Atmos Energy Corporation — FY2016 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended September 30, 2016, not a standalone fourth-quarter report. Atmos is a regulated natural gas distributor serving more than three million customers in eight states, with regulated Texas pipeline and storage operations and a smaller nonregulated business. Regulated distribution and pipeline operations generated approximately 95% of FY2016 net income.
Financial results and condition
| Metric | FY2016 | FY2015 |
|---|---|---|
| Operating revenues | $3.350 billion | $4.142 billion |
| Gross profit | $1.745 billion | $1.680 billion |
| Operating income | $668.0 million | $631.4 million |
| Net income | $350.1 million | $315.1 million |
| Diluted earnings per share | $3.38 | $3.09 |
| Operating cash flow | $795.0 million | $811.9 million |
| Capital expenditures | $1.087 billion | $963.6 million |
- Revenue declined 19% year over year, largely reflecting lower gas costs passed through to customers and lower sales volumes. Gross profit increased 3.9%; management considers gross profit more indicative of performance because purchased gas costs are generally passed through without markup.
- Net income rose 11.1%. The increase reflected favorable rate outcomes that more than offset weather that was 25% warmer than FY2015 and higher pipeline maintenance and integrity spending.
- FY2016 gross profit by segment was $1.273 billion for regulated distribution, $408.8 million for regulated pipeline, and $63.8 million for nonregulated operations. Net income was $232.4 million, $101.7 million, and $16.0 million, respectively.
- Operating cash flow was below capital expenditures; investing activities used $1.080 billion. Financing activities provided $303.6 million, including $371.9 million of net short-term borrowings and $98.6 million net proceeds from ATM share sales. Cash at year-end was $47.5 million.
- At September 30, 2016, short-term debt was $829.8 million, long-term debt excluding current maturities was $2.189 billion, and current maturities were $250 million. Total debt including short-term debt and current maturities was approximately $3.269 billion. Debt was 48.5% of total capitalization including short-term debt; shareholders’ equity was $3.463 billion.
- Total assets were $10.011 billion, including net property, plant and equipment of $8.281 billion. Annual dividends were $1.68 per share, up from $1.56.
Material changes versus the prior year
- Regulated distribution net income increased 13% to $232.4 million. Segment gross profit rose $35.2 million, primarily due to rate adjustments; sales volumes fell 17%, with weather-normalization mechanisms limiting the gross-margin effect.
- Regulated pipeline net income increased 7% to $101.7 million, mainly reflecting higher GRIP rates, partly offset by increased maintenance and lower through-system volumes.
- Nonregulated net income was $16.0 million, slightly above FY2015’s $15.6 million, but well below FY2014’s $32.0 million. Lower realized margins were substantially offset by lower operating expenses.
- Capital spending increased $123.4 million year over year. More than 80% of FY2016 spending supported distribution and transmission safety and reliability.
- Short-term debt increased from $457.9 million to $829.8 million. Shareholders’ equity increased, partly reflecting the ATM equity issuance of 1.36 million shares.
Outlook, commentary, risks and unusual items
- Management expects capital spending to increase and plans to fund investment with operating cash flow, long-term debt, and to a lesser extent equity. It stated that available liquidity and committed facilities should be sufficient for FY2017 and beyond; no specific earnings or revenue guidance was provided.
- The Board increased the quarterly dividend 7.1% for FY2017. The company planned to issue new unsecured notes to replace $250 million due in FY2017 and $450 million due in FY2019.
- After year-end, Atmos amended its revolving credit facility, increasing commitments from $1.25 billion to $1.5 billion and extending maturity to September 2021; an additional $250 million accordion feature remains available. A separate $200 million term loan had no borrowings at year-end.
- On October 29, 2016, Atmos agreed to sell its nonregulated marketing subsidiary, AEM, to CenterPoint Energy Services for $40 million plus working capital, with closing expected in FY2017’s second quarter. Management anticipated no material gain or loss and planned to redeploy proceeds to regulated infrastructure investment.
- Key risks include reliance on capital markets and regulatory cost recovery; higher borrowing needs from gas-price spikes; weather, supply and pipeline disruptions; Texas concentration; competition; safety, environmental and cyber risks; and pension and healthcare cost sensitivity. The company reported investment-grade ratings and compliance with debt covenants at year-end.
- FY2016 included a $5.0 million income tax benefit from adoption of updated stock-compensation accounting. Regulatory rate proceedings produced $122.5 million of annual operating-income increases effective in FY2016; additional requested rate actions totaling $14.9 million remained incomplete at year-end.
- The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether approved and pending rate mechanisms continue to recover infrastructure investment promptly, and whether the reported rate increases translate into realized returns.
- How FY2017 capital expenditures, operating cash flow, short-term borrowing and planned debt refinancing affect leverage and liquidity.
- Completion and final working-capital adjustment for the AEM sale, and the resulting change in earnings mix and risk exposure.
- Whether earnings growth persists under warmer weather, declining distribution volumes, rising maintenance costs, and higher interest rates.
- Potential effects of pension assumptions, commodity-hedge collateral requirements, and the $250 million FY2017 debt maturity on cash needs.