ATMOS ENERGY CORPORATION INTRODUCTION
This section provides management's discussion of the financial condition, changes in financial condition and results of operations ofAtmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management's interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto. Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, "Risk Factors". They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements. Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995 The statements contained in this Annual Report on Form 10-K 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 21 -------------------------------------------------------------------------------- Table of Contents 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 inTexas ; 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. CRITICAL ACCOUNTING POLICIES Our 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 base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from estimates. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. The accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult, subjective or complex accounting estimates. Accordingly, these critical accounting policies are reviewed periodically by the Audit Committee of the Board of Directors. Critical Factors Influencing Accounting Policy Summary of Policy Application of the Policy Regulation Our distribution and pipeline operations meet the Decisions of regulatory criteria of a cost-based, rate-regulated entity under authorities accounting principles generally accepted in the United States. Accordingly, the financial results for
these Issuance of new regulations
operations reflect the effects of the ratemaking and or regulatory mechanisms
accounting practices and policies of the various
regulatory commissions to which we are subject. Assessing the probability of
the recoverability of
As a result, certain costs that would normally be deferred costs
expensed under accounting principles generally accepted
in the United States are permitted to be capitalized or Continuing to meet the
deferred on the balance sheet because it is probable criteria of a cost-based,
they can be recovered through rates. Further, regulation rate regulated entity for
may impact the period in which revenues or expenses are accounting purposes
recognized. The amounts expected to be recovered or
recognized are based upon historical experience and our
understanding of the regulations.
Discontinuing the application of this method of
accounting for regulatory assets and liabilities or
changes in the accounting for our various regulatory
mechanisms could significantly increase our operating
expenses as fewer costs would likely be capitalized or
deferred on the balance sheet, which could reduce our
net income.
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Critical Factors Influencing
Accounting Policy Summary of Policy Application of the PolicyUnbilled Revenue We follow the revenue accrual method of accounting for Estimates of delivered
distribution segment revenues whereby revenues sales volumes based on
attributable to gas delivered to customers, but not actual tariff information
yet billed under the cycle billing method, are and weather information and
estimated and accrued and the related costs are estimates of customer
charged to expense. consumption and/or behavior
When permitted, we implement rates that havenot been Estimates of purchased gas
formally approved by our regulatory authorities, costs related to estimated
subject to refund.We recognize this revenue and deliveries
establish a reserve for amounts that could be refunded
based on our experience for the jurisdiction in which Estimates of amounts billed
the rates were implemented. subject to refund
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Critical Factors Influencing Application
Accounting Policy Summary of Policy of the Policy
Pension and other Pension and other postretirement plan costs and General economic and marketpostretirement plans liabilities are determined on an actuarial basis using a conditions
September 30 measurement date and are affected by numerous assumptions and estimates including the
market Assumed investment returns by
value of plan assets, estimates of the expected return asset class
on plan assets, assumed discount rates and current
demographic and actuarial mortality data. The assumed Assumed future salary increases
discount rate and the expected return are the
assumptions that generally have the most significant Assumed discount rate
impact on our pension costs and liabilities. The assumed
discount rate, the assumed health care cost trendrate Projected timing of future cash
and assumed rates of retirement generally have the most disbursements
significant impact on our postretirement plan costs and
liabilities. Health care cost experience
trends
The discount rate is utilized principally in calculating
the actuarial present value of our pension and Participant demographic
postretirement obligations and net periodic pension and information
postretirement benefit plan costs. When establishing our
discount rate, we consider high quality corporate bond Actuarial mortality assumptions
rates based on bonds available in the marketplace that
are suitable for settling the obligations, changes in Impact of legislation
those rates from the prior year and the implied discount
rate that is derived from matching our projectedbenefit Impact of regulation
disbursements with currently available high quality
corporate bonds.
