Atmos Energy 10-Q 2022-12-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022

or

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)

Texas			and						Virginia						75-1743247
(State or other jurisdiction of incorporation or organization)															(IRS employer identification no.)
1800 Three Lincoln Centre
5430 LBJ Freeway
Dallas						Texas									75240
(Address of principal executive offices)															(Zip code)

(972) 934-9227

(Registrant’s telephone number, including area code)

Title of each class						Trading Symbol			Name of each exchange on which registered
Common stock			No Par Value			ATO			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer			þ			Accelerated filer			¨			Non-accelerated filer			¨			Smaller reporting company			☐			Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No þ

Number of shares outstanding of each of the issuer’s classes of common stock, as of February 3, 2023.

Class									Shares Outstanding
Common stock			No Par Value						143,162,520

GLOSSARY OF KEY TERMS

AEC			Atmos Energy Corporation
AOCI			Accumulated other comprehensive income
ARM			Annual Rate Mechanism
ASC			Accounting Standards Codification
Bcf			Billion cubic feet
DARR			Dallas Annual Rate Review
FASB			Financial Accounting Standards Board
GAAP			Generally Accepted Accounting Principles
GRIP			Gas Reliability Infrastructure Program
GSRS			Gas System Reliability Surcharge
Mcf			Thousand cubic feet
MMcf			Million cubic feet
Moody’s			Moody’s Investors Services, Inc.
PRP			Pipeline Replacement Program
RRC			Railroad Commission of Texas
RRM			Rate Review Mechanism
RSC			Rate Stabilization Clause
S&P			Standard & Poor’s Corporation
SAVE			Steps to Advance Virginia Energy
SEC			United States Securities and Exchange Commission
SIP			System Integrity Program
SIR			System Integrity Rider
SOFR			Secured Overnight Financing Rate
SRF			Stable Rate Filing
SSIR			System Safety and Integrity Rider
TCJA			Tax Cuts and Jobs Act of 2017
WNA			Weather Normalization Adjustment

PART I. FINANCIAL INFORMATION

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

			December 31, 2022						September 30, 2022
			(Unaudited)
			(In thousands, except share data)
ASSETS
Property, plant and equipment			$	20,987,313					$	20,238,139
Less accumulated depreciation and amortization			3,015,645						2,997,900
Net property, plant and equipment			17,971,668						17,240,239
Current assets
Cash and cash equivalents			171,597						51,554
Accounts receivable, net (See Note 5)			826,416						363,708
Gas stored underground			323,678						357,941
Other current assets (See Note 8)			2,306,072						2,274,490
Total current assets			3,627,763						3,047,693
Goodwill			731,257						731,257
Deferred charges and other assets (See Note 8)			1,035,473						1,173,800
			$	23,366,161					$	22,192,989
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
Common stock, no par value (stated at $0.005 per share); 200,000,000 shares authorized; issued and outstanding: December 31, 2022 — 143,155,761 shares; September 30, 2022 — 140,896,598 shares			$	716					$	704
Additional paid-in capital			6,065,763						5,838,118
Accumulated other comprehensive income			391,330						369,112
Retained earnings			3,378,465						3,211,157
Shareholders’ equity			9,836,274						9,419,091
Long-term debt			6,551,795						5,760,647
Total capitalization			16,388,069						15,179,738
Current liabilities
Accounts payable and accrued liabilities			574,723						496,019
Other current liabilities			755,687						720,157
Short-term debt			—						184,967
Current maturities of long-term debt			2,201,484						2,201,457
Total current liabilities			3,531,894						3,602,600
Deferred income taxes			2,075,596						1,999,505
Regulatory excess deferred taxes			345,799						385,213
Regulatory cost of removal obligation			494,626						487,631
Deferred credits and other liabilities			530,177						538,302
			$	23,366,161					$	22,192,989

