filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
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) | |||||||||
| Debt and equity securities activities, net | (2,472) | 2,374 | |||||||||
| Other, net | 5,621 | 2,058 | |||||||||
| Net cash used in investing activities | (792,511) | (679,748) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Net decrease in short-term debt | (184,967) | — | |||||||||
| Net proceeds from equity issuances | 220,000 | 261,943 | |||||||||
| Issuance of common stock through stock purchase and employee retirement plans | 3,779 | 3,918 | |||||||||
| Proceeds from issuance of long-term debt | 797,258 | 596,142 | |||||||||
| Cash dividends paid | (104,552) | (90,411) | |||||||||
| Debt issuance costs | (7,864) | (6,386) | |||||||||
| Net cash provided by financing activities | 723,654 | 765,206 | |||||||||
| Net increase in cash and cash equivalents | 120,043 | 147,282 | |||||||||
| Cash and cash equivalents at beginning of period | 51,554 | 116,723 | |||||||||
| Cash and cash equivalents at end of period | $ | 171,597 | $ | 264,005 | |||||||
See accompanying notes to condensed consolidated financial statements.
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2022
1. Nature of Business
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and its subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. Our distribution business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which our regulated divisions and subsidiaries operate.
Our distribution business delivers natural gas through sales and transportation arrangements to approximately 3.3 million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at December 31, 2022, covered service areas located in eight states.
Our pipeline and storage business, which is also subject to federal and state regulations, includes the transportation of natural gas to our Texas and Louisiana distribution systems and the management of our underground storage facilities used to support our distribution business in various states.
2. Unaudited Financial Information
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2022 are not indicative of our results of operations for the full 2023 fiscal year, which ends September 30, 2023.
No events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
Significant accounting policies
Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Regulatory assets and liabilities
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of other current assets and deferred charges and other assets and our regulatory liabilities are recorded as a component of other current liabilities and deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities.
Significant regulatory assets and liabilities as of December 31, 2022 and September 30, 2022 included the following:
| December 31, 2022 | September 30, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Regulatory assets: | |||||||||||
| Pension and postretirement benefit costs | $ | 26,977 | $ | 31,122 | |||||||
| Infrastructure mechanisms (1) | 164,818 | 235,972 | |||||||||
| Winter Storm Uri incremental costs (2) | 2,125,787 | 2,109,454 | |||||||||
| Deferred gas costs | 41,096 | 119,742 | |||||||||
| Regulatory excess deferred taxes (3) | 48,033 | 47,311 | |||||||||
| Recoverable loss on reacquired debt | 3,364 | 3,406 | |||||||||
| Deferred pipeline record collection costs | 38,647 | 36,898 | |||||||||
| Other | 23,088 | 21,467 | |||||||||
| $ | 2,471,810 | $ | 2,605,372 | ||||||||
| Regulatory liabilities: | |||||||||||
| Regulatory excess deferred taxes (3) | $ | 506,406 | $ | 545,021 | |||||||
| Regulatory cost of removal obligation | 572,384 | 568,307 | |||||||||
| Deferred gas costs | 39,013 | 28,834 | |||||||||
| Asset retirement obligation | 5,737 | 5,737 | |||||||||
| APT annual adjustment mechanism | 37,443 | 31,138 | |||||||||
| Pension and postretirement benefit costs | 151,843 | 156,857 | |||||||||
| Other | 27,141 | 23,013 | |||||||||
| $ | 1,339,967 | $ | 1,358,907 |
(1)Infrastructure mechanisms in Texas, Louisiana and Tennessee allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
(2)Includes extraordinary gas costs incurred during Winter Storm Uri and certain related carrying costs. See Note 8 to the unaudited condensed consolidated financial statements for further information. This amount is recorded within other current assets and deferred charges and other assets on the condensed consolidated balance sheet as of December 31, 2022 and September 30, 2022.
(3)Regulatory excess deferred taxes represent changes in our net deferred tax liability related to our cost of service ratemaking due to the enactment of Tax Cuts and Jobs Act of 2017 (the "TCJA") and a Kansas legislative change enacted in fiscal 2020. See Note 11 to the unaudited condensed consolidated financial statements for further information.
