ATMOS ENERGY CORPORATION INTRODUCTION
The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management's Discussion and Analysis in our Annual Report on Form 10-K for the year endedSeptember 30, 2020 . Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995 The statements contained in this Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words "anticipate", "believe", "estimate", "expect", "forecast", "goal", "intend", "objective", "plan", "projection", "seek", "strategy" or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: federal, state and local regulatory and political trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the availability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competition from energy suppliers and alternative forms of energy; adverse weather conditions; the impact of climate change; the inability to continue to hire, train and retain operational, technical and managerial personnel; increased dependence on technology that may hinder the Company's business if such technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations inTexas ; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements; and the outbreak of COVID-19 and its impact on business and economic conditions. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise. OVERVIEWAtmos Energy and our subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. We distribute natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers throughout our six distribution divisions, which atMarch 31, 2021 covered service areas located in eight states. In addition, we transport natural gas for others through our distribution and pipeline systems.
We manage and review our consolidated operations through the following reportable segments:
•The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. •The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations inLouisiana . 26 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING ESTIMATES AND POLICIES Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted inthe United States . Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill and other long-lived assets. Actual results may differ from such estimates. Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 and include the following: •Regulation •Unbilled revenue •Pension and other postretirement plans •Impairment assessments Our critical accounting policies are reviewed periodically by the Audit Committee of our Board of Directors. There were no significant changes to these critical accounting policies during the six months endedMarch 31, 2021 . RESULTS OF OPERATIONS Executive SummaryAtmos Energy strives to operate our businesses safely and reliably while delivering superior shareholder value. Our commitment to modernizing our natural gas distribution and transmission systems requires a significant level of capital spending. We have the ability to begin recovering a significant portion of these investments timely through rate designs and mechanisms that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. The execution of our capital spending program, the ability to recover these investments timely and our ability to access the capital markets to satisfy our financing needs are the primary drivers that affect our financial performance. During the six months endedMarch 31, 2021 , we recorded net income of$514.4 million , or$4.01 per diluted share, compared to net income of$418.3 million , or$3.42 per diluted share for the six months endedMarch 31, 2020 . The 23 percent period-over-period increase in net income largely reflects positive rate outcomes driven by safety and reliability spending and customer growth in our distribution segment combined with a reduction in certain operating and maintenance expenses. Additionally, in our distribution segment, we have experienced lower service order revenues and higher bad debt expense due to the temporary suspension of collection activities during the pandemic. Finally, our year-to-date results reflect a reduction in our annual effective tax rate related to the refund of excess deferred taxes, primarily to APT customers, which has been or will be offset by a corresponding decrease in revenues over the remainder of the fiscal year. During the six months endedMarch 31, 2021 , we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of$109.8 million . As ofMarch 31, 2021 , we had ratemaking efforts in progress seeking a total increase in annual operating income of$113.8 million . Capital expenditures for the six months endedMarch 31, 2021 were$845.7 million . Over 85 percent was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce lag to six months or less. During the six months endedMarch 31, 2021 , we completed approximately$3.1 billion of long-term debt and equity financing, including the$2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri. As