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 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; 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. 23
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Factors
Influencing
Critical Application of the
Accounting Policy Summary of Policy Policy
Regulation Our distribution and pipeline operations meet Decisions of
the criteria of a cost-based, rate-regulated regulatory
entity under accounting principles generally authorities
accepted in the United States. Accordingly,
the financial results for these operations Issuance of new
reflect the effects of the ratemaking and regulations or
accounting practices and policies of the regulatory
various regulatory commissions to which we are mechanisms
subject.
Assessing the
As a result, certain costs that would normallyprobability of the
be expensed under accounting principles recoverability of
generally accepted in the United States are deferred costs
permitted to be capitalized or deferred on the
balance sheet because it is probable they can Continuing to meet
be recovered through rates. Further, thecriteria of a
regulation may impact the period in which cost-based, rate
revenues or expenses are recognized. The regulated entity
amounts expected to be recovered or recognized for accounting
are based upon historical experience and our purposes
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 Estimates of
accounting for distribution segment revenues delivered sales
whereby revenues attributable to gas delivered volumes based on
to customers, but not yet billed under the actual tariff
cycle billing method, are estimated and information and
accrued and the related costs are charged to weather
expense. information and
estimates of
When permitted, we implement rates that have customer
not been formally approved by our regulatory consumption and/or
authorities, subject to refund.We recognize behavior
this revenue and establish a reserve for
amounts that could be refunded based on our Estimates of
experience for the jurisdiction in which the purchased gas
rates were implemented. costs related to
estimated
deliveries
Estimates of
amounts billed
subject to refund
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Factors
Critical Influencing
Accounting Application of the
Policy Summary of Policy Policy
Pension and Pension and other postretirement plan costs General economic
other and liabilities are determined on an actuarial and market
postretirement basis using a September 30 measurement date conditions
plans and are affected by numerous assumptions and
estimates including the market value of plan Assumed investment
assets, estimates of the expected return on returns by asset
plan assets, assumed discount rates and class
current demographic and actuarial mortality
data. The assumed discount rate and the Assumed future
expected return are the assumptions that salary increases
generally have the most significant impact on
our pension costs and liabilities. The assumed Assumed discount
discount rate, the assumed health care cost rate
trend rate and assumed rates of retirement
generally have the most significant impact on Projected timing
our postretirement plan costs and liabilities. of future cash
disbursements
The discount rate is utilized principally in
calculating the actuarial present value of our Health care cost
pension and postretirement obligations and net experience trends
periodic pension and postretirement benefit
plan costs. When establishing our discount Participant
rate, we consider high quality corporate bond demographic
rates based on bonds available in the information
marketplace that are suitable for settling the
obligations, changes in those rates from the Actuarial
prior year and the implied discount rate that mortality
is derived from matching our projected benefit assumptions
disbursements with currently available high
quality corporate bonds. Impact of
legislation
The expected long-term rate of return on
assets is utilized in calculating the expected Impact of
return on plan assets component of our annual regulation
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 We review the carrying value of our long-lived General economic
assessments assets, including goodwill and identifiable and market
intangibles, whenever events or changes in conditions
circumstance indicate that such carrying
values may not be recoverable, and at least Projected timing
annually for goodwill, as required by U.S. and amount of
accounting standards. future discounted
cash flows
The evaluation of our goodwill balances and
other long-lived assets or identifiable assets Judgment in the
for which uncertainty exists regarding the evaluation of
recoverability of the carrying value of such relevant data
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.