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Three Months Ended December 31
			2022						2021
			(Unaudited) (In thousands, except per share data)
Operating revenues
Distribution segment			$	1,440,426					$	972,422
Pipeline and storage segment			186,629						162,918
Intersegment eliminations			(143,046)						(122,554)
Total operating revenues			1,484,009						1,012,786
Purchased gas cost
Distribution segment			881,915						496,799
Pipeline and storage segment			(858)						(3,411)
Intersegment eliminations			(142,808)						(122,225)
Total purchased gas cost			738,249						371,163
Operation and maintenance expense			185,016						159,110
Depreciation and amortization expense			146,020						127,856
Taxes, other than income			93,538						78,796
Operating income			321,186						275,861
Other non-operating income			21,191						8,702
Interest charges			36,760						19,851
Income before income taxes			305,617						264,712
Income tax expense			33,757						15,503
Net income			$	271,860					$	249,209
Basic net income per share			$	1.92					$	1.86
Diluted net income per share			$	1.91					$	1.86
Cash dividends per share			$	0.74					$	0.68
Basic weighted average shares outstanding			141,820						133,682
Diluted weighted average shares outstanding			141,937						133,689
Net income			$	271,860					$	249,209
Other comprehensive income (loss), net of tax
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $25 and $(20)			87						(69)
Cash flow hedges:
Amortization and unrealized gains (losses) on interest rate agreements, net of tax of $6,397 and $(13,260)			22,131						(45,878)
Total other comprehensive income (loss)			22,218						(45,947)
Total comprehensive income			$	294,078					$	203,262

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

			Three Months Ended December 31
			2022						2021
			(Unaudited) (In thousands)
Cash Flows From Operating Activities
Net income			$	271,860					$	249,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			146,020						127,856
Deferred income taxes			29,693						11,813
Other			(17,508)						(12,689)
Net assets / liabilities from risk management activities			218						(8,834)
Net change in other operating assets and liabilities			(241,383)						(305,531)
Net cash provided by operating activities			188,900						61,824
Cash Flows From Investing Activities
Capital expenditures			(795,660)						(684,180)

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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 ended September 30, 2022.

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; possible significant costs and liabilities resulting from pipeline integrity and other similar programs and related repairs; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the availability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competition from energy suppliers and alternative forms of energy; failure to attract and retain a qualified workforce; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control; increased dependence on technology that may hinder the Company's business if such technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information; the impact of new cybersecurity compliance requirements; adverse weather conditions; the impact of greenhouse gas emissions or other legislation or regulations intended to address climate change; the impact of climate change; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations in Texas; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; and increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

Atmos 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 approximately 3.3 million residential, commercial, public authority and industrial customers throughout our six distribution divisions, which at December 31, 2022 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 in Louisiana.

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, 2022 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 three months ended December 31, 2022.

RESULTS OF OPERATIONS

Executive Summary

Atmos 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 three months ended December 31, 2022, we recorded net income of $271.9 million, or $1.91 per diluted share, compared to net income of $249.2 million, or $1.86 per diluted share for the three months ended December 31, 2021.

The 9 percent year-over-year increase in net income largely reflects positive rate outcomes driven by safety and reliability spending, offset by higher spending on certain operating expenses in both our segments.

During the three months ended December 31, 2022, we implemented ratemaking regulatory actions which resulted in an increase in annual operating income of $111.8 million. Additionally, as of December 31, 2022, we had ratemaking efforts in progress seeking a total increase in annual operating income of $18.8 million.

Capital expenditures for the three months ended December 31, 2022 were $795.7 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 three months ended December 31, 2022, we completed approximately $1.0 billion of long-term debt and equity financing. As of December 31, 2022, our equity capitalization was 52.9 percent. Excluding the $2.2 billion of incremental financing issued in conjunction with Winter Storm Uri, our equity capitalization was 60.0 percent. As of December 31, 2022, we had approximately $3.4 billion in total liquidity, consisting of $171.6 million in cash and cash equivalents, $754.9 million in funds available through equity forward sales agreements and $2,494.4 million in undrawn capacity under our credit facilities.

