ATMOS ENERGY CORPORATION 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 endedSeptember 30, 2019 . 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: the outbreak of COVID-19 and its impact on business and economic conditions; federal, state and local regulatory and political trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the 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 inTexas ; the impact of adverse economic conditions on our customers; changes in the availability and price of 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; increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements; the inability to continue to hire, train and retain operational, technical and managerial personnel; the impact of climate change; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; 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. 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 atMarch 31, 2020 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 .
28-------------------------------------------------------------------------------- CRITICAL ACCOUNTING ESTIMATES AND POLICIES Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted inthe 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 endedSeptember 30, 2019 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 six months ended
Executive SummaryAtmos 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 six months endedMarch 31, 2020 , we recorded net income of$418.3 million , or$3.42 per diluted share, compared to net income of$372.5 million , or$3.21 per diluted share for the six months endedMarch 31, 2019 . The period-over-period increase in net income of$45.8 million , or 12 percent, largely reflects positive rate outcomes and customer growth in our distribution business. During the six months endedMarch 31, 2020 , we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of$59.2 million and had thirteen ratemaking efforts in progress atMarch 31, 2020 , seeking a total increase in annual operating income of$219.3 million . Capital expenditures for the six months endedMarch 31, 2020 increased 28 percent period over period, to$994.7 million . Over 80 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 six months endedMarch 31, 2020 , we completed the public offering of$300 million of 10-year senior notes and$500 million of 30-year senior notes and received net proceeds of$791.7 million . We also received net proceeds from the settlement of certain equity forward sale agreements of$258.0 million during the first six months of 2020. As a result of our sustained financial performance, improved cash flows and capital structure, our Board of Directors increased the quarterly dividend by 9.5 percent for fiscal 2020. COVID-19 Impact Beginning inJanuary 2020 , there has been an outbreak of the Coronavirus Disease 2019 (COVID-19 or virus), which has been declared a "pandemic" by theWorld Health Organization . During this time, we continue to provide essential services to ensure the safety and functionality of our critical infrastructure. These activities include essential service orders, third party damage prevention activities, compliance work and substantially all construction activities. As we perform these activities, we are taking precautions to provide a safe work environment for employees and customers. Our employees are practicing social distancing guidelines, wearing face coverings while working in our communities and working in smaller construction crews. We have also established a remote working protocol where possible and have suspended employee travel. Currently, approximately 95 percent of our employees are working remotely. To protect and support our customers we have implemented customer screening precautions and have safely limited when service technicians will be in customer homes and businesses. And, we have temporarily suspended disconnects for non-payment and waived late payment fees and certain reconnect fees. 29 -------------------------------------------------------------------------------- For the six months endedMarch 31, 2020 , the pandemic did not have a material impact on our operational and financial performance because mitigation efforts to contain the spread of the virus were implemented in our service territories during the last two weeks of the quarter. Approximately 70 percent of our distribution segment's fiscal year revenues are earned during the first two fiscal quarters. In our distribution segment, approximately 60 percent of our revenues from April through September relate to our residential customers and 40 percent relate to non-residential customers including commercial, industrial and transportation. Our rate design allows us to recover approximately 59 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. In our pipeline and storage segment, over 80 percent of that segment's revenues are derived from delivery services provided to our Mid-Tex Division and a limited number of other local distribution companies. The