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Non-GAAP Financial Measures As described further in Note 13 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 . Additionally, the enactment of the Tax Cuts and Jobs Act of 2017 (the TCJA) required us to remeasure our deferred tax assets and liabilities at our new federal statutory income tax rate as ofDecember 22, 2017 . The remeasurement of our net deferred tax liabilities resulted in the recognition of a non-cash income tax benefit of$158.8 million for the fiscal year endedSeptember 30, 2018 . Due to the non-recurring nature of these benefits, we believe that net income and diluted net income per share before the non-cash income tax benefits 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
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, except per share data)
Net income $ 601,443 $ 511,406 $ 603,064 $ 90,037 $ (91,658 )
Non-cash income tax benefits (20,962 ) - (158,782 ) (20,962 ) 158,782
Adjusted net income $ 580,481 $ 511,406 $ 444,282
Diluted net income per share
$ 0.54 $ (1.08 ) Diluted EPS from non-cash income tax benefits (0.17 ) - (1.43 ) (0.17 ) 1.43 Adjusted diluted net income per share$ 4.72 $ 4.35 $ 4.00 $ 0.37 $ 0.35 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. We continue to execute our strategy well while managing the ongoing impacts of the Coronavirus Disease 2019 (COVID-19) pandemic. Approximately 95 percent of our employees continue to work remotely as we provide essential services to ensure the safety and functionality of our critical infrastructure while taking precautions to provide a safe work environment for employees and customers. During fiscal 2020, we recorded net income of$601.4 million , or$4.89 per diluted share, compared to net income of$511.4 million , or$4.35 per diluted share in the prior year. After adjusting for a nonrecurring income tax benefit recognized during fiscal 2020, we recorded adjusted net income of$580.5 million , or$4.72 per diluted share for the year endedSeptember 30, 2020 . The following table details our consolidated net income by segment during the last three fiscal years: For the Fiscal Year Ended September 30 2020 2019 2018 (In thousands) Distribution segment$ 395,664 $ 328,814 $ 442,966 Pipeline and storage segment 205,779 182,592 160,098 Net income$ 601,443 $ 511,406 $ 603,064 The year-over-year increase in adjusted net income of$69.1 million , or 14 percent, largely reflects positive rate outcomes driven by safety and reliability spending and customer growth in our distribution business. We did not experience a material change in year-over-year residential revenue in our distribution segment due to COVID-19; however, we did experience a 10 26
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percent year-over-year decline in nonresidential revenue, including service and other revenues, primarily during the third and fourth fiscal quarter. The decline is partially offset by a reduction in certain operating and maintenance expenses. During the year endedSeptember 30, 2020 , we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of$160.2 million and had ratemaking efforts in progress atSeptember 30, 2020 , seeking a total increase in annual operating income of$131.9 million . As of the date of this report, we have received approval to implement$106.6 million of this amount in the first quarter of fiscal 2021. Capital expenditures for fiscal 2020 increased 14 percent period-over-period, to$1.9 billion . Over 85 percent was invested to improve the safety and reliability of our distribution and transmission systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce regulatory lag to six months or less. During fiscal 2020, we completed over$1.6 billion of long-term debt and equity financing. As ofSeptember 30, 2020 , our equity capitalization was 60 percent and we had approximately$2.6 billion in total liquidity, including cash and cash equivalents and funds available through equity forward sales agreements. As a result of the continued contribution and stability of our earnings, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 8.7% percent for fiscal 2021. 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. Revenues in ourTexas andMississippi service areas include franchise fees and gross receipt taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenue 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 78 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. During fiscal 2020, we completed 17 regulatory proceedings in our distribution segment, resulting in a$110.9 million increase in annual operating income. 27
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Review of Financial and Operating Results Financial and operational highlights for our distribution segment for the fiscal years endedSeptember 30, 2020 , 2019 and 2018 are presented below. For the Fiscal Year Ended September 30 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 (In thousands, unless otherwise noted) Operating revenues$ 2,626,993 $ 2,745,461 $ 3,003,047 $ (118,468 ) $ (257,586 ) Purchased gas cost 1,071,227 1,268,591 1,559,836 (197,364 ) (291,245 ) Operating expenses(1) 1,027,523 1,006,098 957,544 21,425 48,554 Operating income 528,243 470,772 485,667 57,471 (14,895 ) Other non-operating income (expense)(1) (1,265 ) 6,241 (6,649 ) (7,506 ) 12,890 Interest charges 39,634 60,031 65,850 (20,397 ) (5,819 ) Income before income taxes 487,344 416,982 413,168 70,362 3,814 Income tax expense 105,147 88,168 107,880 16,979 (19,712 ) Non-cash income tax benefits(2) (13,467 ) - (137,678 ) (13,467 ) 137,678 Net income$ 395,664 $ 328,814 $ 442,966 $ 66,850 $ (114,152 ) Consolidated distribution sales volumes - MMcf 291,650 315,476 300,817 (23,826 ) 14,659 Consolidated distribution transportation volumes - MMcf 147,387 155,078 150,566 (7,691 ) 4,512 Total consolidated distribution throughput - MMcf 439,037 470,554 451,383 (31,517 ) 19,171
Consolidated distribution
average cost of gas per Mcf sold
(1) In accordance with our adoption of new accounting standards, changes in
comprehensive income statement presentation were implemented on a
retrospective basis and impacted previously issued financial statements for
fiscal 2018.