As a result of our sustained financial performance, our Board of Directors increased the quarterly dividend by 8.8 percent for fiscal 2023.

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.

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 50 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 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 our Texas and Mississippi service areas include franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income.

The cost of gas typically does not have a direct impact on our operating income because these costs are recovered through our purchased gas cost adjustment mechanisms. However, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense. This risk is currently mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 81 percent of our residential and commercial revenues. Additionally, higher gas costs may require us to increase borrowings under our credit facilities, resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or, in the case of industrial consumers, to use alternative energy sources.

Three Months Ended December 31, 2022 compared with Three Months Ended December 31, 2021

Financial and operational highlights for our distribution segment for the three months ended December 31, 2022 and 2021 are presented below.

			Three Months Ended December 31
			2022						2021						Change
			(In thousands, unless otherwise noted)
Operating revenues			$	1,440,426					$	972,422					$	468,004
Purchased gas cost			881,915						496,799						385,116
Operating expenses			326,755						285,126						41,629
Operating income			231,756						190,497						41,259
Other non-operating income			6,774						1,916						4,858
Interest charges			22,839						8,548						14,291
Income before income taxes			215,691						183,865						31,826
Income tax expense			21,223						4,294						16,929
Net income			$	194,468					$	179,571					$	14,897
Consolidated distribution sales volumes — MMcf			100,078						69,545						30,533
Consolidated distribution transportation volumes — MMcf			40,600						38,597						2,003
Total consolidated distribution throughput — MMcf			140,678						108,142						32,536
Consolidated distribution average cost of gas per Mcf sold			$	8.81					$	7.14					$	1.67

Operating income for our distribution segment increased 21.7 percent. Key drivers for the change in operating income include:

• a $57.5 million increase in rate adjustments, primarily in our Mid-Tex and Mississippi Divisions.

• a $5.7 million decrease in refunds of excess deferred taxes to customers.

• a $5.5 million increase related to residential customer growth and increased industrial load.

Partially offset by:

• a $16.0 million increase in depreciation expense and property taxes associated with increased capital investments.

• a $13.2 million increase in operation and maintenance expense primarily attributable to increased line locate spending and increased administrative costs.

Interest charges increased $14.3 million primarily due to the issuance of long-term debt during the second quarter of fiscal 2022 and the first quarter of fiscal 2023.

The following table shows our operating income by distribution division, in order of total rate base, for the three months ended December 31, 2022 and 2021. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.

			Three Months Ended December 31
			2022						2021						Change
			(In thousands)
Mid-Tex			$	113,928					$	106,358					$	7,570
Kentucky/Mid-States			28,185						25,538						2,647
Louisiana			25,348						21,154						4,194
West Texas			21,206						20,874						332
Mississippi			27,049						24,700						2,349
Colorado-Kansas			14,967						2,815						12,152
Other			1,073						(10,942)						12,015
Total			$	231,756					$	190,497					$	41,259

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 three months of fiscal 2023, we implemented, or received approval to implement, regulatory proceedings, resulting in a $111.8 million increase 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 three months ended December 31, 2022 were $112.2 million.

Rate Action						Annual Increase in Operating Income						EDIT Impact						Annual Increase in Operating Income Excluding EDIT
						(In thousands)
Annual formula rate mechanisms						$	111,846					$	342					$	112,188
Rate case filings						—						—						—
Other rate activity						—						—						—
						$	111,846					$	342					$	112,188

The following ratemaking efforts seeking $18.8 million in increased annual operating income were in progress as of December 31, 2022:

Division						Rate Action						Jurisdiction						Operating Income Requested
																		(In thousands)
Colorado-Kansas						Rate Case						Colorado						$	7,554
Colorado-Kansas						Rate Case						Kansas						7,989
Colorado-Kansas						Infrastructure Mechanism						Colorado (1)						1,971
Colorado-Kansas						Ad Valorem						Kansas (2)						1,320
																		$	18,834

(1) The Colorado Public Utilities Commission approved the SSIR implementation at their December 21, 2022 meeting with rates effective January 1, 2023.