revenue earned from these services is charged to these local distribution companies and is recovered from customers through the gas cost component of distribution company bills. With respect to distribution bad debt expense, we have the ability to recover bad debt expense in our next rate filing. Filings are made annually in most of our jurisdictions. Additionally, the Company has the ability to immediately defer the gas cost component of bad debt expense on approximately 77 percent of our residential and commercial revenues. Further, sinceMarch 31, 2020 , we have received regulatory orders inLouisiana ,Mississippi ,Texas (including APT) andVirginia to defer into a regulatory asset all expenses, beyond the normal course of business, related to COVID-19, including bad debt expense. Our regulatory mechanisms continue to operate as designed and we continue to make compliance filings that impact customer rates in accordance with established procedural timelines. However, for approximately 32 percent of our customers inTexas (including theCity of Dallas ), we have voluntarily delayed implementation of new rates toSeptember 1, 2020 that were scheduled to go into effect during our fiscal third quarter. These delayed implementations will not have a material impact to our fiscal 2020 financial performance. As ofMarch 31, 2020 , our equity capitalization was 58.2 percent and we had approximately$2 billion in total liquidity, including cash and cash equivalents and funds available through our equity forward sales agreements. SinceMarch 31, 2020 , we have taken steps to ensure we have sufficient liquidity to continue to provide the essential services necessary to support the safety and functionality of our critical infrastructure. InApril 2020 , we executed a new$200 million 2-year term loan, a new$600 million 364-day credit facility and replaced our$10 million 364-day credit facility with a new$50 million 364-day credit facility. We also renewed an existing credit facility and increased the size to$50 million . As ofApril 30, 2020 , our total liquidity, including cash and cash equivalents and funds available through our equity forward sales agreements, was approximately$2.9 billion . The extent of the pandemic's effect on our future operational and financial performance will depend in large part on future developments, which are difficult to predict. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, actions that may be taken by our regulators, the development of treatments or vaccines, and the resumption of widespread economic activity. As of the date of this report, we continue to believe we remain positioned to continue modernizing our natural gas delivery network and business processes over the long-term. The following discusses the results of operations for each of our operating segments. Distribution Segment The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of this segment are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas. Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. 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: 30 -------------------------------------------------------------------------------- Kansas, West Texas October - May Tennessee October - AprilKentucky ,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 ourTexas andMississippi 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 77 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 EndedMarch 31, 2020 compared with Three Months EndedMarch 31, 2019 Financial and operational highlights for our distribution segment for the three months endedMarch 31, 2020 and 2019 are presented below. Three Months Ended March 31 2020 2019 Change (In thousands, unless otherwise noted) Operating revenues$ 933,005 $ 1,057,889 $ (124,884 ) Purchased gas cost 418,935 570,348 (151,413 ) Operating expenses 260,529 258,578 1,951 Operating income 253,541 228,963 24,578 Other non-operating income (expense) (5,191 ) 5,263 (10,454 ) Interest charges 10,797 15,896 (5,099 ) Income before income taxes 237,553 218,330 19,223 Income tax expense 50,489 46,137 4,352 Net income$ 187,064 $ 172,193 $ 14,871 Consolidated distribution sales volumes - MMcf 119,358 139,242 (19,884 ) Consolidated distribution transportation volumes - MMcf 44,512 46,190 (1,678 ) Total consolidated distribution throughput - MMcf 163,870 185,432 (21,562 ) Consolidated distribution average cost of gas per Mcf sold$ 3.51 $
4.10
Operating income for our distribution segment increased 11 percent, which primarily reflects: • a$28.6 million net increase in rate adjustments, primarily in our Mid-Tex,Mississippi ,Louisiana and West Texas Divisions. • a$4.5 million increase from customer growth primarily in our Mid-Tex Division. Partially offset by: • a$6.4 million increase in depreciation expense associated with increased capital investments. • a$2.5 million increase in employee costs as we increased
service-related headcount during fiscal 2019 to support operations in
our fastest growing service territories.