(2) See Note 13 to the consolidated financial statements for further
information.
Fiscal year ended September 30, 2020 compared with fiscal year ended
September 30, 2019
Operating income for our distribution segment increased 12 percent, which
primarily reflects:
• an $86.8 million net increase in rate adjustments, primarily in our
Mid-Tex, Mississippi , Louisiana and West Texas Divisions.
• a $13.7 million increase from customer growth primarily in our Mid-Tex
Division.
• a
•
•
Partially offset by: • a$18.4 million decrease attributable to COVID-19: •$5.9 million decrease in net consumption and transportation during the third and fourth fiscal quarter, primarily due to a 13 percent decrease in commercial volumes. •$6.3 million decrease in service order revenues primarily during the third and fourth quarter due to the cessation of collection activities during the third and fourth quarters. •$6.2 million increase in bad debt expense primarily due to the cessation of collection activities during the third and fourth quarters. • a$30.6 million increase in depreciation expense and property taxes associated with increased capital investments. • a$4.5 million increase in information technology spending to support the modernization of our systems. The year-over-year change in other non-operating expense and interest charges of$12.9 million primarily reflects increased capitalized interest and AFUDC primarily due to increased capitalized spending, partially offset by an increase in interest expense due to the issuance of long-term debt during fiscal 2020, an increase in community support spending and an increase in pension and other postretirement non-service costs. The fiscal year endedSeptember 30, 2019 compared with fiscal year endedSeptember 30, 2018 for our distribution segment is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . 28
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The following table shows our operating income by distribution division, in order of total rate base, for the fiscal years endedSeptember 30, 2020 , 2019 and 2018. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 (In thousands) Mid-Tex$ 236,066 $ 202,050 $ 202,444 $ 34,016 $ (394 ) Kentucky/Mid-States 76,745 73,965 81,105 2,780 (7,140 ) Louisiana 71,892 70,440 70,609 1,452 (169 ) West Texas 52,493 44,902 45,494 7,591 (592 ) Mississippi 55,938 46,229 47,237 9,709 (1,008 ) Colorado-Kansas 34,039 34,362 32,333 (323 ) 2,029 Other 1,070 (1,176 ) 6,445 2,246 (7,621 ) Total$ 528,243 $ 470,772 $ 485,667 $ 57,471 $ (14,895 ) Pipeline and Storage Segment Our pipeline and storage segment consists of the pipeline and storage operations of our APT Division and our natural gas transmission operations inLouisiana . Over 80 percent of this segment's revenues are derived from transportation and storage services provided by APT to our Mid-Tex Division, other third party local distribution companies, industrial and electric generation customers, as well as marketers and producers. 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 influences the volumes of gas transported for shippers throughTexas pipeline systems 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 14, 2020 , APT made a GRIP filing that covered changes in net investment fromJanuary 1, 2019 throughDecember 31, 2019 with a requested increase in operating income of$49.3 million . OnMay 20, 2020 , the RRC approved the Company's GRIP filing. 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 . 29