3. Segment Information
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.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Income statements and capital expenditures for the three months ended December 31, 2022 and 2021 by segment are presented in the following tables:
| Three Months Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Distribution | Pipeline and Storage | Eliminations | Consolidated | ||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Operating revenues from external parties | $ | 1,439,693 | $ | 44,316 | $ | — | $ | 1,484,009 | |||||||||||||||||||||
| Intersegment revenues | 733 | 142,313 | (143,046) | — | |||||||||||||||||||||||||
| Total operating revenues | 1,440,426 | 186,629 | (143,046) | 1,484,009 | |||||||||||||||||||||||||
| Purchased gas cost | 881,915 | (858) | (142,808) | 738,249 | |||||||||||||||||||||||||
| Operation and maintenance expense | 136,469 | 48,785 | (238) | 185,016 | |||||||||||||||||||||||||
| Depreciation and amortization expense | 105,664 | 40,356 | — | 146,020 | |||||||||||||||||||||||||
| Taxes, other than income | 84,622 | 8,916 | — | 93,538 | |||||||||||||||||||||||||
| Operating income | 231,756 | 89,430 | — | 321,186 | |||||||||||||||||||||||||
| Other non-operating income | 6,774 | 14,417 | — | 21,191 | |||||||||||||||||||||||||
| Interest charges | 22,839 | 13,921 | — | 36,760 | |||||||||||||||||||||||||
| Income before income taxes | 215,691 | 89,926 | — | 305,617 | |||||||||||||||||||||||||
| Income tax expense | 21,223 | 12,534 | — | 33,757 | |||||||||||||||||||||||||
| Net income | $ | 194,468 | $ | 77,392 | $ | — | $ | 271,860 | |||||||||||||||||||||
| Capital expenditures | $ | 443,544 | $ | 352,116 | $ | — | $ | 795,660 |
| Three Months Ended December 31, 2021 | |||||||||||||||||||||||
| Distribution | Pipeline and Storage | Eliminations | Consolidated | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Operating revenues from external parties | $ | 971,636 | $ | 41,150 | $ | — | $ | 1,012,786 | |||||||||||||||
| Intersegment revenues | 786 | 121,768 | (122,554) | — | |||||||||||||||||||
| Total operating revenues | 972,422 | 162,918 | (122,554) | 1,012,786 | |||||||||||||||||||
| Purchased gas cost | 496,799 | (3,411) | (122,225) | 371,163 | |||||||||||||||||||
| Operation and maintenance expense | 123,284 | 36,155 | (329) | 159,110 | |||||||||||||||||||
| Depreciation and amortization expense | 92,797 | 35,059 | — | 127,856 | |||||||||||||||||||
| Taxes, other than income | 69,045 | 9,751 | — | 78,796 | |||||||||||||||||||
| Operating income | 190,497 | 85,364 | — | 275,861 | |||||||||||||||||||
| Other non-operating income | 1,916 | 6,786 | — | 8,702 | |||||||||||||||||||
| Interest charges | 8,548 | 11,303 | — | 19,851 | |||||||||||||||||||
| Income before income taxes | 183,865 | 80,847 | — | 264,712 | |||||||||||||||||||
| Income tax expense | 4,294 | 11,209 | — | 15,503 | |||||||||||||||||||
| Net income | $ | 179,571 | $ | 69,638 | $ | — | $ | 249,209 | |||||||||||||||
| Capital expenditures | $ | 437,382 | $ | 246,798 | $ | — | $ | 684,180 |
Balance sheet information at December 31, 2022 and September 30, 2022 by segment is presented in the following tables:
| December 31, 2022 | |||||||||||||||||||||||
| Distribution | Pipeline and Storage | Eliminations | Consolidated | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net property, plant and equipment | $ | 13,155,891 | $ | 4,815,777 | $ | — | $ | 17,971,668 | |||||||||||||||
| Total assets | $ | 22,595,795 | $ | 5,113,402 | $ | (4,343,036) | $ | 23,366,161 | |||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Distribution | Pipeline and Storage | Eliminations | Consolidated | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net property, plant and equipment | $ | 12,723,532 | $ | 4,516,707 | $ | — | $ | 17,240,239 | |||||||||||||||
| Total assets | $ | 21,424,586 | $ | 4,797,206 | $ | (4,028,803) | $ | 22,192,989 | |||||||||||||||
4. Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic weighted average shares outstanding is calculated based upon the weighted average number of common shares outstanding during the periods presented. Also, this calculation includes fully vested stock awards that have not yet been issued as common stock. Additionally, the weighted average shares outstanding for diluted EPS includes the incremental effects of the forward sale agreements, discussed in Note 7 to the unaudited condensed consolidated financial statements, when the impact is dilutive.
Basic and diluted earnings per share for the three months ended December 31, 2022 and 2021 are calculated as follows:
| Three Months Ended December 31 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In thousands, except per share amounts) | |||||||||||||||||||||||
| Basic Earnings Per Share | |||||||||||||||||||||||
| Net income | $ | 271,860 | $ | 249,209 | |||||||||||||||||||
| Less: Income allocated to participating securities | 167 | 166 | |||||||||||||||||||||
| Income available to common shareholders | $ | 271,693 | $ | 249,043 | |||||||||||||||||||
| Basic weighted average shares outstanding | 141,820 | 133,682 | |||||||||||||||||||||
| Net income per share — Basic | $ | 1.92 | $ | 1.86 | |||||||||||||||||||
| Diluted Earnings Per Share | |||||||||||||||||||||||
| Income available to common shareholders | $ | 271,693 | $ | 249,043 | |||||||||||||||||||
| Effect of dilutive shares | — | — | |||||||||||||||||||||
| Income available to common shareholders | $ | 271,693 | $ | 249,043 | |||||||||||||||||||
| Basic weighted average shares outstanding | 141,820 | 133,682 | |||||||||||||||||||||
| Dilutive shares | 117 | 7 | |||||||||||||||||||||
| Diluted weighted average shares outstanding | 141,937 | 133,689 | |||||||||||||||||||||
| Net income per share — Diluted | $ | 1.91 | $ | 1.86 |
5. Revenue and Accounts Receivable
Revenue
Our revenue recognition policy is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The following tables disaggregate our revenue from contracts with customers by customer type and segment and provide a reconciliation to total operating revenues, including intersegment revenues, for the three months ended December 31, 2022 and 2021.
| Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | ||||||||||||||||||||||
| Distribution | Pipeline and Storage | Distribution | Pipeline and Storage | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Gas sales revenues: | |||||||||||||||||||||||
| Residential | $ | 953,051 | $ | — | $ | 575,841 | $ | — | |||||||||||||||
| Commercial | 388,667 | — | 250,761 | — | |||||||||||||||||||
| Industrial | 59,215 | — | 48,681 | — | |||||||||||||||||||
| Public authority and other | 22,826 | — | 15,192 | — | |||||||||||||||||||
| Total gas sales revenues | 1,423,759 | — | 890,475 | — | |||||||||||||||||||
| Transportation revenues | 32,162 | 195,252 | 27,869 | 163,859 | |||||||||||||||||||
| Miscellaneous revenues | 2,282 | 2,722 | 2,599 | 6,543 | |||||||||||||||||||
| Revenues from contracts with customers | 1,458,203 | 197,974 | 920,943 | 170,402 | |||||||||||||||||||
| Alternative revenue program revenues (1) | (18,322) | (11,345) | 50,986 | (7,484) | |||||||||||||||||||
| Other revenues | 545 | — | 493 | — | |||||||||||||||||||
| Total operating revenues | $ | 1,440,426 | $ | 186,629 | $ | 972,422 | $ | 162,918 |
(1) In our distribution segment, we have weather-normalization adjustment mechanisms that serve to mitigate the effects of weather on our revenue. Additionally, APT has a regulatory mechanism that requires that we share with its tariffed customers 75% of the difference between the total non-tariffed revenues earned during a test period and a revenue benchmark.
Accounts receivable and allowance for uncollectible accounts
Accounts receivable arise from natural gas sales to residential, commercial, industrial, public authority and other customers. Our accounts receivable balance includes unbilled amounts which represent a customer’s consumption of gas from the date of the last cycle billing through the last day of the month. Our policy related to the accounting for our accounts receivable and allowance for uncollectible accounts is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes to this policy. Rollforwards of our allowance for uncollectible accounts for the three months ended December 31, 2022 and 2021 are presented in the table below. The allowance excludes the gas cost portion of customers’ bills for approximately 81 percent of our customers as we have the ability to collect these gas costs through our gas cost recovery mechanisms in most of our jurisdictions.
| Three Months Ended December 31, 2022 | |||||
| (In thousands) | |||||
| Beginning balance, September 30, 2022 | $ | 49,993 | |||
| Current period provisions | 7,233 | ||||
| Write-offs charged against allowance | (10,421) | ||||
| Recoveries of amounts previously written off | 808 | ||||
| Ending balance, December 31, 2022 | $ | 47,613 |
| Three Months Ended December 31, 2021 | |||||
| (In thousands) | |||||
| Beginning balance, September 30, 2021 | $ | 64,471 | |||
| Current period provisions | 6,370 | ||||
| Write-offs charged against allowance | (6,429) | ||||
| Recoveries of amounts previously written off | 522 | ||||
| Ending balance, December 31, 2021 | $ | 64,934 |
6. Debt
The nature and terms of our debt instruments and credit facilities are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Other than as described below, there were no material changes in the terms of our debt instruments during the three months ended December 31, 2022.