ofMarch 31, 2021 , our equity capitalization was 60.4 percent, excluding the$2.2 billion of incremental financing, and we had approximately$3.5 billion in total liquidity, including cash and cash equivalents and funds available through equity forward sales agreements. As a result of our sustained financial performance, our Board of Directors increased the quarterly dividend by 8.7 percent for fiscal 2021. The following discusses the results of operations for each of our operating segments. Distribution Segment The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of this segment are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas. 27 -------------------------------------------------------------------------------- Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. Under our current rate design, approximately 70 percent of our distribution segment revenues are earned through the first six months of the fiscal year. Additionally, we currently recover approximately 60 percent of our distribution segment revenue, excluding gas costs, through the base customer charge, which partially separates the recovery of our approved rate from customer usage patterns. Seasonal weather patterns can also affect our distribution operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which have been approved by state regulatory commissions for approximately 97 percent of our residential and commercial revenues in the following states for the following time periods: Kansas, West Texas October - May Tennessee October - April Kentucky, Mississippi, Mid-Tex November - April Louisiana December - March Virginia January - December Our distribution operations are also affected by the cost of natural gas. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Revenues in 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 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. Three Months EndedMarch 31, 2021 compared with Three Months EndedMarch 31, 2020 Financial and operational highlights for our distribution segment for the three months endedMarch 31, 2021 and 2020 are presented below. Three Months Ended March 31 2021 2020 Change (In thousands, unless otherwise noted) Operating revenues$ 1,282,674 $ 933,005 $ 349,669 Purchased gas cost 691,147 418,935 272,212 Operating expenses 288,272 260,529 27,743 Operating income 303,255 253,541 49,714 Other non-operating expense (760) (5,191) 4,431 Interest charges 14,017 10,797 3,220 Income before income taxes 288,478 237,553 50,925 Income tax expense 56,142 50,489 5,653 Net income$ 232,336 $ 187,064 $ 45,272 Consolidated distribution sales volumes - MMcf 145,478 119,358 26,120 Consolidated distribution transportation volumes - MMcf 45,765 44,512 1,253 Total consolidated distribution throughput - MMcf 191,243 163,870 27,373
Consolidated distribution average cost of gas per Mcf sold $ 4.75
Operating income for our distribution segment increased 20 percent, which primarily reflects:
28
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•a $65.8 million net increase in rate adjustments, primarily in our Mid-Tex,
Mississippi and West Texas Divisions.
•a $4.9 million increase from customer growth primarily in our Mid-Tex Division.
Partially offset by:
•a $3.9 million decrease in service order revenues primarily due to the
temporary suspension of collection activities.
•a $6.5 million increase in bad debt expense primarily due to the temporary
suspension of collection activities.
•a $12.3 million increase in depreciation expense and property taxes associated
with increased capital investments.
The quarter-over-quarter decrease in our effective income tax rate reflects the
anticipated impact on our annual effective income tax rate for the refund of
excess deferred income taxes to customers that began during the second quarter
of fiscal 2021. This reduction in income tax expense has been or will be offset
with a corresponding reduction in revenues over the remainder of the fiscal
year.
The following table shows our operating income by distribution division, in
order of total rate base, for the three months ended March 31, 2021 and 2020.
The presentation of our distribution operating income is included for financial
reporting purposes and may not be appropriate for ratemaking purposes.
Three Months Ended March 31
2021 2020 Change
(In thousands)
Mid-Tex $ 148,649 $ 109,707 $ 38,942
Kentucky/Mid-States 33,248 34,386 (1,138)
Louisiana 32,572 31,302 1,270
West Texas 26,199 23,844 2,355
Mississippi 38,143 32,243 5,900
Colorado-Kansas 20,863 18,796 2,067
Other 3,581 3,263 318
Total $ 303,255 $ 253,541 $ 49,714
Six Months Ended March 31, 2021 compared with Six Months Ended March 31, 2020
Financial and operational highlights for our distribution segment for the six
months ended March 31, 2021 and 2020 are presented below.
