Atmos Energy Corporation — FY2017 Form 10-K Summary
Business context and reporting period
Fiscal year ended September 30, 2017; filed November 13, 2017. Atmos Energy is a regulated natural gas distributor serving more than 3 million customers in eight states and operates intrastate pipeline and storage assets, principally in Texas. Effective January 1, 2017, it sold Atmos Energy Marketing (AEM) and exited nonregulated gas marketing; AEM is reported as discontinued operations.
Financial performance and condition
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Operating revenue | $2.760 billion | $2.455 billion | +12.4% |
| Gross profit (revenue less purchased gas cost; non-GAAP) | $1.834 billion | $1.708 billion | +7.4% |
| Operating income | $727.5 million | $657.2 million | +10.7% |
| Continuing-operations net income | $382.7 million | $345.5 million | +10.8% |
| Net income, including discontinued operations | $396.4 million | $350.1 million | +13.2% |
| Diluted EPS, continuing operations | $3.60 | $3.33 | +$0.27 |
| Diluted EPS, total | $3.73 | $3.38 | +$0.35 |
| Operating cash flow | $867.1 million | $795.0 million | +$72.1 million |
| Capital expenditures | $1.137 billion | $1.087 billion | +$50.1 million |
| Cash and cash equivalents at year-end | $26.4 million | $47.5 million | -$21.1 million |
Revenue increased partly because purchased gas costs rose; management considers gross profit more informative because gas costs are generally passed through to customers. Operating income rose as operating expenses also increased, including depreciation and property taxes associated with investment. The distribution segment’s net income increased 15%, while pipeline and storage net income rose 2%.
At September 30, 2017, total assets were $10.750 billion, shareholders’ equity $3.899 billion, long-term debt $3.067 billion and short-term debt $447.7 million. Total debt was approximately $3.515 billion. The company reported an equity-to-total-capitalization ratio of 52.6% and a covenant-defined debt-to-capitalization ratio of 48%; it was compliant with debt covenants. Available facilities included a $1.5 billion commercial paper program supported by a $1.5 billion committed revolver. Investment-grade ratings were S&P A/A-1 and Moody’s A2/P-1, both with stable outlooks.
Material changes versus the prior period
- Continuing-operations income and diluted EPS increased, driven chiefly by rate outcomes and infrastructure investment; management said this more than offset weather that was 12% warmer than the prior year.
- Distribution gross profit increased $98.5 million, principally from rate adjustments. Distribution sales volume declined by 11,825 MMcf, while transportation volume increased by 8,162 MMcf.
- Pipeline and storage gross profit increased $27.3 million, supported by rate increases, higher through-system revenue and EnLink Pipeline throughput; higher operating costs partly offset the gains.
- Operating cash flow increased $72.1 million. Capital expenditures exceeded operating cash flow by about $270 million before other investing cash flows and financing.
- Long-term debt increased from $2.189 billion to $3.067 billion, while short-term debt fell from $829.8 million to $447.7 million. The company issued $750 million of notes and borrowed $125 million under a term loan, among other financing activity.
- AEM sale proceeds were reported as $140.3 million in the cash-flow discussion; the sale note reports total cash consideration of $147.3 million, including working capital. The filing also reports a $2.7 million after-tax sale gain and $13.7 million of total discontinued-operations income.
Outlook, management commentary, risks and unusual items
- Management expects capital spending to increase as it continues distribution and transmission safety and reliability investment. It states that available financing sources should be sufficient for working capital and the capital program for FY2018 and beyond, but does not provide a specific FY2018 capital-expenditure or earnings forecast in the provided text.
- Rate mechanisms and infrastructure surcharges support timely recovery of investment; management says more than 95% of capital expenditures can be recovered within six months in applicable jurisdictions. Regulatory changes or delayed approvals could increase regulatory lag.
- Rate actions effective in FY2017 increased annual operating income by $104.2 million. At year-end, pending rate filings sought $59.4 million in annual operating income; outcomes and timing remained subject to regulators.
- The company acquired EnLink Pipeline for $86.1 million, including working capital, to expand North Texas pipeline capacity. It received $140.3 million of AEM-sale proceeds in investing cash flows.
- Major disclosed risks include access to credit and capital markets, regulatory decisions, Texas concentration, gas supply and pipeline availability, weather and severe events, rising costs and customer collections, interest rates, competition, safety and environmental regulation, cyber threats, and pension and healthcare costs.
- Management reported that ordinary-course litigation and environmental matters were not expected to have a material adverse effect; environmental costs may be recovered through rates, shared with other parties or covered by insurance. No quantified material loss contingency is specified in the provided text.
- Unusual items include a $10.6 million pre-tax gain from discontinuing AEM hedge accounting, a $2.7 million after-tax gain on sale, and a $2.7 million supplemental executive pension settlement loss following executive departures. The Board raised the quarterly dividend 7.8% for FY2018; FY2017 dividends declared were $1.80 per share.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile AEM sale consideration: the filing cites $140.3 million of cash proceeds in the cash-flow discussion versus $147.3 million total consideration in the divestiture note, including working capital and escrow.
- Track pending rate cases and requested annual income increases, particularly the Dallas annual rate review appeal and the $59.4 million aggregate pending requests at fiscal year-end.
- Assess whether operating cash flow, future rate recovery and financing can sustain rising infrastructure spending, dividends and debt service.
- Review debt maturity and refinancing exposure, including $575 million due in 2019, and sensitivity to higher short-term interest rates; a 1% increase would have raised FY2017 interest expense by about $4.3 million.
- Evaluate reliance on Texas operations, weather-normalization mechanisms, pipeline capacity and safety, and the potential financial effects of regulatory, environmental, cyber or severe-weather events.