162,718        $ 125,949
Regulated transmission and storage segment                63,059                52,415           41,486
Nonregulated segment                                       5,289                (7,532 )         38,404

Net income                                         $     216,717         $     207,601        $ 205,839

The following table segregates our consolidated net income and diluted earnings per share between our regulated and nonregulated operations:

                                                          For the Fiscal Year Ended September 30
                                                       2012                  2011               2010
                                                          (In thousands, except per share data)
Regulated operations                               $     211,428         $     215,133        $ 167,435
Nonregulated operations                                    5,289                (7,532 )         38,404

Consolidated net income                            $     216,717         $     207,601        $ 205,839

Diluted EPS from regulated operations              $        2.31         $        2.35        $    1.79
Diluted EPS from nonregulated operations                    0.06                 (0.08 )           0.41

Consolidated diluted EPS                           $        2.37         $        2.27        $    2.20

We reported net income of $216.7 million, or $2.37 per diluted share for the year ended September 30, 2012, compared with net income of $207.6 million or $2.27 per diluted share in the prior year. Income from continuing operations was $192.2 million, or $2.10 per diluted share compared with $189.6 million, or $2.07 per diluted share in the prior-year period. Income from discontinued . . .

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