Atmos Energy (ATO) - 2024 Q4 - Annual Report

Part I Business Atmos Energy is the largest natural gas-only distributor in the U.S., serving over 3.3 million customers across eight states, focusing on infrastructure modernization and regulatory lag reduction - Atmos Energy is the largest natural gas-only distributor in the U.S. by customer count, serving over 3.3 million customers in eight states[17] - The company operates through two reportable segments: the distribution segment (regulated gas distribution in eight states) and the pipeline and storage segment (regulated pipeline and storage operations, primarily in Texas and Louisiana)[18] - As of September 30, 2024, the company held 1,026 non-exclusive franchise agreements with terms generally ranging from five to 35 years[21] - The company's strategy focuses on modernizing infrastructure and reducing regulatory lag, enabling recovery of approximately 90% of capital expenditures within six months and substantially all within twelve months[17][27] - As of September 30, 2024, the company had 5,260 employees, none of whom are covered by a collective bargaining agreement[48] Operating Segments and Overview The company's operations are divided into two primary segments: Distribution, serving over 3.3 million customers, and Pipeline and Storage, primarily the Atmos Pipeline-Texas (APT) division, one of Texas's largest intrastate pipeline systems Distribution Divisions Key Information (as of Sep 30, 2024) | Division | Service Areas | Communities Served | Customer Meters | | :--- | :--- | :--- | :--- | | Mid-Tex | Texas, including the Dallas/Fort Worth Metroplex | 550 | 1,804,265 | | Kentucky/Mid-States | Kentucky, Tennessee, Virginia | 220 | 361,873 (total) | | Louisiana | Louisiana | 270 | 360,870 | | West Texas | Amarillo, Lubbock, Midland | 80 | 314,503 | | Mississippi | Mississippi | 110 | 251,147 | | Colorado-Kansas | Colorado, Kansas | 170 | 269,162 (total) | - The Pipeline and Storage segment, primarily through its APT division, provides transportation and storage services to the company's Mid-Tex Division and third parties, including industrial and electric generation customers[24] - The company's peak-day natural gas supply availability is estimated at 5.3 Bcf, while the peak-day demand in fiscal 2024 was approximately 4.3 Bcf on January 15, 2024[23] Ratemaking Activity The company's ratemaking strategy minimizes regulatory lag through annual formula rate adjustments, infrastructure programs, and Weather Normalization Adjustment mechanisms, resulting in a $376.3 million increase in annual operating income in fiscal 2024 Annualized Ratemaking Outcomes (in thousands) | Fiscal Year | Annual Increase in Operating Income | EDIT Impact | Annual Increase Excluding EDIT | | :--- | :--- | :--- | :--- | | 2024 | $376,250 | $(69,174) | $307,076 | | 2023 | $263,084 | $5,692 | $268,776 | | 2022 | $174,922 | $40,628 | $215,550 | - As of September 30, 2024, the company had pending ratemaking efforts seeking a total of $218.0 million in additional annual operating income[34] - The company has infrastructure programs in all its states, allowing for annual rate adjustments for qualifying capital expenditures, helping recover approximately 90% of capital expenditures within six months[27] - Weather Normalization Adjustment (WNA) mechanisms are in place in seven states, minimizing weather-related effects on about 97% of distribution residential and commercial revenues[27] Competition Atmos Energy's regulated distribution operations face competition from alternative energy sources like electricity, while its pipeline and storage segment competes with other intrastate pipelines - The primary competitor for residential and commercial customers is electricity, especially for space heating, water heating, and cooking[47] - The pipeline and storage operations face increasing competition from other existing and newly completed intrastate pipelines[47] Risk Factors The company faces diverse risks including regulatory lag, operational hazards, cybersecurity threats, climate-related impacts, and financial vulnerabilities due to capital intensity and credit market reliance - Regulatory risks include the potential for increased "regulatory lag," where assets are placed in service before rates are adjusted, and the risk that regulators may disallow recovery of certain costs[55] - Operational risks include hazards inherent in transporting