NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 over three million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at June 30, 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, 2021. 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, 2021. Because of seasonal and other factors, the results of operations for the nine-month period ended June 30, 2022 are not indicative of our results of operations for the full 2022 fiscal year, which ends September 30, 2022.
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, 2021.
During the second quarter of fiscal 2022, we completed our annual goodwill impairment assessment using a qualitative assessment, as permitted under U.S. GAAP. We test for goodwill at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit. Based on the assessment performed, we determined that our goodwill was not impaired.
Recently issued accounting pronouncements
In November 2021, the Financial Accounting Standards Board (FASB) issued guidance which will require disclosure about government assistance in the notes to the financial statements. The amendment requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy, including information about the nature of the transactions and the related accounting policy used to account for the transactions, the line items on the balance sheet and income statement that are affected by the transactions and the significant terms and conditions of the transactions, including commitments and contingencies. The amendment is effective for us beginning October 1, 2022; however, we elected to adopt this amendment during the first quarter of fiscal 2022 as permitted by the guidance. As the guidance is related only to disclosures in the notes to the financial statements, there will be no impact on our financial position, results of operations or cash flows.
In March 2020, the FASB issued optional guidance which will ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the cessation of the London Interbank Offered Rate (LIBOR). The amendments can be elected immediately, as of March 12, 2020, through December 31, 2022. We are currently evaluating if we will apply the optional guidance as we assess the impact of the cessation of LIBOR on our current contracts and hedging relationships and the potential impact on our financial position, results of operations and cash flows.
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 June 30, 2022 and September 30, 2021 included the following:
| | | | | | | | | | | |
| June 30,
2022 | | September 30,
2021 |
| | (In thousands) |
| Regulatory assets: | | | |
| Pension and postretirement benefit costs | $ | 34,482 | | | $ | 45,922 | |
Infrastructure mechanisms (1) | 225,279 | | | 222,795 | |
Winter Storm Uri incremental costs (2) | 2,107,820 | | | 2,100,728 | |
| Deferred gas costs | 42,818 | | | 66,395 | |
| Regulatory excess deferred taxes | 48,746 | | | 45,370 | |
| Recoverable loss on reacquired debt | 3,448 | | | 3,789 | |
| Deferred pipeline record collection costs | 35,212 | | | 32,099 | |
| | | |
| | | |
| Other | 15,552 | | | 4,343 | |
| $ | 2,513,357 | | | $ | 2,521,441 | |
| Regulatory liabilities: | | | |
| Regulatory excess deferred taxes | $ | 586,149 | | | $ | 705,084 | |
| | | |
| Regulatory cost of removal obligation | 558,542 | | | 541,511 | |
| Deferred gas costs | 45,874 | | | 52,553 | |
| Asset retirement obligation | 18,373 | | | 18,373 | |
| APT annual adjustment mechanism | 26,689 | | | 31,110 | |
| Pension and postretirement benefit costs | 51,954 | | | 56,201 | |
| Other | 23,223 | | | 19,363 | |
| $ | 1,310,804 | | | $ | 1,424,195 | |
(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 subject to securitization incurred during Winter Storm Uri and permissible 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 June 30, 2022.
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, 2021.
Income statements and capital expenditures for the three and nine months ended June 30, 2022 and 2021 by segment are presented in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | Distribution | | Pipeline and Storage | | | | Eliminations | | Consolidated |
| | (In thousands) |
| Operating revenues from external parties | $ | 772,497 | | | $ | 43,932 | | | | | $ | — | | | $ | 816,429 | |
| Intersegment revenues | 814 | | | 139,480 | | | | | (140,294) | | | — | |
| Total operating revenues | 773,311 | | | 183,412 | | | | | (140,294) | | | 816,429 | |
Purchased gas cost | 390,559 | | | (1,347) | | | | | (140,053) | | | 249,159 | |
| Operation and maintenance expense | 133,654 | | | 48,912 | | | | | (241) | | | 182,325 | |
| Depreciation and amortization expense | 97,106 | | | 37,125 | | | | | — | | | 134,231 | |
| Taxes, other than income | 85,933 | | | 10,194 | | | | | — | | | 96,127 | |
