UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 3, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10042
Atmos Energy Corp oration
(Exact name of registrant as specified in its charter)
Texas and Virginia 75-1743247
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1800 Three Lincoln Centre
5430 LBJ Freeway
Dallas Texas 75240
(Address of principal executive offices) (Zip code)
( 972 ) 934-9227
(Registrant’s telephone number, including area code)
Title of each class Trading Symbol Name of each exchange on which registered
Common stock No Par Value ATO New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No þ
Number of shares outstanding of each of the issuer’s classes of common stock, as of , 202.
Class Shares Outstanding
Common stock No Par Value 1
GLOSSARY OF KEY TERMS
AEC Atmos Energy Corporation
AOCI Accumulated other comprehensive income
ARM Annual Rate Mechanism
ASC Accounting Standards Codification
Bcf Billion cubic feet
DARR Dallas Annual Rate Review
FASB Financial Accounting Standards Board
GAAP Generally Accepted Accounting Principles
GRIP Gas Reliability Infrastructure Program
GSRS Gas System Reliability Surcharge
Mcf Thousand cubic feet
MMcf Million cubic feet
Moody’s Moody’s Investors Services, Inc.
PRP Pipeline Replacement Program
RRC Railroad Commission of Texas
RRM Rate Review Mechanism
RSC Rate Stabilization Clause
S&P Standard & Poor’s Corporation
SAVE Steps to Advance Virginia Energy
SEC United States Securities and Exchange Commission
SIP System Integrity Program
SIR System Integrity Rider
SOFR Secured Overnight Financing Rate
SRF Stable Rate Filing
SSIR System Safety and Integrity Rider
TCJA Tax Cuts and Jobs Act of 2017
WNA Weather Normalization Adjustment
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2022 2022
(Unaudited)
(In thousands, except
share data)
ASSETS
Property, plant and equipment $ 20,987,313 $ 20,238,139
Less accumulated depreciation and amortization 3,015,645 2,997,900
Net property, plant and equipment 17,971,668 17,240,239
Current assets
Cash and cash equivalents 171,597 51,554
Accounts receivable, net (See Note 5) 826,416 363,708
Gas stored underground 323,678 357,941
Other current assets (See Note 8) 2,306,072 2,274,490
Total current assets 3,627,763 3,047,693
Goodwill 731,257 731,257
Deferred charges and other assets (See Note 8) 1,035,473 1,173,800
$ 23,366,161 $ 22,192,989
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
Common stock, no par value (stated at $ 0.005 per share); 200,000,000 shares authorized; issued and outstanding: December 31, 2022 — 143,155,761 shares; September 30, 2022 — 140,896,598 shares $ 716 $ 704
Additional paid-in capital 6,065,763 5,838,118
Accumulated other comprehensive income 391,330 369,112
Retained earnings 3,378,465 3,211,157
Shareholders’ equity 9,836,274 9,419,091
Long-term debt 6,551,795 5,760,647
Total capitalization 16,388,069 15,179,738
Current liabilities
Accounts payable and accrued liabilities 574,723 496,019
Other current liabilities 755,687 720,157
Short-term debt — 184,967
Current maturities of long-term debt 2,201,484 2,201,457
Total current liabilities 3,531,894 3,602,600
Deferred income taxes 2,075,596 1,999,505
Regulatory excess deferred taxes 345,799 385,213
Regulatory cost of removal obligation 494,626 487,631
Deferred credits and other liabilities 530,177 538,302
$ 23,366,161 $ 22,192,989
See accompanying notes to condensed consolidated financial statements.
3
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended December 31
2022 2021
(Unaudited)
(In thousands, except per
share data)
Operating revenues
Distribution segment $ 1,440,426 $ 972,422
Pipeline and storage segment 186,629 162,918
Intersegment eliminations ( 143,046 ) ( 122,554 )
Total operating revenues 1,484,009 1,012,786
Purchased gas cost
Distribution segment 881,915 496,799
Pipeline and storage segment ( 858 ) ( 3,411 )
Intersegment eliminations ( 142,808 ) ( 122,225 )
Total purchased gas cost 738,249 371,163
Operation and maintenance expense 185,016 159,110
Depreciation and amortization expense 146,020 127,856
Taxes, other than income 93,538 78,796
Operating income 321,186 275,861
Other non-operating income 21,191 8,702
Interest charges 36,760 19,851
Income before income taxes 305,617 264,712
Income tax expense 33,757 15,503
Net income $ 271,860 $ 249,209
Basic net income per share $ 1.92 $ 1.86
Diluted net income per share $ 1.91 $ 1.86
Cash dividends per share $ 0.74 $ 0.68
Basic weighted average shares outstanding 141,820 133,682
Diluted weighted average shares outstanding 141,937 133,689
Net income $ 271,860 $ 249,209
Other comprehensive income (loss), net of tax
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $ 25 and $( 20 ) 87 ( 69 )
Cash flow hedges:
Amortization and unrealized gains (losses) on interest rate agreements, net of tax of $ 6,397 and $( 13,260 ) 22,131 ( 45,878 )
Total other comprehensive income (loss) 22,218 ( 45,947 )
Total comprehensive income $ 294,078 $ 203,262
See accompanying notes to condensed consolidated financial statements.
4
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
2022 2021
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
Net income $ 271,860 $ 249,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 146,020 127,856
Deferred income taxes 29,693 11,813
Other ( 17,508 ) ( 12,689 )
Net assets / liabilities from risk management activities 218 ( 8,834 )
Net change in other operating assets and liabilities ( 241,383 ) ( 305,531 )
Net cash provided by operating activities 188,900 61,824
Cash Flows From Investing Activities
Capital expenditures ( 795,660 ) ( 684,180 )
Debt and equity securities activities, net ( 2,472 ) 2,374
Other, net 5,621 2,058
Net cash used in investing activities ( 792,511 ) ( 679,748 )
Cash Flows From Financing Activities
Net decrease in short-term debt ( 184,967 ) —
Net proceeds from equity issuances 220,000 261,943
Issuance of common stock through stock purchase and employee retirement plans 3,779 3,918
Proceeds from issuance of long-term debt 797,258 596,142
Cash dividends paid ( 104,552 ) ( 90,411 )
Debt issuance costs ( 7,864 ) ( 6,386 )
Net cash provided by financing activities 723,654 765,206
Net increase in cash and cash equivalents 120,043 147,282
Cash and cash equivalents at beginning of period 51,554 116,723
Cash and cash equivalents at end of period $ 171,597 $ 264,005
See accompanying notes to condensed consolidated financial statements.
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
, 2022
1. Nature of Business
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and its subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. Our distribution business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which our regulated divisions and subsidiaries operate.
Our distribution business delivers natural gas through sales and transportation arrangements to million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at , 2022, covered service areas located in eight states.
Our pipeline and storage business, which is also subject to federal and state regulations, includes the transportation of natural gas to our Texas and Louisiana distribution systems and the management of our underground storage facilities used to support our distribution business in various states.
2. Unaudited Financial Information
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2022 are not indicative of our results of operations for the full 2023 fiscal year, which ends September 30, 2023.
No events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
Significant accounting policies
Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Regulatory assets and liabilities
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of other current assets and deferred charges and other assets and our regulatory liabilities are recorded as a component of other current liabilities and deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities.
Significant regulatory assets and liabilities as of December 31, 2022 and September 30, 2022 included the following:
6
December 31, September 30,
2022 2022
(In thousands)
Regulatory assets:
Pension and postretirement benefit costs $ 26,977 $ 31,122
Infrastructure mechanisms (1) 164,818 235,972
Winter Storm Uri incremental costs (2) 2,125,787 2,109,454
Deferred gas costs 41,096 119,742
Regulatory excess deferred taxes (3) 48,033 47,311
Recoverable loss on reacquired debt 3,364 3,406
Deferred pipeline record collection costs 38,647 36,898
Other 23,088 21,467
$ 2,471,810 $ 2,605,372
Regulatory liabilities:
Regulatory excess deferred taxes (3) $ 506,406 $ 545,021
Regulatory cost of removal obligation 572,384 568,307
Deferred gas costs 39,013 28,834
Asset retirement obligation 5,737 5,737
APT annual adjustment mechanism 37,443 31,138
Pension and postretirement benefit costs 151,843 156,857
Other 27,141 23,013
$ 1,339,967 $ 1,358,907
(1) Infrastructure mechanisms in Texas, Louisiana and Tennessee allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
(2) Includes extraordinary gas costs incurred during Winter Storm Uri and certain related carrying costs. See Note 8 to the unaudited condensed consolidated financial statements for further information. This amount is recorded within other current assets and deferred charges and other assets on the condensed consolidated balance sheet as of December 31, 2022 and September 30, 2022.
