QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2021
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 Corporation
(Exact name of registrant as specified in its charter)
Texas
and
Virginia
75-1743247
(State or other jurisdiction of incorporation or organization)
(IRS employer 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. YesþNo ¨
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). Yesþ 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 ☐Noþ
Number of shares outstanding of each of the issuer’s classes of common stock, as of February 4, 2022.
Class
Shares Outstanding
Common stock
No Par Value
135,432,277
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
LIBOR
London Interbank Offered Rate
Mcf
Thousand cubic feet
MMcf
Million cubic feet
Moody’s
Moody’s Investors Services, Inc.
NTSB
National Transportation Safety Board
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
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, 2021
September 30, 2021
(Unaudited)
(In thousands, except share data)
ASSETS
Property, plant and equipment
$
18,573,857
$
17,885,098
Less accumulated depreciation and amortization
2,847,066
2,821,128
Net property, plant and equipment
15,726,791
15,063,970
Current assets
Cash and cash equivalents
264,005
116,723
Accounts receivable, net (See Note 5)
514,333
342,967
Gas stored underground
220,279
178,116
Other current assets (See Note 8)
2,275,588
2,200,909
Total current assets
3,274,205
2,838,715
Goodwill
731,257
731,257
Deferred charges and other assets (See Note 8)
813,531
974,720
$
20,545,784
$
19,608,662
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, 2021 — 135,425,081 shares; September 30, 2021 — 132,419,754 shares
$
677
$
662
Additional paid-in capital
5,293,541
5,023,751
Accumulated other comprehensive income
23,856
69,803
Retained earnings
2,971,471
2,812,673
Shareholders’ equity
8,289,545
7,906,889
Long-term debt
5,555,177
4,930,205
Total capitalization
13,844,722
12,837,094
Current liabilities
Accounts payable and accrued liabilities
398,431
423,222
Other current liabilities
626,684
686,681
Current maturities of long-term debt
2,401,377
2,400,452
Total current liabilities
3,426,492
3,510,355
Deferred income taxes
1,744,648
1,705,809
Regulatory excess deferred taxes
508,731
549,227
Regulatory cost of removal obligation
474,695
468,688
Deferred credits and other liabilities
546,496
537,489
$
20,545,784
$
19,608,662
See accompanying notes to condensed consolidated financial statements.
3
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended December 31
2021
2020
(Unaudited) (In thousands, except per share data)
Operating revenues
Distribution segment
$
972,422
$
876,650
Pipeline and storage segment
162,918
159,713
Intersegment eliminations
(122,554)
(121,883)
Total operating revenues
1,012,786
914,480
Purchased gas cost
Distribution segment
496,799
411,072
Pipeline and storage segment
(3,411)
(1,244)
Intersegment eliminations
(122,225)
(121,568)
Total purchased gas cost
371,163
288,260
Operation and maintenance expense
159,110
138,643
Depreciation and amortization expense
127,856
115,285
Taxes, other than income
78,796
73,452
Operating income
275,861
298,840
Other non-operating income
8,702
6,072
Interest charges
19,851
22,010
Income before income taxes
264,712
282,902
Income tax expense
15,503
65,224
Net income
$
249,209
$
217,678
Basic net income per share
$
1.86
$
1.71
Diluted net income per share
$
1.86
$
1.71
Cash dividends per share
$
0.680
$
0.625
Basic weighted average shares outstanding
133,682
127,034
Diluted weighted average shares outstanding
133,689
127,034
Net income
$
249,209
$
217,678
Other comprehensive income (loss), net of tax
Net unrealized holding losses on available-for-sale securities, net of tax of $20 and $18
(69)
(63)
Cash flow hedges:
Amortization and unrealized gain (loss) on interest rate agreements, net of tax of $(13,260) and $17,395
(45,878)
60,184
Total other comprehensive income (loss)
(45,947)
60,121
Total comprehensive income
$
203,262
$
277,799
See accompanying notes to condensed consolidated financial statements.
4
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
2021
2020
(Unaudited) (In thousands)
Cash Flows From Operating Activities
Net income
$
249,209
$
217,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
127,856
115,285
Deferred income taxes
11,813
64,587
Other
(12,689)
(2,976)
Net assets / liabilities from risk management activities
(8,834)
(816)
Net change in other operating assets and liabilities
(305,531)
(236,689)
Net cash provided by operating activities
61,824
157,069
Cash Flows From Investing Activities
Capital expenditures
(684,180)
(456,809)
Debt and equity securities activities, net
2,374
511
Other, net
2,058
2,706
Net cash used in investing activities
(679,748)
(453,592)
Cash Flows From Financing Activities
Net proceeds from equity offering
261,943
216,002
Issuance of common stock through stock purchase and employee retirement plans
3,918
4,007
Proceeds from issuance of long-term debt
596,142
597,390
Cash dividends paid
(90,411)
(79,023)
Debt issuance costs
(6,386)
(5,062)
Net cash provided by financing activities
765,206
733,314
Net increase in cash and cash equivalents
147,282
436,791
Cash and cash equivalents at beginning of period
116,723
20,808
Cash and cash equivalents at end of period
$
264,005
$
457,599
See accompanying notes to condensed consolidated financial statements.
