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ATO > SEC Filings for ATO > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for ATMOS ENERGY CORP


7-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION
The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2012.
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995 The statements contained in this Quarterly Report on Form 10-Q 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.
OVERVIEW
Atmos Energy and our subsidiaries are engaged primarily in the regulated natural gas distribution and transportation and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers throughout our six regulated natural gas distribution divisions, which at June 30, 2013 covered service areas located in eight states. In addition, we transport natural gas for others through our regulated distribution and pipeline systems. On April 1, 2013, we completed the divestiture of our natural gas distribution operations in Georgia, representing approximately 64,000 customers.
Through our nonregulated businesses, we provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast and natural gas transportation and storage services to certain of our natural gas distribution divisions and to third parties.

As discussed in Note 12, we operate the Company through the following three segments:
the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,

the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline - Texas Division and

the nonregulated segment, which includes our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our condensed 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 based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results may differ from such estimates. Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and include the following:
Regulation

Unbilled revenue

Financial instruments and hedging activities

Fair value measurements

Impairment assessments

Pension and other postretirement plans

Contingencies

Our critical accounting policies are reviewed periodically by the Audit Committee of our Board of Directors. There were no significant changes to these critical accounting policies during the nine months ended June 30, 2013.
RESULTS OF OPERATIONS
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. Historically, this generally has resulted 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 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.
However, we anticipate that rate design changes, implemented upon the completion of our most recent rate cases in our Mid-Tex and West Texas Divisions during the first quarter of fiscal 2013, will change this trend. The rate design approved in these regulatory proceedings includes an increase to the customer base charge and a decrease in the consumption charge applied to customer usage. The effect of this change in rate design allows our rates to be more closely aligned with the natural gas distribution industry standard rate design. In addition, we anticipate these divisions, which represent approximately 50 percent of the operating income for our natural gas distribution segment, will earn their operating income more ratably over the fiscal year as we are now less dependent on customer consumption. Thus, as expected, we experienced a decline in operating income during the first six months of fiscal 2013 when these rates were implemented. However, the decline experienced during the first six months was partially offset by higher operating income in the third fiscal quarter. 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.
We reported net income of $38.8 million, or $0.42 per diluted share for the three months ended June 30, 2013 compared with net income of $31.1 million, or $0.34 per diluted share in the prior-year quarter. Excluding the impact of unrealized margins, diluted earnings per share increased $0.16 compared with the prior-year quarter. During the nine months ended June 30, 2013 we earned $235.7 million or $2.57 per diluted share, compared with $208.8 million, or $2.28 per diluted share in the prior-year period. Excluding the impact of unrealized margins, diluted earnings per share increased $0.26 compared with the prior-year period. The quarter-over-quarter increase in net income, excluding unrealized margins, was primarily due to the aforementioned rate design changes in our natural gas distribution Texas service areas combined with increased consumption during the fiscal third quarter. The period-over-period increase reflects higher gross profit attributable to current year rate increases in our Kentucky/Mid-States, Colorado-Kansas, Mississippi and Louisiana divisions, recent rate increases approved in our regulated transmission and storage segment and improved asset optimization margins in our nonregulated segment, coupled with lower interest expense.
We completed the sale of our Georgia natural gas distribution operations on April 1, 2013 to Liberty Energy (Georgia) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $153 million. The proposed sale was previously announced on August 8, 2012. In connection with the sale, we recognized a net of tax gain of $5.3 million. Accordingly, the results of operations for this service area are shown in discontinued operations for both periods presented. Prior-year results also reflect our Illinois, Iowa and Missouri service areas in discontinued operations. The sale of these three service areas was completed in August 2012. During the nine months ended June 30, 2013, net income from discontinued


operations was $12.5 million, or $0.14 per diluted share and includes the $5.3 million gain on sale of substantially all of our assets in Georgia. Net income from discontinued operations was $16.3 million, or $0.18 per diluted share in the prior-year period.
We also took several steps during the nine months ended June 30, 2013 to further strengthen our balance sheet and borrowing capability. In December 2012, we amended our $750 million revolving credit agreement primarily to (i) increase our borrowing capacity to $950 million while retaining the accordion feature that would allow an increase in borrowing capacity up to $1.2 billion and
(ii) to permit same-day funding on base rate loans. We also terminated Atmos Energy Marketing's $200 million committed and secured credit facility and replaced this facility with two $25 million 364-day bilateral facilities, which should result in a decrease in external credit expense incurred in our nonregulated operations. After giving effect to these changes, we have over $1 billion of working capital funding from four committed revolving credit facilities and one noncommitted revolving credit facility. On January 11, 2013, we issued $500 million of 4.15% 30-year unsecured senior notes, which replaced, on a long-term basis, our $250 million 5.125% 10-year unsecured senior notes we redeemed in August 2012. The net proceeds of approximately $494 million were used to repay $260 million outstanding under the short-term financing facility used to redeem our 5.125% senior notes and to partially repay commercial paper borrowings and for general corporate purposes.

