The following discussion should be read in conjunction with the summary consolidated financial statements in this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended
Caution for safe harbor purposes 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 in
Texas; 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.
Atmos Energyand 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 at June 30, 2022covered service areas located in eight states. In addition, we transport natural gas for others through our distribution and pipeline systems.
We manage and review our consolidated operations through the following reportable segments:
•The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. •The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in
Louisiana. 28 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in
the 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 ended September 30, 2021and include the following:
•Unbilled revenue •Pension and other postretirement plans •Impairment assessments
Our significant accounting policies are reviewed periodically by the Audit Committee of our Board of Directors. There have been no material changes to these critical accounting policies during the nine months ended
RESULTS OF OPERATIONS
Atmos Energystrives 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 nine months ended June 30, 2022, we recorded net income of $702.8 million, or $5.12per diluted share, compared to net income of $616.8 million, or $4.77per diluted share for the nine months ended June 30, 2021. The 14 percent year-over-year increase in net income largely reflects positive rate outcomes driven by safety and reliability spending and customer growth in our distribution segment, offset by higher spending on certain operating and maintenance expenses in both our segments. During the nine months ended June 30, 2022, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $154.9 million. Excluding the impact of the refund of excess deferred income taxes resulting from previously enacted tax reform legislation, our total rate outcomes were $205.9 millionfor the nine months ended June 30, 2022. Additionally, as of June 30, 2022, we had ratemaking efforts in progress seeking a total increase in annual operating income of $132.6 million. Capital expenditures for the nine months ended June 30, 2022were $1.7 billion. Over 85 percent was invested to improve the safety and reliability of our distribution and transportation systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce lag to six months or less. During the nine months ended June 30, 2022, we completed approximately $1.5 billionof long-term debt and equity financing. As of June 30, 2022, our equity capitalization was 53.8 percent. Excluding the $2.2 billionof incremental financing issued in conjunction with Winter Storm Uri, our equity capitalization was 61.7 percent. As of June 30, 2022, we had approximately $3.5 billionin total liquidity, consisting of $328.1 millionin cash and cash equivalents, $700.9 millionin funds available through equity forward sales agreements and $2,494.4 millionin undrawn capacity under our credit facilities.
Thanks to our strong financial performance, our Board of Directors increased the quarterly dividend by 8.8% for fiscal year 2022.
The following text presents the results of operations for each of our operating segments.
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. 29 -------------------------------------------------------------------------------- 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 96 percent of our residential and commercial revenues in the following states for the following time periods:
Kansas, West TexasOctober - May TennesseeOctober - April Kentucky, Mississippi, Mid- Tex November- April LouisianaDecember - March VirginiaJanuary - 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 our Texasand Mississippiservice areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income. The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 79 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources.
Three months completed
Financial and operational highlights of our distribution segment for the three months ended
Three Months Ended June 30 2022 2021 Change (In thousands, unless otherwise noted) Operating revenues
$ 773,311 $ 558,750 $ 214,561Purchased gas cost 390,559 202,050 188,509 Operating expenses 316,693 288,577 28,116 Operating income 66,059 68,123 (2,064) Other non-operating income 6,708 1,060 5,648 Interest charges 12,341 8,540 3,801 Income before income taxes 60,426 60,643 (217) Income tax expense 3,025 7,354 (4,329) Net income $ 57,401 $ 53,289 $ 4,112Consolidated distribution sales volumes - MMcf 44,954 41,352 3,602 Consolidated distribution transportation volumes - MMcf 34,360 34,776 (416) Total consolidated distribution throughput - MMcf 79,314 76,128 3,186
