Atmos Energy Corporation — FY2014 Form 10-K
Business context and reporting period. Fiscal year ended September 30, 2014 (not calendar Q4). Atmos Energy distributes natural gas to more than 3 million customers in eight states, operates an intrastate Texas pipeline and storage business, and has a smaller nonregulated marketing business. The 10-K was filed November 6, 2014.
Financial results and key metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Operating revenue | $4.941 billion | $3.875 billion | +27% |
| Gross profit | $1.582 billion | $1.412 billion | +12% |
| Operating income | $611.3 million | $501.9 million | +22% |
| Income from continuing operations | $289.8 million | $230.7 million | +26% |
| Net income | $289.8 million | $243.2 million | +19% |
| Diluted EPS | $2.96 | $2.64 | +12% |
| Operating cash flow | $740.0 million | $613.1 million | +$126.9 million |
| Capital expenditures | $835.3 million | $845.0 million | −$9.7 million |
- Revenue growth chiefly reflected higher gas costs and sales volumes; purchased gas costs are generally passed through to regulated customers. Gross profit is therefore a more useful indicator of performance than revenue alone.
- Operating cash flow less capital expenditures was approximately negative $95.3 million. Cash and cash equivalents ended the year at $42.3 million.
- At September 30, 2014, short-term debt was $196.7 million and long-term debt was $2.456 billion. Total debt was 46.2% of capitalization, down from 52.2% a year earlier; shareholders’ equity was $3.086 billion.
- Committed short-term borrowing capacity exceeded $1 billion. The company reported investment-grade ratings and compliance with debt covenants.
- Annual dividends paid per share rose to $1.48 from $1.40. The board increased the quarterly dividend by 5.4% for FY2015.
Material changes versus the prior comparable period
- Management attributed improved results primarily to rate increases and weather that was 20% colder than the prior year. Regulated distribution gross profit rose $95.3 million; regulated pipeline gross profit rose $49.6 million.
- Nonregulated segment net income increased to $32.0 million from $11.6 million. Higher realized margins included a $24.3 million increase in other realized margins associated with advancing storage withdrawals during volatile, cold-weather market conditions; fourth-quarter settlements occurred as prices fell.
- Operating cash flow increased, while capital expenditures remained substantial. Approximately 80% of FY2014 capital spending supported distribution and transportation system safety and reliability.
- A February 2014 public offering of 9.2 million shares generated $390.2 million net proceeds, strengthening equity but increasing shares outstanding.
- Atmos completed its exit from Georgia distribution operations in April 2013; consequently, FY2014 had no discontinued-operations income, unlike FY2013.
Outlook, management commentary, risks and unusual items
- Management expected capital spending over the next five years to remain broadly consistent with FY2014 levels, with continued investment in system safety and reliability. It stated that operating cash flow, debt and equity financing, and credit facilities were expected to fund FY2015 working capital and capital expenditures. No specific earnings or EPS guidance was provided.
- The company issued $500 million of 4.125% 30-year senior notes on October 15, 2014, refinancing $500 million of 4.95% notes at maturity. This was a subsequent event, after the fiscal year-end.
- Management cited regulatory outcomes and regulatory lag, access to capital markets, Texas business and weather concentration, gas-price and counterparty exposure in nonregulated operations, competition, safety and environmental regulation, pension costs, and severe weather or operational incidents as material risks. Weather-normalization mechanisms cover most regulated distribution margins, but do not eliminate all weather exposure.
- FY2014 rate actions were reported to add $93.3 million to annual operating income. Additional filings representing $47.6 million of requested annual operating income were initiated or pending at year-end; some rates were subject to refund or appeal.
- Unusual items included reversal of an accrual after the Kentucky litigation was substantially resolved, and a $6.2 million settlement of a Tennessee business tax dispute. Management said other litigation and environmental matters were not expected to materially adversely affect the company, while noting outcomes are uncertain.
- FY2014 operating results benefited from nonregulated unrealized gains of $9.6 million and unusually favorable realized trading/storage margins. These gains and commodity-market volatility may not recur at the same level. Pension and postretirement costs totaled $69.8 million, down from $78.5 million; management expected FY2015 pension costs to decrease approximately 10%, subject to actuarial and market assumptions.
Important facts for investors to verify
- How much FY2014 earnings growth came from durable rate increases versus unusually cold weather and nonregulated trading/storage results.
- The timing and outcome of pending rate proceedings, including the Mid-Tex rate review appeal and Mississippi filings, and whether requested recovery is approved.
- Whether planned infrastructure spending can be funded while maintaining leverage, liquidity and access to investment-grade financing.
- How the 9.2 million-share offering affected per-share growth, and whether future capital needs could require further equity issuance.
- Potential changes in pension and postretirement obligations, including the expected effect of updated mortality assumptions and future medical costs.