Consolidated Results
The following table presents our consolidated financial highlights for the three
and nine months ended June 30, 2013 and 2012:
                                           Three Months Ended             Nine Months Ended
                                                 June 30                        June 30
                                           2013           2012           2013            2012
                                                  (In thousands, except per share data)
Operating revenues                     $  857,935     $  576,414     $ 3,201,086     $ 2,885,917
Gross profit                              316,497        293,171       1,111,610       1,074,350
Operating expenses                        230,101        211,625         660,114         650,901
Operating income                           86,396         81,546         451,496         423,449
Miscellaneous income (expense)               (467 )       (2,075 )         1,943          (3,585 )
Interest charges                           32,741         34,909          96,594         107,278
Income from continuing operations
before income taxes                        53,188         44,562         356,845         312,586
Income tax expense                         19,714         16,548         133,683         120,104
Income from continuing operations          33,474         28,014         223,162         192,482
Income from discontinued operations,
net of tax                                      -          3,118           7,202          16,268
Gain on sale of discontinued
operations, net of tax                      5,294              -           5,294               -
Net income                             $   38,768     $   31,132     $   235,658     $   208,750
Diluted net income per share from
continuing operations                  $     0.36     $     0.31     $      2.43     $      2.10
Diluted net income per share from
discontinued operations                      0.06           0.03            0.14            0.18
Diluted net income per share           $     0.42     $     0.34     $      2.57     $      2.28

Our consolidated net income (loss) during the three and nine month periods ended June 30, 2013 and 2012 was earned in each of our business segments as follows:

                                                         Three Months Ended June 30
                                                     2013           2012          Change
                                                               (In thousands)
Natural gas distribution segment from continuing
operations                                       $   15,817     $   (4,907 )   $   20,724
Regulated transmission and storage segment           23,097         20,144          2,953
Nonregulated segment                                 (5,440 )       12,777        (18,217 )
Net income from continuing operations                33,474         28,014          5,460
Net income from discontinued operations               5,294          3,118          2,176
Net income                                       $   38,768     $   31,132     $    7,636


                                                         Nine Months Ended June 30
                                                     2013           2012          Change
                                                               (In thousands)
Natural gas distribution segment from continuing
operations                                       $  155,100     $  134,069     $   21,031
Regulated transmission and storage segment           55,732         48,178          7,554
Nonregulated segment                                 12,330         10,235          2,095
Net income from continuing operations               223,162        192,482         30,680
Net income from discontinued operations              12,496         16,268         (3,772 )
Net income                                       $  235,658     $  208,750     $   26,908

Regulated operations contributed 94 percent to our consolidated net income from continuing operations for the nine months ended June 30, 2013. The following tables reflect the segregation of our consolidated net income (loss) and diluted earnings per share between our regulated and nonregulated operations:

                                                            Three Months Ended June 30
                                                       2013               2012           Change
                                                       (In thousands, except per share data)
Regulated operations                             $      38,914       $     15,237     $   23,677
Nonregulated operations                                 (5,440 )           12,777        (18,217 )
Net income from continuing operations                   33,474             28,014          5,460
Net income from discontinued operations                  5,294              3,118          2,176
Net income                                       $      38,768       $     31,132     $    7,636

Diluted EPS from continuing regulated operations $        0.42       $       0.17     $     0.25
Diluted EPS from nonregulated operations                 (0.06 )             0.14          (0.20 )
Diluted EPS from continuing operations                    0.36               0.31           0.05
Diluted EPS from discontinued operations                  0.06               0.03           0.03
Consolidated diluted EPS                         $        0.42       $       0.34     $     0.08


                                                           Nine Months Ended June 30
                                                      2013             2012          Change
                                                     (In thousands, except per share data)
Regulated operations                             $     210,832        182,247     $   28,585
Nonregulated operations                                 12,330         10,235          2,095
Net income from continuing operations                  223,162        192,482         30,680
Net income from discontinued operations                 12,496         16,268         (3,772 )
Net income                                       $     235,658     $  208,750     $   26,908

Diluted EPS from continuing regulated operations $        2.30     $     1.99     $     0.31
Diluted EPS from nonregulated operations                  0.13           0.11           0.02
Diluted EPS from continuing operations                    2.43           2.10           0.33
Diluted EPS from discontinued operations                  0.14           0.18          (0.04 )
Consolidated diluted EPS                         $        2.57     $     2.28     $     0.29

Natural Gas Distribution Segment
The primary factors that impact the results of our natural gas distribution operations are our ability to earn our authorized rates of return, the cost of natural gas, competitive factors in the energy industry and economic conditions in our service areas.
Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and, ultimately, separating the recovery of our approved margins from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions.