(3) Regulatory excess deferred taxes represent changes in our net deferred tax liability related to our cost of service ratemaking due to the enactment of Tax Cuts and Jobs Act of 2017 (the "TCJA") and a Kansas legislative change enacted in fiscal 2020. See Note 11 to the unaudited condensed consolidated financial statements for further information.
3. Segment Information
We manage and review our consolidated operations through the following reportable segments:
• The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states.
• The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
7
Income statements and capital expenditures for the three months ended December 31, 2022 and 2021 by segment are presented in the following tables:
Three Months Ended December 31, 2022
Distribution Pipeline and Storage Eliminations Consolidated
(In thousands)
Operating revenues from external parties $ 1,439,693 $ 44,316 $ — $ 1,484,009
Intersegment revenues 733 142,313 ( 143,046 ) —
Total operating revenues 1,440,426 186,629 ( 143,046 ) 1,484,009
Purchased gas cost 881,915 ( 858 ) ( 142,808 ) 738,249
Operation and maintenance expense 136,469 48,785 ( 238 ) 185,016
Depreciation and amortization expense 105,664 40,356 — 146,020
Taxes, other than income 84,622 8,916 — 93,538
Operating income 231,756 89,430 — 321,186
Other non-operating income 6,774 14,417 — 21,191
Interest charges 22,839 13,921 — 36,760
Income before income taxes 215,691 89,926 — 305,617
Income tax expense 21,223 12,534 — 33,757
Net income $ 194,468 $ 77,392 $ — $ 271,860
Capital expenditures $ 443,544 $ 352,116 $ — $ 795,660
Three Months Ended December 31, 2021
Distribution Pipeline and Storage Eliminations Consolidated
(In thousands)
Operating revenues from external parties $ 971,636 $ 41,150 $ — $ 1,012,786
Intersegment revenues 786 121,768 ( 122,554 ) —
Total operating revenues 972,422 162,918 ( 122,554 ) 1,012,786
Purchased gas cost 496,799 ( 3,411 ) ( 122,225 ) 371,163
Operation and maintenance expense 123,284 36,155 ( 329 ) 159,110
Depreciation and amortization expense 92,797 35,059 — 127,856
Taxes, other than income 69,045 9,751 — 78,796
Operating income 190,497 85,364 — 275,861
Other non-operating income 1,916 6,786 — 8,702
Interest charges 8,548 11,303 — 19,851
Income before income taxes 183,865 80,847 — 264,712
Income tax expense 4,294 11,209 — 15,503
Net income $ 179,571 $ 69,638 $ — $ 249,209
Capital expenditures $ 437,382 $ 246,798 $ — $ 684,180
8
Balance sheet information at December 31, 2022 and September 30, 2022 by segment is presented in the following tables:
December 31, 2022
Distribution Pipeline and Storage Eliminations Consolidated
(In thousands)
Net property, plant and equipment $ 13,155,891 $ 4,815,777 $ — $ 17,971,668
Total assets $ 22,595,795 $ 5,113,402 $ ( 4,343,036 ) $ 23,366,161
September 30, 2022
Distribution Pipeline and Storage Eliminations Consolidated
(In thousands)
Net property, plant and equipment $ 12,723,532 $ 4,516,707 $ — $ 17,240,239
Total assets $ 21,424,586 $ 4,797,206 $ ( 4,028,803 ) $ 22,192,989
4. Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic weighted average shares outstanding is calculated based upon the weighted average number of common shares outstanding during the periods presented. Also, this calculation includes fully vested stock awards that have not yet been issued as common stock. Additionally, the weighted average shares outstanding for diluted EPS includes the incremental effects of the forward sale agreements, discussed in Note 7 to the unaudited condensed consolidated financial statements, when the impact is dilutive.
Basic and diluted earnings per share for the three months ended December 31, 2022 and 2021 are calculated as follows:
Three Months Ended December 31
2022 2021
(In thousands, except per share amounts)
Basic Earnings Per Share
Net income $ 271,860 $ 249,209
Less: Income allocated to participating securities 167 166
Income available to common shareholders $ 271,693 $ 249,043
Basic weighted average shares outstanding 141,820 133,682
Net income per share — Basic $ 1.92 $ 1.86
Diluted Earnings Per Share
Income available to common shareholders $ 271,693 $ 249,043
Effect of dilutive shares — —
Income available to common shareholders $ 271,693 $ 249,043
Basic weighted average shares outstanding 141,820 133,682
Dilutive shares 117 7
Diluted weighted average shares outstanding 141,937 133,689
Net income per share — Diluted $ 1.91 $ 1.86
9
5. Revenue and Accounts Receivable
Revenue
Our revenue recognition policy is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The following tables disaggregate our revenue from contracts with customers by customer type and segment and provide a reconciliation to total operating revenues, including intersegment revenues, for the three months ended December 31, 2022 and 2021.
Three Months Ended December 31, 2022 Three Months Ended December 31, 2021
Distribution Pipeline and Storage Distribution Pipeline and Storage
(In thousands)
Gas sales revenues:
Residential $ 953,051 $ — $ 575,841 $ —
Commercial 388,667 — 250,761 —
Industrial 59,215 — 48,681 —
Public authority and other 22,826 — 15,192 —
Total gas sales revenues 1,423,759 — 890,475 —
Transportation revenues 32,162 195,252 27,869 163,859
Miscellaneous revenues 2,282 2,722 2,599 6,543
Revenues from contracts with customers 1,458,203 197,974 920,943 170,402
Alternative revenue program revenues (1) ( 18,322 ) ( 11,345 ) 50,986 ( 7,484 )
Other revenues 545 — 493 —
Total operating revenues $ 1,440,426 $ 186,629 $ 972,422 $ 162,918
(1) In our distribution segment, we have weather-normalization adjustment mechanisms that serve to mitigate the effects of weather on our revenue. Additionally, APT has a regulatory mechanism that requires that we share with its tariffed customers 75 % of the difference between the total non-tariffed revenues earned during a test period and a revenue benchmark.
Accounts receivable and allowance for uncollectible accounts
Accounts receivable arise from natural gas sales to residential, commercial, industrial, public authority and other customers. Our accounts receivable balance includes unbilled amounts which represent a customer’s consumption of gas from the date of the last cycle billing through the last day of the month. Our policy related to the accounting for our accounts receivable and allowance for uncollectible accounts is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes to this policy. Rollforwards of our allowance for uncollectible accounts for the three months ended December 31, 2022 and 2021 are presented in the table below. The allowance excludes the gas cost portion of customers’ bills for approximately 81 percent of our customers as we have the ability to collect these gas costs through our gas cost recovery mechanisms in most of our jurisdictions.
Three Months Ended December 31, 2022
(In thousands)
Beginning balance, September 30, 2022 $ 49,993
Current period provisions 7,233
Write-offs charged against allowance ( 10,421 )
Recoveries of amounts previously written off 808
Ending balance, December 31, 2022 $ 47,613
10
Three Months Ended December 31, 2021
(In thousands)
Beginning balance, September 30, 2021 $ 64,471
Current period provisions 6,370
Write-offs charged against allowance ( 6,429 )
Recoveries of amounts previously written off 522
Ending balance, December 31, 2021 $ 64,934
6. Debt
The nature and terms of our debt instruments and credit facilities are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Other than as described below, there were no material changes in the terms of our debt instruments during the three months ended December 31, 2022.