Additionally, the quarter-over-quarter change in other non-operating expense and interest charges of$5.4 million is primarily due to decreases in the fair value of our equity securities partially offset by increased capitalized interest and allowance for funds used during construction (AFUDC) primarily due to increased capital spending. 31 -------------------------------------------------------------------------------- The following table shows our operating income by distribution division, in order of total rate base, for the three months endedMarch 31, 2020 and 2019. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. Three Months Ended March 31 2020 2019 Change (In thousands) Mid-Tex$ 109,707 $ 93,131 $ 16,576 Kentucky/Mid-States 34,386 35,022 (636 ) Louisiana 31,302 32,901 (1,599 ) West Texas 23,844 20,921 2,923 Mississippi 32,243 27,110 5,133 Colorado-Kansas 18,796 19,704 (908 ) Other 3,263 174 3,089 Total$ 253,541 $ 228,963 $ 24,578 Six Months EndedMarch 31, 2020 compared with Six Months EndedMarch 31, 2019 Financial and operational highlights for our distribution segment for the six months endedMarch 31, 2020 and 2019 are presented below. Six Months Ended March 31 2020 2019 Change (In thousands, unless otherwise noted) Operating revenues$ 1,761,509 $ 1,896,724 $ (135,215 ) Purchased gas cost 816,493 1,008,080 (191,587 ) Operating expenses 511,198 490,244 20,954 Operating income 433,818 398,400 35,418 Other non-operating expense (3,237 ) (1,214 ) (2,023 ) Interest charges 27,159 34,106 (6,947 ) Income before income taxes 403,422 363,080 40,342 Income tax expense 86,601 76,502 10,099 Net income$ 316,821 $ 286,578 $ 30,243 Consolidated distribution sales volumes - MMcf 218,419 240,940 (22,521 ) Consolidated distribution transportation volumes - MMcf 85,009 87,238 (2,229 ) Total consolidated distribution throughput - MMcf 303,428 328,178 (24,750 ) Consolidated distribution average cost of gas per Mcf sold $ 3.74 $
4.18
Operating income for our distribution segment increased nine percent, which primarily reflects: • a$56.0 million net increase in rate adjustments, primarily in our Mid-Tex,Mississippi ,Louisiana and West Texas Divisions. • an$8.5 million increase from customer growth primarily in our Mid-Tex Division. Partially offset by: • a$15.6 million increase in depreciation expense and property taxes associated with increased capital investments. • a$4.3 million increase in employee costs as we increased
service-related headcount during fiscal 2019 to support operations in
our fastest growing service territories.
• a
The year-over-year change in other non-operating expense and interest charges of$4.9 million primarily reflects increased capitalized interest and AFUDC primarily due to increased capital spending, partially offset by decreases in the fair value of our equity securities and an increase in interest expense due to the issuance of long-term debt during fiscal 2020. Additionally, the increase in income tax expense is primarily a result of increases in income before income taxes as our effective income tax rate of 21.5% in the current year is consistent with 21.1% in the prior year. 32 --------------------------------------------------------------------------------
The following table shows our operating income by distribution division, in
order of total rate base, for the six months ended
Six Months Ended March 31
2020 2019 Change
(In thousands)
Mid-Tex $ 188,002 $ 165,537 $ 22,465
Kentucky/Mid-States 57,667 59,474 (1,807 )
Louisiana 55,595 55,054 541
West Texas 41,610 36,744 4,866
Mississippi 54,657 46,698 7,959
Colorado-Kansas 32,532 33,493 (961 )
Other 3,755 1,400 2,355
Total $ 433,818 $ 398,400 $ 35,418
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 six months of fiscal 2020, we
implemented eight regulatory proceedings, resulting in a $59.2 million increase
in annual operating income as summarized below.
Annual Increase in
Rate Action Operating Income
(In thousands)
Annual formula rate mechanisms $ 58,809
Rate case filings -
Other rate activity 353
$ 59,162
The following ratemaking efforts seeking
Operating Income
Division Rate Action Jurisdiction Requested
(In thousands)
Colorado-Kansas Rate Case Kansas (1) $ 3,697
Kentucky/Mid-States Formula Rate Mechanism Tennessee 726
Louisiana Formula Rate Mechanism Louisiana 14,781
Mid-Tex Formula Rate Mechanism City of Dallas 17,137
Mid-Tex Infrastructure Mechanism ATM Cities 11,148
Mid-Tex Infrastructure Mechanism Environs 4,440
Mid-Tex Formula Rate Mechanism Mid-Tex Cities 94,060
Mississippi Infrastructure Mechanism Mississippi 10,242
Cities of
Amarillo,
Lubbock,
Dalhart and
West Texas Infrastructure Mechanism Channing 5,937
West Texas Infrastructure Mechanism Environs 1,031
West Texas
West Texas Formula Rate Mechanism Cities 7,057
WTX Triangle
West Texas Rate Case (2) (242 )
$ 170,014
33--------------------------------------------------------------------------------
(1) On
with a decrease to operating income of
implemented beginning
(2) On
decrease to operating income of
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 ourLouisiana ,Mississippi andTennessee operations and in substantially all the service areas in ourTexas 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 System Safety and Integrity Colorado Rider (SSIR) - Gas System Reliability Kansas Surcharge (GSRS) - Pipeline Replacement Program Kentucky (PRP) - Louisiana (1) Rate Stabilization Clause (RSC) Mississippi System Integrity Rider (SIR) Stable Rate Filing (SRF) Tennessee - Annual Rate Mechanism (ARM) Gas Reliability Infrastructure Program Dallas Annual Rate Review (DARR), Texas (GRIP), (1) Rate Review Mechanism (RRM) Steps to Advance Virginia Virginia Energy (SAVE) -
(1) Infrastructure mechanisms in
all expenses associated with capital expenditures incurred pursuant to these
rules, which primarily consists of interest, depreciation and other taxes
(
filing), at which time investment and costs would be recoverable through
base rates.
The following annual formula rate mechanisms were approved during the six months
ended March 31, 2020 :
Increase
(Decrease) in
Annual
Test Year Operating Effective
Division Jurisdiction Ended Income Date
(In thousands)
2020 Filings:
Colorado-Kansas Colorado SSIR 12/31/2020 $ 2,082 01/01/2020
Mississippi Mississippi - SIR 10/31/2020 7,586 11/01/2019
Mississippi Mississippi - SRF 10/31/2020 6,886 11/01/2019
Kentucky/Mid-States Virginia - SAVE 09/30/2020 84 10/01/2019
Kentucky/Mid-States Kentucky PRP 09/30/2020 2,912 10/01/2019
Mid-Tex Mid-Tex Cities RRM 12/31/2018 34,380 10/01/2019
West Texas West Texas Cities RRM 12/31/2018 4,879 10/01/2019
Total 2020 Filings $ 58,809
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.
34
--------------------------------------------------------------------------------
There was no rate case activity completed during the six months ended
Other Ratemaking Activity The following table summarizes other ratemaking activity during the six months endedMarch 31, 2020 . Increase in Annual Operating Effective Division Jurisdiction Rate Activity Income Date (In thousands) 2020 Other Rate Activity: Colorado-Kansas Kansas Ad Valorem (1) $ 353 02/01/2020 Total 2020 Other Rate Activity $
353
(1) The Ad Valorem filing relates to property taxes that are either over or
undercollected compared to the amount included in our
base rates.
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. 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.
APT annually uses GRIP to recover capital costs incurred in the prior calendar
year. On February 14, 2020 , APT made a GRIP filing that covered changes in net
investments from January 1, 2019 through December 31, 2019 with a requested
increase in operating income of $49.3 million .
35
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Three Months Ended March 31, 2020 compared with Three Months Ended March 31,
2019
Financial and operational highlights for our pipeline and storage segment for
the three months ended March 31, 2020 and 2019 are presented below.
Three Months Ended March 31
2020 2019 Change
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue $ 113,570 $ 102,812 $ 10,758
Third-party transportation revenue 31,307 30,042 1,265
Other revenue 1,360 2,796 (1,436 )
Total operating revenues 146,237 135,650 10,587
Total purchased gas cost 202 (90 ) 292
Operating expenses 68,138 67,026 1,112
Operating income 77,897 68,714 9,183
Other non-operating income (expense) 2,202 (1,031 ) 3,233
Interest charges 11,374 11,053 321
Income before income taxes 68,725 56,630 12,095
Income tax expense 16,143 13,935 2,208
Net income $ 52,582 $ 42,695 $ 9,887
Gross pipeline transportation volumes - MMcf 218,530 254,833 (36,303 ) Consolidated pipeline transportation volumes - MMcf 143,465 165,369 (21,904 )
Operating income for our pipeline and storage segment increased thirteen percent. Operating revenue increased$10.6 million , primarily due to rate adjustments from the GRIP filing approved inMay 2019 . The increase in rates was driven primarily by increased safety and reliability spending. This increase was partially offset by a$1.1 million increase in operating expenses, primarily due to higher depreciation expense associated with increased capital investments and higher system maintenance expense primarily due to spending on hydro testing and in-line inspections. Six Months EndedMarch 31, 2020 compared with Six Months EndedMarch 31, 2019 Financial and operational highlights for our pipeline and storage segment for the six months endedMarch 31, 2020 and 2019 are presented below. Six Months Ended March 31 2020 2019 Change (In thousands, unless otherwise noted) Mid-Tex / Affiliate transportation revenue$ 226,733 $ 204,539 $ 22,194 Third-party transportation revenue 61,607 61,077 530 Other revenue 6,073 4,504 1,569 Total operating revenues 294,413 270,120 24,293 Total purchased gas cost 301 (448 ) 749 Operating expenses 143,711 134,827 8,884 Operating income 150,401 135,741 14,660 Other non-operating income (expense) 5,135 (2,277 ) 7,412 Interest charges 22,241 20,692 1,549 Income before income taxes 133,295 112,772 20,523 Income tax expense 31,797 26,816 4,981 Net income$ 101,498 $ 85,956 $ 15,542 Gross pipeline transportation volumes - MMcf 442,242
493,688 (51,446 ) Consolidated pipeline transportation volumes - MMcf 299,994 335,896 (35,902 )
Operating income for our pipeline and storage segment increased eleven percent. Operating revenue increased$24.3 million , primarily due to rate adjustments from the GRIP filing approved inMay 2019 . The increase in rates was driven 36 -------------------------------------------------------------------------------- primarily by increased safety and reliability spending. This increase was partially offset by an$8.9 million increase in operating expenses, primarily due to higher depreciation expense associated with increased capital investments and higher system maintenance expense of$6.8 million primarily due to well integrity costs and spending on hydro testing and in-line inspections. Additionally, the year-over-year change in other non-operating income and interest charges of$5.9 million primarily reflects increased AFUDC primarily due to increased capital spending. 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. As of the date of this report, external debt financing is provided primarily through the issuance of long-term debt, a$1.5 billion commercial paper program and four committed revolving credit facilities with a total availability from third-party lenders of approximately$2.2 billion . 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 theSecurities and Exchange Commission (SEC) that allows us to issue up to$4.0 billion in common stock and/or debt securities. AtMarch 31, 2020 , approximately$3.0 billion of securities remained available for issuance under the shelf registration statement, which expiresFebruary 11, 2023 . 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 expiresFebruary 11, 2023 . As ofMarch 31, 2020 , approximately$855 million of equity is available for issuance under this ATM equity sales program. During the first six months of 2020, we executed forward sales under the ATM with various forward sellers who borrowed and sold 1,890,857 shares of our common stock at an aggregate price of$219.9 million . Additionally, we settled forward sale agreements with respect to 2,720,060 shares that had been borrowed and sold by various forward sellers during fiscal 2019 at an aggregate price of$258.0 million . As ofMarch 31, 2020 , if we had settled all 3,800,657 shares that remain available under our various forward sale agreements we would have received proceeds of$418.6 million . Additional details are summarized below. Net Proceeds Available Issue Quarter Issued Under Shares Available (In thousands) Maturity Forward Price June 30, 2019 ATM 486,201 $ 48,819 9/30/2020$ 100.41 September 30, 2019 ATM 1,423,599 153,426 9/30/2020$ 107.77 December 31, 2019 ATM 339,574 36,218 9/30/2020$ 106.66 9/30/2020 March 31, 2020 ATM 1,551,283 180,117 3/31/2021$ 116.11 Total 3,800,657$ 418,580 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 2020 and beyond. 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 ofMarch 31, 2020 ,September 30, 2019 andMarch 31, 2019 : March 31, 2020 September 30, 2019