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Review of Financial and Operating Results Financial and operational highlights for our pipeline and storage segment for the fiscal years endedSeptember 30, 2020 , 2019 and 2018 are presented below. For the Fiscal Year
Ended
2020 2019 2018 2020 vs. 2019 2019 vs. 2018
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate
transportation revenue $ 474,077 $ 428,586 $ 384,500 $ 45,491 $ 44,086
Third-party transportation
revenue 127,444 129,930 115,207 (2,486 ) 14,723
Other revenue 7,818 8,508 8,006 (690 ) 502
Total operating revenues 609,339 567,024 507,713 42,315 59,311
Total purchased gas cost 1,548 (360 ) 1,978 1,908 (2,338 )
Operating expenses 311,935 292,098 263,468 19,837 28,630
Operating income 295,856 275,286 242,267 20,570 33,019
Other non-operating income
(expense) 8,436 1,163 (3,495 ) 7,273 4,658
Interest charges 44,840 43,122 40,796 1,718 2,326
Income before income taxes 259,452 233,327 197,976
26,125 35,351
Income tax expense 61,168 50,735 58,982 10,433 (8,247 )
Non-cash income tax benefits(1) (7,495 ) - (21,104 ) (7,495 ) 21,104
Net income $ 205,779 $ 182,592 $ 160,098 $ 23,187 $ 22,494
Gross pipeline transportation
volumes - MMcf 822,499 939,376 871,904 (116,877 ) 67,472
Consolidated pipeline
transportation volumes - MMcf 621,371 721,998 663,900 (100,627 ) 58,098
(1) See Note 13 to the consolidated financial statements for further
information.
Fiscal year endedSeptember 30, 2020 compared with fiscal year endedSeptember 30, 2019 Operating income for our pipeline and storage segment increased seven percent, which primarily reflects: • a$53.2 million net increase due to rate adjustments from the GRIP filing approved inMay 2019 and 2020. The increase in rates was driven by increased safety and reliability spending.
Partially offset by:
• a
of regional spreads driven by a reduction in associated Permian Basin
gas production.
• a $12.5 million increase in depreciation expense associated with
increased capital investments.
• a $9.4 million increase in system maintenance expense primarily due to
spending on hydro testing and in-line inspections.
The year-over-year change in other non-operating income and interest charges of
$5.6 million reflects increased 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 2020.
The fiscal year ended September 30, 2019 compared with fiscal year ended
September 30, 2018 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, 2019 .
LIQUIDITY AND CAPITAL RESOURCES
The liquidity required to fund our working capital, capital expenditures and
other cash needs is provided from a combination of internally generated cash
flows and external debt and equity financing. As of September 30, 2020 , external
debt financing is provided primarily through the issuance of long-term debt, a
$1.5 billion commercial paper program and four committed revolving credit
facilities with a total availability from third-party lenders of approximately
$2.2 billion . The commercial paper program and credit facilities provide
cost-effective, short-term financing until it can be replaced with a balance of
long-term debt and equity financing that achieves the Company's desired capital
structure with an equity-to-total-capitalization ratio between 50% and 60%,
inclusive of long-term and short-term debt. Additionally, we have various
uncommitted trade credit lines with our gas suppliers that we utilize to
purchase natural gas on a monthly basis.