Long-term debt at December 31, 2022 and September 30, 2022 consisted of the following:
December 31, 2022 September 30, 2022
(In thousands)
Unsecured 0.625 % Senior Notes, due March 2023 $ 1,100,000 $ 1,100,000
Unsecured 3.00 % Senior Notes, due June 2027 500,000 500,000
Unsecured 2.625 % Senior Notes, due September 2029 500,000 500,000
Unsecured 1.50 % Senior Notes, due January 2031 600,000 600,000
Unsecured 5.45 % Senior Notes, due October 2032
300,000 —
Unsecured 5.95 % Senior Notes, due October 2034 200,000 200,000
Unsecured 5.50 % Senior Notes, due June 2041 400,000 400,000
Unsecured 4.15 % Senior Notes, due January 2043 500,000 500,000
Unsecured 4.125 % Senior Notes, due October 2044 750,000 750,000
Unsecured 4.30 % Senior Notes, due October 2048 600,000 600,000
Unsecured 4.125 % Senior Notes, due March 2049 450,000 450,000
Unsecured 3.375 % Senior Notes, due September 2049 500,000 500,000
Unsecured 2.85 % Senior Notes, due February 2052 600,000 600,000
Unsecured 5.75 % Senior Notes, due October 2052 500,000 —
Floating-rate Senior Notes, due March 2023 1,100,000 1,100,000
Medium-term note Series A, 1995-1, 6.67 %, due December 2025 10,000 10,000
Unsecured 6.75 % Debentures, due July 2028 150,000 150,000
Finance lease obligations 51,495 51,850
Total long-term debt 8,811,495 8,011,850
Less:
Original issue discount on unsecured senior notes and debentures 6,358 3,704
Debt issuance cost 51,858 46,042
Current maturities of long-term debt 2,201,484 2,201,457
$ 6,551,795 $ 5,760,647
On October 3, 2022, we completed a public offering of $ 500 million of 5.75 % senior notes due fiscal 2053, with an effective interest rate of 4.50 %, after giving effect to the offering costs and settlement of our interest rate swaps, and $ 300 million of 5.45 % senior notes due fiscal 2033, with an effective interest rate of 5.57 %, after giving effect to the offering costs. The net proceeds from the offering, after the underwriting discount and offering expenses, of $ 789.4 million were used for general corporate purposes.
11
Short-term debt
We utilize short-term debt to provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company’s desired capital structure with an equity-to-total-capitalization ratio between 50 % and 60 %, inclusive of long-term and short-term debt. Our short-term borrowing requirements are driven primarily by construction work in progress and the seasonal nature of the natural gas business.
Our short-term borrowing requirements are satisfied through a combination of a $ 1.5 billion commercial paper program and four committed revolving credit facilities with third-party lenders that provide $ 2.5 billion of total working capital funding.
The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $ 1.5 billion credit facility that expires on March 31, 2027. This facility bears interest at a base rate or at a SOFR-based rate for the applicable interest period, plus a margin ranging from zero percent to 0.25 percent for base rate advances or a margin ranging from 0.75 percent to 1.25 percent for SOFR-based advances, based on the Company’s credit ratings. Additionally, the facility contains a $ 250 million accordion feature, which provides the opportunity to increase the total committed loan to $ 1.75 billion. At December 31, 2022, there were no amounts outstanding under our commercial paper program. At September 30, 2022, there was $ 185.0 million outstanding under our commercial paper program.
We also have a $ 900 million three-year unsecured revolving credit facility, which expires March 31, 2025 and is used to provide additional working capital funding. This facility bears interest at a base rate or at a SOFR-based rate for the applicable interest period, plus a margin ranging from zero percent to 0.25 percent for base rate advances or a margin ranging from 0.75 percent to 1.25 percent for SOFR-based advances, based on the Company's credit ratings. Additionally, the facility contains a $ 100 million accordion feature, which provides the opportunity to increase the total committed loan to $ 1.0 billion. At December 31, 2022 and September 30, 2022, there were no borrowings outstanding under this facility.
Additionally, we have a $ 50 million 364 -day unsecured facility, which will expire March 31, 2023 and is used to provide working capital funding. There were no borrowings outstanding under this facility as of December 31, 2022 and September 30, 2022.
Finally, we have a $ 50 million 364 -day unsecured revolving credit facility, which will expire March 31, 2023 and is used to issue letters of credit and to provide working capital funding. At December 31, 2022, there were no borrowings outstanding under this facility; however, outstanding letters of credit reduced the total amount available to us to $ 44.4 million.
Debt covenants
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total-debt-to-total-capitalization of no greater than 70 percent. At December 31, 2022, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 48 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $ 15 million to in excess of $ 100 million becomes due by acceleration or if not paid at maturity. We were in compliance with all of our debt covenants as of December 31, 2022. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.
7. Shareholders' Equity
The following tables present a reconciliation of changes in stockholders' equity for the three months ended December 31, 2022 and 2021.
12
Accumulated
Additional Other
Paid-in Comprehensive Income Retained
Common stock Capital (Loss) Earnings Total
Number of Stated
Shares Value
(In thousands, except share and per share data)
Balance, September 30, 2022 140,896,598 $ 704 $ 5,838,118 $ 369,112 $ 3,211,157 $ 9,419,091
Net income — — — — 271,860 271,860
Other comprehensive income — — — 22,218 — 22,218
Cash dividends ($ 0.74 per share) — — — — ( 104,552 ) ( 104,552 )
Common stock issued:
Public and other stock offerings 2,147,210 11 223,768 — — 223,779
Stock-based compensation plans 111,953 1 3,877 — — 3,878
Balance, December 31, 2022 143,155,761 $ 716 $ 6,065,763 $ 391,330 $ 3,378,465 $ 9,836,274
Accumulated
Additional Other
Paid-in Comprehensive Income Retained
Common stock Capital (Loss) Earnings Total
Number of Stated
Shares Value
(In thousands, except share and per share data)
Balance, September 30, 2021 132,419,754 $ 662 $ 5,023,751 $ 69,803 $ 2,812,673 $ 7,906,889
Net income — — — — 249,209 249,209
Other comprehensive loss — — — ( 45,947 ) — ( 45,947 )
Cash dividends ($ 0.68 per share) — — — — ( 90,411 ) ( 90,411 )
Common stock issued:
Public and other stock offerings 2,730,115 13 265,848 — — 265,861
Stock-based compensation plans 275,212 2 3,942 — — 3,944
Balance, December 31, 2021 135,425,081 $ 677 $ 5,293,541 $ 23,856 $ 2,971,471 $ 8,289,545
Shelf Registration, At-the-Market Equity Sales Program and Equity Issuances
We have a shelf registration statement with the Securities and Exchange Commission (SEC) that allows us to issue up to $ 5.0 billion in common stock and/or debt securities through June 29, 2024. At December 31, 2022, $ 1.4 billion of securities were available for issuance under this shelf registration statement.
We have an at-the-market (ATM) equity sales program under which we may issue and sell shares of our common stock up to an aggregate offering price of $ 1.0 billion through June 29, 2024 (including shares of common stock that may be sold pursuant to forward sale agreements entered into concurrently with the ATM equity sales program).
During the three months ended December 31, 2022, we executed forward sales under our ATM equity sales program with various forward sellers who borrowed and sold 1,687,190 shares of our common stock at an aggregate price of $ 199.8 million. During the three months ended December 31, 2022, we also settled forward sale agreements with respect to 2,114,488 shares that had been borrowed and sold by various forward sellers under the ATM program for net proceeds of $ 220.0 million. As of December 31, 2022, $ 281.9 million of equity was available for issuance under our existing ATM program. Additionally, we had $754.9 million in available proceeds from outstanding forward sale agreements, as detailed below.
Net Proceeds Available
Maturity Shares Available (In thousands) Forward Price
September 29, 2023 2,437,669 $ 271,874 $ 111.53
December 29, 2023 919,898 105,542 $ 114.73
March 28, 2024 2,744,502 318,963 $ 116.22
June 28, 2024 496,793 58,487 $ 117.73
Total 6,598,862 $ 754,866 $ 114.39
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Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale debt securities and interest rate agreement cash flow hedges. Deferred gains (losses) for our available-for-sale debt securities are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings on a straight-line basis over the life of the related financing. The following tables provide the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income (loss).