Six Months Ended March 31
2021 2020 Change
(In thousands, unless otherwise noted)
Operating revenues $ 2,159,324 $ 1,761,509 $ 397,815
Purchased gas cost 1,102,219 816,493 285,726
Operating expenses 544,296 511,198 33,098
Operating income 512,809 433,818 78,991
Other non-operating income (expense) 75 (3,237) 3,312
Interest charges 24,729 27,159 (2,430)
Income before income taxes 488,155 403,422 84,733
Income tax expense 102,127 86,601 15,526
Net income $ 386,028 $ 316,821 $ 69,207
Consolidated distribution sales volumes - MMcf 234,339 218,419 15,920
Consolidated distribution transportation volumes - MMcf 85,374 85,009 365
Total consolidated distribution throughput - MMcf 319,713 303,428 16,285
Consolidated distribution average cost of gas per Mcf sold $ 4.70
Operating income for our distribution segment increased 18 percent, which primarily reflects: •a$102.7 million net increase in rate adjustments, primarily in our Mid-Tex,Mississippi ,Louisiana and West Texas Divisions. •a$10.7 million increase from customer growth primarily in our Mid-Tex Division. 29 -------------------------------------------------------------------------------- •a$6.2 million decrease in operating and maintenance expenses, excluding bad debt expense, primarily due to a decrease in travel and entertainment expense. •a$14.2 million increase in revenue-related taxes primarily in our Mid-Tex Division, partially offset by a corresponding$9.2 million increase in the related tax expense. Partially offset by: •an$8.1 million decrease in net weather and consumption, primarily during the first quarter of fiscal 2021 attributed to warmer weather and a decrease in commercial sales volumes. •an$8.4 million decrease in service order revenues primarily due to the temporary suspension of collection activities. •an$8.8 million increase in bad debt expense primarily due to the temporary suspension of collection activities. •a$22.1 million increase in depreciation expense and property taxes associated with increased capital investments. The year-over-year decrease in our effective income tax rate reflects the anticipated impact on our annual effective income tax rate for the refund of excess deferred income taxes to customers that began during the second quarter of fiscal 2021. This reduction in income tax expense has been or will be offset with a corresponding reduction in revenues over the remainder of the fiscal year.
The following table shows our operating income by distribution division, in
order of total rate base, for the six months ended
Six Months Ended March 31
2021 2020 Change
(In thousands)
Mid-Tex $ 250,969 $ 188,002 $ 62,967
Kentucky/Mid-States 57,354 57,667 (313)
Louisiana 55,691 55,595 96
West Texas 46,246 41,610 4,636
Mississippi 62,777 54,657 8,120
Colorado-Kansas 34,093 32,532 1,561
Other 5,679 3,755 1,924
Total $ 512,809 $ 433,818 $ 78,991
Recent Ratemaking Developments
The amounts described in the following sections represent the operating income
that was requested or received in each rate filing, which may not necessarily
reflect the stated amount referenced in the final order, as certain operating
costs may have changed as a result of a commission's or other governmental
authority's final ruling. During the first six months of fiscal 2021, we
implemented regulatory proceedings, resulting in a $109.8 million increase in
annual operating income as summarized below.
Annual Increase (Decrease) in
Rate Action Operating Income
(In thousands)
Annual formula rate mechanisms $ 110,630
Rate case filings -
Other rate activity (877)
$ 109,753
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The following ratemaking efforts seeking
Operating Income
Division Rate Action Jurisdiction Requested
(In thousands)
Kentucky/Mid-States Formula Rate Mechanism Tennessee $ 7,689
Louisiana Formula Rate Mechanism Louisiana 11,829
Mid-Tex Formula Rate Mechanism City of Dallas 15,871
Mid-Tex Infrastructure Mechanism ATM Cities 11,110
Mid-Tex Infrastructure Mechanism Environs 4,643
Mississippi Infrastructure Mechanism Mississippi 8,572
West Texas Infrastructure Mechanism Environs 1,271
West Texas Infrastructure Mechanism WTX Triangle 418
Amarillo, Lubbock, Dalhart
West Texas Rate Case and Channing (1) 8,406
$ 69,809
(1) On March 5, 2021 , we reached a settlement agreement of $5.1 million pending
final approval by the ALDC cities in May 2021 ; we anticipate new rates will be
implemented on June 1, 2021 .
Annual Formula Rate Mechanisms
As an instrument to reduce regulatory lag, formula rate mechanisms allow us to
refresh our rates on an annual basis without filing a formal rate case. However,
these filings still involve discovery by the appropriate regulatory authorities
prior to the final determination of rates under these mechanisms. We currently
have formula rate mechanisms in our Louisiana , Mississippi and Tennessee
operations and in substantially all the service areas in our Texas divisions.