| Operating income | 66,059 | | | 88,528 | | | | | — | | | 154,587 | |
| Other non-operating income | 6,708 | | | 6,555 | | | | | — | | | 13,263 | |
| Interest charges | 12,341 | | | 13,849 | | | | | — | | | 26,190 | |
Income before income taxes | 60,426 | | | 81,234 | | | | | — | | | 141,660 | |
| Income tax expense | 3,025 | | | 10,088 | | | | | — | | | 13,113 | |
| Net income | $ | 57,401 | | | $ | 71,146 | | | | | $ | — | | | $ | 128,547 | |
| Capital expenditures | $ | 417,244 | | | $ | 118,766 | | | | | $ | — | | | $ | 536,010 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
| | Distribution | | Pipeline and Storage | | Eliminations | | Consolidated |
| | (In thousands) |
| Operating revenues from external parties | $ | 557,931 | | | $ | 47,622 | | | $ | — | | | $ | 605,553 | |
| Intersegment revenues | 819 | | | 115,365 | | | (116,184) | | | — | |
| Total operating revenues | 558,750 | | | 162,987 | | | (116,184) | | | 605,553 | |
Purchased gas cost | 202,050 | | | 691 | | | (115,871) | | | 86,870 | |
| Operation and maintenance expense | 130,454 | | | 54,329 | | | (313) | | | 184,470 | |
| Depreciation and amortization expense | 86,099 | | | 33,249 | | | — | | | 119,348 | |
| Taxes, other than income | 72,024 | | | 9,451 | | | — | | | 81,475 | |
| Operating income | 68,123 | | | 65,267 | | | — | | | 133,390 | |
| Other non-operating income | 1,060 | | | 4,827 | | | — | | | 5,887 | |
| Interest charges | 8,540 | | | 12,422 | | | — | | | 20,962 | |
Income before income taxes | 60,643 | | | 57,672 | | | — | | | 118,315 | |
| Income tax expense | 7,354 | | | 8,550 | | | — | | | 15,904 | |
| Net income | $ | 53,289 | | | $ | 49,122 | | | $ | — | | | $ | 102,411 | |
| Capital expenditures | $ | 398,416 | | | $ | 113,816 | | | $ | — | | | $ | 512,232 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Nine Months Ended June 30, 2022 |
| | Distribution | | Pipeline and Storage | | Eliminations | | Consolidated |
| | (In thousands) |
| Operating revenues from external parties | $ | 3,353,800 | | | $ | 125,234 | | | $ | — | | | $ | 3,479,034 | |
| Intersegment revenues | 2,479 | | | 384,843 | | | (387,322) | | | — | |
| Total operating revenues | 3,356,279 | | | 510,077 | | | (387,322) | | | 3,479,034 | |
Purchased gas cost | 1,881,212 | | | (3,075) | | | (386,437) | | | 1,491,700 | |
| Operation and maintenance expense | 378,479 | | | 127,193 | | | (885) | | | 504,787 | |
| Depreciation and amortization expense | 286,515 | | | 108,946 | | | — | | | 395,461 | |
| Taxes, other than income | 242,214 | | | 29,292 | | | — | | | 271,506 | |
| Operating income | 567,859 | | | 247,721 | | | — | | | 815,580 | |
| Other non-operating income | 9,173 | | | 18,005 | | | — | | | 27,178 | |
| Interest charges | 36,046 | | | 38,923 | | | — | | | 74,969 | |
Income before income taxes | 540,986 | | | 226,803 | | | — | | | 767,789 | |
| Income tax expense | 35,163 | | | 29,871 | | | — | | | 65,034 | |
| Net income | $ | 505,823 | | | $ | 196,932 | | | $ | — | | | $ | 702,755 | |
| Capital expenditures | $ | 1,217,094 | | | $ | 508,945 | | | $ | — | | | $ | 1,726,039 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Nine Months Ended June 30, 2021 |
| | Distribution | | Pipeline and Storage | | Eliminations | | Consolidated |
| | (In thousands) |
| Operating revenues from external parties | $ | 2,715,644 | | | $ | 123,462 | | | $ | — | | | $ | 2,839,106 | |
| Intersegment revenues | 2,430 | | | 353,406 | | | (355,836) | | | — | |
| Total operating revenues | 2,718,074 | | | 476,868 | | | (355,836) | | | 2,839,106 | |
Purchased gas cost | 1,304,269 | | | (440) | | | (354,890) | | | 948,939 | |
| Operation and maintenance expense | 363,246 | | | 117,188 | | | (946) | | | 479,488 | |
| Depreciation and amortization expense | 254,636 | | | 98,633 | | | — | | | 353,269 | |
| Taxes, other than income | 214,991 | | | 28,385 | | | — | | | 243,376 | |
| Operating income | 580,932 | | | 233,102 | | | — | | | 814,034 | |
| Other non-operating income | 1,135 | | | 13,658 | | | — | | | 14,793 | |
| Interest charges | 33,269 | | | 35,799 | | | — | | | 69,068 | |
Income before income taxes | 548,798 | | | 210,961 | | | — | | | 759,759 | |
| Income tax expense | 109,481 | | | 33,435 | | | — | | | 142,916 | |
| Net income | $ | 439,317 | | | $ | 177,526 | | | $ | — | | | $ | 616,843 | |
| Capital expenditures | $ | 1,000,616 | | | $ | 357,344 | | | $ | — | | | $ | 1,357,960 | |
Balance sheet information at June 30, 2022 and September 30, 2021 by segment is presented in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Distribution | | Pipeline and Storage | | Eliminations | | Consolidated |
| | (In thousands) |
| Property, plant and equipment, net | $ | 12,314,182 | | | $ | 4,242,421 | | | $ | — | | | $ | 16,556,603 | |
| Total assets | $ | 20,891,285 | | | $ | 4,497,125 | | | $ | (3,732,926) | | | $ | 21,655,484 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
| | Distribution | | Pipeline and Storage | | Eliminations | | Consolidated |
| | (In thousands) |
| Property, plant and equipment, net | $ | 11,232,649 | | | $ | 3,831,321 | | | $ | — | | | $ | 15,063,970 | |
| Total assets | $ | 18,847,266 | | | $ | 4,076,844 | | | $ | (3,315,448) | | | $ | 19,608,662 | |
| | | | | | | |
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 and nine months ended June 30, 2022 and 2021 are calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 | | Nine Months Ended June 30 |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands, except per share amounts) |
Basic Earnings Per Share | | | | | | | |
| Net income | $ | 128,547 | | | $ | 102,411 | | | $ | 702,755 | | | $ | 616,843 | |
Less: Income allocated to participating securities | 79 | | | 70 | | | 465 | | | 440 | |
Income available to common shareholders | $ | 128,468 | | | $ | 102,341 | | | $ | 702,290 | | | $ | 616,403 | |
Basic weighted average shares outstanding | 139,881 | | | 131,358 | | | 136,799 | | | 129,185 | |
Net income per share — Basic | $ | 0.92 | | | $ | 0.78 | | | $ | 5.13 | | | $ | 4.77 | |
Diluted Earnings Per Share | | | | | | | |
| Income available to common shareholders | $ | 128,468 | | | $ | 102,341 | | | $ | 702,290 | | | $ | 616,403 | |
Effect of dilutive shares | — | | | — | | | — | | | — | |
Income available to common shareholders | $ | 128,468 | | | $ | 102,341 | | | $ | 702,290 | | | $ | 616,403 | |
Basic weighted average shares outstanding | 139,881 | | | 131,358 | | | 136,799 | | | 129,185 | |
| Dilutive shares | 346 | | | 128 | | | 256 | | | 44 | |
Diluted weighted average shares outstanding | 140,227 | | | 131,486 | | | 137,055 | | | 129,229 | |
Net income per share - Diluted | $ | 0.92 | | | $ | 0.78 | | | $ | 5.12 | | | $ | 4.77 | |
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, 2021. 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 and nine months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
| Distribution | | Pipeline and Storage | | Distribution | | Pipeline and Storage |
| (In thousands) |
| Gas sales revenues: | | | | | | | |
| Residential | $ | 441,806 | | | $ | — | | | $ | 336,016 | | | $ | — | |
| Commercial | 231,309 | | | — | | | 157,314 | | | — | |
| Industrial | 57,045 | | | — | | | 25,348 | | | — | |
| Public authority and other | 13,080 | | | — | | | 8,870 | | | — | |
| Total gas sales revenues | 743,240 | | | — | | | 527,548 | | | — | |
| Transportation revenues | 27,216 | | | 186,405 | | | 25,903 | | | 164,619 | |
| Miscellaneous revenues | 2,453 | | | 3,104 | | | 2,615 | | | 3,895 | |
| Revenues from contracts with customers | 772,909 | | | 189,509 | | | 556,066 | | | 168,514 | |
Alternative revenue program revenues (1) | (77) | | | (6,097) | | | 2,206 | | | (5,527) | |
| Other revenues | 479 | | | — | | | 478 | | | — | |
| Total operating revenues | $ | 773,311 | | | $ | 183,412 | | | $ | 558,750 | | | $ | 162,987 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended June 30, 2022 | | Nine Months Ended June 30, 2021 |
| Distribution | | Pipeline and Storage | | Distribution | | Pipeline and Storage |
| (In thousands) |
| Gas sales revenues: | | | | | | | |
| Residential | $ | 2,108,349 | | | $ | — | | | $ | 1,821,570 | | | $ | — | |
| Commercial | 910,400 | | | — | | | 692,443 | | | — | |
| Industrial | 160,098 | | | — | | | 81,122 | | | — | |
| Public authority and other | 54,668 | | | — | | | 42,159 | | | — | |
| Total gas sales revenues | 3,233,515 | | | — | | | 2,637,294 | | | — | |
| Transportation revenues | 87,886 | | | 514,114 | | | 84,643 | | | 480,945 | |
| Miscellaneous revenues | 7,732 | | | 11,931 | | | 8,336 | | | 12,921 | |
| Revenues from contracts with customers | 3,329,133 | | | 526,045 | | | 2,730,273 | | | 493,866 | |
Alternative revenue program revenues (1) | 25,663 | | | (15,968) | | | (13,666) | | | (16,998) | |
| Other revenues | 1,483 | | | — | | | 1,467 | | | — | |
| Total operating revenues | $ | 3,356,279 | | | $ | 510,077 | | | $ | 2,718,074 | | | $ | 476,868 | |
(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 regulatorily determined 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. The receivable balances are short term and generally do not extend beyond one month. To minimize credit risk, we assess the credit worthiness of new customers, require deposits where necessary, assess late fees, pursue collection activities and disconnect service for nonpayment. After disconnection, accounts are written off when deemed uncollectible.
Our policy related to the accounting for our 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, 2021. During the nine months ended June 30, 2022, there were no material changes to this policy. Rollforwards of our allowance for uncollectible accounts for the three and nine months ended June 30, 2022 and 2021 are presented in the table below. The allowance excludes the gas cost portion of customers’ bills for approximately 79 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 June 30, 2022 |
| | (In thousands) |
| Beginning balance, March 31, 2022 | $ | 62,213 | |
| Current period provisions | 5,657 | |
| Write-offs charged against allowance | (7,430) | |
| Recoveries of amounts previously written off | 328 | |
Ending balance, June 30, 2022 | $ | 60,768 | |
| | | | | |
| | Three Months Ended June 30, 2021 |
| | (In thousands) |
| Beginning balance, March 31, 2021 | $ | 44,680 | |
| Current period provisions | 14,403 | |
| Write-offs charged against allowance | (2,875) | |
| Recoveries of amounts previously written off | 437 | |
Ending balance, June 30, 2021 | $ | 56,645 | |
| | | | | |
| | Nine Months Ended June 30, 2022 |
| | (In thousands) |
Beginning balance, September 30, 2021 | $ | 64,471 | |
| Current period provisions | 17,733 | |
| Write-offs charged against allowance | (22,888) | |
| Recoveries of amounts previously written off | 1,452 | |
Ending balance, June 30, 2022 | $ | 60,768 | |
| | | | | |
| | Nine Months Ended June 30, 2021 |
| | (In thousands) |
Beginning balance, September 30, 2020 | $ | 29,949 | |
| Current period provisions | 32,872 | |
| Write-offs charged against allowance | (7,544) | |
| Recoveries of amounts previously written off | 1,368 | |
Ending balance, June 30, 2021 | $ | 56,645 | |
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, 2021. Other than as described below, there were no material changes in the terms of our debt instruments during the nine months ended June 30, 2022.
Long-term debt at June 30, 2022 and September 30, 2021 consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | September 30, 2021 |
| | (In thousands) |
Unsecured 0.625% Senior Notes, due March 2023 | $ | 1,100,000 | | | $ | 1,100,000 | |
Unsecured 3.00% Senior Notes, due 2027 | 500,000 | | | 500,000 | |
Unsecured 2.625% Senior Notes, due 2029 | 500,000 | | | 300,000 | |
Unsecured 1.50% Senior Notes, due 2031 | 600,000 | | | 600,000 | |
Unsecured 5.95% Senior Notes, due 2034 | 200,000 | | | 200,000 | |
Unsecured 5.50% Senior Notes, due 2041 | 400,000 | | | 400,000 | |
Unsecured 4.15% Senior Notes, due 2043 | 500,000 | | | 500,000 | |
Unsecured 4.125% Senior Notes, due 2044 | 750,000 | | | 750,000 | |
Unsecured 4.30% Senior Notes, due 2048 | 600,000 | | | 600,000 | |
Unsecured 4.125% Senior Notes, due 2049 | 450,000 | | | 450,000 | |
Unsecured 3.375% Senior Notes, due 2049 | 500,000 | | | 500,000 | |
Unsecured 2.85% Senior Notes, due 2052 | 600,000 | | | — | |
Floating-rate term loan, due April 2022 | — | | | 200,000 | |
Floating-rate Senior Notes, due March 2023 | 1,100,000 | | | 1,100,000 | |
Medium-term note Series A, 1995-1, 6.67%, due 2025 | 10,000 | | | 10,000 | |
Unsecured 6.75% Debentures, due 2028 | 150,000 | | | 150,000 | |
| Finance lease obligations | 52,196 | | | 18,739 | |
| Total long-term debt | 8,012,196 | | | 7,378,739 | |
| Less: | | | |
| Original issue discount on unsecured senior notes and debentures | 3,760 | | | 2,811 | |
| Debt issuance cost | 47,842 | | | 45,271 | |
| Current maturities | 2,201,430 | | | 2,400,452 | |
| $ | 5,759,164 | | | $ | 4,930,205 | |
On October 1, 2021, we completed a public offering of $600 million of 2.85% senior notes due 2052, with an effective interest rate of 2.58%, after giving effect to the offering costs and settlement of our interest rate swaps. The net proceeds from the offering, after the underwriting discount and offering expenses, of $589.8 million were used for general corporate purposes.
On January 14, 2022, we completed a public offering of $200 million of 2.625% senior notes due 2029, with an effective interest rate of 2.54%, after giving effect to the offering costs. The net proceeds from the offering, after the underwriting discount and offering expenses, of $200.8 million were used to repay our $200 million floating-rate term loan on January 18, 2022.
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. On March 31, 2022, we amended this agreement to (i) extend the maturity date from March 31, 2026 to March 31, 2027 and (ii) replace the London interbank offered rate (the LIBOR Rate) with the forward-looking term rate based on the secured overnight financing rate (the SOFR Rate) as the interest rate benchmark. This facility now 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 June 30, 2022 there were no amounts outstanding under our commercial paper program.
We also have a $900 million three-year unsecured revolving credit facility which is used to provide additional working capital funding. On March 31, 2022, we amended this agreement to (i) extend the maturity date from March 31, 2024 to March 31, 2025 and (ii) replace the LIBOR Rate with the SOFR Rate as the interest rate benchmark. This facility now 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 June 30, 2022, there were no borrowings outstanding under this facility.
Additionally, we have a $50 million 364-day unsecured facility, which was renewed April 1, 2022 and is used to provide working capital funding. There were no borrowings outstanding under this facility as of June 30, 2022.