5
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2021
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 over three million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at December 31, 2021, 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, 2021. 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, 2021. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2021 are not indicative of our results of operations for the full 2022 fiscal year, which ends September 30, 2022.
Except as described in Note 6 and Note 8 to the unaudited condensed consolidated financial statements, 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, 2021.
Recently issued accounting pronouncements
In November 2021, the Financial Accounting Standards Board (FASB) issued guidance which will require disclosure about government assistance in the notes to the financial statements. The amendment requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy, including information about the nature of the transactions and the related accounting policy used to account for the transactions, the line items on the balance sheet and income statement that are affected by the transactions and the significant terms and conditions of the transactions, including commitments and contingencies. The amendment is effective for us beginning October 1, 2022; however, we elected to adopt this amendment during the first quarter of fiscal 2022 as permitted by the guidance. As the guidance is related only to disclosures in the notes to the financial statements, there will be no impact on our financial position, results of operations or cash flows.
In March 2020, the FASB issued optional guidance which will ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the cessation of the London Interbank Offered Rate (LIBOR). The amendments can be elected immediately, as of March 12, 2020, through December 31, 2022. We are currently evaluating if we will apply the optional guidance as we assess the impact of the cessation of LIBOR on our current contracts and hedging relationships and the potential impact on our financial position, results of operations and cash flows.
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
6
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, 2021 and September 30, 2021 included the following:
December 31, 2021
September 30, 2021
(In thousands)
Regulatory assets:
Pension and postretirement benefit costs
$
41,327
$
45,922
Infrastructure mechanisms (1)
166,560
222,795
Winter Storm Uri incremental costs (2)
2,106,840
2,100,728
Deferred gas costs
84,014
66,395
Regulatory excess deferred taxes
48,873
45,370
Recoverable loss on reacquired debt
3,655
3,789
Deferred pipeline record collection costs
33,748
32,099
Other
18,222
4,343
$
2,503,239
$
2,521,441
Regulatory liabilities:
Regulatory excess deferred taxes
$
667,882
$
705,084
Regulatory cost of removal obligation
547,779
541,511
Deferred gas costs
3,988
52,553
Asset retirement obligation
18,373
18,373
APT annual adjustment mechanism
31,815
31,110
Pension and postretirement benefit costs
54,786
56,201
Other
20,747
19,363
$
1,345,370
$
1,424,195
(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 subject to securitization incurred during Winter Storm Uri and permissible 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, 2021.
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, 2021.
Income statements and capital expenditures for the three months ended December 31, 2021 and 2020 by segment are presented in the following tables:
7
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
Three Months Ended December 31, 2020
Distribution
Pipeline and Storage
Eliminations
Consolidated
(In thousands)
Operating revenues from external parties
$
875,887
$
38,593
$
—
$
914,480
Intersegment revenues
763
121,120
(121,883)
—
Total operating revenues
876,650
159,713
(121,883)
914,480
Purchased gas cost
411,072
(1,244)
(121,568)
288,260
Operation and maintenance expense
108,802
30,156
(315)
138,643
Depreciation and amortization expense
82,870
32,415
—
115,285
Taxes, other than income
64,352
9,100
—
73,452
Operating income
209,554
89,286
—
298,840
Other non-operating income
835
5,237
—
6,072
Interest charges
10,712
11,298
—
22,010
Income before income taxes
199,677
83,225
—
282,902
Income tax expense
45,985
19,239
—
65,224
Net income
$
153,692
$
63,986
$
—
$
217,678
Capital expenditures
$
306,016
$
150,793
$
—
$
456,809
Balance sheet information at December 31, 2021 and September 30, 2021 by segment is presented in the following tables:
8
December 31, 2021
Distribution
Pipeline and Storage
Eliminations
Consolidated
(In thousands)
Property, plant and equipment, net
$
11,676,614
$
4,050,177
$
—
$
15,726,791
Total assets
$
19,778,943
$
4,309,629
$
(3,542,788)
$
20,545,784
September 30, 2021
Distribution
Pipeline and Storage
Eliminations
Consolidated
(In thousands)
Property, plant and equipment, net
$
11,232,649
$
3,831,321
$
—
$
15,063,970
Total assets
$
18,847,266
$
4,076,844
$
(3,315,448)
$
19,608,662
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, 2021 and 2020 are calculated as follows:
Three Months Ended December 31
2021
2020
(In thousands, except per share amounts)
Basic Earnings Per Share
Net income
$
249,209
$
217,678
Less: Income allocated to participating securities
166
151
Income available to common shareholders
$
249,043
$
217,527
Basic weighted average shares outstanding
133,682
127,034
Net income per share — Basic
$
1.86
$
1.71
Diluted Earnings Per Share
Income available to common shareholders
$
249,043
$
217,527
Effect of dilutive shares
—
—
Income available to common shareholders
$
249,043
$
217,527
Basic weighted average shares outstanding
133,682
127,034
Dilutive shares
7
—
Diluted weighted average shares outstanding
133,689
127,034
Net income per share - Diluted
$
1.86
$
1.71
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, 2021. 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, 2021 and 2020.