Interest Rate
Available- Agreement
for-Sale Cash Flow
Securities Hedges Total
(In thousands)
September 30, 2022 $ ( 495 ) $ 369,607 $ 369,112
Other comprehensive income before reclassifications 87 22,661 22,748
Amounts reclassified from accumulated other comprehensive income — ( 530 ) ( 530 )
Net current-period other comprehensive income 87 22,131 22,218
December 31, 2022 $ ( 408 ) $ 391,738 $ 391,330
Interest Rate
Available- Agreement
for-Sale Cash Flow
Securities Hedges Total
(In thousands)
September 30, 2021 $ 47 $ 69,756 $ 69,803
Other comprehensive loss before reclassifications ( 69 ) ( 46,622 ) ( 46,691 )
Amounts reclassified from accumulated other comprehensive income — 744 744
Net current-period other comprehensive loss ( 69 ) ( 45,878 ) ( 45,947 )
December 31, 2021 $ ( 22 ) $ 23,878 $ 23,856
8. Winter Storm Uri
Overview
As described in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, a historic winter storm impacted supply, market pricing and demand for natural gas in our service territories in mid-February 2021. During this time, the governors of Kansas and Texas each declared a state of emergency, and certain regulatory agencies issued emergency orders that impacted the utility and natural gas industries, including statewide utilities curtailment programs and orders encouraging or requiring jurisdictional natural gas utilities to work to ensure customers were provided with safe and reliable natural gas service.
Due to the historic nature of this winter storm, we experienced unforeseeable and unprecedented market pricing for gas costs, which resulted in aggregated natural gas purchases during the month of February of approximately $ 2.3 billion. These gas costs were paid using funds received from a public offering of debt securities completed in March 2021 of $ 2.2 billion.
Regulatory Asset Accounting
Our purchased gas costs are recoverable through purchased gas cost adjustment mechanisms in each state where we operate. Due to the unprecedented level of purchased gas costs incurred during Winter Storm Uri, the Kansas Corporation Commission (KCC) and the Railroad Commission of Texas (RRC) issued orders authorizing natural gas utilities to record a regulatory asset to account for the extraordinary costs associated with the winter storm. Pursuant to these orders, as of December 31, 2022, we have recorded a $ 2.1 billion regulatory asset for incremental costs, including certain carrying costs, incurred in Kansas ($ 89.0 million) and Texas ($ 2,021.9 million). Additionally, pursuant to a separate regulatory order issued by the RRC, we have deferred $ 14.9 million in carrying costs incurred after September 1, 2022.
Securitization Proceedings
To minimize the impact on the customer bill by extending the recovery periods for these unprecedented purchased gas costs, the Kansas and Texas State Legislatures each enacted securitization legislation during fiscal 2021, as described in further detail in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
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Kansas
The KCC issued a financing order on October 25, 2022, which authorizes us to securitize, through the issuance of bonds, $ 118.5 million, which includes the carrying costs and estimated interest related to the securitization over a time period not to exceed 12 years. We currently expect the issuance of bonds to take place during fiscal 2023. Because we intend to recover these costs over several years, we have recorded the regulatory asset for Kansas as a long-term asset in deferred charges and other assets as of December 31, 2022.
Texas
On February 8, 2022, the RRC issued a Financing Order that authorizes the Texas Public Financing Authority to issue customer rate relief bonds to securitize the costs that were approved in the Final Determination over a period not to exceed 30 years. Upon receipt of the securitization funds we will repay outstanding debt utilized to finance gas costs incurred during Winter Storm Uri.
9. Interim Pension and Other Postretirement Benefit Plan Information
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three months ended December 31, 2022 and 2021 are presented in the following tables. Most of these costs are recoverable through our tariff rates. A portion of these costs is capitalized into our rate base or deferred as a regulatory asset or liability. The remaining costs are recorded as a component of operation and maintenance expense or other non-operating expense.
Three Months Ended December 31
Pension Benefits Other Benefits
2022 2021 2022 2021
(In thousands)
Components of net periodic pension cost:
Service cost $ 2,908 $ 4,323 $ 1,546 $ 2,559
Interest cost (1) 7,325 5,063 3,478 2,683
Expected return on assets (1) ( 7,278 ) ( 7,383 ) ( 2,804 ) ( 3,312 )
Amortization of prior service cost (credit) (1) ( 30 ) ( 58 ) ( 3,285 ) ( 3,309 )
Amortization of actuarial (gain) loss (1) 164 1,951 ( 1,863 ) —
Net periodic pension cost $ 3,089 $ 3,896 $ ( 2,928 ) $ ( 1,379 )
(1) The components of net periodic cost other than the service cost component are included in the line item other non-operating expense in the condensed consolidated statements of comprehensive income or are capitalized on the condensed consolidated balance sheets as a regulatory asset or liability, as described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
For the three months ended December 31, 2022 we contributed $ 3.0 million to our postretirement medical plans. We anticipate contributing a total of between $ 15 million and $ 25 million to our postretirement plans during fiscal 2023.
10. Commitments and Contingencies
Litigation and Environmental Matters
In the normal course of business, we are subject to various legal and regulatory proceedings. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts, our historical experience and our estimates of the ultimate outcome or resolution of the liability in the future. While the outcome of these proceedings is uncertain and a loss in excess of the amount we have accrued is possible though not reasonably estimable, it is the opinion of management that any amounts exceeding the accruals will not have a material adverse impact on our financial position, results of operations or cash flows.
We are a party to various other litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Purchase Commitments
Our distribution divisions maintain supply contracts with several vendors that generally cover a period of up to one year . Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually
negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area, which obligate it to purchase specified volumes at prices under contracts indexed to natural gas hubs or fixed price contracts. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There were no material changes to the purchase commitments for the three months ended December 31, 2022.
Future Lease Payments
Two service center leases are expected to commence in the fourth quarter of fiscal 2023 that impact our future lease payments. The total future lease payments for these leases are $ 48.1 million.
Rate Regulatory Proceedings
As of December 31, 2022, routine rate regulatory proceedings were in progress in several of our service areas, which are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments . Except for these proceedings, there were no material changes to rate regulatory proceedings for the three months ended December 31, 2022.
11. Income Taxes
Income Tax Expense
Our interim effective tax rates reflect the estimated annual effective tax rates for the fiscal years ended September 30, 2023 and 2022, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended December 31, 2022 and 2021 were 11.0 % and 5.9 %. These effective tax rates differ from the federal statutory tax rate of 21% primarily due to the amortization of excess deferred federal income tax liabilities, tax credits, state income taxes and other permanent book-to-tax differences. These adjustments have a relative impact on the effective tax rate proportionally to pretax income or loss.
Regulatory Excess Deferred Taxes
Regulatory excess net deferred taxes represent changes in our net deferred tax liability related to our cost of service ratemaking due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA") and a Kansas legislative change enacted in fiscal 2020. Currently, the regulatory excess net deferred tax liability of $ 458.4 million is being returned over various periods. Of this amount, $ 368.8 million is being returned to customers over 35 - 60 months. An additional $ 74.5 million is being returned to customers on a provisional basis over 15 - 69 years until our regulators establish the final refund periods. The refund of the remaining $ 15.1 million will be addressed in future rate proceedings.
As of December 31, 2022 and September 30, 2022, $ 160.6 million and $ 159.8 million is recorded in other current liabilities.
12. Financial Instruments
We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 15 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes in our objectives, strategies and accounting for using financial instruments. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions. The following summarizes those objectives and strategies.
Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our distribution segment from commodity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2022-2023 heating season (generally October through March), in the jurisdictions where we are permitted
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to utilize financial instruments, we anticipate hedging approximately 32 percent, or 17.7 Bcf, of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.
Interest Rate Risk Management Activities
We manage interest rate risk by periodically entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
The following table summarizes our existing forward starting interest rate swaps as of December 31, 2022. These swaps were designated as cash flow hedges at the time the agreements were executed.