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We have a shelf registration statement on file with theSecurities and Exchange Commission (SEC) that allows us to issue up to$4.0 billion in common stock and/or debt securities. As of the date of this report, approximately$2.4 billion of securities remained available for issuance under the shelf registration statement, which expiresFebruary 11, 2023 . We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of$1.0 billion , which expiresFebruary 11, 2023 . AtSeptember 30, 2020 , approximately$552 million of equity is available for issuance under this ATM equity sales program. Additionally, as ofSeptember 30, 2020 , we have$345.2 million in proceeds from previously executed forward sale agreements that must be settled during fiscal 2021. The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditures program. The following table presents our capitalization as ofSeptember 30, 2020 and 2019: September 30 2020 2019 (In thousands, except percentages) Short-term debt $ - - %$ 464,915 4.8 % Long-term debt(1) 4,531,944 40.0 % 3,529,452 36.2 % Shareholders' equity 6,791,203 60.0 % 5,750,223 59.0 % Total capitalization, including short-term debt$ 11,323,147 100.0 % $
9,744,590 100.0 %
(1) Inclusive of our finance leases as of
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, 2020 , 2019 and 2018 are presented below. For the Fiscal Year Ended September 30 2020 2019 2018 2020 vs. 2019 2018 vs. 2017 (In thousands) Total cash provided by (used in) Operating activities$ 1,037,999 $ 968,769 $ 1,124,662 $ 69,230 $ (155,893 ) Investing activities (1,925,518 ) (1,683,660 ) (1,463,566 ) (241,858 ) (220,094 ) Financing activities 883,777 725,670 326,266 158,107 399,404 Change in cash and cash equivalents (3,742 ) 10,779 (12,638 ) (14,521 ) 23,417 Cash and cash equivalents at beginning of period 24,550 13,771 26,409 10,779 (12,638 ) Cash and cash equivalents at end of period$ 20,808 $ 24,550 $
13,771
Cash flows for the fiscal year endedSeptember 30, 2019 compared with fiscal year endedSeptember 30, 2018 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, 2019 . Cash flows from operating activities For the fiscal year endedSeptember 30, 2020 , we generated cash flow from operating activities of$1,038.0 million compared with$968.8 million in the prior year. The year-over-year increase in operating cash flows reflects positive cash effects of rate case outcomes achieved in fiscal 2019 and working capital changes, primarily as a result of the timing of gas cost recoveries under our purchase gas cost mechanisms. Cash flows from investing activities Our capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 87 percent of our capital spending has been committed to improving the safety and reliability of our system. 31
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We allocate our capital spending among our service areas using risk management models and subject matter experts to identify, assess and develop a plan of action to address our highest risk facilities. We have regulatory mechanisms in most of our service areas that provide the opportunity to include approved capital costs in rate base on a periodic basis without being required to file a rate case. These mechanisms permit us a reasonable opportunity to earn a fair return on our investment without compromising safety or reliability. For the fiscal year endedSeptember 30, 2020 , we had$1.9 billion in capital expenditures compared with$1.7 billion for the fiscal year endedSeptember 30, 2019 . Capital spending increased by$242.2 million , or 14 percent, as a result of planned increases to modernize our system. Cash flows from financing activities Our financing activities provided$883.8 million and$725.7 million in cash for fiscal years 2020 and 2019. 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, during the fiscal year endedSeptember 30, 2020 , 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. Additionally, cash dividends increased due to a 9.5 percent increase in our dividend rate and an increase in shares outstanding. During the fiscal year endedSeptember 30, 2019 , we received$1.7 billion in net proceeds from the issuance of long-term debt and equity. A portion of the net proceeds was used to repay at maturity our$450 million 8.50% unsecured senior notes and the related settlement of our interest rate swaps for$90.1 million , to repay at maturity our$125 million floating rate term loan, to reduce short-term debt, to support our capital spending and for other general corporate purposes. Cash dividends increased due to an 8.2 percent increase in our dividend rate and an increase in shares outstanding. The following table shows the number of shares issued for the fiscal years endedSeptember 30, 2020 , 2019 and 2018: For the Fiscal Year Ended September 30 2020 2019 2018 Shares issued: Direct Stock Purchase Plan 107,989 110,063 131,213 Retirement Savings Plan and Trust 78,941 81,456
94,081
1998 Long-Term Incentive Plan (LTIP) 254,706 299,612 385,351 Equity Issuance(1) 6,101,916 7,574,111 4,558,404 Total shares issued 6,543,552 8,065,242 5,169,049
(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). OnDecember 16, 2019 , Moody's upgraded our senior unsecured long-term debt rating to A1 and changed their outlook to stable, citing our strong credit metrics as a result of continued improvement in rate design to minimize regulatory lag and our balanced fiscal policy. 32
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As of
S&P Moody's
Senior unsecured long-term debt A A1
Short-term debt A-1 P-1
Outlook Stable Stable
A significant degradation in our operating performance or a significant
reduction in our liquidity caused by more limited access to the private and
public credit markets as a result of deteriorating global or national financial
and credit conditions could trigger a negative change in our ratings outlook or
even a reduction in our credit ratings by the two credit rating agencies. This
would mean more limited access to the private and public credit markets and an
increase in the costs of such borrowings.
