Atmos Energy Corporation — FY2015 Form 10-K Summary
Business context and reporting period
Atmos Energy is a regulated natural-gas distributor and pipeline operator, with smaller nonregulated gas marketing and related businesses. It serves more than three million customers in eight states. This Form 10-K covers the fiscal year ended September 30, 2015; it is not a standalone fourth-quarter filing. The filing also provides unaudited quarterly data, including for the quarter ended September 30, 2015.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Operating revenue | $4.142 billion | $4.941 billion |
| Gross profit | $1.680 billion | $1.582 billion |
| Operating income | $631.4 million | $611.3 million |
| Net income | $315.1 million | $289.8 million |
| Diluted EPS | $3.09 | $2.96 |
| Operating cash flow | $836.5 million | $740.0 million |
| Capital expenditures | $975.1 million | $835.3 million |
Revenue fell about 16% year over year, while gross profit increased about 6%, net income about 9%, and operating cash flow about 13%. Management said lower gas costs reduced reported revenue; purchased-gas adjustment mechanisms generally pass those costs through without affecting distribution gross profit. Capital spending exceeded operating cash flow by approximately $138.6 million.
- Segment earnings: Regulated distribution net income was $204.8 million, up from $171.6 million; regulated pipeline net income was $94.7 million, up from $86.2 million. Nonregulated net income fell to $15.6 million from $32.0 million.
- Margins and weather: Distribution gross profit increased $61.1 million, principally reflecting rate increases, partly offset by lower consumption. Weather was 10% warmer than the prior year. Distribution sales volume decreased 8%.
- Fourth-quarter snapshot: The unaudited September 2015 quarter reported revenue of $656.9 million, operating income of $75.9 million, net income of $23.5 million and diluted EPS of $0.23.
- Assets and liquidity: Total assets were $9.093 billion; cash was $28.7 million; current assets were $631.0 million and current liabilities $1.155 billion. Short-term debt was $457.9 million, up from $196.7 million; long-term debt was $2.455 billion. Total debt was 47.7% of capitalization including short-term debt, versus 46.2% a year earlier.
- Dividends: FY2015 dividends declared were $1.56 per share, up from $1.48. The board increased the quarterly dividend 7.7% for FY2016.
Material changes, outlook, risks, and unusual items
- Rate mechanisms and regulatory outcomes were central to performance. Rate actions effective during FY2015 were expected to add $114.5 million to annual operating income. Management said many mechanisms enable recovery of approved capital costs with limited regulatory lag.
- Capital expenditures were $975.1 million, with approximately 80% directed to distribution and transmission safety and reliability. Management expects elevated investment to continue and plans to fund it with operating cash flow and debt and equity financing. It stated available liquidity should support FY2016 and beyond, but gave no specific FY2016 capital-spending or earnings forecast.
- The company replaced $500 million of 4.95% notes due in 2014 with $500 million of 4.125% 30-year notes. It also entered a new five-year $1.25 billion revolving credit facility. Management planned to refinance $250 million due in 2017 and $450 million due in 2019.
- Nonregulated results weakened as less volatile gas markets reduced optimization opportunities and unrealized margins declined; the segment recorded $2.4 million of unrealized margin losses, compared with $9.6 million of gains in FY2014. Management also cited higher legal expenses compared with favorable prior-year litigation and tax-matter resolutions.
- Key exposures include regulatory changes or delays in cost recovery, credit-market access and borrowing costs, seasonal working-capital needs, Texas concentration, competition, weather and gas-price volatility in nonregulated operations, pension and healthcare costs, safety and environmental obligations, cyber threats, and operational hazards. A one-percentage-point increase in short-term borrowing rates was estimated to raise FY2015 interest expense by about $2.7 million.
- At September 30, 2015, regulated distribution risk-management instruments had a net liability fair value of $119.4 million, largely associated with interest-rate agreements; nonregulated instruments had a net liability of $34.6 million before cash collateral. These positions and related valuation changes merit attention.
- Management said ordinary-course litigation and environmental matters were not expected to materially adversely affect results; environmental matters are principally associated with former manufactured-gas-plant sites. The filing reports compliance with debt covenants and unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether regulatory approvals and infrastructure-recovery mechanisms deliver the expected earnings and cash recovery, and whether pending or recently approved rate actions take effect as anticipated.
- How elevated capital spending will be financed, including refinancing needs, short-term debt levels, credit-facility availability, and the effect on leverage and ratings.
- Whether regulated earnings growth can offset warmer-weather sensitivity and weaker nonregulated margins, including the impact of commodity volatility and hedge accounting.
- The development of pension and postretirement obligations, funding needs, and rate recovery; management projected lower FY2016 pension costs but expected $30–$40 million of postretirement-plan contributions.
- Material developments in safety, environmental, litigation, cyber, and regulatory matters, and the sustainability of dividend growth alongside investment requirements.