The expected long-term rate of return on assets is
utilized in calculating the expected return on plan
assets component of our annual pension and
postretirement plan costs. We estimate the expected
return on plan assets by evaluating expected bond
returns, equity risk premiums, asset allocations, the
effects of active plan management, the impact of
periodic plan asset rebalancing and historical
performance. We also consider the guidance from our
investment advisors in making a final determination of
our expected rate of return on assets. To the extent the
actual rate of return on assets realized over the course
of a year is greater than or less than the assumed rate,
that year's annual pension or postretirement plan costs
are not affected. Rather, this gain or loss reduces or
increases future pension or postretirement plan costs
over a period of approximately ten to twelve years.
The market-related value of our plan assets represents
the fair market value of the plan assets, adjusted to
smooth out short-term market fluctuations over a
five-year period. The use of this methodology will delay
the impact of current market fluctuations on the pension
expense for the period.
We estimate the assumed health care cost trend rate used
in determining our postretirement net expense based upon
our actual health care cost experience, the effects of
recently enacted legislation and general economic
conditions. Our assumed rate of retirement is estimated
based upon our annual review of our participant census
information as of the measurement date.Impairment assessments We review the carrying value of our long-lived assets, General economic and market
including goodwill and identifiable intangibles, conditions
whenever events or changes in circumstance indicate that
such carrying values may not be recoverable, and at Projected timing and amount of
least annually for goodwill, as required by U.S. future discounted cash flows
accounting standards.
Judgment in the evaluation of
The evaluation of our goodwill balances and other relevant data
long-lived assets or identifiable assets for which
uncertainty exists regarding the recoverability of the
carrying value of such assets involves the assessment of
future cash flows and external market conditions and
other subjective factors that could impact the
estimation of future cash flows including, but not
limited to the commodity prices, the amount and timing
of future cash flows, future growth rates and the
discount rate. Unforeseen events and changes in
circumstances or market conditions could adversely
affect these estimates, which could result in an
impairment charge.
24-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures As described further in Note 14 to the consolidated financial statements, due to the passage of Kansas House Bill 2585, we remeasured our deferred tax liability and updated our state deferred tax rate. As a result, we recorded a non-cash income tax benefit of$21.0 million for the fiscal year endedSeptember 30, 2020 . Due to the non-recurring nature of this benefit, we believe that net income and diluted net income per share before the non-cash income tax benefit provide a more relevant measure to analyze our financial performance than net income and diluted net income per share in order to allow investors to better analyze our core results and allow the information to be presented on a comparative basis. Accordingly, the following discussion and analysis of our financial performance will reference adjusted net income and adjusted diluted earnings per share, non-GAAP measures, which are calculated as follows: For
the Fiscal Year Ended
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
(In thousands, except per share data)
Net income $ 665,563 $ 601,443
- (20,962) - 20,962 (20,962)
Adjusted net income $ 665,563 $ 580,481 Diluted net income per share$ 5.12 $ 4.89
- (0.17) - 0.17 (0.17)
Adjusted diluted net income per share
$ 4.35 $ 0.40 $ 0.37 RESULTS OF OPERATIONS OverviewAtmos Energy strives to operate its 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. The following table details our consolidated net income by segment during the last three fiscal years: For the Fiscal Year Ended September 30 2021 2020 2019 (In thousands) Distribution segment$ 445,862 $ 395,664 $ 328,814 Pipeline and storage segment 219,701 205,779 182,592 Net income$ 665,563 $ 601,443 $ 511,406 During fiscal 2021, we recorded net income of$665.6 million , or$5.12 per diluted share, compared to net income of$601.4 million , or$4.89 per diluted share in the prior year. After adjusting for a nonrecurring income tax benefit recognized during fiscal 2020, adjusted net income was$580.5 million , or$4.72 per diluted share in the prior year. The year-over-year increase in adjusted net income of$85.1 million largely reflects positive rate outcomes driven by safety and reliability spending and distribution customer growth, partially offset by lower service order revenues and higher bad debt expense in our distribution segment due to the temporary suspension of collection activities during the pandemic and increased spending on system maintenance activities. During the year endedSeptember 30, 2021 , we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of$185.7 million . Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2021 rate outcomes were$226.2 million . Additionally, we had ratemaking efforts in progress atSeptember 30, 2021 , seeking a total increase in annual operating income of$56.5 million . As of the date of this report, we have received approval to implement$25.0 million of this amount in the first quarter of fiscal 2022. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, we have received approval to implement$68.5 million during the first quarter of fiscal 2022. 25 -------------------------------------------------------------------------------- Table of Contents During fiscal year 2021, we refunded$55.9 million in excess deferred tax liabilities to customers. The refunds reduced operating income and reduced our annual effective income tax rate to 18.8% in fiscal 2021 compared with 19.5% in fiscal 2020. Capital expenditures for fiscal 2021 increased 2 percent period-over-period, to$2.0 billion . 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 regulatory lag to six months or less. During fiscal 2021, we completed over$3.4 billion of long-term debt and equity financing, including$2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri. As ofSeptember 30, 2021 , our equity capitalization was 51.9 percent. Excluding the$2.2 billion of incremental financing, our equity capitalization was 60.6 percent. As ofSeptember 30, 2021 , we had approximately$2.9 billion in total liquidity, including cash and cash equivalents and funds available through equity forward sales agreements. As a result of the continued stability of our earnings, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 8.8% percent for fiscal 2022. 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 our distribution operations 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 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. The "Ratemaking Activity" section of this Form 10-K describes our current rate strategy, progress towards implementing that strategy and recent ratemaking initiatives in more detail. During fiscal 2021, we completed regulatory proceedings in our distribution segment resulting in a$141.8 million increase in annual operating income. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2021 annualized rate outcomes in our distribution segment were$182.3 million . Our distribution operations are also affected by the cost of natural gas. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Revenues in ourTexas andMississippi service areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income. The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 79 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. 26 -------------------------------------------------------------------------------- Table of Contents Review of Financial and Operating Results Financial and operational highlights for our distribution segment for the fiscal years endedSeptember 30, 2021 , 2020 and 2019 are presented below. For the Fiscal Year Ended September 30 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 (In thousands, unless otherwise noted) Operating revenues$ 3,241,973 $
2,626,993
1,501,695 1,071,227 1,268,591 430,468 (197,364)
Operating expenses 1,121,764 1,027,523 1,006,098 94,241 21,425 Operating income 618,514 528,243 470,772 90,271 57,471 Other non-operating income (expense) (20,694) (1,265) 6,241 (19,429) (7,506) Interest charges 36,629 39,634 60,031 (3,005) (20,397) Income before income taxes 561,191 487,344 416,982 73,847 70,362 Income tax expense 115,329 105,147 88,168 10,182 16,979 Non-cash income tax benefit (1) - (13,467) - 13,467 (13,467) Net income$ 445,862 $ 395,664 $ 328,814 $ 50,198 $ 66,850 Consolidated distribution sales volumes - MMcf 308,833 291,650 315,476 17,183
(23,826)
Consolidated distribution transportation volumes - MMcf 152,513 147,387 155,078 5,126
(7,691)
Total consolidated distribution throughput - MMcf 461,346 439,037 470,554 22,309
(31,517)
Consolidated distribution average cost of gas per Mcf sold$ 4.86 $
3.67
(1)See Note 14 to the consolidated financial statements for further information.