Additionally, we have specific infrastructure programs in substantially all of
our distribution divisions with tariffs in place to permit the investment
associated with these programs to have their surcharge rate adjusted annually to
recover approved capital costs incurred in a prior test-year period. The
following table summarizes our annual formula rate mechanisms by state:
Annual Formula Rate Mechanisms
State Infrastructure Programs Formula Rate Mechanisms
System Safety and Integrity Rider
Colorado (SSIR) -
Gas System Reliability Surcharge
Kansas (GSRS) -
Kentucky Pipeline Replacement Program (PRP) -
Louisiana (1) Rate Stabilization Clause (RSC)
Mississippi System Integrity Rider (SIR) Stable Rate Filing (SRF)
Tennessee (1) Annual Rate Mechanism (ARM)
Gas Reliability Infrastructure Dallas Annual Rate Review (DARR), Rate
Texas Program (GRIP), (1) Review Mechanism (RRM)
Steps to Advance Virginia Energy
Virginia (SAVE) -
(1) Infrastructure mechanisms in Texas , Louisiana and Tennessee allow for the
deferral of all expenses associated with capital expenditures incurred pursuant
to these rules, which primarily consists of interest, depreciation and other
taxes (Texas only), until the next rate proceeding (rate case or annual rate
filing), at which time investment and costs would be recoverable through base
rates.
31-------------------------------------------------------------------------------- The following annual formula rate mechanisms were approved during the six months endedMarch 31, 2021 : Increase in Annual Test Year Operating Effective Division Jurisdiction Ended Income Date (In thousands) 2021 Filings: Colorado-Kansas Kansas GSRS 09/30/2020$ 1,695 02/01/2021 Colorado-Kansas Colorado SSIR 12/31/2021 2,366 01/01/2021 Mid-Tex Mid-Tex Cities RRM 12/31/2019 82,645 12/01/2020 West Texas West Texas Cities RRM 12/31/2019 5,645 12/01/2020 Mississippi Mississippi - SIR 10/31/2021 10,556 11/01/2020 Mississippi Mississippi - SRF 10/31/2021 5,856 11/01/2020 Kentucky/Mid-States Virginia - SAVE 09/30/2021 305 10/01/2020 Kentucky/Mid-States Kentucky PRP 09/30/2021 1,562 10/01/2020 Total 2021 Filings$ 110,630 Rate Case Filings A rate case is a formal request fromAtmos Energy to a regulatory authority to increase rates that are charged to our customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a "show cause" action. Adequate rates are intended to provide for recovery of the Company's costs as well as a fair rate of return and ensure that we continue to deliver reliable, reasonably priced natural gas service safely to our customers. There was no rate case activity completed during the six months endedMarch 31, 2021 . Other Ratemaking Activity The following table summarizes other ratemaking activity during the six months endedMarch 31, 2021 . Decrease in Annual Operating Effective Division Jurisdiction Rate Activity Income Date (In thousands) 2021 Other Rate Activity: Colorado-Kansas Kansas Ad Valorem (1) $ (877) 02/01/2021 Total 2021 Other Rate Activity $ (877) (1) The Ad Valorem filing relates to property taxes that are either over or undercollected compared to the amount included in ourKansas service area's base rate. 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 32 -------------------------------------------------------------------------------- segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipelines. Further, natural gas price differences between the various hubs that we serve inTexas could influence the volumes of gas transported for shippers through ourTexas pipeline system and rates for such transportation. The results of APT are also significantly impacted by the natural gas requirements of its local distribution company customers. Additionally, its operations may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs. APT annually uses GRIP to recover capital costs incurred in the prior calendar year. OnFebruary 12, 2021 , APT made a GRIP filing that covered changes in net property, plant and equipment investment fromJanuary 1, 2020 throughDecember 31, 2020 with a requested increase in operating income of$44.0 million . Three Months EndedMarch 31, 2021 compared with Three Months EndedMarch 31, 2020 Financial and operational highlights for our pipeline and storage segment for the three months endedMarch 31, 2021 and 2020 are presented below. Three Months Ended March 31 2021 2020 Change (In thousands, unless otherwise noted) Mid-Tex / Affiliate transportation revenue$ 120,588 $ 113,570 $ 7,018 Third-party transportation revenue 29,508 31,307 (1,799) Other revenue 4,072 1,360 2,712 Total operating revenues 154,168 146,237 7,931 Total purchased gas cost 