Finally, we have a $50 million 364-day unsecured revolving credit facility, which was renewed March 31, 2022 and is used to issue letters of credit and to provide working capital funding. At June 30, 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 June 30, 2022, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 47 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 June 30, 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 and nine months ended June 30, 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, 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 | |
| Net income | — | | | — | | | — | | | — | | | 324,999 | | | 324,999 | |
| Other comprehensive income | — | | | — | | | — | | | 121,723 | | | — | | | 121,723 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends ($0.68 per share) | — | | | — | | | — | | | — | | | (93,533) | | | (93,533) | |
| | | | | | | | | | | |
| Common stock issued: | | | | | | | | | | | |
| Public and other stock offerings | 3,509,116 | | | 18 | | | 336,451 | | | — | | | — | | | 336,469 | |
| Stock-based compensation plans | 77,832 | | | — | | | 4,028 | | | — | | | — | | | 4,028 | |
| Balance, March 31, 2022 | 139,012,029 | | | 695 | | | 5,634,020 | | | 145,579 | | | 3,202,937 | | | 8,983,231 | |
| Net income | — | | | — | | | — | | | — | | | 128,547 | | | 128,547 | |
| Other comprehensive income | — | | | — | | | — | | | 159,631 | | | — | | | 159,631 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends ($0.68 per share) | — | | | — | | | — | | | — | | | (95,312) | | | (95,312) | |
| | | | | | | | | | | |
| Common stock issued: | | | | | | | | | | | |
| Public and other stock offerings | 801,952 | | | 4 | | | 84,656 | | | — | | | — | | | 84,660 | |
| Stock-based compensation plans | 74,775 | | | — | | | 7,414 | | | — | | | — | | | 7,414 | |
| Balance, June 30, 2022 | 139,888,756 | | | $ | 699 | | | $ | 5,726,090 | | | $ | 305,210 | | | $ | 3,236,172 | | | $ | 9,268,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | 125,882,477 | | | $ | 629 | | | $ | 4,377,149 | | | $ | (57,589) | | | $ | 2,471,014 | | | $ | 6,791,203 | |
| Net income | — | | | — | | | — | | | — | | | 217,678 | | | 217,678 | |
| Other comprehensive income | — | | | — | | | — | | | 60,121 | | | — | | | 60,121 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends ($0.625 per share) | — | | | — | | | — | | | — | | | (79,023) | | | (79,023) | |
| | | | | | | | | | | |
| Common stock issued: | | | | | | | | | | | |
| Public and other stock offerings | 2,126,118 | | | 11 | | | 219,998 | | | — | | | — | | | 220,009 | |
| Stock-based compensation plans | 144,366 | | | 1 | | | 3,167 | | | — | | | — | | | 3,168 | |
| Balance, December 31, 2020 | 128,152,961 | | | 641 | | | 4,600,314 | | | 2,532 | | | 2,609,669 | | | 7,213,156 | |
| Net income | — | | | — | | | — | | | — | | | 296,754 | | | 296,754 | |
| Other comprehensive income | — | | | — | | | — | | | 137,939 | | | — | | | 137,939 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends ($0.625 per share) | — | | | — | | | — | | | — | | | (80,325) | | | (80,325) | |
| | | | | | | | | | | |
| Common stock issued: | | | | | | | | | | | |
| Public and other stock offerings | 2,498,026 | | | 12 | | | 248,948 | | | — | | | — | | | 248,960 | |
| Stock-based compensation plans | 16,122 | | | — | | | 4,441 | | | — | | | — | | | 4,441 | |
| Balance, March 31, 2021 | 130,667,109 | | | 653 | | | 4,853,703 | | | 140,471 | | | 2,826,098 | | | 7,820,925 | |
| Net income | — | | | — | | | — | | | — | | | 102,411 | | | 102,411 | |
| Other comprehensive loss | — | | | — | | | — | | | (79,232) | | | — | | | (79,232) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends ($0.625 per share) | — | | | — | | | — | | | — | | | (81,912) | | | (81,912) | |
| | | | | | | | | | | |
| Common stock issued: | | | | | | | | | | | |
| Public and other stock offerings | 39,078 | | | 1 | | | 3,829 | | | — | | | — | | | 3,830 | |
| Stock-based compensation plans | 80,852 | | | — | | | 7,736 | | | — | | | — | | | 7,736 | |
| Balance, June 30, 2021 | 130,787,039 | | | $ | 654 | | | $ | 4,865,268 | | | $ | 61,239 | | | $ | 2,846,597 | | | $ | 7,773,758 | |
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. As of the date of this report, $2.2 billion of securities were available for issuance under this shelf registration statement.
On March 23, 2022, we filed a prospectus supplement under the shelf registration statement relating to 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). This ATM equity sales program replaced our previous ATM equity sales program, filed on June 29, 2021, which was exhausted during our second fiscal quarter.