9
Three Months Ended December 31, 2021
Three Months Ended December 31, 2020
Distribution
Pipeline and Storage
Distribution
Pipeline and Storage
(In thousands)
Gas sales revenues:
Residential
$
575,841
$
—
$
591,834
$
—
Commercial
250,761
—
208,947
—
Industrial
48,681
—
24,708
—
Public authority and other
15,192
—
13,062
—
Total gas sales revenues
890,475
—
838,551
—
Transportation revenues
27,869
163,859
27,767
164,761
Miscellaneous revenues
2,599
6,543
2,396
5,148
Revenues from contracts with customers
920,943
170,402
868,714
169,909
Alternative revenue program revenues (1)
50,986
(7,484)
7,441
(10,196)
Other revenues
493
—
495
—
Total operating revenues
$
972,422
$
162,918
$
876,650
$
159,713
(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 regulatorily determined 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. The receivable balances are short term and generally do not extend beyond one month. To minimize credit risk, we assess the credit worthiness of new customers, require deposits where necessary, assess late fees, pursue collection activities and disconnect service for nonpayment. After disconnection, accounts are written off when deemed uncollectible.
Our policy related to the accounting for our 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, 2021. During the three months ended December 31, 2021, there were no material changes to this policy. Rollforwards of our allowance for uncollectible accounts for the three months ended December 31, 2021 and 2020 are presented in the table below. The allowance excludes the gas cost portion of customers’ bills for approximately 79 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, 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
Three Months Ended December 31, 2020
(In thousands)
Beginning balance, September 30, 2020
$
29,949
Current period provisions
6,937
Write-offs charged against allowance
(2,288)
Recoveries of amounts previously written off
491
Ending balance, December 31, 2020
$
35,089
10
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, 2021. Other than as described below, there were no material changes in the terms of our debt instruments during the three months ended December 31, 2021.
Long-term debt at December 31, 2021 and September 30, 2021 consisted of the following:
December 31, 2021
September 30, 2021
(In thousands)
Unsecured 0.625% Senior Notes, due 2023
$
1,100,000
$
1,100,000
Unsecured 3.00% Senior Notes, due 2027
500,000
500,000
Unsecured 2.625% Senior Notes, due 2029
300,000
300,000
Unsecured 1.50% Senior Notes, due 2031
600,000
600,000
Unsecured 5.95% Senior Notes, due 2034
200,000
200,000
Unsecured 5.50% Senior Notes, due 2041
400,000
400,000
Unsecured 4.15% Senior Notes, due 2043
500,000
500,000
Unsecured 4.125% Senior Notes, due 2044
750,000
750,000
Unsecured 4.30% Senior Notes, due 2048
600,000
600,000
Unsecured 4.125% Senior Notes, due 2049
450,000
450,000
Unsecured 3.375% Senior Notes, due 2049
500,000
500,000
Unsecured 2.85% Senior Notes, due 2052
600,000
—
Floating-rate term loan, due April 2022
200,000
200,000
Floating-rate Senior Notes, due 2023
1,100,000
1,100,000
Medium-term note Series A, 1995-1, 6.67%, due 2025
10,000
10,000
Unsecured 6.75% Debentures, due 2028
150,000
150,000
Finance lease obligations
52,873
18,739
Total long-term debt
8,012,873
7,378,739
Less:
Original issue discount on unsecured senior notes and debentures
6,529
2,811
Debt issuance cost
49,790
45,271
Current maturities
2,401,377
2,400,452
$
5,555,177
$
4,930,205
On October 1, 2021, we completed a public offering of $600 million of 2.85% senior notes due 2052, with an effective interest rate of 2.58%, after giving effect to the offering costs and settlement of our interest rate swaps. The net proceeds from the offering, after the underwriting discount and offering expenses, of $589.8 million, were used for general corporate purposes.
On January 14, 2022, we completed a public offering of $200 million of 2.625% senior notes due 2029, with an effective interest rate of 2.55%, after giving effect to the estimated offering costs. The net proceeds from the offering, after the underwriting discount and estimated offering expenses, of approximately $200 million were used to repay our $200 million floating-rate term loan on January 18, 2022.
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, 2026. This facility bears interest at a base rate or at a LIBOR-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 LIBOR-based advances, based on the Company’s credit ratings. Additionally, the facility
11
contains a $250 million accordion feature, which provides the opportunity to increase the total committed loan to $1.75 billion. At December 31, 2021 and September 30, 2021, there were no amounts outstanding under our commercial paper program.
We have a $900 million three-year unsecured revolving credit facility, which expires March 31, 2024 and is used to provide additional working capital funding. This facility bears interest at a base rate or at a LIBOR-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 LIBOR-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, 2021, there were no borrowings outstanding under this facility.
Additionally, we have a $50 million 364-day unsecured facility, which will expire March 31, 2022 and is used to provide working capital funding. There were no borrowings outstanding under this facility as of December 31, 2021.
Finally, we have a $50 million 364-day unsecured revolving credit facility, which was renewed April 29, 2021 and is used to issue letters of credit and to provide working capital funding. At December 31, 2021, 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, 2021, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 50 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, 2021. 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, 2021 and 2020.