Long-term debt at December 31, 2022 and September 30, 2022 consisted of the following:
| December 31, 2022 | September 30, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Unsecured 0.625% Senior Notes, due March 2023 | $ | 1,100,000 | $ | 1,100,000 | |||||||
| Unsecured 3.00% Senior Notes, due June 2027 | 500,000 | 500,000 | |||||||||
| Unsecured 2.625% Senior Notes, due September 2029 | 500,000 | 500,000 | |||||||||
| Unsecured 1.50% Senior Notes, due January 2031 | 600,000 | 600,000 | |||||||||
| Unsecured 5.45% Senior Notes, due October 2032 | 300,000 | — | |||||||||
| Unsecured 5.95% Senior Notes, due October 2034 | 200,000 | 200,000 | |||||||||
| Unsecured 5.50% Senior Notes, due June 2041 | 400,000 | 400,000 | |||||||||
| Unsecured 4.15% Senior Notes, due January 2043 | 500,000 | 500,000 | |||||||||
| Unsecured 4.125% Senior Notes, due October 2044 | 750,000 | 750,000 | |||||||||
| Unsecured 4.30% Senior Notes, due October 2048 | 600,000 | 600,000 | |||||||||
| Unsecured 4.125% Senior Notes, due March 2049 | 450,000 | 450,000 | |||||||||
| Unsecured 3.375% Senior Notes, due September 2049 | 500,000 | 500,000 | |||||||||
| Unsecured 2.85% Senior Notes, due February 2052 | 600,000 | 600,000 | |||||||||
| Unsecured 5.75% Senior Notes, due October 2052 | 500,000 | — | |||||||||
| Floating-rate Senior Notes, due March 2023 | 1,100,000 | 1,100,000 | |||||||||
| Medium-term note Series A, 1995-1, 6.67%, due December 2025 | 10,000 | 10,000 | |||||||||
| Unsecured 6.75% Debentures, due July 2028 | 150,000 | 150,000 | |||||||||
| Finance lease obligations | 51,495 | 51,850 | |||||||||
| Total long-term debt | 8,811,495 | 8,011,850 | |||||||||
| Less: | |||||||||||
| Original issue discount on unsecured senior notes and debentures | 6,358 | 3,704 | |||||||||
| Debt issuance cost | 51,858 | 46,042 | |||||||||
| Current maturities of long-term debt | 2,201,484 | 2,201,457 | |||||||||
| $ | 6,551,795 | $ | 5,760,647 |
On October 3, 2022, we completed a public offering of $500 million of 5.75% senior notes due fiscal 2053, with an effective interest rate of 4.50%, after giving effect to the offering costs and settlement of our interest rate swaps, and $300 million of 5.45% senior notes due fiscal 2033, with an effective interest rate of 5.57%, after giving effect to the offering costs. The net proceeds from the offering, after the underwriting discount and offering expenses, of $789.4 million were used for general corporate purposes.
Short-term debt
We utilize short-term debt to 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. Our short-term borrowing requirements are driven primarily by construction work in progress and the seasonal nature of the natural gas business.
Our short-term borrowing requirements are satisfied through a combination of a $1.5 billion commercial paper program and four committed revolving credit facilities with third-party lenders that provide $2.5 billion of total working capital funding.
The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility that expires on March 31, 2027. This facility bears interest at a base rate or at a SOFR-based rate for the applicable interest period, plus a margin ranging from zero percent to 0.25 percent for base rate advances or a margin ranging from 0.75 percent to 1.25 percent for SOFR-based advances, based on the Company’s credit ratings. Additionally, the facility contains a $250 million accordion feature, which provides the opportunity to increase the total committed loan to $1.75 billion. At December 31, 2022, there were no amounts outstanding under our commercial paper program. At September 30, 2022, there was $185.0 million outstanding under our commercial paper program.
We also have a $900 million three-year unsecured revolving credit facility, which expires March 31, 2025 and is used to provide additional working capital funding. This facility bears interest at a base rate or at a SOFR-based rate for the applicable interest period, plus a margin ranging from zero percent to 0.25 percent for base rate advances or a margin ranging from 0.75 percent to 1.25 percent for SOFR-based advances, based on the Company's credit ratings. Additionally, the facility contains a $100 million accordion feature, which provides the opportunity to increase the total committed loan to $1.0 billion. At December 31, 2022 and September 30, 2022, there were no borrowings outstanding under this facility.
Additionally, we have a $50 million 364-day unsecured facility, which will expire March 31, 2023 and is used to provide working capital funding. There were no borrowings outstanding under this facility as of December 31, 2022 and September 30, 2022.
Finally, we have a $50 million 364-day unsecured revolving credit facility, which will expire March 31, 2023 and is used to issue letters of credit and to provide working capital funding. At December 31, 2022, there were no borrowings outstanding under this facility; however, outstanding letters of credit reduced the total amount available to us to $44.4 million.
Debt covenants
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total-debt-to-total-capitalization of no greater than 70 percent. At December 31, 2022, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 48 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or if not paid at maturity. We were in compliance with all of our debt covenants as of December 31, 2022. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.
7. Shareholders' Equity
The following tables present a reconciliation of changes in stockholders' equity for the three months ended December 31, 2022 and 2021.