Fiscal year endedSeptember 30, 2021 compared with fiscal year endedSeptember 30, 2020 Operating income for our distribution segment increased 17 percent, which primarily reflects: •a$150.6 million increase in rate adjustments, primarily in our Mid-Tex,Mississippi ,Louisiana and West Texas Divisions. •a$19.2 million increase from customer growth primarily in our Mid-Tex Division. •a$3.8 million decrease in employee related costs. •a$5.0 million decrease in travel and entertainment expense. Partially offset by: •a$43.6 million increase in depreciation expense and property taxes associated with increased capital investments. •an$18.2 million increase in bad debt expense primarily due to the temporary suspension of collection activities. •a$12.8 million increase in pipeline maintenance and related activities. •a$5.1 million increase in insurance expense. •an$8.4 million decrease in service order revenues primarily due to the temporary suspension of collection activities. The year-over- year change in other non-operating expense and interest charges of$22.4 million primarily reflects increased amortization of prior service cost associated with our Retiree Medical Plan, as presented in Note 12 to the consolidated financial statements. During fiscal 2021, we refunded$29.4 million in excess deferred taxes in the distribution segment, which reduced operating income year over year and reduced the annual effective income tax rate for this segment to 20.6% compared with 21.6% in the prior year. The fiscal year endedSeptember 30, 2020 compared with fiscal year endedSeptember 30, 2019 for our distribution segment is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . 27 -------------------------------------------------------------------------------- Table of Contents The following table shows our operating income by distribution division, in order of total rate base, for the fiscal years endedSeptember 30, 2021 , 2020 and 2019. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 (In thousands) Mid-Tex$ 310,293 $ 236,066 $ 202,050 $ 74,227 $ 34,016 Kentucky/Mid-States 73,259 76,745 73,965 (3,486) 2,780 Louisiana 72,388 71,892 70,440 496 1,452 West Texas 51,104 52,493 44,902 (1,389) 7,591 Mississippi 65,337 55,938 46,229 9,399 9,709 Colorado-Kansas 32,778 34,039 34,362 (1,261) (323) Other 13,355 1,070 (1,176) 12,285 2,246 Total$ 618,514 $ 528,243 $ 470,772 $ 90,271 $ 57,471 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 inLouisiana . APT is one of the largest intrastate pipeline operations inTexas with a heavy concentration in the established natural gas producing areas of central, northern and easternTexas , extending into or near the major producing areas of theBarnett Shale , theTexas Gulf Coast and thePermian Basin ofWest 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 inTexas . Our natural gas transmission operations inLouisiana are comprised of a 21-mile pipeline located in theNew Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division inLouisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to ourLouisiana distribution division for these services is subject to regulatory approval by theLouisiana 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 ourTexas andLouisiana 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 inTexas could influence the volumes of gas transported for shippers through ourTexas 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. OnFebruary 12, 2021 , APT made a GRIP filing that covered changes in net property, plant and equipment investment fromJanuary 1, 2020 throughDecember 31, 2020 with a requested increase in operating income of$44.0 million . OnMay 11, 2021 , theTexas Railroad Commission approved an increase in operating income of$43.9 million . InFebruary 2021 , the RRC approved a reduction in revenue of$106.6 million to refund excess deferred tax liabilities to customers over 35 months. OnDecember 21, 2016 , theLouisiana Public Service Commission approved an annual increase of five percent to the demand fee charged by our natural gas transmission pipeline for each of the next 10 years, effectiveOctober 1, 2017 . 28 -------------------------------------------------------------------------------- Table of Contents Review of Financial and Operating Results Financial and operational highlights for our pipeline and storage segment for the fiscal years endedSeptember 30, 2021 , 2020 and 2019 are presented below.
For the Fiscal Year Ended
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue $ 497,730 $ 474,077
127,874 127,444 129,930 430 (2,486)
Other revenue 11,743 7,818 8,508 3,925 (690)
Total operating revenues 637,347 609,339 567,024 28,008 42,315
Total purchased gas cost 1,582 1,548 (360) 34 1,908
Operating expenses 349,281 311,935 292,098 37,346 19,837
Operating income 286,484 295,856 275,286 (9,372) 20,570
Other non-operating income 18,549 8,436 1,163 10,113 7,273
Interest charges 46,925 44,840 43,122 2,085 1,718
Income before income taxes 258,108 259,452 233,327 (1,344) 26,125
Income tax expense 38,407 61,168 50,735 (22,761) 10,433
Non-cash income tax benefit (1) - (7,495) - 7,495 (7,495)
Net income $ 219,701 $ 205,779
822,499 939,376 (22,775) (116,877)
Consolidated pipeline transportation volumes
- MMcf 585,857 621,371 721,998 (35,514) (100,627)
(1)See Note 14 to the consolidated financial statements for further information.