113 202 (89) Operating expenses 75,506 68,138 7,368 Operating income 78,549 77,897 652 Other non-operating income 3,594 2,202 1,392 Interest charges 12,079 11,374 705 Income before income taxes 70,064 68,725 1,339 Income tax expense 5,646 16,143 (10,497) Net income$ 64,418 $ 52,582 $ 11,836 Gross pipeline transportation volumes - MMcf 222,321 218,530 3,791 Consolidated pipeline transportation volumes - MMcf 130,578 143,465 (12,887) Operating income for our pipeline and storage segment increased slightly, which primarily reflects: •a$14.0 million increase due to rate adjustments from the GRIP filing approved inMay 2020 . The increase in rates was driven by increased safety and reliability spending. Partially offset by: •a$6.4 million decrease as we began to refund excess deferred income taxes to APT customers during the second quarter of fiscal 2021. •a$3.4 million net decrease in APT's thru-system activities. Thru-system volumes decreased ten percent due to lower production related to the impact of Winter Storm Uri. Prices were 31 percent lower primarily associated with the tightening of regional spreads driven by increased competing takeaway capacity in thePermian Basin . •a$6.8 million increase in depreciation expense and property taxes associated with increased capital investments. The quarter-over-quarter decrease in our effective income tax rate reflects the anticipated impact on our annual effective income tax rate for the refund of excess deferred income taxes to APT customers that began during the second quarter of fiscal 2021. This reduction in income tax expense has been or will be offset with a corresponding reduction in revenues over the remainder of the fiscal year. 33 -------------------------------------------------------------------------------- Six Months EndedMarch 31, 2021 compared with Six Months EndedMarch 31, 2020 Financial and operational highlights for our pipeline and storage segment for the six months endedMarch 31, 2021 and 2020 are presented below. Six Months Ended March 31 2021 2020 Change (In thousands, unless otherwise noted) Mid-Tex / Affiliate transportation revenue$ 245,849 $ 226,733 $ 19,116 Third-party transportation revenue 60,329 61,607 (1,278) Other revenue 7,703 6,073 1,630 Total operating revenues 313,881 294,413 19,468 Total purchased gas cost (1,131) 301 (1,432) Operating expenses 147,177 143,711 3,466 Operating income 167,835 150,401 17,434 Other non-operating income 8,831 5,135 3,696 Interest charges 23,377 22,241 1,136 Income before income taxes 153,289 133,295 19,994 Income tax expense 24,885 31,797 (6,912) Net income$ 128,404 $ 101,498 $ 26,906 Gross pipeline transportation volumes - MMcf 427,186 442,242 (15,056) Consolidated pipeline transportation volumes - MMcf 275,165 299,994 (24,829) Operating income for our pipeline and storage segment increased 12 percent, which primarily reflects: •a$27.3 million increase due to rate adjustments from the GRIP filing approved inMay 2020 . The increase in rates was driven by increased safety and reliability spending. •a$7.8 million decrease in system maintenance expense primarily due to well integrity costs that were non-recurring from the prior year. Partially offset by: •a$6.4 million decrease as we began to refund excess deferred income taxes to APT customers during the second quarter of 2021. •a$4.9 million net decrease in APT's thru-system activities. Thru-system volumes decreased ten percent due to lower production related to the impact of Winter Storm Uri as well as competing takeaway capacity. Additionally, prices were 16 percent lower primarily associated with the tightening of regional spreads driven by increased competing takeaway capacity in thePermian Basin . •an$11.4 million increase in depreciation expense and property taxes associated with increased capital investments. The year-over-year decrease in our effective income tax rate reflects the anticipated impact on our annual effective income tax rate for the refund of excess deferred income taxes to APT customers that began during the second quarter of fiscal 2021. This reduction in income tax expense has been or will be offset with a corresponding reduction in revenues over the remainder of the fiscal year. 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 theSecurities and Exchange Commission (SEC) that allows us to issue up to$4.0 billion in common stock and/or debt securities. AtMarch 31, 2021 , approximately$200 million of securities were available for issuance under the shelf registration statement, which expiresFebruary 11, 2023 . 