Average consolidated gas distribution cost per Mcf sold $8.69
30 -------------------------------------------------------------------------------- Operating income for our distribution segment decreased three percent. Increased refunds of excess deferred taxes to customers decreased period-over-period operating income by
$20.8 millionand reduced the interim effective income tax rate for this segment to 5.0% compared to 12.1% in the prior year period. Additional key drivers for the change in operating income include:
$1.8 milliondecrease in other operation and maintenance expense, primarily due to lower bad debt expense and other administrative costs in the current-year quarter. Partially offset by:
The following table shows our operating income by distribution division, in order of total rate base, for the three months ended
Three Months Ended June 30 2022 2021 Change (In thousands) Mid-Tex
$ 30,574 $ 33,135 $ (2,561)Kentucky/Mid-States 13,715 11,773 1,942 Louisiana 10,892 11,027 (135) West Texas 1,876 5,118 (3,242) Mississippi 4,932 5,365 (433) Colorado-Kansas 3,335 2,517 818 Other 735 (812) 1,547 Total $ 66,059 $ 68,123 $ (2,064)31
Nine month period ended
Financial and operational highlights of our distribution segment for the nine months ended
Nine Months Ended June 30 2022 2021 Change (In thousands, unless otherwise noted) Operating revenues
$ 3,356,279 $ 2,718,074 $ 638,205Purchased gas cost 1,881,212 1,304,269 576,943 Operating expenses 907,208 832,873 74,335 Operating income 567,859 580,932 (13,073) Other non-operating income 9,173 1,135 8,038 Interest charges 36,046 33,269 2,777 Income before income taxes 540,986 548,798 (7,812) Income tax expense 35,163 109,481 (74,318) Net income $ 505,823 $ 439,317 $ 66,506Consolidated distribution sales volumes - MMcf 256,717 275,691 (18,974) Consolidated distribution transportation volumes - MMcf 120,037 120,150 (113) Total consolidated distribution throughput - MMcf 376,754 395,841 (19,087)
Average consolidated gas distribution cost per Mcf sold $7.33
Operating income for our distribution segment decreased two percent. Increased refunds of excess deferred taxes to customers decreased period-over-period operating income by
$89.5 millionand reduced the interim effective income tax rate for this segment to 6.5% compared to 19.9% in the prior year period. Additional key drivers for the change in operating income include:
Partially offset by:
The following table shows our operating income by distribution division, in order of total rate base, for the nine months ended
Nine Months Ended June 30 2022 2021 Change (In thousands) Mid-Tex
$ 292,207 $ 284,104 $ 8,103Kentucky/Mid-States 75,541 69,127 6,414 Louisiana 61,842 66,718 (4,876) West Texas 53,907 51,364 2,543 Mississippi 66,719 68,142 (1,423) Colorado-Kansas 28,187 36,610 (8,423) Other (10,544) 4,867 (15,411) Total $ 567,859 $ 580,932 $ (13,073)32
Recent developments in pricing
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 nine months of fiscal 2022, we implemented, or received approval to implement, regulatory proceedings, resulting in a
$76.1 millionincrease in annual operating income as summarized below. Our ratemaking outcomes include the refund of excess deferred income taxes (EDIT) resulting from previously enacted tax reform legislation and do not reflect the true economic benefit of the outcomes because they do not include the corresponding income tax benefit. Excluding these amounts, our total rate outcomes for ratemaking activities for the nine months ended June 30, 2022were $127.1 million. Annual Increase Annual Increase (Decrease) in (Decrease) in Operating Income Rate Action Operating Income EDIT Impact Excluding EDIT (In thousands) Annual formula rate mechanisms $ 70,488 $ 43,638$ 114,126 Rate case filings 5,938 7,379 13,317 Other rate activity (370) - (370) $ 76,056 $ 51,017$ 127,073
The following pricing efforts aimed at
Operating Income Division Rate Action Jurisdiction Requested (In thousands) Kentucky/Mid-States Infrastructure Mechanism Virginia $ 477 Kentucky/Mid-States Formula Rate Mechanism Tennessee (1) 3,662 Louisiana Formula Rate Mechanism Louisiana (2) 17,650 Mid-Tex Formula Rate Mechanism Mid-Tex Cities 92,615 Mississippi Infrastructure Mechanism Mississippi 10,006 West Texas Formula Rate Mechanism
West Texas Cities 8,208 $ 132,618 (1)
The Tennessee Public Utility Commissionapproved the ARM filing on June 20, 2022for an increase in operating income of $2.5 millionwith rates effective July 1, 2022. (2) The Company implemented the requested amount, subject to refund, on July 1, 2022and anticipates resolving the RSC filing during the fourth quarter of fiscal 2022.
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, Mississippiand Tennesseeoperations and in substantially all the service areas in our Texasdivisions. 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: 33 -------------------------------------------------------------------------------- Annual Formula Rate Mechanisms State Infrastructure Programs Formula Rate Mechanisms System Safety and Integrity Rider Colorado (SSIR) - Gas System Reliability Surcharge (GSRS), System Integrity Program Kansas (SIP) - 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, Louisianaand Tennesseeallow for the deferral of all expenses associated with capital expenditures incurred pursuant to these rules, which primarily consists of interest, depreciation and other taxes ( Texasonly), until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
The following annual formula rate mechanisms have been approved during the nine months ended
Increase Increase (Decrease) in (Decrease) in Annual Annual Operating Test Year Operating Income Effective Division Jurisdiction Ended Income EDIT Impact Excluding EDIT Date (In thousands) 2022 Filings: Amarillo, Lubbock, West Texas Dalhart and Channing
06/11/2022 West Texas Triangle 12/31/2021 1,549 - 1,549 06/11/2022 West Texas Environs 12/31/2021 1,221 - 1,221 06/11/2022 Mid-Tex ATM Cities 12/31/2021 12,815 - 12,815 06/10/2022 Mid-Tex Environs 12/31/2021 5,646 - 5,646 06/10/2022 Mid-Tex DARR (1) 09/30/2021 13,201 - 13,201 05/25/2022 Colorado-Kansas Kansas SIP 12/31/2021 623 - 623 04/01/2022 Colorado-Kansas Kansas GSRS 09/30/2021 1,820 - 1,820 02/01/2022 Colorado-Kansas Colorado SSIR 12/31/2022 2,610 - 2,610 01/01/2022 Mid-Tex Mid-Tex Cities RRM 12/31/2020 21,673 33,851 55,524 12/01/2021 West Texas West Texas Cities RRM 12/31/2020 151 3,347 3,498 12/01/2021 Mississippi Mississippi - SIR 10/31/2022 8,354 2,123 10,477 11/01/2021 Mississippi Mississippi - SRF 10/31/2022 (5,624) 4,317 (1,307) 11/01/2021 Kentucky/Mid-States Virginia - SAVE 09/30/2022 327 - 327 10/01/2021 Total 2022 Filings
$ 70,488 $ 43,638 $ 114,126
(1) The rate increase for this filing was approved based on the effective date hereof; however, the new rates will be applied from
Pricing case filings
A rate case is a formal request from
Atmos Energyto a regulatory authority to increase rates that are charged to our customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a "show cause" action. Adequate rates are intended to provide for recovery of the Company's costs as well as a fair rate of return and ensure that we continue to deliver reliable, reasonably priced natural gas service safely to our customers. 34 --------------------------------------------------------------------------------
The following table summarizes the rate cases completed during the nine months ended
Increase Increase in Annual in Annual Operating Operating Income Effective Division State Income EDIT Impact Excluding EDIT Date (In thousands) 2022 Rate Case Filings: Kentucky/Mid-States Kentucky (1)
$ 5,938 $ 7,379 $ 13,31705/20/2022 Total 2022 Rate Case Filings $ 5,938 $ 7,379 $ 13,317
(1) The outcome of the tariff case for
Other Ratemaking Activity The following table summarizes other ratemaking activity during the nine months ended
June 30, 2022. Decrease in Annual Operating Effective Division Jurisdiction Rate Activity Income Date (In thousands) 2022 Other Rate Activity: Colorado-Kansas Kansas Ad Valorem (1) $ (370) 02/01/2022 Total 2022 Other Rate Activity $ (370) (1) The Ad Valorem filing relates to property taxes that are either over or undercollected compared to the amount included in our Kansasservice 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 in Louisiana. APT is one of the largest intrastate pipeline operations in Texaswith a heavy concentration in the established natural gas producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Barnett Shale, the Texas Gulf Coastand the Permian Basinof West Texas. APT provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. 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 in Texas. Our natural gas transmission operations in Louisianaare comprised of a 21-mile pipeline located in the New Orleans, Louisianaarea that is primarily used to aggregate gas supply for our distribution division in Louisianaunder a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisianadistribution division for these services is subject to regulatory approval by the Louisiana Public Service Commission. We also manage two asset management plans, which have been approved by applicable state regulatory commissions. Generally, these asset management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements. Our pipeline and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Texasand Louisianaservice areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipelines. Further, natural gas price differences between the various hubs that we serve in Texascould influence the volumes of gas transported for shippers through our Texaspipeline system and rates for such transportation.
APT’s results are also strongly impacted by the natural gas needs of its ELD customers. In addition, its operations may be affected by when costs and expenses are incurred and when those costs and expenses are recovered through its rates.
APT annually uses GRIP to recover capital costs incurred in the prior calendar year. On
February 11, 2022, APT made a GRIP filing that covered changes in net property, plant and equipment investments from January 1, 2021through December 31, 2021with a requested increase in operating income of $78.8 million. On May 18, 2022, the Texas Railroad Commissionapproved the Company's GRIP filing. 35 --------------------------------------------------------------------------------
Three months completed
Financial and operational highlights for our pipeline and storage segment for the three months ended
Three Months Ended June 30 2022 2021 Change (In thousands, unless otherwise noted) Mid-Tex / Affiliate transportation revenue
$ 144,970 $ 126,022 $ 18,948Third-party transportation revenue 35,939 33,565 2,374 Other revenue 2,503 3,400 (897) Total operating revenues 183,412 162,987 20,425 Total purchased gas cost (1,347) 691 (2,038) Operating expenses 96,231 97,029 (798) Operating income 88,528 65,267 23,261 Other non-operating income 6,555 4,827 1,728 Interest charges 13,849 12,422 1,427 Income before income taxes 81,234 57,672 23,562 Income tax expense 10,088 8,550 1,538 Net income $ 71,146 $ 49,122 $ 22,024Gross pipeline transportation volumes - MMcf 175,117 187,408 (12,291) Consolidated pipeline transportation volumes - MMcf 146,422 153,166 (6,744)
Operating profit for our pipeline and storage segment increased by 36%. The main factors for the variation in operating income include:
$21.0 millionincrease due to rate adjustments from the GRIP filings approved in May 2021and 2022. The increase in rates was driven by increased safety and reliability spending.
Partially offset by:
Nine month period ended
Financial and operational highlights for our pipeline and storage segment for the nine months ended
Nine Months Ended June 30 2022 2021 Change (In thousands, unless otherwise noted) Mid-Tex / Affiliate transportation revenue
$ 401,455 $ 371,871 $ 29,584Third-party transportation revenue 98,696 93,894 4,802 Other revenue 9,926 11,103 (1,177) Total operating revenues 510,077 476,868 33,209 Total purchased gas cost (3,075) (440) (2,635) Operating expenses 265,431 244,206 21,225 Operating income 247,721 233,102 14,619 Other non-operating income 18,005 13,658 4,347 Interest charges 38,923 35,799 3,124 Income before income taxes 226,803 210,961 15,842 Income tax expense 29,871 33,435 (3,564) Net income $ 196,932 $ 177,526 $ 19,406Gross pipeline transportation volumes - MMcf 581,545 614,594 (33,049) Consolidated pipeline transportation volumes - MMcf 411,884 428,331 (16,447) Operating income for our pipeline and storage segment increased six percent. Increased refunds of excess deferred taxes to customers decreased period-over-period operating income by $13.3 millionand reduced the interim effective income tax rate for this segment to 13.2% compared to 15.8% in the prior year period. Additional drivers for the change in operating income include: •a $49.4 millionincrease due to rate adjustments from the GRIP filings approved in May 2021and 2022. The increase in rates was driven by increased safety and reliability spending. Partially offset by:
Cash 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 billioncommercial paper program and four committed revolving credit facilities with $2.5 billionin total availability from third-party lenders. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company's desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis. We have a shelf registration statement on file with the Securities and Exchange Commission(SEC) that allows us to issue up to $5.0 billionin common stock and/or debt securities. As of the date of this report, $2.2 billionof securities were available for issuance under the shelf registration statement, which expires June 29, 2024. We also have an at-the-market (ATM) equity sales program that allows us to issue and sell shares of our common stock up to an aggregate offering price of $1.0 billion(including shares of common stock that may be sold pursuant to forward sale agreements entered into in connection with the ATM equity sales program), which expires June 29, 2024. As of June 30, 2022, $663.0 millionof equity was available for issuance under this ATM equity sales program. Additionally, as of June 30, 2022, we had $700.9 millionin proceeds from executed forward sale agreements available through December 29, 2023. Additional details are summarized in Note 7 to the unaudited condensed consolidated financial statements. 37 -------------------------------------------------------------------------------- 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 2022. 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 of June 30, 2022, September 30, 2021and June 30, 2021: June 30, 2022 September 30, 2021 June 30, 2021 (In thousands, except percentages)
Short-term debt $ - - % $ - - % $ - - % Long-term debt (1) 7,960,594 46.2 % 7,330,657 48.1 % 7,328,947 48.5 % Shareholders' equity (2) 9,268,171 53.8 % 7,906,889 51.9 % 7,773,758 51.5 % Total
$ 17,228,765100.0 % $ 15,237,546100.0 % $ 15,102,705100.0 % (1) Inclusive of our finance leases. (2) Excluding the $2.2 billionof incremental financing issued to pay for the purchased gas costs incurred during Winter Storm Uri, our equity capitalization ratio was 61.7% at June 30, 2022and 60.6% at September 30, 2021.
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 of our services, demand for these products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.
Cash flow from operating, investing and financing activities for the nine months ended
Nine month period ended
2022 2021 Change (In thousands) Total cash provided by (used in) Operating activities
$ 929,316 $ (1,158,467) $ 2,087,783Investing activities (1,714,569) (1,352,317) (362,252) Financing activities 996,605 3,014,597 (2,017,992) Change in cash and cash equivalents 211,352 503,813 (292,461) Cash and cash equivalents at beginning of period 116,723 20,808 95,915 Cash and cash equivalents at end of period $ 328,075
Cash flow from operating activities
For the nine months ended
June 30, 2022, we generated cash flow from operating activities of $929.3 millioncompared with $1.2 billionof cash flows used from operating activities for the nine months ended June 30, 2021. Excluding the $2.1 billionincurred in the prior-year period for gas costs incurred during Winter Storm Uri, operating cash flow decreased $0.8 millionprimarily due to a $102.8 millionrefund of excess deferred tax liabilities, mostly offset by the timing of gas cost recoveries and the positive effects of successful rate case outcomes achieved in fiscal 2021.
Cash flow from investing activities
Our capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 88 percent of our capital spending has been committed to improving the safety and reliability of our system. For the nine months ended
June 30, 2022, cash used for investing activities was $1,714.6 millioncompared to $1,352.3 millionfor the nine months ended June 30, 2021. Capital spending increased $368.1 million. Capital spending in our distribution segment increased $216.5 million, primarily as a result of increased system modernization and customer growth spending. Capital spending in our pipeline and storage segment increased $151.6 millionprimarily due to increased spending for pipeline system safety and reliability in Texas. 38 --------------------------------------------------------------------------------
Cash flow from financing activities
For the nine months ended
In the nine months ended
June 30, 2022, we received $1.5 billionin net proceeds from the issuance of long-term debt and equity. We completed a public offering of $600 millionof 2.85% senior notes due 2052 and received net proceeds from the offering, after the underwriting discount and offering expenses, of $589.8 million. We also completed a public offering of $200 millionof 2.625% senior notes due 2029, and received net proceeds of $200.8 millionthat were used to repay our $200 millionfloating-rate term loan. Additionally, during the nine months ended June 30, 2022, we settled 6,932,722 shares that had been sold on a forward basis for net proceeds of $675.3 million. The net proceeds were used primarily to support capital spending and for other general corporate purposes.
Cash dividends increased due to an 8.8% increase in our dividend yield and an increase in the number of shares outstanding.
In the nine months ended
June 30, 2021, we received $3.3 billionin net proceeds from the issuance of long-term debt and equity. 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 an 8.7 percent increase in our dividend rate and an increase in shares outstanding. The following table summarizes our share issuances for the nine months ended June 30, 2022and 2021: Nine Months Ended June 30 2022 2021 Shares issued: Direct Stock Purchase Plan 52,907 61,561 1998 Long-Term Incentive Plan 427,819 241,340 Retirement Savings Plan and Trust 55,554 63,992 Equity Issuance 6,932,722 4,537,669 Total shares issued 7,469,002 4,904,562 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 of June 30, 2022, our outlook and current debt ratings, which are all considered investment grade are as follows: S&P Moody's Senior unsecured long-term debt A- A1 Short-term debt A-2 P-1 Outlook Negative 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 AAAfor 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. 39 --------------------------------------------------------------------------------
We complied with all of our covenants at
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 nine months ended
June 30, 2022.
Risk management activities
In our distribution and pipeline and storage segments, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by periodically entering into financial instruments to effectively fix the
Treasuryyield 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 nine months ended June 30, 2022and 2021: Three Months Ended June 30 Nine Months Ended June 30 2022 2021 2022 2021
(In thousands) Fair value of contracts at the beginning of the period
(260) 13 31,224 980 Fair value of new contracts 1,834 4,030 3,550 4,356 Other changes in value 203,985 (97,622) 227,768 149,518 Fair value of contracts at end of period 487,959 233,517 487,959 233,517 Netting of cash collateral - - - - Cash collateral and fair value of contracts at period end
The fair value of our financial instruments at
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
$ 186,643 $ 246,826 $ 54,490$ - $ 487,959Prices based on models and other valuation methods - - - - - Total Fair Value $ 186,643 $ 246,826 $ 54,490$ - $ 487,95940
OPERATING STATISTICS AND OTHER INFORMATION
The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three and nine months ended
June 30, 2022and 2021.
Distribution sales and statistical data
Three Months Ended June 30 Nine Months Ended June 30 2022 2021 2022 2021 METERS IN SERVICE, end of period Residential 3,138,790 3,095,895 3,138,790 3,095,895 Commercial 281,839 281,628 281,839 281,628 Industrial 1,643 1,664 1,643 1,664 Public authority and other 8,204 8,264 8,204 8,264 Total meters 3,430,476 3,387,451 3,430,476 3,387,451 INVENTORY STORAGE BALANCE - Bcf 49.4 46.4 49.4 46.4 SALES VOLUMES - MMcf (1) Gas sales volumes Residential 19,760 17,590 144,695 162,154 Commercial 17,012 16,233 83,307 86,559 Industrial 6,988 6,260 22,848 20,650 Public authority and other 1,194 1,269 5,867 6,328 Total gas sales volumes 44,954 41,352 256,717 275,691 Transportation volumes 36,503 36,679 125,993 125,704 Total throughput 81,457 78,031 382,710 401,395
Pipeline and Storage Operations Sales and Statistical Data
Three Months Ended June 30 Nine Months Ended June 30 2022 2021 2022 2021 CUSTOMERS, end of period Industrial 96 95 96 95 Other 197 202 197 202 Total 293 297 293 297 INVENTORY STORAGE BALANCE - Bcf 0.7 0.4 0.7 0.4 PIPELINE TRANSPORTATION VOLUMES - MMcf (1) 175,117 187,408 581,545 614,594 Note to preceding tables:
(1) Sales and transportation volumes reflect segment transactions, including intercompany sales and transportation amounts.
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting developments and their impact on our financial condition, results of operations and cash flows are described in Note 2 to the unaudited condensed consolidated financial statements.
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