Common stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Total
Number of Shares
Stated 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
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Common stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Total
Number of Shares
Stated Value
(In thousands, except share and per share data)
Balance, September 30, 2020
125,882,477
$
629
$
4,377,149
$
(57,589)
$
2,471,014
$
6,791,203
Net income
—
—
—
—
217,678
217,678
Other comprehensive income
—
—
—
60,121
—
60,121
Cash dividends ($0.625 per share)
—
—
—
—
(79,023)
(79,023)
Common stock issued:
Public and other stock offerings
2,126,118
11
219,998
—
—
220,009
Stock-based compensation plans
144,366
1
3,167
—
—
3,168
Balance, December 31, 2020
128,152,961
$
641
$
4,600,314
$
2,532
$
2,609,669
$
7,213,156
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. As of the date of this report, $3.2 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, 2021, we executed forward sales under our ATM equity sales program with various forward sellers who borrowed and sold 2,712,043 shares of our common stock at an aggregate price of $260.2 million. During the three months ended December 31, 2021, we also settled forward sale agreements with respect to 2,689,327 shares that had been borrowed and sold by various forward sellers under the ATM program for net proceeds of $261.9 million. As of December 31, 2021, $499.7 million of equity was available for issuance under the ATM program. Additionally, we had $294.7 million in available proceeds from outstanding forward sale agreements, as detailed below.
Maturity
Shares Available
Net Proceeds Available (In thousands)
Forward Price
September 30, 2022
1,142,291
$
108,348
$
94.85
November 30, 2022
1,319,733
124,680
$
94.47
June 30, 2023
632,416
61,657
$
97.49
Total
3,094,440
$
294,685
$
95.23
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 as they are amortized. 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).
Available- for-Sale Securities
Interest Rate Agreement Cash Flow 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
13
Available- for-Sale Securities
Interest Rate Agreement Cash Flow Hedges
Total
(In thousands)
September 30, 2020
$
238
$
(57,827)
$
(57,589)
Other comprehensive income (loss) before reclassifications
(63)
59,042
58,979
Amounts reclassified from accumulated other comprehensive income
—
1,142
1,142
Net current-period other comprehensive income (loss)
(63)
60,184
60,121
December 31, 2020
$
175
$
2,357
$
2,532
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, 2021, 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, 2021, we have recorded a $2.1 billion regulatory asset for incremental costs, including carrying costs, incurred in Kansas ($89.4 million) and Texas ($2,017.5 million).
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 in 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, 2021.
Kansas
On September 14, 2021, we filed with the KCC an application to securitize $94.1 million of extraordinary gas costs incurred during Winter Storm Uri. This amount also includes an estimate of penalties, carrying costs and administrative costs that we expect to incur in connection with the resolution of this filing. A procedural schedule has been established that will result in a final Commission order in the third fiscal quarter of 2022. Because we intend to securitize these costs and recover 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, 2021.
Texas
We filed our application with the RRC on July 30, 2021 to securitize $2.0 billion of extraordinary gas costs incurred during Winter Storm Uri. This amount also included an estimate of carrying costs and administrative costs that we expect to incur in connection with the resolution of this filing.
On November 10, 2021, the RRC issued a Final Determination of the Regulatory Asset (the Final Determination). The Final Determination stipulates that all of our gas and storage costs were prudently incurred. Additionally, the Final Determination permits us to defer, through December 31, 2021 our actual carrying costs associated with the $2.2 billion of incremental financing issued in March 2021 and to recover approximately $0.6 million of our administrative costs.
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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. As required by the Financing Order, the Texas Public Financing Authority has 180 days to issue the securitization bonds. Issuance may occur after 180 days if necessary based on bond market conditions, the receipt of necessary approvals and the timely receipt of necessary financial disclosure information from each participating gas utility. Upon receipt of the securitization funds we will repay the $2.2 billion in public notes issued to finance the incremental gas costs incurred during Winter Storm Uri. Accordingly, we have recorded the regulatory asset for Texas in other current assets and these notes as current maturities of long-term debt as of December 31, 2021.
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, 2021 and 2020 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
2021
2020
2021
2020
(In thousands)
Components of net periodic pension cost:
Service cost
$
4,323
$
4,612
$
2,559
$
4,306
Interest cost (1)
5,063
5,028
2,683
2,660
Expected return on assets (1)
(7,383)
(6,978)
(3,312)
(2,614)
Amortization of prior service cost (credit) (1)
(58)
(58)
(3,309)
43
Amortization of actuarial (gain) loss (1)
1,951
3,172
—
—
Net periodic pension cost
$
3,896
$
5,776
$
(1,379)
$
4,395
(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, 2021.
For the three months ended December 31, 2021 we contributed $4.0 million to our postretirement medical plans. We anticipate contributing a total of between $15 million and $25 million to our postretirement plans during fiscal 2022.
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 maintain liability insurance for various risks associated with the operation of our natural gas pipelines and facilities, including for property damage and bodily injury. These liability insurance policies generally require us to be responsible for the first $1.0 million (self-insured retention) of each incident.
The National Transportation Safety Board (NTSB) held a public meeting on January 12, 2021 to determine the probable cause of the incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. At the meeting, the Board deliberated and voted on proposed findings of fact, a probable cause statement, and safety recommendations. On February 8, 2021, the NTSB issued its final report that included an Executive Summary, Findings, Probable Cause, and Recommendations. Also on February 8, 2021, safety recommendations letters were distributed to recommendation recipients, including Atmos Energy. Atmos Energy timely provided a written response on May 7, 2021. Following the release of the NTSB’s final report, the Railroad Commission of Texas (RRC) completed its safety evaluation related to the same incident finding four alleged violations and initiated an enforcement proceeding to pursue administrative
15
penalties totaling $1.6 million. Atmos Energy is working with the RRC to resolve the alleged violations and satisfy the administrative penalties.
The NTSB is investigating a worksite accident that occurred in Farmersville, Texas on June 28, 2021 that resulted in two fatalities and injuries to two others. Together with the Railroad Commission of Texas and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with all parties to help determine the cause of this incident. On July 16, 2021 and July 28, 2021, two civil actions were filed in Dallas, Texas against Atmos Energy and one of its contractors in response to the accident.
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 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, 2021. There were no material changes to the purchase commitments for the three months ended December 31, 2021.
Rate Regulatory Proceedings
As of December 31, 2021, 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, 2021.
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, 2022 and 2021, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended December 31, 2021 and 2020 were 5.9% and 23.1%. 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.
Beginning in the second quarter of fiscal 2021 and through the end of the fiscal year, we reached agreement with regulators in various states to begin refunding excess deferred tax liabilities generally over a three to five year period. This increased the refund of excess deferred tax liabilities to customers in the current year period and significantly reduced the effective tax rate for the three month period ended December 31, 2021 compared to the prior year period.
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 state tax legislative changes in Kansas and Louisiana. Currently, the regulatory excess net deferred tax liability of $619.0 million is being returned over various periods. Of this amount, $497.9 million, is being returned to customers over 35 - 60 months. An additional $106.0 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, 2021 and September 30, 2021, $159.2 million and $155.9 million is recorded in other current liabilities.
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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, 2021. During the three months ended December 31, 2021, 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 2021-2022 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we anticipate hedging approximately 42 percent, or 23.9 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.
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, 2021, 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, 2021, we had 12,982 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, 2021 and September 30, 2021. 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, for December 31, 2021 and September 30, 2021, no gross amounts and no cash collateral were netted within our consolidated balance sheet.
17
December 31, 2021
Balance Sheet Location
Assets
Liabilities
(In thousands)
Designated As Hedges:
Interest rate contracts
Other current assets / Other current liabilities
$
61,867
$
(3,439)
Interest rate contracts
Deferred charges and other assets / Deferred credits and other liabilities
67,553
(16,609)
Total
129,420
(20,048)
Not Designated As Hedges:
Commodity contracts
Other current assets / Other current liabilities
10,342
(1,572)
Commodity contracts
Deferred charges and other assets / Deferred credits and other liabilities
1,790
(14)
Total
12,132
(1,586)
Gross / Net Financial Instruments
$
141,552
$
(21,634)
September 30, 2021
Balance Sheet Location
Assets
Liabilities
(In thousands)
Designated As Hedges:
Interest rate contracts
Deferred charges and other assets / Deferred credits and other liabilities
$
169,469
$
—
Total
169,469
—
Not Designated As Hedges:
Commodity contracts
Other current assets / Other current liabilities
55,073
(5,269)
Commodity contracts
Deferred charges and other assets / Deferred credits and other liabilities
6,144
—
Total
61,217
(5,269)
Gross / Net Financial Instruments
$
230,686
$
(5,269)
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 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, 2021 and 2020 was $1.0 million and $1.5 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, 2021 and 2020. 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.
18
Three Months Ended December 31
2021
2020
(In thousands)
Increase (decrease) in fair value:
Interest rate agreements
$
(46,622)
$
59,042
Recognition of losses in earnings due to settlements:
Interest rate agreements
744
1,142
Total other comprehensive income (loss) from hedging, net of tax
$
(45,878)
$
60,184
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, 2021, we had $61.0 million of net realized losses 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 losses 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 2052. 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
$
(2,976)
Thereafter
(57,994)
Total
$
(60,970)
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, 2021. During the three months ended December 31, 2021, 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, 2021.
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
19
December 31, 2021 and September 30, 2021. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
Quoted Prices in Active Markets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)(1)
Significant Other Unobservable Inputs (Level 3)
Netting and Cash Collateral
December 31, 2021
(In thousands)
Assets:
Financial instruments
$
—
$
141,552
$
—
$
—
$
141,552
Debt and equity securities
Registered investment companies
31,805
—
—
—
31,805
Bond mutual funds
34,100
—
—
—
34,100
Bonds (2)
—
35,792
—
—
35,792
Money market funds
—
5,064
—
—
5,064
Total debt and equity securities
65,905
40,856
—
—
106,761
Total assets
$
65,905
$
182,408
$
—
$
—
$
248,313
Liabilities:
Financial instruments
$
—
$
21,634
$
—
$
—
$
21,634
Quoted Prices in Active Markets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)(1)
Significant Other Unobservable Inputs (Level 3)
Netting and Cash Collateral
September 30, 2021
(In thousands)
Assets:
Financial instruments
$
—
$
230,686
$
—
$
—
$
230,686
Debt and equity securities
Registered investment companies
35,175
—
—
—
35,175
Bond mutual funds
34,298
—
—
—
34,298
Bonds (2)
—
35,655
—
—
35,655
Money market funds
—
2,943
—
—
2,943
Total debt and equity securities
69,473
38,598
—
—
108,071
Total assets
$
69,473
$
269,284
$
—
$
—
$
338,757
Liabilities:
Financial instruments
$
—
$
5,269
$
—
$
—
$
5,269
(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, 2021, 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, 2021, no allowance for credit losses was recorded for our available-for-sale debt securities. At December 31, 2021 and September 30, 2021, the amortized cost of our available-for-sale debt securities was $35.8 million and $35.6 million. At December 31, 2021, we maintained investments in bonds that have contractual maturity dates ranging from January 2022 through November 2024.
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
20
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, 2021 and September 30, 2021:
December 31, 2021
September 30, 2021
(In thousands)
Carrying Amount
$
7,960,000
$
7,360,000
Fair Value
$
8,653,665
$
8,086,136
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, 2021. During the three months ended December 31, 2021, there were no material changes in our concentration of credit risk.
21
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, 2021, the related condensed consolidated statements of comprehensive income and cash flows for the three months ended December 31, 2021 and 2020, 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, 2021, 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 12, 2021, 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, 2021, 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
February 8, 2022
22
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, 2021.
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; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; 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; adverse weather conditions; the impact of climate change; the inability to continue to hire, train and retain operational, technical and managerial personnel; 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; 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; 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; increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements; and the outbreak of COVID-19 and its impact on business and economic conditions. 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 over three million residential, commercial, public authority and industrial customers throughout our six distribution divisions, which at December 31, 2021 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.
23
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, 2021 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 three months ended December 31, 2021.
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, 2021, we recorded net income of $249.2 million, or $1.86 per diluted share, compared to net income of $217.7 million, or $1.71 per diluted share for the three months ended December 31, 2020.
The 14.5 percent year-over-year increase in net income largely reflects positive rate outcomes driven by safety and reliability spending and customer growth in our distribution segment, offset by higher spending on certain operating and maintenance expenses in both our segments due to the timing of certain activities.
During the three months ended December 31, 2021, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $24.9 million. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total rate outcomes were $68.5 million for the three months ended December 31, 2021. Additionally, as of December 31, 2021, we had ratemaking efforts in progress seeking a total increase in annual operating income of $22.0 million.
Capital expenditures for the three months ended December 31, 2021 were $684.2 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, 2021, we completed approximately $862 million of long-term debt and equity financing. As of December 31, 2021, our equity capitalization was 51.0 percent. Excluding the $2.2 billion of incremental financing issued in conjunction with Winter Storm Uri, our equity capitalization was 59.0 percent. As of December 31, 2021, we had approximately $3.1 billion in total liquidity, including cash and cash equivalents and funds available through equity forward sales agreements.
As a result of our sustained financial performance, our Board of Directors increased the quarterly dividend by 8.8 percent for fiscal 2022.
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.
24
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 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 60 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 79 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, 2021 compared with Three Months Ended December 31, 2020
Financial and operational highlights for our distribution segment for the three months ended December 31, 2021 and 2020 are presented below.
Three Months Ended December 31
2021
2020
Change
(In thousands, unless otherwise noted)
Operating revenues
$
972,422
$
876,650
$
95,772
Purchased gas cost
496,799
411,072
85,727
Operating expenses
285,126
256,024
29,102
Operating income
190,497
209,554
(19,057)
Other non-operating income
1,916
835
1,081
Interest charges
8,548
10,712
(2,164)
Income before income taxes
183,865
199,677
(15,812)
Income tax expense
4,294
45,985
(41,691)
Net income
$
179,571
$
153,692
$
25,879
Consolidated distribution sales volumes — MMcf
69,545
88,861
(19,316)
Consolidated distribution transportation volumes — MMcf
38,597
39,609
(1,012)
Total consolidated distribution throughput — MMcf
108,142
128,470
(20,328)
Consolidated distribution average cost of gas per Mcf sold
$
7.14
$
4.63
$
2.51
25
Operating income for our distribution segment decreased nine percent. During the three months ended December 31, 2021 we refunded $28.8 million more excess deferred taxes to customers in the distribution segment compared to the prior year, which reduced operating income year over year and reduced the interim effective income tax rate for this segment to 2.3% compared to 23.0% in the prior year. Additional key drivers for the change in operating income include:
•a $32.2 million increase in rate adjustments, primarily in our Mid-Tex, Louisiana and Kentucky/Mid-States Divisions.
•a $4.3 million increase in customers, primarily in our Mid-Tex Division.
Partially offset by:
•a $10.1 million increase in depreciation expense and property taxes associated with increased capital investments.
•a $3.2 million increase in pipeline maintenance and related activities.
•an $11.3 million increase in other operation and maintenance expense, primarily due to employee related costs, insurance premiums and other administrative costs.
The following table shows our operating income by distribution division, in order of total rate base, for the three months ended December 31, 2021 and 2020. 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
2021
2020
Change
(In thousands)
Mid-Tex
$
106,358
$
102,320
$
4,038
Kentucky/Mid-States
25,538
24,106
1,432
Louisiana
21,154
23,119
(1,965)
West Texas
20,874
20,047
827
Mississippi
24,700
24,634
66
Colorado-Kansas
2,815
13,230
(10,415)
Other
(10,942)
2,098
(13,040)
Total
$
190,497
$
209,554
$
(19,057)
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 2022, we implemented regulatory proceedings, resulting in a $24.9 million increase in annual operating income as summarized below. Ratemaking outcomes include the refund of excess deferred income taxes 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, 2021 were $68.5 million.
Rate Action
Annual Increase in Operating Income
(In thousands)
Annual formula rate mechanisms
$
24,881
Rate case filings
—
Other rate activity
—
$
24,881
26
The following ratemaking efforts seeking $22.0 million in increased annual operating income were in progress as of December 31, 2021:
Division
Rate Action
Jurisdiction
Operating Income (Loss) Requested
(In thousands)
Colorado-Kansas
Infrastructure Mechanism
Colorado (1)
$
2,610
Colorado-Kansas
Infrastructure Mechanism
Kansas (2)
1,829
Colorado-Kansas
Ad Valorem
Kansas (3)
(370)
Kentucky/Mid-States
Rate Case
Kentucky (4)
14,394
Kentucky/Mid-States
Infrastructure Mechanism
Kentucky
3,506
$
21,969
(1) The Colorado Public Utilities Commission approved the SSIR implementation at their December 22, 2021 meeting with rates effective January 1, 2022.
(2) The Kansas Corporation Commission approved the GSRS filing on January 27, 2022, with rates effective February 1, 2022..
(3) The Kansas Corporation Commission approved the Ad Valorem filing on January 13, 2022, with rates effective February 1, 2022.
(4) Included with the Kentucky rate case filing is the $3.5 million filing related to the annual Kentucky pipeline replacement program.
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)
(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.
27
The following annual formula rate mechanisms were approved during the three months ended December 31, 2021:
Division
Jurisdiction
Test Year Ended
Increase (Decrease) in Annual Operating Income
Effective Date
(In thousands)
2022 Filings:
Mid-Tex
Mid-Tex Cities RRM (1)
12/31/2020
$
21,673
12/01/2021
West Texas
West Texas Cities RRM (1)
12/31/2020
151
12/01/2021
Mississippi
Mississippi - SIR (1)
10/31/2022
8,354
11/01/2021
Mississippi
Mississippi - SRF (1)
10/31/2022
(5,624)
11/01/2021
Kentucky/Mid-States
Virginia - SAVE
09/30/2022
327
10/01/2021
Total 2022 Filings
$
24,881
(1) The rate change for the RRM and Mississippi filings include $33.8 million for the Mid-Tex Cities RRM filing, $3.3 million for the West Texas Cities RRM filing, $2.1 million for the Mississippi SIR filing and $4.3 million for the Mississippi SRF filing related to the refund of excess deferred income taxes that will be offset by lower income tax expense. Excluding the amounts related to the refund of excess deferred taxes, our total rate outcomes for our formulate rate mechanisms for the three months ended December 31, 2021 were $68.5 million.
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, 2021.
Other Ratemaking Activity
The Company had no other ratemaking activity during the three months ended December 31, 2021.
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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Three Months Ended December 31, 2021 compared with Three Months Ended December 31, 2020
Financial and operational highlights for our pipeline and storage segment for the three months ended December 31, 2021 and 2020 are presented below.
Operating income for our pipeline and storage segment decreased four percent. During the three months ended December 31, 2021, we refunded $10.0 million in excess deferred taxes to pipeline and storage customers, which reduced operating income year over year and reduced the interim effective income tax rate for this segment to 13.9% compared to 23.1% in the prior year. Additional drivers for the change in operating income include:
•a $14.5 million increase due to rate adjustments from the GRIP filing approved in May 2021. The increase in rates was driven by increased safety and reliability spending.
Partially offset by:
•a $5.8 million increase in system maintenance expense primarily due to spending on hydro testing.
•a $2.5 million net decrease in APT's thru-system activities primarily associated with the tightening of regional spreads driven by increased competing takeaway capacity in the Permian Basin.
•a $3.1 million increase in depreciation expense and property taxes associated with increased capital investments.
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 the date of this report, $3.2 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, 2021, $499.7 million of equity was available for issuance under this ATM equity sales program. Additionally, as of
29
December 31, 2021, we had $294.7 million in proceeds from executed forward sale agreements available through June 30, 2023. Additional details are summarized in Note 7 to the unaudited condensed consolidated financial statements.
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 2022. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary.
The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as of December 31, 2021, September 30, 2021 and December 31, 2020:
December 31, 2021
September 30, 2021
December 31, 2020
(In thousands, except percentages)
Short-term debt
$
—
—
%
$
—
—
%
$
—
—
%
Long-term debt(1)
7,956,554
49.0
%
7,330,657
48.1
%
5,125,033
41.5
%
Shareholders’ equity(2)
8,289,545
51.0
%
7,906,889
51.9
%
7,213,156
58.5
%
Total
$
16,246,099
100.0
%
$
15,237,546
100.0
%
$
12,338,189
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 59.0% at December 31, 2021 and 60.6% at September 30, 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, 2021 and 2020 are presented below.
Three Months Ended December 31
2021
2020
Change
(In thousands)
Total cash provided by (used in)
Operating activities
$
61,824
$
157,069
$
(95,245)
Investing activities
(679,748)
(453,592)
(226,156)
Financing activities
765,206
733,314
31,892
Change in cash and cash equivalents
147,282
436,791
(289,509)
Cash and cash equivalents at beginning of period
116,723
20,808
95,915
Cash and cash equivalents at end of period
$
264,005
$
457,599
$
(193,594)
Cash flows from operating activities
For the three months ended December 31, 2021, we generated cash flow from operating activities of $61.8 million compared with $157.1 million for the three months ended December 31, 2020. The $95.2 million decrease in operating cash flows reflects working capital changes, primarily due to the timing of gas cost recoveries under our purchase gas cost mechanisms partially offset by the positive effects of successful rate case outcomes achieved in fiscal 2021.
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, 2021, cash used for investing activities was $679.7 million compared to $453.6 million for the three months ended December 31, 2020. Capital spending increased $227.4 million, primarily as a result of timing of spending in our distribution and pipeline and storage segments.
Cash flows from financing activities
30
For the three months ended December 31, 2021, our financing activities provided $765.2 million of cash compared with $733.3 million of cash provided by financing activities in the prior-year period.
In the three months ended December 31, 2021, we received $851.7 million 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.
In the three months ended December 31, 2020, we received $808.3 million in net proceeds from the issuance of long-term debt and equity. The net proceeds were used primarily to support capital spending and for other general corporate purposes. Cash dividends increased due to an 8.7 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, 2021 and 2020:
Three Months Ended December 31
2021
2020
Shares issued:
Direct Stock Purchase Plan
20,983
19,918
1998 Long-Term Incentive Plan
275,212
144,366
Retirement Savings Plan and Trust
19,805
20,708
Equity Issuance
2,689,327
2,085,492
Total shares issued
3,005,327
2,270,484
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). As of December 31, 2021, our outlook and current debt ratings, which are all considered investment grade are as follows:
S&P
Moody’s
Senior unsecured long-term debt
A-
A1
Short-term debt
A-2
P-1
Outlook
Negative
Negative
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, 2021. Our debt covenants are described in greater detail in Note 6 to the unaudited condensed consolidated financial statements.
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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, 2021.
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, 2021 and 2020:
Three Months Ended December 31
2021
2020
(In thousands)
Fair value of contracts at beginning of period
$
225,417
$
78,663
Contracts realized/settled
22,601
1,332
Fair value of new contracts
1,184
87
Other changes in value
(129,284)
68,473
Fair value of contracts at end of period
119,918
148,555
Netting of cash collateral
—
—
Cash collateral and fair value of contracts at period end
$
119,918
$
148,555
The fair value of our financial instruments at December 31, 2021 is presented below by time period and fair value source:
Fair Value of Contracts at December 31, 2021
Maturity in Years
Source of Fair Value
Less Than 1
1-3
4-5
Greater Than 5
Total Fair Value
(In thousands)
Prices actively quoted
$
67,198
$
60,088
$
(7,368)
$
—
$
119,918
Prices based on models and other valuation methods
—
—
—
—
—
Total Fair Value
$
67,198
$
60,088
$
(7,368)
$
—
$
119,918
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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, 2021 and 2020.
Distribution Sales and Statistical Data
Three Months Ended December 31
2021
2020
METERS IN SERVICE, end of period
Residential
3,120,873
3,077,786
Commercial
282,155
281,840
Industrial
1,653
1,673
Public authority and other
8,248
8,323
Total meters
3,412,929
3,369,622
INVENTORY STORAGE BALANCE — Bcf
70.5
58.1
SALES VOLUMES — MMcf (1)
Gas sales volumes
Residential
37,834
53,530
Commercial
23,008
26,687
Industrial
7,073
6,651
Public authority and other
1,630
1,993
Total gas sales volumes
69,545
88,861
Transportation volumes
40,315
41,285
Total throughput
109,860
130,146
Pipeline and Storage Operations Sales and Statistical Data
Three Months Ended December 31
2021
2020
CUSTOMERS, end of period
Industrial
95
92
Other
202
217
Total
297
309
INVENTORY STORAGE BALANCE — Bcf
1.4
1.3
PIPELINE TRANSPORTATION VOLUMES — MMcf (1)
181,468
204,865
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.
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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, 2021. During the three months ended December 31, 2021, 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, 2021 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, 2022 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, 2021, 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, 2021. 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, 2021.
Item 6.
Exhibits
The following exhibits are filed as part of this Quarterly Report.
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Exhibit Number
Description
Page Number or Incorporation by Reference to
3.1
Restated Articles of Incorporation of Atmos Energy Corporation - Texas (As Amended Effective February 3, 2010)
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.
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.
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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.
