ATMOS ENERGY CORPORATION INTRODUCTION
This section provides management's discussion of the financial condition,
changes in financial condition and results of operations of
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 various state regulatory commissions;
increased federal regulatory oversight and potential penalties; possible
increased federal, state and local regulation of the safety of our operations;
possible significant costs and liabilities resulting from pipeline integrity and
other similar programs and related repairs; the inherent hazards and risks
involved in distributing, transporting and storing natural gas; the availability
and accessibility of contracted gas supplies, interstate pipeline and/or storage
services; increased competition from energy suppliers and alternative forms of
energy; failure to attract and retain a qualified workforce; natural disasters,
terrorist activities or other events and other risks and uncertainties discussed
herein, all of which are difficult to predict and many of which are beyond our
control; increased dependence on technology that may hinder the Company's
business if such technologies fail; the threat of cyber-attacks or acts of
cyber-terrorism that could disrupt our business operations and information
technology systems or result in the loss or exposure of confidential or
sensitive customer, employee or Company information; the impact of new
cybersecurity compliance requirements; adverse weather conditions; the impact of
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greenhouse gas emissions or other legislation or regulations intended to address climate change; the impact of climate change; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations inTexas ; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; and increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.
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.Unbilled Revenue We follow the revenue accrual method of accounting for Estimates of delivered sales
distribution segment revenues whereby revenues volumes based on actual
attributable to gas delivered to customers, but not yet tariff information and
billed under the cycle billing method, are estimated and weather information and
accrued and the related costs are charged to expense. estimates of customer
consumption and/or behavior
When permitted, we implement rates that have not been
formally approved by our regulatory authorities, subject Estimates of purchased gas
to refund.We recognize this revenue and establish a costs related to estimated
reserve for amounts that could be refunded based on our deliveries
experience for the jurisdiction in which the rates were
implemented. Estimates of amounts billed
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
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(In thousands, except per share data)
Net income $ 774,398 $ 665,563
- - (20,962) - 20,962
Adjusted net income $ 774,398 $ 665,563 Diluted net income per share$ 5.60 $ 5.12
- - (0.17) - 0.17
Adjusted diluted net income per share
$ 4.72 $ 0.48 $ 0.40 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 2022 2021 2020 (In thousands) Distribution segment$ 521,977 $ 445,862 $ 395,664 Pipeline and storage segment 252,421 219,701 205,779 Net income$ 774,398 $ 665,563 $ 601,443 During fiscal 2022, we recorded net income of$774.4 million , or$5.60 per diluted share, compared to net income of$665.6 million , or$5.12 per diluted share in the prior year. The year-over-year increase in net income of$108.8 million largely reflects positive rate outcomes driven by safety and reliability spending and distribution customer growth, partially offset by an increase in employee related costs, increased spending on system maintenance activities and an increase in depreciation expense and property taxes associated with increased capital investments. During the year endedSeptember 30, 2022 , we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of$174.9 million . Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total fiscal 2022 rate outcomes were$215.6 million . Additionally, we had ratemaking efforts in progress atSeptember 30, 2022 , seeking a total increase in annual operating income of$144.5 million . During fiscal year 2022, we refunded$167.8 million in excess deferred tax liabilities to customers. The refunds reduced operating income and reduced our annual effective income tax rate to 9.1% in fiscal 2022 compared with 18.8% in fiscal 2021.
Capital expenditures for fiscal 2022 were
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During fiscal 2022, we completed approximately$1.6 billion of long-term debt and equity financing. As ofSeptember 30, 2022 , our equity capitalization was 53.6 percent. Excluding the$2.2 billion of incremental financing issued in conjunction with Winter Storm Uri, our equity capitalization was 61.3 percent. As ofSeptember 30, 2022 , we had approximately$3.1 billion in total liquidity, consisting of$51.6 million in cash and cash equivalents,$776.6 million in funds available through equity forward sales agreements and$2,309.4 million in undrawn capacity under our credit facilities.
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 2023.
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 2022, we completed regulatory proceedings in our distribution segment resulting in a$96.2 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 2022 annualized rate outcomes in our distribution segment were$136.8 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 81 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources. 26
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Review of Financial and Operating Results
Financial and operational highlights for our distribution segment for the fiscal
years ended
For the Fiscal Year Ended September 30
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(In thousands, unless otherwise noted)
Operating revenues $ 4,035,194 $
3,241,973
2,210,302 1,501,695 1,071,227 708,607 430,468
Operating expenses 1,220,347 1,121,764 1,027,523 98,583 94,241 Operating income 604,545 618,514 528,243 (13,969) 90,271 Other non-operating income (expense) 6,946 (20,694) (1,265) 27,640 (19,429) Interest charges 49,921 36,629 39,634 13,292 (3,005) Income before income taxes 561,570 561,191 487,344 379 73,847 Income tax expense 39,593 115,329 105,147 (75,736) 10,182 Non-cash income tax benefit (1) - - (13,467) - 13,467 Net income$ 521,977 $ 445,862 $ 395,664 $ 76,115 $ 50,198 Consolidated distribution sales volumes - MMcf 292,266 308,833 291,650 (16,567)
17,183
Consolidated distribution transportation volumes - MMcf 152,709 152,513 147,387 196
5,126
Total consolidated distribution throughput - MMcf 444,975 461,346 439,037 (16,371)
22,309
Consolidated distribution average cost of gas per Mcf sold$ 7.56 $
4.86
(1)See Note 14 to the consolidated financial statements for further information.
Fiscal year ended
Operating income for our distribution segment decreased two percent. Increased refunds of excess deferred taxes to customers decreased year-over-year operating income$98.5 million and reduced the effective income tax rate for this segment to 7.1% compared to 20.6% in the prior year. Additional key drivers for the change in operating income include:
•a
•a
•a
Partially offset by:
•a
•a
•an
•a
•an
The year-over-year change in other non-operating income (expense) of$27.6 million primarily reflects lower non-service costs related to our postretirement medical plan, partially offset by an increase in unrealized losses on equity investments. Interest charges increased$13.3 million due to the issuance of long-term debt during fiscal 2022 and interest expense recognized in fiscal 2022 related to debt incurred as a result of Winter Storm Uri. As described in Note 9 to the consolidated financial statements, interest related to the incremental financing incurred as a result of Winter Storm Uri was deferred throughDecember 31, 2021 pursuant to a regulatory order issued by theState of Texas . 27
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The fiscal year ended
The following table shows our operating income by distribution division, in order of total rate base, for the fiscal years endedSeptember 30, 2022 , 2021 and 2020. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 (In thousands) Mid-Tex$ 315,644 $ 310,293 $ 236,066 $ 5,351 $ 74,227 Kentucky/Mid-States 84,098 73,259 76,745 10,839 (3,486) Louisiana 73,486 72,388 71,892 1,098 496 West Texas 53,604 51,104 52,493 2,500 (1,389) Mississippi 65,947 65,337 55,938 610 9,399 Colorado-Kansas 26,000 32,778 34,039 (6,778) (1,261) Other (14,234) 13,355 1,070 (27,589) 12,285 Total$ 604,545 $ 618,514 $ 528,243 $ (13,969) $ 90,271 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 11, 2022 , APT made a GRIP filing that covered changes in net property, plant and equipment investment fromJanuary 1, 2021 throughDecember 31, 2021 with a requested increase in operating income of$78.8 million . OnMay 18, 2022 , theTexas Railroad Commission approved the Company's GRIP filing. The demand fee ourLouisiana natural gas transmission pipeline charges to ourLouisiana distribution division increases five percent annually and has been approved by theLouisiana Public Service Commission untilSeptember 30, 2027 . 28
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Review of Financial and Operating Results
Financial and operational highlights for our pipeline and storage segment for
the fiscal years ended
For the Fiscal Year Ended
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue $ 546,038 $ 497,730
136,907 127,874 127,444 9,033 430
Other revenue 10,715 11,743 7,818 (1,028) 3,925
Total operating revenues 693,660 637,347 609,339 56,313 28,008
Total purchased gas cost (1,583) 1,582 1,548 (3,165) 34
Operating expenses 378,806 349,281 311,935 29,525 37,346
Operating income 316,437 286,484 295,856 29,953 (9,372)
Other non-operating income 26,791 18,549 8,436 8,242 10,113
Interest charges 52,890 46,925 44,840 5,965 2,085
Income before income taxes 290,338 258,108 259,452 32,230 (1,344)
Income tax expense 37,917 38,407 61,168 (490) (22,761)
Non-cash income tax benefit (1) - - (7,495) - 7,495
Net income $ 252,421 $ 219,701
799,724 822,499 (23,116) (22,775)
Consolidated pipeline transportation volumes
- MMcf 580,488 585,857 621,371 (5,369) (35,514)
(1)See Note 14 to the consolidated financial statements for further information.
Fiscal year ended
Operating income for our pipeline and storage segment increased 10 percent. Increased refunds of excess deferred taxes to customers decreased year-over-year operating income by$13.3 million and reduced the effective income tax rate for this segment to 13.1% compared to 14.9% in the prior year. Additional drivers for the change in operating income include:
•a
Partially offset by:
•an
•a
The year-over-year change in other non-operating income and interest charges of$2.3 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 2022.
The fiscal year ended
INFLATION REDUCTION ACT OF 2022
InAugust 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 (the Inflation Reduction Act) into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the Corporate AMT) of 15% on the adjusted financial statement income (AFSI) of corporations with average AFSI exceeding$1.0 billion over a three-year period. We currently anticipate this tax will apply to us within the next four to five years. The impact on our financial position, results of operations and cash flows is dependent on future guidance from theU.S. government. Also, the Inflation Reduction Act imposes a methane emissions charge for methane emissions in excess of 25,000 metric tons carbon dioxide equivalent per year. Based on our preliminary evaluation of the regulations, we currently do not anticipate this provision of the Inflation Reduction Act will have a material impact on our financial position, results of operations or cash flows. Additionally, the Inflation 29
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Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made afterDecember 31, 2022 . The impact of this provision will be dependent on the extent of share repurchases made in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. Additionally, we have a$1.5 billion commercial paper program and four committed revolving credit facilities with$2.5 billion in total availability from third-party lenders. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company's desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis.
We have a shelf registration statement on file with the
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 expiresJune 29, 2024 . AtSeptember 30, 2022 , approximately$481.7 million of equity is available for issuance under this ATM equity sales program. Additionally, as ofSeptember 30, 2022 , we had$776.6 million in available proceeds from outstanding forward sale agreements. OnSeptember 27, 2022 , we settled$500 million of forward starting interest rate swaps associated with a planned debt issuance that was completed onOctober 3, 2022 . The following table summarizes our existing forward starting interest rate swaps as ofSeptember 30, 2022 . Planned Debt Issuance Date Amount Hedged Effective Interest Rate (In thousands) Fiscal 2024$ 450,000 1.80 % Fiscal 2025 600,000 1.75 % Fiscal 2026 300,000 2.16 %$ 1,350,000 The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital 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 ofSeptember 30, 2022 and 2021: September 30 2022 2021 (In thousands, except percentages) Short-term debt $ 184,967 1.1 % $ - - % Long-term debt (1) 7,962,104 45.3 % 7,330,657 48.1 % Shareholders' equity (2) 9,419,091 53.6 % 7,906,889 51.9 %
Total capitalization, including short-term debt
100.0 %$ 15,237,546 100.0 % (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 61.3% and 60.6% atSeptember 30, 2022 and 2021.
Cash Flows
Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.
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Cash flows from operating, investing and financing activities for the years
ended
For the Fiscal Year Ended
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(In thousands)
Total cash provided by (used in)
Operating activities $ 977,584 $
(1,084,251)
(2,429,958) (1,963,655) (1,925,518) (466,303) (38,137)
Financing activities 1,387,205 3,143,821 883,777 (1,756,616)
2,260,044
Change in cash and cash equivalents (65,169) 95,915 (3,742) (161,084) 99,657 Cash and cash equivalents at beginning of period 116,723 20,808 24,550 95,915 (3,742) Cash and cash equivalents at end of period$ 51,554 $
116,723
Cash flows for the fiscal year endedSeptember 30, 2021 compared with fiscal year endedSeptember 30, 2020 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, 2021 .
Cash flows from operating activities
For the fiscal year endedSeptember 30, 2022 , cash flow provided by operating activities was$977.6 million compared with cash flow used in operating activities of$1.1 billion in the prior year. Fiscal 2021 operating cash flow included$2.1 billion of cash paid for gas costs incurred during Winter Storm Uri. Excluding this cash outflow, operating cash flow in fiscal 2021 was$996.1 million . The year-over-year decrease in operating cash flow reflects the refund of excess deferred tax liabilities, increased purchases of gas stored underground and the timing of gas cost recoveries, partially offset by increased customer collections and the positive effects of successful rate case outcomes achieved in fiscal 2021 and 2022.
Cash flows from investing activities
Our capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 88 percent of our capital spending has been committed to improving the safety and reliability of our system. For the fiscal year endedSeptember 30, 2022 , we had$2.4 billion in capital expenditures compared with$2.0 billion for the fiscal year endedSeptember 30, 2021 . Capital spending increased by$474.9 million , or 24 percent, as a result of planned increases to modernize our system.
Cash flows from financing activities
Our financing activities provided
During the fiscal year endedSeptember 30, 2022 , we received$1.6 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of$600 million of 2.85% senior notes due 2052. We also completed a public offering of$200 million of 2.625% senior notes due 2029 that were used to repay our$200 million floating-rate term loan. Additionally, during the year endedSeptember 30, 2022 , we settled 7,907,833 shares that had been sold on a forward basis for net proceeds of$776.8 million . The net proceeds were used primarily to support capital spending and for other general corporate purposes. We also received$197.1 million from the settlement of forward starting interest rate swaps related to a debt issuance completed inOctober 2022 . Additionally, cash dividends increased due to an 8.8 percent increase in our dividend rate and an increase in shares outstanding. 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. 31
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The following table shows the number of shares issued for the fiscal years ended
For the Fiscal Year Ended
2022 2021 2020
Shares issued:
Direct Stock Purchase Plan 68,693 79,921 107,989
Retirement Savings Plan and Trust 72,339 84,265 78,941
1998 Long-Term Incentive Plan (LTIP) 427,929 242,216 254,706
Equity Issuance (1) 7,907,883 6,130,875 6,101,916
Total shares issued 8,476,844 6,537,277 6,543,552
(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. Additionally, Moody's placed our ratings under negative outlook. InFebruary 2022 , Moody's reaffirmed its long-term and short-term credit ratings and revised our outlook from negative to stable.
As of
S&P Moody's
Senior unsecured long-term debt A- A1
Short-term debt A-2 P-1
Outlook Negative Stable
A significant degradation in our operating performance or a significant
reduction in our liquidity caused by more limited access to the private and
public credit markets as a result of deteriorating global or national financial
and credit conditions could trigger a negative change in our ratings outlook or
even a reduction in our credit ratings by the two credit rating agencies. This
would mean more limited access to the private and public credit markets and an
increase in the costs of such borrowings.
A credit rating is not a recommendation to buy, sell or hold securities. The
highest investment grade credit rating is AAA for S&P and Aaa for Moody's. The
lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody's. Our
credit ratings may be revised or withdrawn at any time by the rating agencies,
and each rating should be evaluated independently of any other rating. There can
be no assurance that a rating will remain in effect for any given period of time
or that a rating will not be lowered, or withdrawn entirely, by a rating agency
if, in its judgment, circumstances so warrant.
Debt Covenants
We were in compliance with all of our debt covenants as of
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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) $ 7,960,000 $ 2,200,000 $ - $ 510,000 $ 5,250,000
Short-term debt (1) 184,967 184,967 - - -
Interest charges (2) 4,098,799 232,370 423,684 422,487 3,020,258
Finance leases (3) 73,193 3,313 6,813 7,070 55,997
Operating leases (4) 259,835 43,104 63,631 38,393 114,707
Financial instrument obligations (5) 4,129 3,000 1,129 - -
Pension and postretirement benefit plan
contributions (6) 359,479 35,636 91,664 63,831 168,348
Uncertain tax positions (7) 52,683 - 52,683 - -
Total contractual obligations $ 12,993,085 $ 2,702,390 $ 639,604 $ 1,041,781 $ 8,609,310
(1)Long-term and short-term debt excludes our finance lease obligations, which
are separately reported within this table. See Note 7 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 $21.3 million .
See Note 6 to the consolidated financial statements.
(4)Operating lease payments shown above include interest totaling $36.9 million .
See Note 6 to the consolidated financial statements.
(5)Represents liabilities for natural gas commodity financial instruments that
were valued as of September 30, 2022 . 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. See Note 14 to the
consolidated financial statements for further details.
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. At September 30, 2022 ,
we were committed to purchase 55.6 Bcf within one year and 89.1 Bcf within two
to three years under indexed contracts. At September 30, 2022 , we were committed
to purchase 13.2 Bcf within one year under fixed price contracts with a weighted
average price of $5.39 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
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The following table shows the components of the change in fair value of our
financial instruments for the fiscal year ended
Fair value of contracts atSeptember 30, 2021 $ 225,417 Contracts realized/settled (167,683) Fair value of new contracts 2,998 Other changes in value 317,130 Fair value of contracts atSeptember 30, 2022
377,862
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 $ 23,207 $ 290,267 $ 64,388 $ - $ 377,862
Prices based on models and other valuation
methods - - - - -
Total Fair Value $ 23,207 $ 290,267 $ 64,388 $ - $ 377,862 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
2022.
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