Seasonal weather patterns can also affect our natural gas distribution operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which has been approved by state regulatory commissions for approximately 96 percent of our residential and commercial meters in the following states for the following time periods:

Kansas, West Texas October - May Kentucky, Mississippi, Tennessee, Mid-Tex November - April Louisiana December - March Virginia January - December

Our natural gas distribution operations are also affected by the cost of natural gas. The cost of gas is passed through to our customers without markup. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe gross profit is a better indicator of our financial performance than revenues. However, gross profit in our Texas and Mississippi service areas does include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income. Although changes in these revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income.
As discussed above, the cost of gas typically does not have a direct impact on our gross profit. However, higher gas costs mean higher bills for our customers, which may adversely impact our accounts receivable collections, resulting in higher bad debt expense and may require us to increase borrowings under our credit facilities resulting in higher interest expense. In addition, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. However, gas cost risk has been mitigated in recent years through improvements in rate design that allow us to collect from our customers the gas cost portion of our bad debt expense on approximately 75 percent of our residential and commercial margins.
As discussed above, on April 1, 2013, we completed the sale of substantially all of our natural gas distribution operations in Georgia. Prior-year results also reflect our Illinois, Iowa and Missouri service areas in discontinued operations. The results of these operations have been separately reported in the following tables as discontinued operations and exclude general corporate overhead and interest expense that would normally be allocated to these operations.
During the first nine months of fiscal 2013, we completed 12 regulatory proceedings, which should result in a $70.5 million increase in annual operating income. The majority of this rate increase related to our Mid-Tex Division, where rates became effective January 1, 2013. The rate design approved in our Mid-Tex Division and West Texas Division regulatory proceedings includes an increase to the base customer charge and a decrease in the commodity charge applied to customer consumption. The effect of this change in rate design allows the Company's rates to be more closely aligned with utility industry standard rate design. In addition, we anticipate these divisions will earn their operating income more ratably over the fiscal year as we are now less dependent on customer consumption. Therefore, we anticipate operating income earned during the first and second fiscal quarters to be lower than in previous periods while operating income earned during the third and fourth fiscal quarters to be higher than in previous periods. For fiscal 2013, as expected, we experienced a decline in operating income in the first and second fiscal quarters when these rates became effective. However, this decline was partially offset in the third fiscal quarter with higher operating income compared to the prior-year period.


Three Months Ended June 30, 2013 compared with Three Months Ended June 30, 2012 Financial and operational highlights for our natural gas distribution segment for the three months ended June 30, 2013 and 2012 are presented below.

                                                          Three Months Ended June 30
                                                      2013             2012          Change
                                                    (In thousands, unless otherwise noted)
Gross profit                                     $     239,495     $  195,059     $   44,436
Operating expenses                                     187,544        174,392         13,152
Operating income                                        51,951         20,667         31,284
Miscellaneous income (expense)                             268         (1,053 )        1,321
Interest charges                                        25,001         27,820         (2,819 )
Income (loss) from continuing operations before
income taxes                                            27,218         (8,206 )       35,424
Income tax expense (benefit)                            11,401         (3,299 )       14,700
Income (loss) from continuing operations                15,817         (4,907 )       20,724
Income from discontinued operations, net of tax              -          3,118         (3,118 )
Gain on sale of discontinued operations, net of
tax                                                      5,649              -          5,649
Net income (loss)                                $      21,466     $   (1,789 )   $   23,255
Consolidated natural gas distribution sales
volumes from continuing operations - MMcf               43,190         32,535         10,655
Consolidated natural gas distribution
transportation volumes from continuing
operations - MMcf                                       29,179         29,856           (677 )
Consolidated natural gas distribution throughput
from continuing operations - MMcf                       72,369         62,391          9,978
Consolidated natural gas distribution throughput
from discontinued operations - MMcf                          -          3,309         (3,309 )
Total consolidated natural gas distribution
throughput - MMcf                                       72,369         65,700          6,669
Consolidated natural gas distribution average
transportation revenue per Mcf                   $        0.45     $     0.43     $     0.02
Consolidated natural gas distribution average
cost of gas per Mcf sold                         $        5.27     $     3.73     $     1.54

The $44.4 million quarter-over-quarter increase in natural gas distribution gross profit primarily reflects the following:

         $28.6 million increase from rate design changes and rate increases,
          primarily in the Mid-Tex and West Texas Divisions.


         $10.5 million increase due to colder weather experienced across most of
          our service territories after the weather normalization adjustment
          period.

The increase in gross profit was partially offset by a $13.2 million increase in . . .

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