| Common stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Number of Shares | Stated Value | ||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share data) | |||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 140,896,598 | $ | 704 | $ | 5,838,118 | $ | 369,112 | $ | 3,211,157 | $ | 9,419,091 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 271,860 | 271,860 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 22,218 | — | 22,218 | |||||||||||||||||||||||||||||
| Cash dividends ($0.74 per share) | — | — | — | — | (104,552) | (104,552) | |||||||||||||||||||||||||||||
| Common stock issued: | |||||||||||||||||||||||||||||||||||
| Public and other stock offerings | 2,147,210 | 11 | 223,768 | — | — | 223,779 | |||||||||||||||||||||||||||||
| Stock-based compensation plans | 111,953 | 1 | 3,877 | — | — | 3,878 | |||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 143,155,761 | $ | 716 | $ | 6,065,763 | $ | 391,330 | $ | 3,378,465 | $ | 9,836,274 | ||||||||||||||||||||||||
| Common stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Number of Shares | Stated Value | ||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share data) | |||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 132,419,754 | $ | 662 | $ | 5,023,751 | $ | 69,803 | $ | 2,812,673 | $ | 7,906,889 | ||||||||||||||||||||||||
| Net income | — | — | — | — | 249,209 | 249,209 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (45,947) | — | (45,947) | |||||||||||||||||||||||||||||
| Cash dividends ($0.68 per share) | — | — | — | — | (90,411) | (90,411) | |||||||||||||||||||||||||||||
| Common stock issued: | |||||||||||||||||||||||||||||||||||
| Public and other stock offerings | 2,730,115 | 13 | 265,848 | — | — | 265,861 | |||||||||||||||||||||||||||||
| Stock-based compensation plans | 275,212 | 2 | 3,942 | — | — | 3,944 | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 135,425,081 | $ | 677 | $ | 5,293,541 | $ | 23,856 | $ | 2,971,471 | $ | 8,289,545 | ||||||||||||||||||||||||
Shelf Registration, At-the-Market Equity Sales Program and Equity Issuances
We have a shelf registration statement with the Securities and Exchange Commission (SEC) that allows us to issue up to $5.0 billion in common stock and/or debt securities through June 29, 2024. At December 31, 2022, $1.4 billion of securities were available for issuance under this shelf registration statement.
We have an at-the-market (ATM) equity sales program under which we may issue and sell shares of our common stock up to an aggregate offering price of $1.0 billion through June 29, 2024 (including shares of common stock that may be sold pursuant to forward sale agreements entered into concurrently with the ATM equity sales program).
During the three months ended December 31, 2022, we executed forward sales under our ATM equity sales program with various forward sellers who borrowed and sold 1,687,190 shares of our common stock at an aggregate price of $199.8 million. During the three months ended December 31, 2022, we also settled forward sale agreements with respect to 2,114,488 shares that had been borrowed and sold by various forward sellers under the ATM program for net proceeds of $220.0 million. As of December 31, 2022, $281.9 million of equity was available for issuance under our existing ATM program. Additionally, we had $754.9 million in available proceeds from outstanding forward sale agreements, as detailed below.
| Maturity | Shares Available | Net Proceeds Available (In thousands) | Forward Price | ||||||||||||||||||||
| September 29, 2023 | 2,437,669 | $ | 271,874 | $ | 111.53 | ||||||||||||||||||
| December 29, 2023 | 919,898 | 105,542 | $ | 114.73 | |||||||||||||||||||
| March 28, 2024 | 2,744,502 | 318,963 | $ | 116.22 | |||||||||||||||||||
| June 28, 2024 | 496,793 | 58,487 | $ | 117.73 | |||||||||||||||||||
| Total | 6,598,862 | $ | 754,866 | $ | 114.39 |
Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale debt securities and interest rate agreement cash flow hedges. Deferred gains (losses) for our available-for-sale debt securities are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings on a straight-line basis over the life of the related financing. The following tables provide the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income (loss).
| Available- for-Sale Securities | Interest Rate Agreement Cash Flow Hedges | Total | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| September 30, 2022 | $ | (495) | $ | 369,607 | $ | 369,112 | |||||||||||||||||
| Other comprehensive income before reclassifications | 87 | 22,661 | 22,748 | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | (530) | (530) | ||||||||||||||||||||
| Net current-period other comprehensive income | 87 | 22,131 | 22,218 | ||||||||||||||||||||
| December 31, 2022 | $ | (408) | $ | 391,738 | $ | 391,330 |
| Available- for-Sale Securities | Interest Rate Agreement Cash Flow Hedges | Total | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| September 30, 2021 | $ | 47 | $ | 69,756 | $ | 69,803 | |||||||||||||||||
| Other comprehensive loss before reclassifications | (69) | (46,622) | (46,691) | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | 744 | 744 | ||||||||||||||||||||
| Net current-period other comprehensive loss | (69) | (45,878) | (45,947) | ||||||||||||||||||||
| December 31, 2021 | $ | (22) | $ | 23,878 | $ | 23,856 |
8. Winter Storm Uri
Overview
As described in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, a historic winter storm impacted supply, market pricing and demand for natural gas in our service territories in mid-February 2021. During this time, the governors of Kansas and Texas each declared a state of emergency, and certain regulatory agencies issued emergency orders that impacted the utility and natural gas industries, including statewide utilities curtailment programs and orders encouraging or requiring jurisdictional natural gas utilities to work to ensure customers were provided with safe and reliable natural gas service.
Due to the historic nature of this winter storm, we experienced unforeseeable and unprecedented market pricing for gas costs, which resulted in aggregated natural gas purchases during the month of February of approximately $2.3 billion. These gas costs were paid using funds received from a public offering of debt securities completed in March 2021 of $2.2 billion.