A credit rating is not a recommendation to buy, sell or hold securities. The
highest investment grade credit rating is AAA for S&P and Aaa for Moody's. The
lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody's. Our
credit ratings may be revised or withdrawn at any time by the rating agencies,
and each rating should be evaluated independently of any other rating. There can
be no assurance that a rating will remain in effect for any given period of time
or that a rating will not be lowered, or withdrawn entirely, by a rating agency
if, in its judgment, circumstances so warrant.
Debt Covenants
We were in compliance with all of our debt covenants as of September 30, 2020 .
Our debt covenants are described in Note 7 to the consolidated financial
statements.
Contractual Obligations and Commercial Commitments
The following table provides information about contractual obligations and
commercial commitments at September 30, 2020 .
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) $ 4,560,000 $ - $ 200,000 $ 10,000 $ 4,350,000
Interest charges(2) 3,925,475 194,092 381,386 378,984 2,971,013
Finance leases(3) 16,477 741 1,513 1,557 12,666
Operating leases(4) 278,181 40,049 70,176 41,573 126,383
Financial instrument
obligations(5) 2,015 2,015 - - -
Pension and postretirement
benefit plan
contributions(6) 423,505 60,553 133,694 85,792 143,466
Uncertain tax positions (7) 30,921 - 30,921 - -
Total contractual
obligations $ 9,236,574 $ 297,450 $ 817,690 $ 517,906 $ 7,603,528 (1) Long-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.
(3) Finance lease payments shown above include interest totaling
See Note 6 to the consolidated financial statements.
(4) Operating lease payments shown above include interest totaling
million. See Note 6 to the consolidated financial statements.
(5) Represents liabilities for natural gas commodity financial instruments that
were valued as 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 9 to the consolidated financial
statements.
(7) Represents liabilities associated with uncertain tax positions claimed orexpected 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.
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AtSeptember 30, 2020 , we were committed to purchase 59.3 Bcf within one year, 57.0 Bcf within two to three years and 0.1 Bcf beyond three years under indexed contracts. 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. The following table shows the components of the change in fair value of our financial instruments for the fiscal year endedSeptember 30, 2020 (in thousands): Fair value of contracts atSeptember 30, 2019 $ (3,990 ) Contracts realized/settled (2,731 ) Fair value of new contracts 2,570 Other changes in value 82,814 Fair value of contracts atSeptember 30, 2020 78,663 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 September 30, 2020
Maturity in years
Total
Less Greater Fair
Source of Fair Value than 1 1-3 4-5 than 5 Value
(In thousands)
Prices actively quoted $ 3,672 $ 49,371 $ 25,620 $ - $ 78,663
Prices based on models and other
valuation methods - - - - -
Total Fair Value $ 3,672 $ 49,371 $ 25,620 $ - $ 78,663
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 14 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.
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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
2020.
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