(2) The Kansas Corporation Commission approved the Ad Valorem filing on January 17, 2023, with rates effective February 1, 2023.

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
Colorado						System Safety and Integrity Rider (SSIR)						—
Kansas						Gas System Reliability Surcharge (GSRS), System Integrity Program (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)
Texas						Gas Reliability Infrastructure Program (GRIP), (1)						Dallas Annual Rate Review (DARR), Rate Review Mechanism (RRM)
Virginia						Steps to Advance Virginia Energy (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.

The following annual formula rate mechanisms were approved during the three months ended December 31, 2022:

Division						Jurisdiction						Test Year Ended						Increase in Annual Operating Income						EDIT Impact						Increase in Annual Operating Income Excluding EDIT						Effective Date
																		(In thousands)
2023 Filings:
Mississippi						Mississippi - SIR						10/31/2023						$	8,560					$	—					$	8,560					11/01/2022
Mississippi						Mississippi - SRF						10/31/2023						12,188						778						12,966						11/01/2022
Kentucky/Mid-States						Kentucky PRP (1)						09/30/2023						1,904						—						1,904						10/02/2022
Mid-Tex						Mid-Tex Cities RRM						12/31/2021						81,402						(395)						81,007						10/01/2022
West Texas						West Texas Cities RRM						12/31/2021						7,315						(41)						7,274						10/01/2022
Kentucky/Mid-States						Virginia - SAVE						09/30/2023						477						—						477						10/01/2022
Total 2023 Filings																		$	111,846					$	342					$	112,188

(1) Rates were implemented on October 2, 2022, subject to refund.

Rate Case Filings

A rate case is a formal request from Atmos 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 three months ended December 31, 2022.

Other Ratemaking Activity

The Company had no other ratemaking activity during the three months ended December 31, 2022.

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 Texas with 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 Coast and the Permian Basin of 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 Louisiana are comprised of a 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution 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 Texas and Louisiana 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 in Texas could influence the volumes of gas transported for shippers through our Texas 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.

The demand fee our Louisiana natural gas transmission pipeline charges to our Louisiana distribution division increases five percent annually and has been approved by the Louisiana Public Service Commission until September 30, 2027.

Three Months Ended December 31, 2022 compared with Three Months Ended December 31, 2021

Financial and operational highlights for our pipeline and storage segment for the three months ended December 31, 2022 and 2021 are presented below.

			Three Months Ended December 31
			2022						2021						Change
			(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue			$	146,231					$	127,323					$	18,908
Third-party transportation revenue			38,079						30,625						7,454
Other revenue			2,319						4,970						(2,651)
Total operating revenues			186,629						162,918						23,711
Total purchased gas cost			(858)						(3,411)						2,553
Operating expenses			98,057						80,965						17,092
Operating income			89,430						85,364						4,066
Other non-operating income			14,417						6,786						7,631
Interest charges			13,921						11,303						2,618
Income before income taxes			89,926						80,847						9,079
Income tax expense			12,534						11,209						1,325
Net income			$	77,392					$	69,638					$	7,754
Gross pipeline transportation volumes — MMcf			206,244						181,468						24,776
Consolidated pipeline transportation volumes — MMcf			142,076						136,067						6,009

Operating income for our pipeline and storage segment increased 4.8 percent. Key drivers for the change in operating income include:

• a $21.0 million increase due to rate adjustments from the GRIP filing approved in May 2022. The increase in rates was driven by increased safety and reliability spending.

• a $4.9 million net increase in APT's through-system activities primarily associated with increased prices.

Partially offset by:

• a $12.6 million increase in operation and maintenance expense primarily attributable to in-line inspection spending.

• a $4.4 million increase in depreciation and property tax expenses associated with increased capital investments.

• a $3.4 million decrease in other revenues due to a nonrecurring retention gas sale in the prior 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 the Securities and Exchange Commission (SEC) that allows us to issue up to $5.0 billion in common stock and/or debt securities. As of December 31, 2022, $1.4 billion of 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 December 31, 2022, $281.9 million of equity was available for issuance under this ATM equity sales program. Additionally, as of

December 31, 2022, we had $754.9 million in available proceeds from outstanding forward sale agreements. Additional details are summarized in Note 7 to the unaudited condensed consolidated financial statements.

The following table summarizes our existing forward starting interest rate swaps as of December 31, 2022.

Planned Debt Issuance Date						Amount Hedged						Effective Interest Rate
						(In thousands)
Fiscal 2024						$	450,000					1.80		%
Fiscal 2025						600,000						1.75		%
Fiscal 2026						300,000						2.16		%
						$	1,350,000

The liquidity provided by these sources is expected to be sufficient to fund the Company's working capital needs and capital expenditure program for the remainder of fiscal year 2023. Additionally, we expect to continue to be able to obtain financing upon reasonable terms as necessary.

On March 9, 2023, $2.2 billion in long-term notes issued to pay for gas costs incurred during Winter Storm Uri will mature. We had anticipated paying off these notes prior to their maturity primarily using net proceeds from a Texas statewide securitization program that was authorized by the Texas Legislature in 2021. We currently anticipate this process will not be completed prior to March 9, 2023. Therefore, we currently anticipate using a combination of a syndicated bank term loan, borrowings on our credit facilities and cash to pay off these notes.

The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as of December 31, 2022, September 30, 2022 and December 31, 2021:

			December 31, 2022												September 30, 2022												December 31, 2021
			(In thousands, except percentages)
Short-term debt			$	—					—		%				$	184,967					1.1		%				$	—					—		%
Long-term debt (1)			8,753,279						47.1		%				7,962,104						45.3		%				7,956,554						49.0		%
Shareholders’ equity (2)			9,836,274						52.9		%				9,419,091						53.6		%				8,289,545						51.0		%
Total			$	18,589,553					100.0		%				$	17,566,162					100.0		%				$	16,246,099					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 was 60.0% at December 31, 2022, 61.3% at September 30, 2022 and 59.0% at December 31, 2021.

Cash Flows

Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, 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 three months ended December 31, 2022 and 2021 are presented below.

			Three Months Ended December 31
			2022						2021						Change
			(In thousands)
Total cash provided by (used in)
Operating activities			$	188,900					$	61,824					$	127,076
Investing activities			(792,511)						(679,748)						(112,763)
Financing activities			723,654						765,206						(41,552)
Change in cash and cash equivalents			120,043						147,282						(27,239)
Cash and cash equivalents at beginning of period			51,554						116,723						(65,169)
Cash and cash equivalents at end of period			$	171,597					$	264,005					$	(92,408)

Cash flows from operating activities

For the three months ended December 31, 2022, we generated cash flow from operating activities of $188.9 million compared with $61.8 million for the three months ended December 31, 2021. Operating cash flow increased $127.1 million primarily due to working capital changes, including the timing of payments for natural gas purchases and deferred gas cost recoveries and the positive effects of successful rate case outcomes achieved in fiscal 2022.

Cash flows from investing activities

Our capital expenditures are primarily used to improve the safety and reliability of our distribution and transmission system through pipeline replacement and system modernization and to enhance and expand our system to meet customer needs. Over the last three fiscal years, approximately 88 percent of our capital spending has been committed to improving the safety and reliability of our system.

For the three months ended December 31, 2022, cash used for investing activities was $792.5 million compared to $679.7 million for the three months ended December 31, 2021. Capital spending increased $111.5 million, which was primarily the result of a $105.3 million increase in our pipeline and storage segment due to increased spending for pipeline system safety and reliability in Texas.

Cash flows from financing activities

For the three months ended December 31, 2022, our financing activities provided $723.7 million of cash compared with $765.2 million of cash provided by financing activities in the prior-year period.

In the three months ended December 31, 2022, we received approximately $1.0 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $500 million of 5.75% senior notes due fiscal 2053 and $300 million of 5.45% senior notes due fiscal 2033, and received net proceeds from the offering, after the underwriting discount and offering expenses, of $789.4 million. Additionally, during the three months ended December 31, 2022, we settled 2,114,488 shares that had been sold on a forward basis for net proceeds of $220.0 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 percent increase in our dividend rate and an increase in shares outstanding.

In the three months ended December 31, 2021, we received approximately $0.9 billion in net proceeds from the issuance of long-term debt and equity. We completed a public offering of $600 million of 2.85% senior notes due 2052 and received net proceeds from the offering, after the underwriting discount and offering expenses, of $589.8 million. Additionally, during the three months ended December 31, 2021, we settled 2,689,327 shares that had been sold on a forward basis for net proceeds of $261.9 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 percent increase in our dividend rate and an increase in shares outstanding.

The following table summarizes our share issuances for the three months ended December 31, 2022 and 2021:

			Three Months Ended December 31
			2022						2021
Shares issued:
Direct Stock Purchase Plan			16,142						20,983
1998 Long-Term Incentive Plan			111,953						275,212
Retirement Savings Plan and Trust			16,580						19,805
Equity Issuance			2,114,488						2,689,327
Total shares issued			2,259,163						3,005,327

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). In November 2022, S&P revised our outlook from negative to stable. As of December 31, 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			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 December 31, 2022. 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 three months ended December 31, 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 Treasury 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 months ended December 31, 2022 and 2021:

			Three Months Ended December 31
			2022						2021
			(In thousands)
Fair value of contracts at beginning of period			$	377,862					$	225,417
Contracts realized/settled			6,322						22,601
Fair value of new contracts			(1,693)						1,184
Other changes in value			(6,675)						(129,284)
Fair value of contracts at end of period			375,816						119,918
Netting of cash collateral			—						—
Cash collateral and fair value of contracts at period end			$	375,816					$	119,918

The fair value of our financial instruments at December 31, 2022 is presented below by time period and fair value source:

			Fair Value of Contracts at December 31, 2022
			Maturity in Years
Source of Fair Value			Less Than 1						1-3						4-5						Greater Than 5						Total Fair Value
			(In thousands)
Prices actively quoted			$	100,646					$	275,170					$	—					$	—					$	375,816
Prices based on models and other valuation methods			—						—						—						—						—
Total Fair Value			$	100,646					$	275,170					$	—					$	—					$	375,816

OPERATING STATISTICS AND OTHER INFORMATION

The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three months ended December 31, 2022 and 2021.

Distribution Sales and Statistical Data

			Three Months Ended December 31
			2022						2021
METERS IN SERVICE, end of period
Residential			3,167,556						3,120,873
Commercial			282,644						282,155
Industrial			1,644						1,653
Public authority and other			8,162						8,248
Total meters			3,460,006						3,412,929
INVENTORY STORAGE BALANCE — Bcf			63.7						70.5
SALES VOLUMES — MMcf (1)
Gas sales volumes
Residential			58,540						37,834
Commercial			30,508						23,008
Industrial			8,908						7,073
Public authority and other			2,122						1,630
Total gas sales volumes			100,078						69,545
Transportation volumes			42,444						40,315
Total throughput			142,522						109,860

Pipeline and Storage Operations Sales and Statistical Data

			Three Months Ended December 31
			2022						2021
CUSTOMERS, end of period
Industrial			95						95
Other			209						202
Total			304						297
INVENTORY STORAGE BALANCE — Bcf			1.1						1.4
PIPELINE TRANSPORTATION VOLUMES — MMcf (1)			206,244						181,468

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.