Regulatory Asset Accounting
Our purchased gas costs are recoverable through purchased gas cost adjustment mechanisms in each state where we operate. Due to the unprecedented level of purchased gas costs incurred during Winter Storm Uri, the Kansas Corporation Commission (KCC) and the Railroad Commission of Texas (RRC) issued orders authorizing natural gas utilities to record a regulatory asset to account for the extraordinary costs associated with the winter storm. Pursuant to these orders, as of December 31, 2022, we have recorded a $2.1 billion regulatory asset for incremental costs, including certain carrying costs, incurred in Kansas ($89.0 million) and Texas ($2,021.9 million). Additionally, pursuant to a separate regulatory order issued by the RRC, we have deferred $14.9 million in carrying costs incurred after September 1, 2022.
Securitization Proceedings
To minimize the impact on the customer bill by extending the recovery periods for these unprecedented purchased gas costs, the Kansas and Texas State Legislatures each enacted securitization legislation during fiscal 2021, as described in further detail in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Kansas
The KCC issued a financing order on October 25, 2022, which authorizes us to securitize, through the issuance of bonds, $118.5 million, which includes the carrying costs and estimated interest related to the securitization over a time period not to exceed 12 years. We currently expect the issuance of bonds to take place during fiscal 2023. Because we intend to recover these costs over several years, we have recorded the regulatory asset for Kansas as a long-term asset in deferred charges and other assets as of December 31, 2022.
Texas
On February 8, 2022, the RRC issued a Financing Order that authorizes the Texas Public Financing Authority to issue customer rate relief bonds to securitize the costs that were approved in the Final Determination over a period not to exceed 30 years. Upon receipt of the securitization funds we will repay outstanding debt utilized to finance gas costs incurred during Winter Storm Uri.
9. Interim Pension and Other Postretirement Benefit Plan Information
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three months ended December 31, 2022 and 2021 are presented in the following tables. Most of these costs are recoverable through our tariff rates. A portion of these costs is capitalized into our rate base or deferred as a regulatory asset or liability. The remaining costs are recorded as a component of operation and maintenance expense or other non-operating expense.
| Three Months Ended December 31 | |||||||||||||||||||||||
| Pension Benefits | Other Benefits | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Components of net periodic pension cost: | |||||||||||||||||||||||
| Service cost | $ | 2,908 | $ | 4,323 | $ | 1,546 | $ | 2,559 | |||||||||||||||
| Interest cost (1) | 7,325 | 5,063 | 3,478 | 2,683 | |||||||||||||||||||
| Expected return on assets (1) | (7,278) | (7,383) | (2,804) | (3,312) | |||||||||||||||||||
| Amortization of prior service cost (credit) (1) | (30) | (58) | (3,285) | (3,309) | |||||||||||||||||||
| Amortization of actuarial (gain) loss (1) | 164 | 1,951 | (1,863) | — | |||||||||||||||||||
| Net periodic pension cost | $ | 3,089 | $ | 3,896 | $ | (2,928) | $ | (1,379) |
(1) The components of net periodic cost other than the service cost component are included in the line item other non-operating expense in the condensed consolidated statements of comprehensive income or are capitalized on the condensed consolidated balance sheets as a regulatory asset or liability, as described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
For the three months ended December 31, 2022 we contributed $3.0 million to our postretirement medical plans. We anticipate contributing a total of between $15 million and $25 million to our postretirement plans during fiscal 2023.
10. Commitments and Contingencies
Litigation and Environmental Matters
In the normal course of business, we are subject to various legal and regulatory proceedings. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts, our historical experience and our estimates of the ultimate outcome or resolution of the liability in the future. While the outcome of these proceedings is uncertain and a loss in excess of the amount we have accrued is possible though not reasonably estimable, it is the opinion of management that any amounts exceeding the accruals will not have a material adverse impact on our financial position, results of operations or cash flows.
We are a party to various other litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Purchase Commitments
Our distribution divisions maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually
negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area, which obligate it to purchase specified volumes at prices under contracts indexed to natural gas hubs or fixed price contracts. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There were no material changes to the purchase commitments for the three months ended December 31, 2022.
Future Lease Payments
Two service center leases are expected to commence in the fourth quarter of fiscal 2023 that impact our future lease payments. The total future lease payments for these leases are $48.1 million.
Rate Regulatory Proceedings
As of December 31, 2022, routine rate regulatory proceedings were in progress in several of our service areas, which are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments. Except for these proceedings, there were no material changes to rate regulatory proceedings for the three months ended December 31, 2022.
11. Income Taxes
Income Tax Expense
Our interim effective tax rates reflect the estimated annual effective tax rates for the fiscal years ended September 30, 2023 and 2022, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended December 31, 2022 and 2021 were 11.0% and 5.9%. These effective tax rates differ from the federal statutory tax rate of 21% primarily due to the amortization of excess deferred federal income tax liabilities, tax credits, state income taxes and other permanent book-to-tax differences. These adjustments have a relative impact on the effective tax rate proportionally to pretax income or loss.
Regulatory Excess Deferred Taxes
Regulatory excess net deferred taxes represent changes in our net deferred tax liability related to our cost of service ratemaking due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA") and a Kansas legislative change enacted in fiscal 2020. Currently, the regulatory excess net deferred tax liability of $458.4 million is being returned over various periods. Of this amount, $368.8 million is being returned to customers over 35 - 60 months. An additional $74.5 million is being returned to customers on a provisional basis over 15 - 69 years until our regulators establish the final refund periods. The refund of the remaining $15.1 million will be addressed in future rate proceedings.
As of December 31, 2022 and September 30, 2022, $160.6 million and $159.8 million is recorded in other current liabilities.
12. Financial Instruments
We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 15 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes in our objectives, strategies and accounting for using financial instruments. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions. The following summarizes those objectives and strategies.
Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our distribution segment from commodity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2022-2023 heating season (generally October through March), in the jurisdictions where we are permitted
to utilize financial instruments, we anticipate hedging approximately 32 percent, or 17.7 Bcf, of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.
Interest Rate Risk Management Activities
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 summarizes our existing forward starting interest rate swaps as of December 31, 2022. These swaps were designated as cash flow hedges at the time the agreements were executed.
| Planned Debt Issuance Date | Amount Hedged | |||||||||||||
| (In thousands) | ||||||||||||||
| Fiscal 2024 | $ | 450,000 | ||||||||||||
| Fiscal 2025 | 600,000 | |||||||||||||
| Fiscal 2026 | 300,000 | |||||||||||||
| $ | 1,350,000 |
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and statements of comprehensive income.
As of December 31, 2022, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of December 31, 2022, we had 12,039 MMcf of net long commodity contracts outstanding. These contracts have not been designated as hedges.
Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of December 31, 2022 and September 30, 2022. The gross amounts of recognized assets and liabilities are netted within our unaudited condensed consolidated balance sheets to the extent that we have netting arrangements with our counterparties. However, as of December 31, 2022 and September 30, 2022, no gross amounts and no cash collateral were netted within our consolidated balance sheet.
| December 31, 2022 | |||||||||||||||||
| Balance Sheet Location | Assets | Liabilities | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Designated As Hedges: | |||||||||||||||||
| Interest rate contracts | Other current assets / Other current liabilities | $ | 107,834 | $ | — | ||||||||||||
| Interest rate contracts | Deferred charges and other assets / Deferred credits and other liabilities | 276,451 | — | ||||||||||||||
| Total | 384,285 | — | |||||||||||||||
| Not Designated As Hedges: | |||||||||||||||||
| Commodity contracts | Other current assets / Other current liabilities | 3,255 | (10,443) | ||||||||||||||
| Commodity contracts | Deferred charges and other assets / Deferred credits and other liabilities | 316 | (1,597) | ||||||||||||||
| Total | 3,571 | (12,040) | |||||||||||||||
| Gross / Net Financial Instruments | $ | 387,856 | $ | (12,040) | |||||||||||||
| September 30, 2022 | |||||||||||||||||
| Balance Sheet Location | Assets | Liabilities | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Designated As Hedges: | |||||||||||||||||
| Interest rate contracts | Deferred charges and other assets / Deferred credits and other liabilities | $ | 355,075 | $ | — | ||||||||||||
| Total | 355,075 | — | |||||||||||||||
| Not Designated As Hedges: | |||||||||||||||||
| Commodity contracts | Other current assets / Other current liabilities | 26,207 | (3,000) | ||||||||||||||
| Commodity contracts | Deferred charges and other assets / Deferred credits and other liabilities | 709 | (1,129) | ||||||||||||||
| Total | 26,916 | (4,129) | |||||||||||||||
| Gross / Net Financial Instruments | $ | 381,991 | $ | (4,129) | |||||||||||||
Impact of Financial Instruments on the Statement of Comprehensive Income
Cash Flow Hedges
As discussed above, our distribution segment has interest rate agreements, which we designated as cash flow hedges at the time the agreements were executed. The net (gain) loss on settled interest rate agreements reclassified from AOCI into interest charges on our condensed consolidated statements of comprehensive income for the three months ended December 31, 2022 and 2021 was $(0.7) million and $1.0 million.
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three months ended December 31, 2022 and 2021. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the statement of comprehensive income as incurred.
| Three Months Ended December 31 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Increase (decrease) in fair value: | |||||||||||||||||||||||
| Interest rate agreements | $ | 22,661 | $ | (46,622) | |||||||||||||||||||
| Recognition of (gains) losses in earnings due to settlements: | |||||||||||||||||||||||
| Interest rate agreements | (530) | 744 | |||||||||||||||||||||
| Total other comprehensive income (loss) from hedging, net of tax | $ | 22,131 | $ | (45,878) |
Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments. As of December 31, 2022, we had $93.6 million of net realized gains in AOCI associated with our interest rate agreements. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred net gains recorded in AOCI associated with our interest rate agreements, based upon the fair values of these agreements at the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2053. However, the table below does not include the expected recognition in earnings of our outstanding interest rate swaps as those instruments have not yet settled.
| Interest Rate Agreements | |||||
| (In thousands) | |||||
| Next twelve months | $ | 2,120 | |||
| Thereafter | 91,497 | ||||
| Total | $ | 93,617 |
Financial Instruments Not Designated as Hedges
As discussed above, commodity contracts which are used in our distribution segment are not designated as hedges. However, there is no earnings impact on our distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of comprehensive income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
13. Fair Value Measurements
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no changes in these methods.
Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 10 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Quantitative Disclosures
Financial Instruments
The classification of our fair value measurements requires judgment regarding the degree to which market data is observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and September 30, 2022. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2)****(1) | Significant Other Unobservable Inputs (Level 3) | Netting and Cash Collateral | December 31, 2022 | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Financial instruments | $ | — | $ | 387,856 | $ | — | $ | — | $ | 387,856 | |||||||||||||||||||
| Debt and equity securities | |||||||||||||||||||||||||||||
| Registered investment companies | 26,984 | — | — | — | 26,984 | ||||||||||||||||||||||||
| Bond mutual funds | 32,753 | — | — | — | 32,753 | ||||||||||||||||||||||||
| Bonds (2) | — | 35,696 | — | — | 35,696 | ||||||||||||||||||||||||
| Money market funds | — | 2,823 | — | — | 2,823 | ||||||||||||||||||||||||
| Total debt and equity securities | 59,737 | 38,519 | — | — | 98,256 | ||||||||||||||||||||||||
| Total assets | $ | 59,737 | $ | 426,375 | $ | — | $ | — | $ | 486,112 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Financial instruments | $ | — | $ | 12,040 | $ | — | $ | — | $ | 12,040 |
| Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2)****(1) | Significant Other Unobservable Inputs (Level 3) | Netting and Cash Collateral | September 30, 2022 | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Financial instruments | $ | — | $ | 381,991 | $ | — | $ | — | $ | 381,991 | |||||||||||||||||||
| Debt and equity securities | |||||||||||||||||||||||||||||
| Registered investment companies | 26,367 | — | — | — | 26,367 | ||||||||||||||||||||||||
| Bond mutual funds | 32,367 | — | — | — | 32,367 | ||||||||||||||||||||||||
| Bonds (2) | — | 33,433 | — | — | 33,433 | ||||||||||||||||||||||||
| Money market funds | — | 3,845 | — | — | 3,845 | ||||||||||||||||||||||||
| Total debt and equity securities | 58,734 | 37,278 | — | — | 96,012 | ||||||||||||||||||||||||
| Total assets | $ | 58,734 | $ | 419,269 | $ | — | $ | — | $ | 478,003 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Financial instruments | $ | — | $ | 4,129 | $ | — | $ | — | $ | 4,129 |
(1)Our Level 2 measurements consist of over-the-counter options and swaps, which are valued using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds, which are valued based on the most recent available quoted market prices and money market funds that are valued at cost.
(2)Our investments in bonds are considered available-for-sale debt securities in accordance with current accounting guidance.
Debt and equity securities are comprised of our available-for-sale debt securities and our equity securities. As described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, we evaluate the performance of our available-for-sale debt securities on an investment by investment basis for impairment, taking into consideration the investment’s purpose, volatility, current returns and any intent to sell the security. As of December 31, 2022, no allowance for credit losses was recorded for our available-for-sale debt securities. At December 31, 2022 and September 30, 2022, the amortized cost of our available-for-sale debt securities was $36.2 million and $34.1 million. At December 31, 2022, we maintained investments in bonds that have contractual maturity dates ranging from January 2023 through September 2026.
Other Fair Value Measures
Our long-term debt is recorded at carrying value. The fair value of our long-term debt, excluding finance leases, is determined using third party market value quotations, which are considered Level 1 fair value measurements for debt instruments with a recent, observable trade or Level 2 fair value measurements for debt instruments where fair value is determined using the most recent available quoted market price. The carrying value of our finance leases materially approximates fair value. The following table presents the carrying value and fair value of our long-term debt, excluding finance leases, debt issuance costs and original issue premium or discount, as of December 31, 2022 and September 30, 2022:
| December 31, 2022 | September 30, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Carrying Amount | $ | 8,760,000 | $ | 7,960,000 | |||||||
| Fair Value | $ | 7,856,154 | $ | 6,918,843 |
14. Concentration of Credit Risk
Information regarding our concentration of credit risk is disclosed in Note 17 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. During the three months ended December 31, 2022, there were no material changes in our concentration of credit risk.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Atmos Energy Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Atmos Energy Corporation (the Company) as of December 31, 2022, the related condensed consolidated statements of comprehensive income and cash flows for the three month periods ended December 31, 2022 and 2021, and the related notes (collectively referred to as the "condensed consolidated interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of September 30, 2022, the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated November 14, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 7, 2023
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