10-QPeriod: Q1 FY2005

ATMOS ENERGY CORP Quarterly Report for Q1 Ended Dec 31, 2004

Filed February 9, 2005For Securities:ATO

Summary

Atmos Energy Corporation (ATO) reported significant growth in its second fiscal quarter of 2005, driven by the transformative acquisition of TXU Gas Company in October 2004. This acquisition effectively doubled the size of the company, expanding its utility operations in Texas and creating a new pipeline and storage segment. While the acquisition led to a substantial increase in long-term debt and a higher debt-to-capitalization ratio, the company successfully funded the transaction through a combination of equity and debt issuances. Financially, the quarter showed robust performance across segments. The utility segment saw a significant increase in net income due to the integration of the acquired Mid-Tex Division and rate increases in other jurisdictions. The natural gas marketing segment also delivered strong results, driven by favorable storage and marketing activities. The newly formed pipeline and storage segment, largely comprised of the acquired TXU Gas pipeline operations, contributed positively to net income. Overall, the company demonstrated strong operational execution and strategic growth, positioning itself for continued expansion in the energy distribution market.

Key Highlights

  • 1Completed the acquisition of TXU Gas Company in October 2004, significantly expanding the company's Texas operations and doubling its size.
  • 2Operating revenues more than doubled to $1.37 billion for the three months ended December 31, 2004, from $763.6 million in the prior year period, largely due to the TXU Gas acquisition.
  • 3Net income increased by 101.7% to $59.6 million for the three months ended December 31, 2004, compared to $29.5 million in the prior year period.
  • 4The company successfully managed a significant increase in long-term debt, rising to $2.26 billion from $861.3 million, primarily to finance the TXU Gas acquisition.
  • 5The debt-to-capitalization ratio increased to 59.8% from 43.3%, reflecting the increased leverage from the acquisition, with plans to reduce it to 53-55% within three to five years.
  • 6Capital expenditures increased to $67.2 million from $45.5 million, reflecting investments in the newly acquired Mid-Tex and Atmos Pipeline — Texas Divisions.
  • 7Cash flow from operating activities significantly improved to $67.9 million from $11.5 million, driven by improved net working capital management and favorable hedging activities.

Frequently Asked Questions

The primary driver was the acquisition of TXU Gas Company, which closed on October 1, 2004. This acquisition effectively doubled the size of Atmos Energy, significantly expanding its utility operations, particularly in Texas, and creating a new pipeline and storage segment.

The acquisition led to a substantial increase in long-term debt, rising from $861.3 million to $2.26 billion. Consequently, the total debt-to-capitalization ratio increased from 43.3% to 59.8%. The company funded the acquisition through a combination of equity offerings and debt issuances, and has stated plans to reduce this ratio over the next three to five years.

The utility segment saw a significant increase in net income due to the integration of the acquired Mid-Tex Division and favorable rate adjustments in other regions. The natural gas marketing segment performed strongly, driven by improved storage and marketing operations. The newly established pipeline and storage segment, largely composed of the acquired TXU Gas pipeline assets, also contributed positively to net income.

The company utilizes risk management activities in both its utility and natural gas marketing segments. While the utility segment's hedging gains and losses are generally passed through to customers, the natural gas marketing segment engages in hedging to manage price risk and lock in profit margins. For the quarter, there were notable unrealized gains in the natural gas marketing segment's storage and derivative activities.