(In thousands, except percentages)
Short-term debt
- - %
Long-term debt(1) 4,328,997 40.0 % 3,529,452 36.2 % 3,653,713 39.9 %
Shareholders' equity 6,304,415 58.2 % 5,750,223 59.0 % 5,508,101 60.1 %
Total $ 10,833,335 100.0 % $ 9,744,590 100.0 % $ 9,161,814 100.0 %
(1) Inclusive of our finance leases as of
37-------------------------------------------------------------------------------- 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 six months endedMarch 31, 2020 and 2019 are presented below. Six Months Ended March 31 2020 2019 Change (In thousands) Total cash provided by (used in) Operating activities$ 633,775 $ 560,829 $ 72,946 Investing activities (991,237 ) (768,421 ) (222,816 ) Financing activities 653,011 302,174 350,837 Change in cash and cash equivalents 295,549 94,582
200,967
Cash and cash equivalents at beginning of period 24,550 13,771
10,779
Cash and cash equivalents at end of period
Cash flows from operating activities For the six months endedMarch 31, 2020 , we generated cash flow from operating activities of$633.8 million compared with$560.8 million for the six months endedMarch 31, 2019 . The$72.9 million increase in operating cash flows reflects positive cash effects of successful rate case outcomes achieved in fiscal 2019 and working capital changes, primarily as a result of the timing of gas cost recoveries under our purchase gas cost mechanisms. 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 84 percent of our capital spending has been committed to improving the safety and reliability of our system. We allocate our capital spending among our service areas using risk management models and subject matter experts to identify, assess and develop a plan of action to address our highest risk facilities. We have regulatory mechanisms in most of our service areas that provide the opportunity to include approved capital costs in rate base on a periodic basis without being required to file a rate case. These mechanisms permit us a reasonable opportunity to earn a fair return on our investment without compromising safety or reliability. For the six months endedMarch 31, 2020 , cash used for investing activities was$991.2 million compared to$768.4 million for the six months endedMarch 31, 2019 . Capital spending increased by$217.2 million , or 28 percent, as a result of planned increases in our distribution segment to repair and replace vintage pipe and increases in spending in our pipeline and storage segment to improve the reliability of gas service to our local distribution company customers. Cash flows from financing activities For the six months endedMarch 31, 2020 , our financing activities provided$653.0 million of cash compared with$302.2 million of cash provided by financing activities in the prior-year period. In the six months endedMarch 31, 2020 , we received$1.1 billion in net proceeds from the issuance of long-term debt and equity. OnOctober 2, 2019 , we completed a public offering of$300 million of 2.625% senior notes due 2029 and$500 million of 3.375% senior notes due 2049. We received net proceeds from the offering, after the underwriting discount and offering expenses, of$791.7 million . Additionally, during the six months endedMarch 31, 2020 , we settled 2,720,060 shares that had been sold on a forward basis during fiscal 2019 for net proceeds of$258.0 million . The net proceeds were used primarily to support capital spending, reduce short term debt and for other general corporate purposes. Cash dividends increased due to a 9.5 percent increase in our dividend rate and an increase in shares outstanding. In the six months endedMarch 31, 2019 , we received$1.5 billion in net proceeds from the issuance of long-term debt and equity. A portion of the net proceeds was used to repay at maturity our$450 million 8.50% unsecured senior notes and the related settlement of our interest rate swaps for$90.1 million , to reduce short-term debt, to support our capital spending and for 38 --------------------------------------------------------------------------------
other general corporate purposes. Cash dividends increased due to an 8.2 percent
increase in our dividend rate and an increase in shares outstanding.
