Atmos Energy Corporation (NYSE: ATO) — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. Although the request identifies 2020 Q4, this is an annual filing; quarterly data show the quarter ended September 30, 2020. Atmos is a regulated natural-gas distributor serving more than three million customers in eight states, with a major Texas pipeline and storage business.
Financial performance and condition
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Operating revenue | $2.821 billion | $2.902 billion | Down 2.8% |
| Operating income | $824.1 million | $746.1 million | Up 10.5% |
| Net income | $601.4 million | $511.4 million | Up 17.6% |
| Diluted EPS | $4.89 | $4.35 | Up $0.54 |
| Adjusted net income | $580.5 million | $511.4 million | Up 13.5% |
| Adjusted diluted EPS | $4.72 | $4.35 | Up $0.37 |
| Cash from operating activities | $1.038 billion | $968.8 million | Up $69.2 million |
| Capital expenditures | $1.936 billion | $1.693 billion | Up 14% |
| Cash and cash equivalents | $20.8 million | $24.6 million | Down $3.7 million |
Operating cash flow was substantially below capital spending, leaving an approximate $897.7 million shortfall before financing and other investing items. Reported operating margin was approximately 29.2%; revenue includes substantial gas-cost pass-throughs, so margin comparisons should be interpreted in that context.
- Segments: Distribution operating income rose to $528.2 million from $470.8 million; pipeline and storage operating income increased to $295.9 million from $275.3 million. Segment net income was $395.7 million and $205.8 million, respectively.
- Balance sheet and debt: Total assets were $15.36 billion, net property, plant and equipment $13.36 billion, shareholders’ equity $6.79 billion, and long-term debt $4.53 billion (excluding current maturities). Debt was 40% of capitalization and equity 60%, versus 36.2% and 59.0%, respectively, in FY2019; FY2019 also included $464.9 million of short-term debt.
- Liquidity: Management reported approximately $2.6 billion of total liquidity, including cash and amounts available through equity forward sales agreements. The company had approximately $2.2 billion of committed revolving-credit availability, a $1.5 billion commercial-paper program, and no commercial-paper borrowings at year-end. It reported compliance with debt covenants.
- Dividends: FY2020 dividends declared were $2.30 per share, versus $2.10 in FY2019. The board increased the quarterly dividend by 8.7% for FY2021.
- FY2020 fourth quarter: Net income was $65.3 million and diluted EPS was $0.53, versus $58.4 million and $0.49 in the prior-year quarter.
Changes versus the prior year
- Revenue fell by $80.7 million, largely as lower purchased-gas costs flowed through distribution revenues; distribution sales and transportation volumes also declined. Consolidated operating revenue is not a direct measure of underlying margin because gas costs are generally passed through to customers.
- Adjusted net income increased $69.1 million. Management attributed the improvement primarily to favorable rate outcomes and customer growth, partially offset by higher depreciation and property taxes from system investment.
- Distribution operating income increased 12%; pipeline and storage operating income increased 7%. Rate adjustments contributed $86.8 million of distribution operating-income growth and $53.2 million in the pipeline segment, before offsets.
- COVID-19 reduced nonresidential revenue by about 10% year over year, including lower commercial volumes and service-order revenues, and contributed to higher bad-debt expense. Residential revenue was not materially changed year over year, according to management.
- Operating cash flow increased, while investing outflows expanded as capital expenditures rose. Debt and equity issuance funded the capital program; shareholders’ equity increased to $6.79 billion.
Outlook, risks and unusual items
- Investment and rate recovery: FY2020 capital expenditures were $1.936 billion, with more than 85% directed to distribution and transmission safety and reliability. Management says rate mechanisms allow recovery of approximately 90% of capital expenditures within six months and substantially all within twelve months. It reported $131.9 million of annual operating-income increases sought in pending ratemaking efforts at year-end; by the filing date, $106.6 million had been approved for implementation in FY2021’s first quarter.
- COVID-19: The company continued operating as an essential service and reported extensive remote work. It warned that continued pandemic effects could pressure nonresidential demand, collections, bad debt, workforce availability, liquidity, and access to capital. It had received regulatory orders in most states permitting deferral of certain incremental pandemic costs; no such costs had been recorded as regulatory assets or liabilities at year-end.
- Tax benefit: FY2020 net income includes a $21.0 million non-cash income-tax benefit from a Kansas state deferred-tax-rate remeasurement. Excluding it, adjusted net income was $580.5 million and adjusted diluted EPS $4.72. FY2018 similarly included a $158.8 million non-cash benefit from federal tax reform.
- Other unusual item: A $9.2 million one-time pension settlement charge followed an executive retirement; a $22.7 million lump-sum benefit payment was also made.
- Safety and litigation: The NTSB, Texas Railroad Commission, and PHMSA were investigating a February 2018 Dallas-area incident that resulted in one fatality and injuries to four residents. Management said excess losses beyond accruals in litigation and other matters were possible but not reasonably estimable, and did not expect them to materially affect financial condition, results, or cash flows.
- Key risks: Regulatory changes or loss of rate mechanisms could increase regulatory lag; pipeline incidents and integrity requirements may increase costs; climate policy and competition from electricity could affect demand; and severe weather, cyberattacks, supply interruptions, Texas concentration, and capital-market access pose additional risks. The company’s long-term debt was investment grade, rated A by S&P and A1 by Moody’s, both with stable outlooks.
- Formal guidance: The filing does not provide a clear numerical earnings or EPS forecast for FY2021.
Most important facts for investors to verify
- Reconcile reported EPS of $4.89 with adjusted EPS of $4.72 and assess the nonrecurring $21.0 million tax benefit.
- Track rate-case approvals and timing of the pending $131.9 million of requested annual operating-income increases, including the $106.6 million approved for FY2021 implementation.
- Compare operating cash generation with the large capital program, and monitor future debt, equity issuance, and dividend coverage.
- Monitor pandemic-related collections and bad debt, including the increase in the doubtful-account allowance from $15.9 million to $29.9 million.
- Follow the Dallas incident investigation and any resulting legal, regulatory, remediation, or insurance exposure.
- Assess whether pipeline throughput and regional gas-production spreads recover after the reported decline, and whether safety spending remains recoverable through rates.