During the nine months ended June 30, 2022, we executed forward sales under our ATM equity sales program with various forward sellers who borrowed and sold 10,308,214 shares of our common stock at an aggregate price of $1.1 billion. During the nine months ended June 30, 2022, we also settled forward sale agreements with respect to 6,932,722 shares that had been borrowed and sold by various forward sellers under the ATM program for net proceeds of $675.3 million. As of June 30, 2022, $663.0 million of equity was available for issuance under our existing ATM program. Additionally, we had $700.9 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 | | 5,527,318 | | | $ | 595,261 | | | | $ | 107.69 | |
| | | | | | | |
| December 29, 2023 | | 919,898 | | | 105,634 | | | | $ | 114.83 | |
| Total | | 6,447,216 | | | $ | 700,895 | | | | $ | 108.71 | |
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, 2021 | $ | 47 | | | $ | 69,756 | | | | | $ | 69,803 | |
| Other comprehensive income (loss) before reclassifications | (336) | | | 233,511 | | | | | 233,175 | |
| Amounts reclassified from accumulated other comprehensive income | — | | | 2,232 | | | | | 2,232 | |
| Net current-period other comprehensive income (loss) | (336) | | | 235,743 | | | | | 235,407 | |
| | | | | | | |
| June 30, 2022 | $ | (289) | | | $ | 305,499 | | | | | $ | 305,210 | |
| | | | | | | | | | | | | | | | | | | |
| Available-
for-Sale
Securities | | Interest Rate
Agreement
Cash Flow
Hedges | | | | Total |
| | (In thousands) |
| September 30, 2020 | $ | 238 | | | $ | (57,827) | | | | | $ | (57,589) | |
| Other comprehensive income (loss) before reclassifications | (165) | | | 115,568 | | | | | 115,403 | |
| Amounts reclassified from accumulated other comprehensive income | — | | | 3,425 | | | | | 3,425 | |
| Net current-period other comprehensive income (loss) | (165) | | | 118,993 | | | | | 118,828 | |
| | | | | | | |
| June 30, 2021 | $ | 73 | | | $ | 61,166 | | | | | $ | 61,239 | |
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, 2021, 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 June 30, 2022, we have recorded a $2.1 billion regulatory asset for incremental costs, including carrying costs, incurred in Kansas ($88.0 million) and Texas ($2,019.8 million).
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 in 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, 2021.
Kansas
On March 24, 2022, the KCC issued an Order Approving Unanimous Settlement Agreement which stipulated that all of our gas and storage costs were prudently incurred. On May 25, 2022, we filed with the KCC an application to securitize $90.2 million in securitized utility tariff costs. 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 June 30, 2022.
Texas
We filed our application with the RRC on July 30, 2021 to securitize $2.0 billion of extraordinary gas costs incurred during Winter Storm Uri. This amount also included an estimate of carrying costs and administrative costs that we expect to incur in connection with the resolution of this filing.
On November 10, 2021, the RRC issued a Final Determination of the Regulatory Asset (the Final Determination). The Final Determination stipulates that all of our gas and storage costs were prudently incurred. Additionally, the Final Determination permits us to defer, through December 31, 2021 our actual carrying costs associated with the $2.2 billion of incremental financing issued in March 2021 and to recover approximately $0.6 million of our administrative costs.
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. As required by the Financing Order, the Texas Public Financing Authority has 180 days to issue the securitization bonds. Issuance may occur after 180 days if necessary based on bond market conditions, the receipt of necessary approvals and the timely receipt of necessary financial disclosure information from each participating gas utility. Upon receipt of the securitization funds we will repay the $2.2 billion in public notes issued to finance the incremental 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 and nine months ended June 30, 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 June 30 |
| | Pension Benefits | | Other Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) |
| Components of net periodic pension cost: | | | | | | | |
| Service cost | $ | 4,323 | | | $ | 4,609 | | | $ | 2,559 | | | $ | 4,305 | |
Interest cost (1) | 5,063 | | | 5,016 | | | 2,683 | | | 2,661 | |
Expected return on assets (1) | (7,383) | | | (6,978) | | | (3,312) | | | (2,613) | |
| | | | | | | |
Amortization of prior service cost (credit) (1) | (58) | | | (58) | | | (3,308) | | | 44 | |
Amortization of actuarial (gain) loss (1) | 1,951 | | | 3,062 | | | — | | | — | |
Settlements(1) | — | | | 8,999 | | | — | | | — | |
| Net periodic pension cost | $ | 3,896 | | | $ | 14,650 | | | $ | (1,378) | | | $ | 4,397 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Nine Months Ended June 30 |
| | Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) |
| Components of net periodic pension cost: | | | | | | | |
| Service cost | $ | 12,970 | | | $ | 13,834 | | | $ | 7,676 | | | $ | 12,917 | |
Interest cost (1) | 15,190 | | | 15,072 | | | 8,050 | | | 7,981 | |
Expected return on assets (1) | (22,149) | | | (20,934) | | | (9,937) | | | (7,841) | |
| | | | | | | |
Amortization of prior service cost (credit) (1) | (174) | | | (174) | | | (9,925) | | | 130 | |
Amortization of actuarial (gain) loss (1) | 5,853 | | | 9,405 | | | — | | | — | |
Settlements(1) | — | | | 8,999 | | | — | | | — | |
| Net periodic pension cost | $ | 11,690 | | | $ | 26,202 | | | $ | (4,136) | | | $ | 13,187 | |
(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, 2021.