Fiscal year ended September 30, 2021 compared with fiscal year ended
September 30, 2020
Operating income for our pipeline and storage segment decreased three percent,
which primarily reflects:
•an $8.2 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 $17.1 million increase in system maintenance expense primarily due to
spending on hydro testing and in-line inspections.
•a $17.0 million increase in depreciation expense and property taxes associated
with increased capital investments.
Partially offset by:
•a $56.2 million increase due to rate adjustments from the GRIP filings approved
in May 2020 and 2021. The increase in rates was driven by increased safety and
reliability spending.
The year-over- year change in other non-operating income and interest charges of
$8.0 million reflects increased allowance for funds used during construction
(AFUDC) primarily due to increased capital spending, partially offset by an
increase in interest expense due to the issuance of long-term debt during fiscal
2021.
During fiscal 2021 we refunded $26.5 million in excess deferred taxes in our
pipeline and storage segment, which reduced operating income year over year and
reduced the annual effective tax rate for this segment to 14.9% compared with
23.6% in the prior year.
The fiscal year ended September 30, 2020 compared with fiscal year ended
September 30, 2019 for our pipeline and storage segment is described in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2020 .
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
29
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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, approximately $3.4
billion of securities remained 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 . At September 30, 2021 , approximately $760 million
of equity is available for issuance under this ATM equity sales program.
Additionally, as of September 30, 2021 , we had $302.0 million in available
proceeds from outstanding forward sale agreements that must be settled during
fiscal 2022.
During fiscal 2021, we entered into forward starting interest rate swaps to
effectively fix the Treasury yield component associated with $1.4 billion of
planned issuances of unsecured senior notes. During fiscal 2021, we settled
swaps of $600 million with a net receipt of $62.2 million . On October 1, 2021 ,
the notes were issued as planned.
The following table summarizes our existing forward starting interest rate swaps
as of September 30, 2021 .
Planned Debt Issuance Date Amount Hedged Effective Interest Rate
(In thousands)
Fiscal 2023 500,000 1.66 %
Fiscal 2024 450,000 1.80 %
Fiscal 2025 600,000 1.75 %
Fiscal 2026 300,000 2.16 %
$ 1,850,000
The liquidity provided by these sources is expected to be sufficient to fund the
Company's working capital needs and capital expenditures program. Additionally,
we expect to continue to be able to obtain financing upon reasonable terms as
necessary.
The following table presents our capitalization as of September 30, 2021 and
2020:
September 30
2021 2020
(In thousands, except percentages)
Short-term debt $ - - % $ - - %
Long-term debt (1) 7,330,657 48.1 % 4,531,944 40.0 %
Shareholders' equity (2) 7,906,889 51.9 % 6,791,203 60.0 %
Total capitalization, including short-term debt
100.0 %$ 11,323,147 100.0 % (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 would have been 60.6%. 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, the 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 years endedSeptember 30, 2021 , 2020 and 2019 are presented below. 30
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For the Fiscal Year Ended
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
(In thousands)
Total cash provided by (used in)
Operating activities $ (1,084,251) $ 1,037,999
(1,963,655) (1,925,518) (1,683,660) (38,137) (241,858)
Financing activities 3,143,821 883,777 725,670 2,260,044 158,107 Change in cash and cash equivalents 95,915 (3,742) 10,779 99,657
(14,521)
Cash and cash equivalents at beginning of period 20,808 24,550 13,771 (3,742) 10,779 Cash and cash equivalents at end of period$ 116,723 $ 20,808