34 -------------------------------------------------------------------------------- We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of$1.0 billion (including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity sales program), which expiresFebruary 11, 2023 . As ofMarch 31, 2021 , approximately$313 million of equity was available for issuance under this ATM equity sales program. Additionally, as ofMarch 31, 2021 , we have$115.6 million in proceeds from executed forward sale agreements available throughJune 30, 2022 . Additional details are summarized in Note 7 to the unaudited condensed consolidated financial statements. The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditure program for the remainder of fiscal year 2021. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary. The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as ofMarch 31, 2021 ,September 30, 2020 andMarch 31, 2020 : March 31, 2021 September 30, 2020 March 31, 2020 (In thousands, except percentages) Short-term debt $ - - % $ - - %$ 199,923 1.8 % Long-term debt(1) 7,316,581 48.3 % 4,531,944 40.0 % 4,328,997 40.0 % Shareholders' equity(2) 7,820,925 51.7 % 6,791,203 60.0 % 6,304,415 58.2 % Total$ 15,137,506 100.0 %$ 11,323,147 100.0 %$ 10,833,335 100.0 % (1) Inclusive of our finance leases. (2) Excluding the$2.2 billion of incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri, our equity capitalization ratio would have been 60.4%. Cash Flows Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors. Cash flows from operating, investing and financing activities for the six months endedMarch 31, 2021 and 2020 are presented below. Six Months Ended March 31 2021 2020 Change (In thousands) Total cash provided by (used in) Operating activities$ (1,402,246) $ 633,775 $ (2,036,021) Investing activities (846,063) (991,237) 145,174 Financing activities 3,092,812 653,011 2,439,801 Change in cash and cash equivalents 844,503 295,549 548,954 Cash and cash equivalents at beginning of period 20,808 24,550 (3,742) Cash and cash equivalents at end of period$ 865,311
Cash flows from operating activities For the six months endedMarch 31, 2021 , cash flow used from operating activities was$1.4 billion compared with cash flow generated from operating activities of$633.8 million for the six months endedMarch 31, 2020 . The$2.0 billion decrease in operating cash flows reflects gas costs incurred during Winter Storm Uri, the timing of other gas cost recoveries under our purchase gas cost mechanisms and the timing of customer collections partially offset by the positive effects of successful rate case outcomes achieved in fiscal 2020. 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. 35 -------------------------------------------------------------------------------- For the six months endedMarch 31, 2021 , cash used for investing activities was$846.1 million compared to$991.2 million for the six months endedMarch 31, 2020 . Capital spending decreased by$149.0 million , or 15 percent, primarily as a result of timing of spending in our distribution segment. Cash flows from financing activities For the six months endedMarch 31, 2021 , our financing activities provided$3.1 billion of cash compared with$653.0 million of cash provided by financing activities in the prior-year period. In the six months endedMarch 31, 2021 , we received$3.3 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. Additionally, during the six months endedMarch 31, 2021 , we settled 4,537,669 shares that had been sold on a forward basis for net proceeds of$460.7 million . The net proceeds were used primarily for the payment of natural gas costs incurred during Winter Storm Uri, to support capital spending and for other general corporate purposes. Cash dividends increased due to a 8.7 percent increase in our dividend rate and an increase in shares outstanding. In the six months endedMarch 31, 2020 , we received$1.1 billion in net proceeds from the issuance of long-term debt and equity. The net proceeds were used primarily to support capital spending, reduce short term debt and for other general corporate purposes. Cash dividends increased due to a 9.5 percent increase in our dividend rate and an increase in shares outstanding. The following table summarizes our share issuances for the six months endedMarch 31, 2021 and 2020: Six Months Ended March 31 2021 2020 Shares issued: Direct Stock Purchase Plan 42,249 36,752 1998 Long-Term Incentive Plan 160,488 172,209 Retirement Savings Plan and Trust 44,226 40,779 Equity Issuance 4,537,669 2,720,060 Total shares issued 4,784,632 2,969,800 Credit Ratings Our credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including but not limited to, debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the quality of our management and business strategy, the risks associated with our businesses and the regulatory structures that govern our rates in the states where we operate. Our debt is rated by two rating agencies: Standard & Poor's Corporation (S&P) and Moody's Investors Service (Moody's). As a result of the impacts of Winter Storm Uri, during the second quarter, S&P lowered our long-term and short-term credit ratings by one notch and placed our ratings under negative outlook and Moody's reaffirmed its long-term and short-term credit ratings and placed our ratings under negative outlook. As ofMarch 31, 2021 , our outlook and current debt ratings, which are all considered investment grade are as follows: March 31, 2021: S&P Moody's Senior unsecured long-term debt A- A1 Short-term debt A-2 P-1 Outlook Negative Negative A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the two credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings. A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating isAAA 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 36 -------------------------------------------------------------------------------- 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 ofMarch 31, 2021 . Our debt covenants are described in greater detail in Note 6 to the unaudited condensed consolidated financial statements. Contractual Obligations and Commercial Commitments Except as noted in Note 10 to the unaudited condensed consolidated financial statements, there were no significant changes in our contractual obligations and commercial commitments during the six months endedMarch 31, 2021 . Risk Management Activities In our distribution and pipeline and storage segments, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by periodically entering into financial instruments to effectively fix theTreasury yield component of the interest cost associated with anticipated financings. The following table shows the components of the change in fair value of our financial instruments for the three and six months endedMarch 31, 2021 and 2020: Three Months Ended March 31 Six Months Ended March 31 2021 2020 2021 2020 (In thousands) Fair value of contracts at beginning of period$ 148,555 $ (7,459) $ 78,663 $ (3,990) Contracts realized/settled (365) (4,073) 967 (6,936) Fair value of new contracts 239 (10) 326 95 Other changes in value 178,667 10,710 247,140 9,999 Fair value of contracts at end of period 327,096 (832) 327,096 (832) Netting of cash collateral - - - - Cash collateral and fair value of contracts at period end$ 327,096
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 $ 133,310 $ 96,677 $ 97,109 $ - $ 327,096
Prices based on models and other
valuation methods - - - - -
Total Fair Value $ 133,310 $ 96,677 $ 97,109 $ - $ 327,096
37-------------------------------------------------------------------------------- OPERATING STATISTICS AND OTHER INFORMATION The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three and six months endedMarch 31, 2021 and 2020. Distribution Sales and Statistical Data Three Months Ended March 31 Six Months Ended March 31 2021 2020 2021 2020 METERS IN SERVICE, end of period Residential 3,087,890 3,025,771 3,087,890 3,025,771 Commercial 282,313 276,668 282,313 276,668 Industrial 1,668 1,659 1,668 1,659 Public authority and other 8,282 8,518 8,282 8,518 Total meters 3,380,153 3,312,616 3,380,153 3,312,616 INVENTORY STORAGE BALANCE - Bcf 28.4 34.5 28.4 34.5 SALES VOLUMES - MMcf(1) Gas sales volumes Residential 91,034 71,124 144,564 129,904 Commercial 43,639 37,585 70,326 68,838 Industrial 7,739 7,913 14,390 14,768 Public authority and other 3,066 2,736 5,059 4,909 Total gas sales volumes 145,478 119,358 234,339 218,419 Transportation volumes 47,740 46,542 89,025 88,816 Total throughput 193,218 165,900 323,364 307,235
Pipeline and Storage Operations Sales and Statistical Data
Three Months Ended March 31 Six Months Ended March 31
2021 2020 2021 2020
CUSTOMERS, end of period
Industrial 92 93 92 93
Other 215 235 215 235
Total 307 328 307 328
INVENTORY STORAGE BALANCE - Bcf 0.1 1.0 0.1 1.0
PIPELINE TRANSPORTATION VOLUMES - MMcf(1) 222,321 218,530 427,186 442,242
Note to preceding tables:
(1)Sales and transportation volumes reflect segment operations, including
intercompany sales and transportation amounts.
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting developments and their impact on our financial position,
results of operations and cash flows are described in Note 2 to the unaudited
condensed consolidated financial statements.
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