For the nine months ended June 30, 2022 we contributed $11.1 million to our postretirement medical plans. We anticipate contributing a total of between $15 million and $25 million to our postretirement plans during fiscal 2022.
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 maintain liability insurance for various risks associated with the operation of our natural gas pipelines and facilities, including for property damage and bodily injury. These liability insurance policies generally require us to be responsible for the first $1.0 million (self-insured retention) of each incident.
The National Transportation Safety Board (NTSB) held a public meeting on January 12, 2021 to determine the probable cause of the incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. At the meeting, the Board deliberated and voted on proposed findings of fact, a probable cause statement, and safety recommendations. On February 8, 2021, the NTSB issued its final report that included an Executive Summary, Findings, Probable Cause, and Recommendations. Also on February 8, 2021, safety recommendations letters were distributed to recommendation recipients, including Atmos Energy. Atmos Energy timely provided a written response on May 7, 2021. Following the release of the NTSB’s final report, the Railroad Commission of Texas (RRC) completed its safety evaluation related to the same incident finding four alleged violations and initiated an enforcement proceeding to pursue administrative penalties totaling $1.6 million. Atmos Energy is working with the RRC to resolve the alleged violations and satisfy the administrative penalties.
The NTSB is investigating a worksite accident that occurred in Farmersville, Texas on June 28, 2021 that resulted in two fatalities and injuries to two others. Together with the Railroad Commission of Texas and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with all parties to help determine the cause of this incident. Three civil actions have been filed in Dallas, Texas against Atmos Energy and one of its contractors in response to the accident.
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 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, 2021. At June 30, 2022, we were committed to purchase 68.3 Bcf within one year and 97.2 Bcf within two to three years under indexed contracts. At June 30, 2022, we were committed to purchase 3.4 Bcf within one year under fixed price contracts with a weighted average price of $5.41 per Mcf.
Future Lease Payments
A finance lease for a service center is expected to commence in fiscal 2023 that impacts our future lease payments. The total future lease payments for this lease are $19.3 million.
Rate Regulatory Proceedings
As of June 30, 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 nine months ended June 30, 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, 2022 and 2021, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended June 30, 2022 and 2021 were 9.3% and 13.4% and for the nine months ended June 30, 2022 and 2021 were 8.5% and 18.8%. 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.
Beginning in the second quarter of fiscal 2021 and through the end of the last fiscal year, we reached agreement with regulators in various states to begin refunding excess deferred tax liabilities generally over a three to five year period. This increased the refund of excess deferred tax liabilities to customers in the current year period and significantly reduced the effective tax rate for the three and nine month periods ended June 30, 2022 compared to the prior year periods.
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 state tax legislative changes in Kansas and Louisiana. Currently, the regulatory excess net deferred tax liability of $537.4 million is being returned over various periods. Of this amount, $444.2 million is being returned to customers over 35 - 60 months. An additional $78.1 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 June 30, 2022 and September 30, 2021, $160.2 million and $155.9 million is recorded in other current liabilities.
Winter Storm Uri Deferred Tax Assets and Liabilities
We deduct our purchased gas costs for federal income tax purposes in the period they are paid. As a result of impacts from Winter Storm Uri, we recorded a $471.0 million (tax effected) increase in our deferred tax liability and an increase in our net operating loss carryforward as of September 30, 2021. At September 30, 2021, we had $850.2 million (tax effected) of federal net operating loss carryforwards.
As a result of the Financing Order issued by the Texas RRC on February 8, 2022, we reduced the deferred tax liability associated with the Winter Storm Uri regulatory asset and the corresponding deferred tax asset associated with net operating loss carryforwards by $451.1 million during the second quarter of fiscal 2022.
As of June 30, 2022, we had $403.8 million (tax effected) of federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset future taxable income. These net operating losses can be carried forward indefinitely. The Company also has $28.1 million (tax effected) of state net operating loss carryforwards (net of $7.3 million of federal effects) and $1.7 million of state tax credits carryforwards (net of $0.5 million of federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards are subject to expiration as early as 2035.
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, 2021. During the nine months ended June 30, 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 2021-2022 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 42 percent, or 23.9 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.
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 June 30, 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 June 30, 2022, we had 5,819 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 June 30, 2022 and September 30, 2021. 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 June 30, 2022 and September 30, 2021, no gross amounts and no cash collateral were netted within our consolidated balance sheet.