Planned Debt Issuance Date Amount Hedged
(In thousands)
Fiscal 2024 $ 450,000
Fiscal 2025 600,000
Fiscal 2026 300,000
$ 1,350,000
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and statements of comprehensive income.
As of December 31, 2022, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of December 31, 2022, we had 12,039 MMcf of net long commodity contracts outstanding. These contracts have not been designated as hedges.
Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of December 31, 2022 and September 30, 2022. The gross amounts of recognized assets and liabilities are netted within our unaudited condensed consolidated balance sheets to the extent that we have netting arrangements with our counterparties. However, as of December 31, 2022 and September 30, 2022, no gross amounts and no cash collateral were netted within our consolidated balance sheet.
December 31, 2022
Balance Sheet Location Assets Liabilities
(In thousands)
Designated As Hedges:
Interest rate contracts Other current assets /
Other current liabilities $ 107,834 $ —
Interest rate contracts Deferred charges and other assets /
Deferred credits and other liabilities 276,451 —
Total 384,285 —
Not Designated As Hedges:
Commodity contracts Other current assets /
Other current liabilities 3,255 ( 10,443 )
Commodity contracts Deferred charges and other assets /
Deferred credits and other liabilities 316 ( 1,597 )
Total 3,571 ( 12,040 )
Gross / Net Financial Instruments $ 387,856 $ ( 12,040 )
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September 30, 2022
Balance Sheet Location Assets Liabilities
(In thousands)
Designated As Hedges:
Interest rate contracts Deferred charges and other assets /
Deferred credits and other liabilities $ $ —
Total —
Not Designated As Hedges:
Commodity contracts Other current assets /
Other current liabilities ( )
Commodity contracts Deferred charges and other assets /
Deferred credits and other liabilities 709 ( 1,129 )
Total 26,916 ( 4,129 )
Gross / Net Financial Instruments $ 381,991 $ ( 4,129 )
Impact of Financial Instruments on the Statement of Comprehensive Income
Cash Flow Hedges
As discussed above, our distribution segment has interest rate agreements, which we designated as cash flow hedges at the time the agreements were executed. The net (gain) loss on settled interest rate agreements reclassified from AOCI into interest charges on our condensed consolidated statements of comprehensive income for the three months ended December 31, 2022 and 2021 was $( 0.7 ) million and $ 1.0 million.
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three months ended December 31, 2022 and 2021. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the statement of comprehensive income as incurred.
Three Months Ended December 31
2022 2021
(In thousands)
Increase (decrease) in fair value:
Interest rate agreements $ 22,661 $ ( 46,622 )
Recognition of (gains) losses in earnings due to settlements:
Interest rate agreements ( 530 ) 744
Total other comprehensive income (loss) from hedging, net of tax $ 22,131 $ ( 45,878 )
Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments. As of December 31, 2022, we had $ 93.6 million of net realized gains in AOCI associated with our interest rate agreements. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred net gains recorded in AOCI associated with our interest rate agreements, based upon the fair values of these agreements at the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2053. However, the table below does not include the expected recognition in earnings of our outstanding interest rate swaps as those instruments have not yet settled.
Interest Rate
Agreements
(In thousands)
Next twelve months $ 2,120
Thereafter 91,497
Total $ 93,617
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Financial Instruments Not Designated as Hedges
As discussed above, commodity contracts which are used in our distribution segment are not designated as hedges. However, there is no earnings impact on our distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of comprehensive income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
13. Fair Value Measurements
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no changes in these methods.
Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 10 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Quantitative Disclosures
Financial Instruments
The classification of our fair value measurements requires judgment regarding the degree to which market data is observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and September 30, 2022. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
Quoted Significant Significant
Prices in Other Other
Active Observable Unobservable Netting and
Markets Inputs Inputs Cash
(Level 1) (Level 2) (1) (Level 3) Collateral December 31, 2022
(In thousands)
Assets:
Financial instruments $ — $ 387,856 $ — $ — $ 387,856
Debt and equity securities
Registered investment companies 26,984 — — — 26,984
Bond mutual funds 32,753 — — — 32,753
Bonds (2) — 35,696 — — 35,696
Money market funds — 2,823 — — 2,823
Total debt and equity securities 59,737 38,519 — — 98,256
Total assets $ 59,737 $ 426,375 $ — $ — $ 486,112
Liabilities:
Financial instruments $ — $ 12,040 $ — $ — $ 12,040
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Quoted Significant Significant
Prices in Other Other
Active Observable Unobservable Netting and
Markets Inputs Inputs Cash
(Level 1) (Level 2) (1) (Level 3) Collateral September 30, 202
(In thousands)
Assets:
Financial instruments $ — $ 381,991 $ — $ — $ 381,991
Debt and equity securities
Registered investment companies 26,367 — — — 26,367
Bond mutual funds 32,367 — — — 32,367
Bonds (2) — 33,433 — — 33,433
Money market funds — 3,845 — — 3,845
Total debt and equity securities 58,734 37,278 — — 96,012
Total assets $ 58,734 $ 419,269 $ — $ — $ 478,003
Liabilities:
Financial instruments $ — $ 4,129 $ — $ — $ 4,129
(1) Our Level 2 measurements consist of over-the-counter options and swaps, which are valued using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds, which are valued based on the most recent available quoted market prices and money market funds that are valued at cost.
(2) Our investments in bonds are considered available-for-sale debt securities in accordance with current accounting guidance.
Debt and equity securities are comprised of our available-for-sale debt securities and our equity securities. As described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, we evaluate the performance of our available-for-sale debt securities on an investment by investment basis for impairment, taking into consideration the investment’s purpose, volatility, current returns and any intent to sell the security. As of December 31, 2022, no allowance for credit losses was recorded for our available-for-sale debt securities. At December 31, 2022 and September 30, 2022, the amortized cost of our available-for-sale debt securities was $ 36.2 million and $ 34.1 million. At December 31, 2022, we maintained investments in bonds that have contractual maturity dates ranging from January 2023 through September 2026.
Other Fair Value Measures
Our long-term debt is recorded at carrying value. The fair value of our long-term debt, excluding finance leases, is determined using third party market value quotations, which are considered Level 1 fair value measurements for debt instruments with a recent, observable trade or Level 2 fair value measurements for debt instruments where fair value is determined using the most recent available quoted market price. The carrying value of our finance leases materially approximates fair value. The following table presents the carrying value and fair value of our long-term debt, excluding finance leases, debt issuance costs and original issue premium or discount, as of December 31, 2022 and September 30, 2022:
December 31, 2022 September 30, 2022
(In thousands)
Carrying Amount $ 8,760,000 $ 7,960,000
Fair Value $ 7,856,154 $ 6,918,843
14. Concentration of Credit Risk
Information regarding our concentration of credit risk is disclosed in Note 17 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes in our concentration of credit risk.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Atmos Energy Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Atmos Energy Corporation (the Company) as of December 31, 2022, the related condensed consolidated statements of comprehensive income and cash flows for the three month periods ended December 31, 2022 and 2021, and the related notes (collectively referred to as the "condensed consolidated interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of September 30, 2022, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated November 14, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ ERNST & YOUNG LLP
Dallas, Texas
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2022.
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: federal, state and local regulatory and political trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the availability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competition from energy suppliers and alternative forms of energy; failure to attract and retain a qualified workforce; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control; increased dependence on technology that may hinder the Company's business if such technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information; the impact of new cybersecurity compliance requirements; adverse weather conditions; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; the impact of climate change; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations in Texas; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; and increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.
OVERVIEW
Atmos Energy and our subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.3 million residential, commercial, public authority and industrial customers throughout our six distribution divisions, which at December 31, 2022 covered service areas located in eight states. In addition, we transport natural gas for others through our distribution and pipeline systems.
We manage and review our consolidated operations through the following reportable segments:
• The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states.
• The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana.
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill and other long-lived assets. Actual results may differ from such estimates.
Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 202 and include the following:
• Regulation
• Unbilled revenue
• Pension and other postretirement plans
• Impairment assessments
Our critical accounting policies are reviewed periodically by the Audit Committee of our Board of Directors. There were no significant changes to these critical accounting policies during the e months ended , 2022.
RESULTS OF OPERATIONS
Executive Summary
Atmos Energy strives to operate our businesses safely and reliably while delivering superior shareholder value. Our commitment to modernizing our natural gas distribution and transmission systems requires a significant level of capital spending. We have the ability to begin recovering a significant portion of these investments timely through rate designs and mechanisms that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. The execution of our capital spending program, the ability to recover these investments timely and our ability to access the capital markets to satisfy our financing needs are the primary drivers that affect our financial performance.
During the three months ended December 31, 2022, we recorded net income of $271.9 million, or $1.91 per diluted share, compared to net income of $249.2 million, or $1.86 per diluted share for the three months ended December 31, 2021.
The 9 percent year-over-year increase in net income largely reflects positive rate outcomes driven by safety and reliability spending, offset by higher spending on certain operating expenses in both our segments.
During the three months ended December 31, 2022, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $111.8 million. Additionally, as of December 31, 2022, we had ratemaking efforts in progress seeking a total increase in annual operating income of $18.8 million.
Capital expenditures for the three months ended December 31, 2022 were $795.7 million. Over 85 percent was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce lag to six months or less.
During the three months ended December 31, 2022, we completed approximately $1.0 billion of long-term debt and equity financing. As of December 31, 2022, our equity capitalization was 52.9 percent. Excluding the $2.2 billion of incremental financing issued in conjunction with Winter Storm Uri, our equity capitalization was 60.0 percent. As of December 31, 2022, we had approximately $3.4 billion in total liquidity, consisting of $171.6 million in cash and cash equivalents, $754.9 million in funds available through equity forward sales agreements and $2,494.4 million in undrawn capacity under our credit facilities.
As a result of our sustained financial performance, our Board of Directors increased the quarterly dividend by 8.8 percent for fiscal 2023.
The following discusses the results of operations for each of our operating segments.
Distribution Segment
The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of this segment are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas.
Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer
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usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. Under our current rate design, approximately 70 percent of our distribution segment revenues are earned through the first six months of the fiscal year. Additionally, we currently recover approximately 50 percent of our distribution segment revenue, excluding gas costs, through the base customer charge, which partially separates the recovery of our approved rate from customer usage patterns.
Seasonal weather patterns can also affect our distribution operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which have been approved by state regulatory commissions for approximately 96 percent of our residential and commercial revenues in the following states for the following time periods:
Kansas, West Texas October — May
Tennessee October — April
Kentucky, Mississippi, Mid-Tex November — April
Louisiana December — March
Virginia January — December
Our distribution operations are also affected by the cost of natural gas. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Revenues in our Texas and Mississippi service areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income.
The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 81 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources.
Three Months Ended December 31, 2022 compared with Three Months Ended December 31, 2021
Financial and operational highlights for our distribution segment for the three months ended December 31, 2022 and 2021 are presented below.
Three Months Ended December 31
2022 2021 Change
(In thousands, unless otherwise noted)
Operating revenues $ 1,440,426 $ 972,422 $ 468,004
Purchased gas cost 881,915 496,799 385,116
Operating expenses 326,755 285,126 41,629
Operating income 231,756 190,497 41,259
Other non-operating income 6,774 1,916 4,858
Interest charges 22,839 8,548 14,291
Income before income taxes 215,691 183,865 31,826
Income tax expense 21,223 4,294 16,929
Net income $ 194,468 $ 179,571 $ 14,897
Consolidated distribution sales volumes — MMcf 100,078 69,545 30,533
Consolidated distribution transportation volumes — MMcf 40,600 38,597 2,003
Total consolidated distribution throughput — MMcf 140,678 108,142 32,536
Consolidated distribution average cost of gas per Mcf sold $ 8.81 $ 7.14 $ 1.67
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Operating income for our distribution segment increased 21.7 percent. Key drivers for the change in operating income include:
• a $57.5 million increase in rate adjustments, primarily in our Mid-Tex and Mississippi Divisions.
• a $5.7 million decrease in refunds of excess deferred taxes to customers.
• a $5.5 million increase related to residential customer growth and increased industrial load.
Partially offset by:
• a $16.0 million increase in depreciation expense and property taxes associated with increased capital investments.
• a $13.2 million increase in operation and maintenance expense primarily attributable to increased line locate spending and increased administrative costs.
Interest charges increased $14.3 million primarily due to the issuance of long-term debt during the second quarter of fiscal 2022 and the first quarter of fiscal 2023.
The following table shows our operating income by distribution division, in order of total rate base, for the three months ended December 31, 2022 and 2021. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
Three Months Ended December 31
2022 2021 Change
(In thousands)
Mid-Tex $ 113,928 $ 106,358 $ 7,570
Kentucky/Mid-States 28,185 25,538 2,647
Louisiana 25,348 21,154 4,194
West Texas 21,206 20,874 332
Mississippi 27,049 24,700 2,349
Colorado-Kansas 14,967 2,815 12,152
Other 1,073 (10,942) 12,015
Total $ 231,756 $ 190,497 $ 41,259
Recent Ratemaking Developments
The amounts described in the following sections represent the operating income that was requested or received in each rate filing, which may not necessarily reflect the stated amount referenced in the final order, as certain operating costs may have changed as a result of a commission’s or other governmental authority’s final ruling. During the first three months of fiscal 2023, we implemented, or received approval to implement, regulatory proceedings, resulting in a $111.8 million increase in annual operating income as summarized below. Our ratemaking outcomes include the refund of excess deferred income taxes (EDIT) resulting from previously enacted tax reform legislation and do not reflect the true economic benefit of the outcomes because they do not include the corresponding income tax benefit. Excluding these amounts, our total rate outcomes for ratemaking activities for the three months ended December 31, 2022 were $112.2 million.
Annual Increase in Annual Increase in
Rate Action Operating Income EDIT Impact Operating Income Excluding EDIT
(In thousands)
Annual formula rate mechanisms $ 111,846 $ 342 $ 112,188
Rate case filings — — —
Other rate activity — — —
$ 111,846 $ 342 $ 112,188
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The following ratemaking efforts seeking $18.8 million in increased annual operating income were in progress as of December 31, 2022:
Division Rate Action Jurisdiction Operating Income Requested
(In thousands)
Colorado-Kansas Rate Case Colorado $ 7,554
Colorado-Kansas Rate Case Kansas 7,989
Colorado-Kansas Infrastructure Mechanism Colorado (1) 1,971
Colorado-Kansas Ad Valorem Kansas (2) 1,320
$ 18,834
(1) The Colorado Public Utilities Commission approved the SSIR implementation at their December 21, 2022 meeting with rates effective January 1, 2023.
(2) The Kansas Corporation Commission approved the Ad Valorem filing on January 17, 2023, with rates effective February 1, 2023.