The following table summarizes our share issuances for the six months ended
Six Months Ended March 31
2020 2019
Shares issued:
Direct Stock Purchase Plan 36,752 61,237
1998 Long-Term Incentive Plan 172,209 213,402
Retirement Savings Plan and Trust 40,779 43,745
Equity Issuance 2,720,060 5,390,836
Total shares issued 2,969,800 5,709,220
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). On December 16, 2019 , Moody's upgraded
our senior unsecured long-term debt rating to A1 and changed their outlook to
stable, citing our strong credit metrics as a result of continued improvement in
rate design to minimize regulatory lag and our balanced fiscal policy. As of
March 31, 2020 , S&P maintained a stable outlook. Our current debt ratings are
all considered investment grade and are as follows:
S&P Moody's
Senior unsecured long-term debt A A1
Short-term debt A-1 P-1
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 March 31, 2020 . Our
debt covenants are described in greater detail in Note 7 to the unaudited
condensed consolidated financial statements.
Contractual Obligations and Commercial Commitments
Except as noted in Note 10 to the unaudited condensed consolidated financial
statements, there were no significant changes in our contractual obligations and
commercial commitments during the six months ended March 31, 2020 .
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.
39
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The following table shows the components of the change in fair value of our
financial instruments for the three and six months ended
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inthousands)
Fair value of contracts at beginning of period$ (7,459 ) $ (83,669 ) $ (3,990 ) $ (55,218 ) Contracts realized/settled (4,073 ) 89,916 (6,936 ) 96,374 Fair value of new contracts (10 ) 405 95 889 Other changes in value 10,710 (5,079 ) 9,999 (40,472 ) Fair value of contracts at end of period (832 ) 1,573 (832 ) 1,573 Netting of cash collateral - - - - Cash collateral and fair value of contracts at period end$ (832 ) $ 1,573
The fair value of our financial instruments at
Fair Value of Contracts at March 31, 2020
Maturity in Years
Total
Less Greater Fair
Source of Fair Value Than 1 1-3 4-5 Than 5 Value
(In thousands)
Prices actively quoted $ (834 ) $ 2 $ - $ - $ (832 )
Prices based on models and other
valuation methods - - - - -
Total Fair Value $ (834 ) $ 2 $ - $ - $ (832 )
40-------------------------------------------------------------------------------- OPERATING STATISTICS AND OTHER INFORMATION The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three and six month periods endedMarch 31, 2020 and 2019. Distribution Sales and Statistical Data Three Months EndedMarch 31
Six Months Ended
2020 2019 2020 2019
METERS IN SERVICE, end of period
Residential 3,025,771 2,995,438 3,025,771 2,995,438
Commercial 276,668 273,533 276,668 273,533
Industrial 1,659 1,669 1,659 1,669
Public authority and other 8,518 8,365 8,518 8,365
Total meters 3,312,616 3,279,005 3,312,616 3,279,005
INVENTORY STORAGE BALANCE - Bcf 34.5 30.3 34.5 30.3
SALES VOLUMES - MMcf(1)
Gas sales volumes
Residential 71,124 84,757 129,904 144,621
Commercial 37,585 42,974 68,838 74,557
Industrial 7,913 8,727 14,768 16,901
Public authority and other 2,736 2,784 4,909 4,861
Total gas sales volumes 119,358 139,242 218,419 240,940
Transportation volumes 46,542 48,235 88,816 91,086
Total throughput 165,900 187,477 307,235 332,026
Pipeline and Storage Operations Sales and Statistical Data
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
CUSTOMERS, end of period
Industrial 93 93 93 93
Other 235 230 235 230
Total 328 323 328 323
INVENTORY STORAGE BALANCE - Bcf 1.0 0.2 1.0 0.2
PIPELINE TRANSPORTATION VOLUMES - MMcf(1) 218,530 254,833 442,242 493,688
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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