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| | | June 30, 2022 |
| Balance Sheet Location | | Assets | | Liabilities |
| | | | (In thousands) |
| | | | | |
| Designated As Hedges: | | | | | |
| | | | | |
| Interest rate contracts | Other current assets /
Other current liabilities | | $ | 169,318 | | | $ | — | |
| | | | | |
| Interest rate contracts | Deferred charges and other assets /
Deferred credits and other liabilities | | 301,152 | | | — | |
| Total | | | 470,470 | | | — | |
| Not Designated As Hedges: | | | | | |
| Commodity contracts | Other current assets /
Other current liabilities | | 17,518 | | | (193) | |
| Commodity contracts | Deferred charges and other assets /
Deferred credits and other liabilities | | 169 | | | (5) | |
| Total | | | 17,687 | | | (198) | |
| Gross / Net Financial Instruments | | | $ | 488,157 | | | $ | (198) | |
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| | | September 30, 2021 |
| Balance Sheet Location | | Assets | | Liabilities |
| | | | (In thousands) |
| | | | | |
| Designated As Hedges: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Interest rate contracts | Deferred charges and other assets /
Deferred credits and other liabilities | | $ | 169,469 | | | $ | — | |
| Total | | | 169,469 | | | — | |
| Not Designated As Hedges: | | | | | |
| Commodity contracts | Other current assets /
Other current liabilities | | 55,073 | | | (5,269) | |
| Commodity contracts | Deferred charges and other assets /
Deferred credits and other liabilities | | 6,144 | | | — | |
| Total | | | 61,217 | | | (5,269) | |
| Gross / Net Financial Instruments | | | $ | 230,686 | | | $ | (5,269) | |
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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 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 June 30, 2022 and 2021 was $1.0 million and $1.5 million and for the nine months ended June 30, 2022 and 2021 was $2.9 million and $4.4 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 and nine months ended June 30, 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.
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| | Three Months Ended June 30 | | Nine Months Ended June 30 |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (In thousands) |
| Increase (decrease) in fair value: | | | | | | | |
| Interest rate agreements | $ | 158,993 | | | $ | (80,338) | | | $ | 233,511 | | | $ | 115,568 | |
| | | | | | | |
| Recognition of losses in earnings due to settlements: | | | | | | | |
| Interest rate agreements | 744 | | | 1,142 | | | 2,232 | | | 3,425 | |
| | | | | | | |
| Total other comprehensive income (loss) from hedging, net of tax | $ | 159,737 | | | $ | (79,196) | | | $ | 235,743 | | | $ | 118,993 | |
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 June 30, 2022, we had $59.5 million of net realized losses 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 losses 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 2052. 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.
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| Interest Rate
Agreements |
| | (In thousands) |
| Next twelve months | $ | (2,976) | |
| Thereafter | (56,506) | |
| Total | $ | (59,482) | |
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, 2021. During the nine months ended June 30, 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, 2021.
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 June 30, 2022 and September 30, 2021. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
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| Quoted
Prices in
Active
Markets
(Level 1) | | Significant Other Observable Inputs (Level 2)(1) | | Significant
Other
Unobservable
Inputs
(Level 3) | | Netting and
Cash
Collateral | | June 30, 2022 |
| | (In thousands) |
| Assets: | | | | | | | | | |
| Financial instruments | $ | — | | | $ | 488,157 | | | $ | — | | | $ | — | | | $ | 488,157 | |
| Debt and equity securities | | | | | | | | | |
| Registered investment companies | 28,370 | | | — | | | — | | | — | | | 28,370 | |
| Bond mutual funds | 32,667 | | | — | | | — | | | — | | | 32,667 | |
Bonds (2) | — | | | 33,729 | | | — | | | — | | | 33,729 | |
| Money market funds | — | | | 3,590 | | | — | | | — | | | 3,590 | |
| Total debt and equity securities | 61,037 | | | 37,319 | | | — | | | — | | | 98,356 | |
| Total assets | $ | 61,037 | | | $ | 525,476 | | | $ | — | | | $ | — | | | $ | 586,513 | |
| Liabilities: | | | | | | | | | |
| Financial instruments | $ | — | | | $ | 198 | | | $ | — | | | $ | — | | | $ | 198 | |
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| 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, 2021 |
| | (In thousands) |
| Assets: | | | | | | | | | |
| Financial instruments | $ | — | | | $ | 230,686 | | | $ | — | | | $ | — | | | $ | 230,686 | |
| Debt and equity securities | | | | | | | | | |
| Registered investment companies | 35,175 | | | — | | | — | | | — | | | 35,175 | |
| Bond mutual funds | 34,298 | | | — | | | — | | | — | | | 34,298 | |
Bonds (2) | — | | | 35,655 | | | — | | | — | | | 35,655 | |
| Money market funds | — | | | 2,943 | | | — | | | — | | | 2,943 | |
| Total debt and equity securities | 69,473 | | | 38,598 | | | — | | | — | | | 108,071 | |
| Total assets | $ | 69,473 | | | $ | 269,284 | | | $ | — | | | $ | — | | | $ | 338,757 | |
| Liabilities: | | | | | | | | | |
| Financial instruments | $ | — | | | $ | 5,269 | | | $ | — | | | $ | — | | | $ | 5,269 | |
(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, 2021, 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 June 30, 2022, no allowance for credit losses was recorded for our available-for-sale debt securities. At June 30, 2022 and September 30, 2021, the amortized cost of our available-for-sale debt securities was $34.1 million and $35.6 million. At June 30, 2022, we maintained investments in bonds that have contractual maturity dates ranging from July 2022 through June 2025.
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 June 30, 2022 and September 30, 2021:
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| | June 30, 2022 | | September 30, 2021 |
| | (In thousands) |
| Carrying Amount | $ | 7,960,000 | | | $ | 7,360,000 | |
| Fair Value | $ | 7,340,176 | | | $ | 8,086,136 | |
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, 2021. During the nine months ended June 30, 2022, there were no material changes in our concentration of credit risk.