Annual Formula Rate Mechanisms
As an instrument to reduce regulatory lag, formula rate mechanisms allow us to refresh our rates on an annual basis without filing a formal rate case. However, these filings still involve discovery by the appropriate regulatory authorities prior to the final determination of rates under these mechanisms. We currently have formula rate mechanisms in our Louisiana, Mississippi and Tennessee operations and in substantially all the service areas in our Texas divisions. Additionally, we have specific infrastructure programs in substantially all of our distribution divisions with tariffs in place to permit the investment associated with these programs to have their surcharge rate adjusted annually to recover approved capital costs incurred in a prior test-year period. The following table summarizes our annual formula rate mechanisms by state:
Annual Formula Rate Mechanisms
State Infrastructure Programs Formula Rate Mechanisms
Colorado System Safety and Integrity Rider (SSIR) —
Kansas Gas System Reliability Surcharge (GSRS), System Integrity Program (SIP) —
Kentucky Pipeline Replacement Program (PRP) —
Louisiana (1) Rate Stabilization Clause (RSC)
Mississippi System Integrity Rider (SIR) Stable Rate Filing (SRF)
Tennessee (1) Annual Rate Mechanism (ARM)
Texas Gas Reliability Infrastructure Program (GRIP), (1) Dallas Annual Rate Review (DARR), Rate Review Mechanism (RRM)
Virginia Steps to Advance Virginia Energy (SAVE) —
(1) Infrastructure mechanisms in Texas, Louisiana and Tennessee allow for the deferral of all expenses associated with capital expenditures incurred pursuant to these rules, which primarily consists of interest, depreciation and other taxes (Texas only), until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
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The following annual formula rate mechanisms were approved during the three months ended December 31, 2022:
Increase in Increase in
Annual Annual
Test Year Operating Operating Effective
Division Jurisdiction Ended Income EDIT Impact Income Excluding EDIT Date
(In thousands)
2023 Filings:
Mississippi Mississippi - SIR 10/31/2023 $ 8,560 $ — $ 8,560 11/01/2022
Mississippi Mississippi - SRF 10/31/2023 12,188 778 12,966 11/01/2022
Kentucky/Mid-States Kentucky PRP (1) 09/30/2023 1,904 — 1,904 10/02/2022
Mid-Tex Mid-Tex Cities RRM 12/31/2021 81,402 (395) 81,007 10/01/2022
West Texas West Texas Cities RRM 12/31/2021 7,315 (41) 7,274 10/01/2022
Kentucky/Mid-States Virginia - SAVE 09/30/2023 477 — 477 10/01/2022
Total 2023 Filings $ 111,846 $ 342 $ 112,188
(1) Rates were implemented on October 2, 2022, subject to refund.
Rate Case Filings
A rate case is a formal request from Atmos Energy to a regulatory authority to increase rates that are charged to our customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a “show cause” action. Adequate rates are intended to provide for recovery of the Company’s costs as well as a fair rate of return and ensure that we continue to deliver reliable, reasonably priced natural gas service safely to our customers. There was no rate case activity completed during the three months ended December 31, 2022.
Other Ratemaking Activity
The Company had no other ratemaking activity during the three months ended December 31, 2022.
Pipeline and Storage Segment
Our pipeline and storage segment consists of the pipeline and storage operations of our Atmos Pipeline–Texas Division (APT) and our natural gas transmission operations in Louisiana. APT is one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Barnett Shale, the Texas Gulf Coast and the Permian Basin of West Texas. APT provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. Over 80 percent of this segment’s revenues are derived from these services. As part of its pipeline operations, APT owns and operates five underground storage facilities in Texas.
Our natural gas transmission operations in Louisiana are comprised of a 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution division for these services is subject to regulatory approval by the Louisiana Public Service Commission. We also manage two asset management plans, which have been approved by applicable state regulatory commissions. Generally, these asset management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements.
Our pipeline and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Texas and Louisiana service areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipelines. Further, natural gas price differences between the various hubs that we serve in Texas could influence the volumes of gas transported for shippers through our Texas pipeline system and rates for such transportation.
The results of APT are also significantly impacted by the natural gas requirements of its local distribution company customers. Additionally, its operations may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs.
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The demand fee our Louisiana natural gas transmission pipeline charges to our Louisiana distribution division increases five percent annually and has been approved by the Louisiana Public Service Commission until September 30, 2027.
Three Months Ended December 31, 2022 compared with Three Months Ended December 31, 2021
Financial and operational highlights for our pipeline and storage segment for the three months ended December 31, 2022 and 2021 are presented below.
Three Months Ended December 31
2022 2021 Change
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue $ 146,231 $ 127,323 $ 18,908
Third-party transportation revenue 38,079 30,625 7,454
Other revenue 2,319 4,970 (2,651)
Total operating revenues 186,629 162,918 23,711
Total purchased gas cost (858) (3,411) 2,553
Operating expenses 98,057 80,965 17,092
Operating income 89,430 85,364 4,066
Other non-operating income 14,417 6,786 7,631
Interest charges 13,921 11,303 2,618
Income before income taxes 89,926 80,847 9,079
Income tax expense 12,534 11,209 1,325
Net income $ 77,392 $ 69,638 $ 7,754
Gross pipeline transportation volumes — MMcf 206,244 181,468 24,776
Consolidated pipeline transportation volumes — MMcf 142,076 136,067 6,009
Operating income for our pipeline and storage segment increased 4.8 percent. Key drivers for the change in operating income include:
• a $21.0 million increase due to rate adjustments from the GRIP filing approved in May 2022. The increase in rates was driven by increased safety and reliability spending.
• a $4.9 million net increase in APT's through-system activities primarily associated with increased prices.
Partially offset by:
• a $12.6 million increase in operation and maintenance expense primarily attributable to in-line inspection spending.
• a $4.4 million increase in depreciation and property tax expenses associated with increased capital investments.
• a $3.4 million decrease in other revenues due to a nonrecurring retention gas sale in the prior year.
Liquidity and Capital Resources
The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. Additionally, we have a $1.5 billion commercial paper program and four committed revolving credit facilities with $2.5 billion in total availability from third-party lenders. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company's desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis.
We have a shelf registration statement on file with the Securities and Exchange Commission (SEC) that allows us to issue up to $5.0 billion in common stock and/or debt securities. As of December 31, 2022, $1.4 billion of securities were available for issuance under the shelf registration statement, which expires June 29, 2024.
We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of $1.0 billion (including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity sales program), which expires June 29, 2024. As of December 31, 2022, $281.9 million of equity was available for issuance under this ATM equity sales program. Additionally, as of
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December 31, 2022, we had $754.9 million in available proceeds from outstanding forward sale agreements. Additional details are summarized in Note 7 to the unaudited condensed consolidated financial statements.
The following table summarizes our existing forward starting interest rate swaps as of December 31, 2022.
Planned Debt Issuance Date Amount Hedged Effective Interest Rate
(In thousands)
Fiscal 2024 $ 450,000 1.80 %
Fiscal 2025 600,000 1.75 %
Fiscal 2026 300,000 2.16 %
$ 1,350,000
The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditure program for the remainder of fiscal year 2023. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary.
On March 9, 2023, $2.2 billion in long-term notes issued to pay for gas costs incurred during Winter Storm Uri will mature. We had anticipated paying off these notes prior to their maturity primarily using net proceeds from a Texas statewide securitization program that was authorized by the Texas Legislature in 2021. We currently anticipate this process will not be completed prior to March 9, 2023. Therefore, we currently anticipate using a combination of a syndicated bank term loan, borrowings on our credit facilities and cash to pay off these notes.
The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as of December 31, 2022, September 30, 2022 and December 31, 2021:
December 31, 2022 September 30, 2022 December 31, 2021
(In thousands, except percentages)
Short-term debt $ — — % $ 184,967 1.1 % $ — — %
Long-term debt (1) 8,753,279 47.1 % 7,962,104 45.3 % 7,956,554 49.0 %
Shareholders’ equity (2) 9,836,274 52.9 % 9,419,091 53.6 % 8,289,545 51.0 %
Total $ 18,589,553 100.0 % $ 17,566,162 100.0 % $ 16,246,099 100.0 %
(1) Inclusive of our finance leases.
(2) Excluding the $2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri, our equity capitalization ratio was 60.0% at December 31, 2022, 61.3% at September 30, 2022 and 59.0% at December 31, 2021.
Cash Flows
Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.
Cash flows from operating, investing and financing activities for the three months ended December 31, 2022 and 2021 are presented below.
Three Months Ended December 31
2022 2021 Change
(In thousands)
Total cash provided by (used in)
Operating activities $ 188,900 $ 61,824 $ 127,076
Investing activities (792,511) (679,748) (112,763)
Financing activities 723,654 765,206 (41,552)
Change in cash and cash equivalents 120,043 147,282 (27,239)
Cash and cash equivalents at beginning of period 51,554 116,723 (65,169)
Cash and cash equivalents at end of period $ 171,597 $ 264,005 $ (92,408)
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Cash flows from operating activities
For the three months ended December 31, 2022, we generated cash flow from operating activities of $188.9 million compared with $61.8 million for the three months ended December 31, 2021. Operating cash flow increased $127.1 million primarily due to working capital changes, including the timing of payments for natural gas purchases and deferred gas cost recoveries and the positive effects of successful rate case outcomes achieved in fiscal 2022.