and storing natural gas, such as leaks and explosions, which could lead to significant legal liability and repair costs not fully covered by insurance[60] - Technology and cybersecurity risks involve potential disruption from system failures or cyber-attacks, which could impact the ability to deliver gas safely and lead to the unauthorized release of sensitive data[65] - Climate-related risks include adverse weather affecting operations and potential legislation to limit greenhouse gas emissions, which could increase operating costs or reduce demand for natural gas[66][68] - Financial risks stem from the capital-intensive nature of the business, dependence on access to credit markets, and exposure to economic conditions in Texas, where approximately 75% of consolidated operations are located[69][70][71] Unresolved Staff Comments This item is not applicable Cybersecurity Atmos Energy manages cybersecurity risk through a NIST-aligned program with continuous monitoring and incident response, overseen by the CIO and Board's Audit Committee, with no material incidents reported - The company's cybersecurity program is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework[77] - Cybersecurity governance is led by the Vice President and Chief Information Officer (CIO), with oversight from the Audit Committee of the Board of Directors[80] - The company has not had any material cybersecurity breaches or incidents and has not incurred any material related expenses[76] Properties As of September 30, 2024, Atmos Energy owned 74,596 miles of distribution and transmission mains and 5,682 miles of gas transmission lines, along with significant owned and contracted underground natural gas storage capacity - The company owns 74,596 miles of underground distribution and transmission mains and 5,682 miles of gas transmission lines[82] Owned Underground Gas Storage Capacity (as of Sep 30, 2024) | Segment | Working Capacity (Mcf) | Total Capacity (Mcf) | Max Daily Delivery (Mcf) | | :--- | :--- | :--- | :--- | | Distribution | 13,103,562 | 27,408,762 | 207,796 | | Pipeline and Storage | 53,494,589 | 73,429,514 | 2,516,000 | | Total | 66,598,151 | 100,838,276 | 2,723,796 | Contracted Storage Capacity (as of Sep 30, 2024) | Segment | Maximum Storage Quantity (MMBtu) | Maximum Daily Withdrawal (Mcf) | | :--- | :--- | :--- | | Distribution | 35,413,242 | 1,210,541 | | Pipeline and Storage | 1,500,000 | 71,250 | | Total | 36,913,242 | 1,281,791 | Legal Proceedings The company is involved in various legal and regulatory proceedings, including an NTSB investigation into two incidents in Jackson, Mississippi, but management believes outcomes will not materially affect financial condition - The National Transportation Safety Board (NTSB) is investigating two incidents that occurred in Jackson, Mississippi in January 2024, which resulted in one fatality; Atmos Energy is cooperating with the investigation[300] Mine Safety Disclosures This item is not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Atmos Energy's common stock trades on the NYSE under ATO, declared $3.22 per share in dividends in fiscal 2024, and achieved a five-year cumulative total return of 138.10% as of September 30, 2024 Dividends Declared Per Share | Quarter Ended | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | December 31 | $0.805 | $0.740 | | March 31 | $0.805 | $0.740 | | June 30 | $0.805 | $0.740 | | September 30 | $0.805 | $0.740 | | Total | $3.22 | $2.96 | Comparison of Five-Year Cumulative Total Return | Company/Index | 9/30/2019 | 9/30/2024 | | :--- | :--- | :--- | | Atmos Energy Corporation | $100.00 | $138.10 | | S&P 500 Stock Index | $100.00 | $209.84 | | S&P 500 Utilities Stock Index | $100.00 | $146.87 | - As of September 30, 2024, there were 737,219 securities to be issued upon exercise of outstanding rights under equity compensation plans, with 407,966 securities remaining available for future issuance[96] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In fiscal 2024, net income increased 17.7% to $1,042.9 million due to positive rate outcomes, with $2.9 billion in capital expenditures, strong liquidity of $4.8 billion, and a 61.0% equity capitalization Consolidated Net Income by Segment (in millions) | Segment | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Distribution | $671.4 | $580.4 | $522.0 | | Pipeline and storage | $371.5 | $305.5 | $252.4 | | Total Net Income | $1,042.9 | $885.9 | $774.4 | - Fiscal 2024 net income increased by $157.0 million year-over-year, primarily due to positive rate outcomes from safety and reliability spending[107] - Capital expenditures for fiscal 2024 totaled $2.9 billion, with approximately 83% invested in improving the safety and reliability of distribution and transportation systems[107] Critical Accounting Policies Critical accounting policies involve significant estimates for Regulation, deferring costs as regulatory assets based on recovery probability, and Pension and other postretirement plans, determined actuarially with sensitive assumptions - Regulation: The company's accounting for its rate-regulated operations allows for the capitalization or deferral of certain costs as regulatory assets, based on the probability of their recovery through future customer rates; discontinuation could significantly increase operating expenses[102] - Pension and Postretirement Plans: Costs and liabilities are determined actuarially and are highly sensitive to assumptions such as the discount rate and the expected long-term rate of return on plan assets; these assumptions are reviewed annually[104] Results of Operations Consolidated operating income increased to $1,355.4 million in fiscal 2024, driven by a 23.4% increase in Distribution segment operating income and a 33.8% increase in Pipeline and Storage segment operating income due to rate adjustments and through-system activities Distribution Segment Operating Income by Division (in thousands) | Division | FY 2024 | FY 2023 | Change | | :--- | :--- | :--- | :--- | | Mid-Tex | $464,616 | $345,545 | $119,071 | | Kentucky/Mid-States | $90,601 | $87,258 | $3,343 | | Louisiana | $94,362 | $80,942 | $13,420 | | West Texas | $72,929 | $62,351 | $10,578 | | Mississippi | $97,512 | $78,517 | $18,995 | | Colorado-Kansas | $42,816 | $40,674 | $2,142 | | Total | $854,434 | $692,626 | $161,808 | Pipeline and Storage Segment Financial Highlights (in thousands) | Metric | FY 2024 | FY 2023 | Change | | :--- | :--- | :--- | :--- | | Total operating revenues | $938,029 | $785,174 | $152,855 | | Operating income | $500,928 | $374,521 | $126,407 | | Net income | $371,482 | $305,465 | $66,017 | Liquidity and Capital Resources The company maintains strong liquidity with $1.7 billion cash from operations and $19.9 billion total capitalization, supported by investment-grade credit ratings and compliance with debt covenants Capitalization (as of Sep 30) | Component | 2024 (in thousands) | 2024 % | 2023 (in thousands) | 2023 % | | :--- | :--- | :--- | :--- | :--- | | Short-term debt | $ - | 0.0% | $241,933 | 1.4% | | Long-term debt | $7,785,297 | 39.0% | $6,555,701 | 37.1% | | Shareholders' equity | $12,157,669 | 61.0% | $10,870,064 | 61.5% | | Total capitalization | $19,942,966 | 100.0% | $17,667,698 | 100.0% | Cash Flow Summary (in millions) | Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Operating activities | $1,733.7 | $3,459.7 | | Investing activities | $(2,922.8) | $(2,795.3) | | Financing activities | $1,478.6 | $(696.8) | - The decrease in cash from operating activities from $3.5 billion in FY2023 to $1.7 billion in FY2024 is primarily because FY2023 included a $2.02 billion cash inflow from the conclusion of Texas securitization proceedings related to Winter Storm Uri[123] - The company maintains investment-grade credit ratings: A- (Stable) from S&P and A1 (Negative) from Moody's[128] Quantitative and Qualitative Disclosures About Market Risk The company manages commodity price risk through purchased gas cost adjustment mechanisms and assesses interest rate risk, with a hypothetical 1% increase in short-term rates having no material impact in fiscal 2024 - Commodity price risk for distribution operations is limited as substantially all purchased gas costs are recovered from customers through purchased gas cost adjustment mechanisms[140] - A sensitivity analysis showed that a hypothetical 1% average increase in interest rates on short-term borrowings would not have materially increased interest expense in fiscal 2024[141] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2024, with an unqualified auditor's opinion from Ernst & Young LLP, highlighting Regulation as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[146] - The auditor identified 'Regulation' as a Critical Audit Matter, citing the complexity and subjective judgments required for accounting for regulatory assets and liabilities in a rate-regulated entity[150][152] Consolidated Financial Statements The consolidated financial statements show total assets grew to $25.2 billion in 2024, with net income of $1,042.9 million and shareholders' equity increasing to $12.2 billion Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2024 | Sep 30, 2023 | | :--- | :--- | :--- | | Net property, plant and equipment | $22,204.4 | $19,606.6 | | Total Assets | $25,194.5 | $22,517.0 | | Long-term debt | $7,783.6 | $6,554.1 | | Shareholders' equity | $12,157.7 | $10,870.1 | | Total Capitalization and Liabilities | $25,194.5 | $22,517.0 | Consolidated Statement of Comprehensive Income Highlights (in millions) | Account | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Total operating revenues | $4,165.2 | $4,275.4 | $4,201.7 | | Operating income | $1,355.4 | $1,067.1 | $921.0 | | Net income | $1,042.9 | $885.9 | $774.4 | | Diluted net income per share | $6.83 | $6.10 | $5.60 | Notes to Consolidated Financial Statements Notes detail accounting policies, including $579.4 million in regulatory assets, $1,227.9 million in regulatory liabilities, $7.8 billion in long-term debt, and an overfunded pension plan of $124.3 million - Regulatory assets totaled $579.4 million and regulatory liabilities were $1,227.9 million as of September 30, 2024, reflecting the impact of rate regulation on accounting[193] - As of September 30, 2024, the company had $7.8 billion in long-term debt outstanding, excluding finance leases[220] - The company's main employee pension plan was overfunded with a funded status of $124.3 million as of September 30, 2024[244] - The company uses forward starting interest rate swaps to hedge anticipated debt issuances; as of September 30, 2024, it had swaps in place to hedge $300 million of planned debt for fiscal 2026[313] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item reports no changes in or disagreements with accountants on accounting and financial disclosure Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of September 30, 2024, with no material changes during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[332] - Management and the independent auditor, Ernst & Young LLP, both concluded that the company's internal control over financial reporting was effective as of September 30, 2024[333][336] Other Information No director or officer adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the fourth quarter of fiscal 2024 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable Part III Directors, Executive Officers and Corporate Governance Information on directors and corporate governance is incorporated by reference from the upcoming proxy statement, with executive officer biographies provided, and the company maintaining a Code of Conduct and Insider Trading Policy - Information regarding directors, the audit committee, and the audit committee financial expert is incorporated by reference from the Definitive Proxy Statement for the Annual Meeting of Shareholders on February 5, 2025[349][353] Executive Officers (as of Sep 30, 2024) | Name | Age | Years of Service | Office Currently Held | | :--- | :--- | :--- | :--- | | John K. Akers | 61 | 33 | President, Chief Executive Officer and Director | | Christopher T. Forsythe | 53 | 21 | Senior Vice President and Chief Financial Officer | | John S. McDill | 60 | 37 | Senior Vice President, Utility Operations | | Karen E. Hartsfield | 54 | 9 | Senior Vice President, General Counsel and Corporate Secretary | | John M. Robbins | 54 | 11 | Senior Vice President, Human Resources | Executive Compensation Information on executive and director compensation is incorporated by reference from the company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 5, 2025 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the company's Definitive Proxy Statement, with equity compensation plan details in Part II, Item 5 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 5, 2025 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's Definitive Proxy Statement for the Annual Meeting of Shareholders on February 5, 2025 Part IV Exhibits and Financial Statement Schedules This section lists financial statements included in Item 8 and exhibits filed as part of the Form 10-K, with financial statement schedules omitted as not applicable or included elsewhere Form 10-K Summary This item is not applicable