Cash flows for the fiscal year endedSeptember 30, 2020 compared with fiscal year endedSeptember 30, 2019 is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . Cash flows from operating activities For the fiscal year endedSeptember 30, 2021 , cash flow used from operating activities was$1.1 billion compared with cash flows generated from operating activities of$1.0 billion in the prior year. The year-over-year decrease in operating cash flows reflects gas costs incurred during Winter Storm Uri and the timing of customer collections partially offset by the positive effects of successful rate case outcomes achieved in fiscal 2020 and 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 fiscal year endedSeptember 30, 2021 , we had$1.97 billion in capital expenditures compared with$1.94 billion for the fiscal year endedSeptember 30, 2020 . Capital spending increased by$33.8 million , or two percent, as a result of planned increases to modernize our system. Cash flows from financing activities Our financing activities provided$3.1 billion and$883.8 million in cash for fiscal years 2021 and 2020. During the fiscal year endedSeptember 30, 2021 , we received$3.4 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of$600 million of 1.50% senior notes due 2031,$1.1 billion of 0.625% senior notes due 2023 and$1.1 billion floating rate senior notes due 2023. Net proceeds from the latter two notes were used to pay for gas costs incurred during Winter Storm Uri. Additionally, during the year endedSeptember 30, 2021 , we settled 6,130,875 shares that had been sold on a forward basis for net proceeds of$606.7 million . The net proceeds were used primarily to support capital spending and for other general corporate purposes, including the payment of natural gas purchases. Additionally, cash dividends increased due to an 8.7 percent increase in our dividend rate and an increase in shares outstanding. During the fiscal year endedSeptember 30, 2020 , we received$1.6 billion in net proceeds from the issuance of long-term debt and equity. 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 and entered into a two year$200 million term loan. We received net proceeds from these offerings, after the underwriting discount and offering expenses, of$791.7 million . Additionally, we settled 6,101,916 shares that had been sold on a forward basis for net proceeds of approximately$624 million . The net proceeds were used primarily to support capital spending, reduce short-term debt and other general corporate purposes. Cash dividends increased due to a 9.5 percent increase in our dividend rate and an increase in shares outstanding. 31 -------------------------------------------------------------------------------- Table of Contents The following table shows the number of shares issued for the fiscal years endedSeptember 30, 2021 , 2020 and 2019:
For the Fiscal Year Ended
2021 2020 2019
Shares issued:
Direct Stock Purchase Plan 79,921 107,989 110,063
Retirement Savings Plan and Trust 84,265 78,941 81,456
1998 Long-Term Incentive Plan (LTIP) 242,216 254,706 299,612
Equity Issuance (1) 6,130,875 6,101,916 7,574,111
Total shares issued 6,537,277 6,543,552 8,065,242
(1)Share amounts do not include shares issued under forward sale agreements
until the shares have been settled.
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 operating cash flow less dividends to debt. In addition, the rating agencies
consider qualitative factors such as consistency of our earnings over time, the
risks associated with our business 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 a result of the impacts of Winter
Storm Uri, during the second quarter of fiscal 2021, S&P lowered our long-term
and short-term credit ratings by one notch and placed our ratings under negative
outlook and Moody's reaffirmed its long-term and short-term credit ratings and
placed our ratings under negative outlook.
As of September 30, 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 September 30, 2021 .
Our debt covenants are described in Note 7 to the consolidated financial
statements.
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Contractual Obligations and Commercial Commitments
The following table provides information about contractual obligations and
commercial commitments at
Payments Due by Period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
(In thousands)
Contractual Obligations
Long-term debt (1) $ 7,360,000 $ 200,000 $ 2,200,000 $ 10,000 $ 4,950,000
Interest charges (2) 4,268,559 221,325 418,664 412,654 3,215,916
Finance leases (3) 29,809 1,342 2,753 2,846 22,868
Operating leases (4) 271,074 41,822 68,043 39,359 121,850
Financial instrument obligations (5) 5,269 5,269 - - -
Pension and postretirement benefit plan
contributions (6) 315,298 26,126 59,252 90,829 139,091
Uncertain tax positions (7) 32,792 - 32,792 - -
Total contractual obligations $ 12,282,801 $
495,884
(1)Long-term debt excludes our finance lease obligations, which are separately reported within this table. The$1.1 billion of 0.625% senior notes and$1.1 billion floating rate senior notes that were issued inMarch 2021 contractually mature in 2023; however, we intend to repay these after the receipt of securitization funds, which we expect will occur in the next twelve months. As such, we have classified the senior notes as current maturities of long-term debt as ofSeptember 30, 2021 . See Notes 7 and 9 to the consolidated financial statements for further details. (2)Interest charges were calculated using the effective rate for each debt issuance through the contractual maturity date. (3)Finance lease payments shown above include interest totaling$11.1 million . See Note 6 to the consolidated financial statements. (4)Operating lease payments shown above include interest totaling$38.6 million . See Note 6 to the consolidated financial statements. (5)Represents liabilities for natural gas commodity financial instruments that were valued as ofSeptember 30, 2021 . The ultimate settlement amounts of these remaining liabilities are unknown because they are subject to continuing market risk until the financial instruments are settled. (6)Represents expected contributions to our defined benefit and postretirement benefit plans, which are discussed in Note 10 to the consolidated financial statements. (7)Represents liabilities associated with uncertain tax positions claimed or expected to be claimed on tax returns. The amount does not include interest and penalties that may be applied to these positions. We 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 individual contracts. 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 market and fixed prices. AtSeptember 30, 2021 , we were committed to purchase 32.4 Bcf within one year and 12.9 Bcf within two to three years under indexed contracts. AtSeptember 30, 2021 , we were committed to purchase 11.9 Bcf within one year under fixed price contracts ranging from$1.86 to$7.03 per Mcf. 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 entering into financial instruments to effectively fix theTreasury yield component of the interest cost associated with anticipated financings. We record our financial instruments as a component of risk management assets and liabilities, which are classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. Substantially all of our financial instruments are valued using external market quotes and indices. 33 -------------------------------------------------------------------------------- Table of Contents The following table shows the components of the change in fair value of our financial instruments for the fiscal year endedSeptember 30, 2021 (in thousands): Fair value of contracts atSeptember 30, 2020 $ 78,663 Contracts realized/settled (64,205) Fair value of new contracts 13,136 Other changes in value 197,823 Fair value of contracts atSeptember 30, 2021
225,417
Netting of cash collateral
-
Cash collateral and fair value of contracts at
The fair value of our financial instruments at
Fair Value
of Contracts at
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 $ 49,804 $ 94,522 $ 81,091 $ - $ 225,417
Prices based on models and other valuation
methods - - - - -
Total Fair Value $ 49,804 $ 94,522 $ 81,091 $ - $ 225,417
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 consolidated
financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to risks associated with commodity prices and interest rates.
Commodity price risk is the potential loss that we may incur as a result of
changes in the fair value of a particular instrument or commodity. Interest-rate
risk is the potential increased cost we could incur when we issue debt
instruments or to provide financing and liquidity for our business activities.
Additionally, interest-rate risk could affect our ability to issue cost
effective equity instruments.
We conduct risk management activities in our distribution and pipeline and
storage segments. In our distribution segment, we use 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. Our risk management activities and related accounting treatment are
described in further detail in Note 15 to the consolidated financial statements.
Additionally, our earnings are affected by changes in short-term interest rates
as a result of our issuance of short-term commercial paper and our other
short-term borrowings.
Commodity Price Risk
We purchase natural gas for our distribution operations. Substantially all of
the costs of gas purchased for distribution operations are recovered from our
customers through purchased gas cost adjustment mechanisms. Therefore, our
distribution operations have limited commodity price risk exposure.
Interest Rate Risk
Our earnings are exposed to changes in short-term interest rates associated with
our short-term commercial paper program and other short-term borrowings. We use
a sensitivity analysis to estimate our short-term interest rate risk. For
purposes of this analysis, we estimate our short-term interest rate risk as the
difference between our actual interest expense for the period and estimated
interest expense for the period assuming a hypothetical average one percent
increase in the interest rates associated with our short-term borrowings. Had
interest rates associated with our short-term borrowings increased by an average
of one percent, our interest expense would not have materially increased during
2021.
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