Cash flows from investing activities
Our capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 88 percent of our capital spending has been committed to improving the safety and reliability of our system.
For the three months ended December 31, 2022, cash used for investing activities was $792.5 million compared to $679.7 million for the three months ended December 31, 2021. Capital spending increased $111.5 million, which was primarily the result of a $105.3 million increase in our pipeline and storage segment due to increased spending for pipeline system safety and reliability in Texas.
Cash flows from financing activities
For the three months ended December 31, 2022, our financing activities provided $723.7 million of cash compared with $765.2 million of cash provided by financing activities in the prior-year period.
In the three months ended December 31, 2022, we received approximately $1.0 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $500 million of 5.75% senior notes due fiscal 2053 and $300 million of 5.45% senior notes due fiscal 2033, and received net proceeds from the offering, after the underwriting discount and offering expenses, of $789.4 million. Additionally, during the three months ended December 31, 2022, we settled 2,114,488 shares that had been sold on a forward basis for net proceeds of $220.0 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes. Cash dividends increased due to an 8.8 percent increase in our dividend rate and an increase in shares outstanding.
In the three months ended December 31, 2021, we received approximately $0.9 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $600 million of 2.85% senior notes due 2052 and received net proceeds from the offering, after the underwriting discount and offering expenses, of $589.8 million. Additionally, during the three months ended December 31, 2021, we settled 2,689,327 shares that had been sold on a forward basis for net proceeds of $261.9 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes. Cash dividends increased due to an 8.8 percent increase in our dividend rate and an increase in shares outstanding.
The following table summarizes our share issuances for the three months ended December 31, 2022 and 2021:
Three Months Ended December 31
2022 2021
Shares issued:
Direct Stock Purchase Plan 16,142 20,983
1998 Long-Term Incentive Plan 111,953 275,212
Retirement Savings Plan and Trust 16,580 19,805
Equity Issuance 2,114,488 2,689,327
Total shares issued 2,259,163 3,005,327
Credit Ratings
Our credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including but not limited to, debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the quality of our management and business strategy, the risks associated with our businesses and the regulatory structures that govern our rates in the states where we operate.
Our debt is rated by two rating agencies: Standard & Poor’s Corporation (S&P) and Moody’s Investors Service (Moody’s). In November 2022, S&P revised our outlook from negative to stable. As of December 31, 2022, our outlook and current debt ratings, which are all considered investment grade are as follows:
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S&P Moody’s
Senior unsecured long-term debt A- A1
Short-term debt A-2 P-1
Outlook Stable Stable
A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the two credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings.
A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating is AAA for S&P and Aaa for Moody’s. The lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody’s. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independently of any other rating. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant.
Debt Covenants
We were in compliance with all of our debt covenants as of December 31, 2022. Our debt covenants are described in greater detail in Note 6 to the unaudited condensed consolidated financial statements.
Contractual Obligations and Commercial Commitments
Except as noted in Note 10 to the unaudited condensed consolidated financial statements, there were no significant changes in our contractual obligations and commercial commitments during the three months ended December 31, 2022.
Risk Management Activities
In our distribution and pipeline and storage segments, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by periodically entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
The following table shows the components of the change in fair value of our financial instruments for the three months ended December 31, 2022 and 2021:
Three Months Ended December 31
2022 2021
(In thousands)
Fair value of contracts at beginning of period $ 377,862 $ 225,417
Contracts realized/settled 6,322 22,601
Fair value of new contracts (1,693) 1,184
Other changes in value (6,675) (129,284)
Fair value of contracts at end of period 375,816 119,918
Netting of cash collateral — —
Cash collateral and fair value of contracts at period end $ 375,816 $ 119,918
The fair value of our financial instruments at December 31, 2022 is presented below by time period and fair value source:
Fair Value of Contracts at December 31, 2022
Maturity in Years
Total
Less Greater Fair
Source of Fair Value Than 1 1-3 4-5 Than 5 Value
(In thousands)
Prices actively quoted $ 100,646 $ 275,170 $ — $ — $ 375,816
Prices based on models and other valuation methods — — — — —
Total Fair Value $ 100,646 $ 275,170 $ — $ — $ 375,816
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OPERATING STATISTICS AND OTHER INFORMATION
The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three months ended December 31, 2022 and 2021.
Distribution Sales and Statistical Data
Three Months Ended December 31
2022 2021
METERS IN SERVICE, end of period
Residential 3,167,556 3,120,873
Commercial 282,644 282,155
Industrial 1,644 1,653
Public authority and other 8,162 8,248
Total meters 3,460,006 3,412,929
INVENTORY STORAGE BALANCE — Bcf 63.7 70.5
SALES VOLUMES — MMcf (1)
Gas sales volumes
Residential 58,540 37,834
Commercial 30,508 23,008
Industrial 8,908 7,073
Public authority and other 2,122 1,630
Total gas sales volumes 100,078 69,545
Transportation volumes 42,444 40,315
Total throughput 142,522 109,860
Pipeline and Storage Operations Sales and Statistical Data
Three Months Ended December 31
2022 2021
CUSTOMERS, end of period
Industrial 95 95
Other 209 202
Total 304 297
INVENTORY STORAGE BALANCE — Bcf 1.1 1.4
PIPELINE TRANSPORTATION VOLUMES — MMcf (1) 206,244 181,468
Note to preceding tables:
(1) Sales and transportation volumes reflect segment operations, including intercompany sales and transportation amounts.
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding our quantitative and qualitative disclosures about market risk are disclosed in Item 7A in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes in our quantitative and qualitative disclosures about market risk.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022 to provide reasonable assurance that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, including a reasonable level of assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We did not make any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of the fiscal year ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1 . Legal Proceedings
During the three months ended December 31, 2022, except as noted in Note 10 to the unaudited condensed consolidated financial statements, there were no material changes in the status of the litigation and other matters that were disclosed in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. We continue to believe that the final outcome of such litigation and other matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A . Risk Factors
There were no material changes from the risk factors disclosed under the heading “Risk Factors” in Item 1A in the Annual Report on Form 10-K for the year ended September 30, 2022.
Item 6. Exhibits
The following exhibits are filed as part of this Quarterly Report.
Page Number or
Exhibit Incorporation by
Number Description Reference to
3.1 Restated Articles of Incorporation of Atmos Energy Corporation - Texas (As Amended Effective February 3, 2010) Exhibit 3.1 to Form 10-Q dated March 31, 2010 (File No. 1-10042)
3.2 Restated Articles of Incorporation of Atmos Energy Corporation - Virginia (As Amended Effective February 3, 2010) Exhibit 3.2 to Form 10-Q dated March 31, 2010 (File No. 1-10042)
3.3 Amended and Restated Bylaws of Atmos Energy Corporation (as of February 5, 2019) Exhibit 3.1 to Form 8-K dated February 5, 2019 (File No. 1-10042)
4.1(a) Officers' Certificate dated October 3, 2022 Exhibit 4.1 to Form 8-K dated October 3, 2022 (File No. 1-10042)
4.1(b) Global Security for the 5.450% Senior Notes due 2032 Exhibit 4.2 to Form 8-K dated October 3, 2022 (File No. 1-10042)
4.1(c) Global Security for the 5.750% Senior Notes due 2052 Exhibit 4.3 to Form 8-K dated October 3, 2022 (File No. 1-10042)
15 Letter regarding unaudited interim financial information
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications*
101.INS XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
* These certifications, which were made pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer and Chief Financial Officer, furnished as Exhibit 32 to this Quarterly Report on Form 10-Q, will not be deemed to be filed with the Commission or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
A TMOS E NERGY C ORPORATION
(Registrant)
By: /s/ CHRISTOPHER T. FORSYTHE
Christopher T. Forsythe
Senior Vice President and Chief Financial Officer
(Duly authorized signatory)
Date: