Home Energy company ATMOS ENERGY CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

ATMOS ENERGY CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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INTRODUCTION

The following discussion should be read in conjunction with the condensed
consolidated financial statements in this Quarterly Report on Form 10-Q and
Management's Discussion and Analysis in our Annual Report on Form 10-K for the
year ended September 30, 2021.
Cautionary Statement for the Purposes of the Safe Harbor under the Private
Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements other than statements of historical fact included in this Report are
forward-looking statements made in good faith by us and are intended to qualify
for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. When used in this Report, or any other of our
documents or oral presentations, the words "anticipate", "believe", "estimate",
"expect", "forecast", "goal", "intend", "objective", "plan", "projection",
"seek", "strategy" or similar words are intended to identify forward-looking
statements. Such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the statements relating to our strategy, operations,
markets, services, rates, recovery of costs, availability of gas supply and
other factors. These risks and uncertainties include the following: federal,
state and local regulatory and political trends and decisions, including the
impact of rate proceedings before various state regulatory commissions;
increased federal regulatory oversight and potential penalties; possible
increased federal, state and local regulation of the safety of our operations;
the impact of greenhouse gas emissions or other legislation or regulations
intended to address climate change; possible significant costs and liabilities
resulting from pipeline integrity and other similar programs and related
repairs; the inherent hazards and risks involved in distributing, transporting
and storing natural gas; the availability and accessibility of contracted gas
supplies, interstate pipeline and/or storage services; increased competition
from energy suppliers and alternative forms of energy; adverse weather
conditions; the impact of climate change; the inability to continue to hire,
train and retain operational, technical and managerial personnel; increased
dependence on technology that may hinder the Company's business if such
technologies fail; the threat of cyber-attacks or acts of cyber-terrorism that
could disrupt our business operations and information technology systems or
result in the loss or exposure of confidential or sensitive customer, employee
or Company information; natural disasters, terrorist activities or other events
and other risks and uncertainties discussed herein, all of which are difficult
to predict and many of which are beyond our control; the capital-intensive
nature of our business; our ability to continue to access the credit and capital
markets to execute our business strategy; market risks beyond our control
affecting our risk management activities, including commodity price volatility,
counterparty performance or creditworthiness and interest rate risk; the
concentration of our operations in Texas; the impact of adverse economic
conditions on our customers; changes in the availability and price of natural
gas; increased costs of providing health care benefits, along with pension and
postretirement health care benefits and increased funding requirements; and the
outbreak of COVID-19 and its impact on business and economic conditions.
Accordingly, while we believe these forward-looking statements to be reasonable,
there can be no assurance that they will approximate actual experience or that
the expectations derived from them will be realized. Further, we undertake no
obligation to update or revise any of our forward-looking statements whether as
a result of new information, future events or otherwise.
OVERVIEW
Atmos Energy and our subsidiaries are engaged in the regulated natural gas
distribution and pipeline and storage businesses. We distribute natural gas
through sales and transportation arrangements to over three million residential,
commercial, public authority and industrial customers throughout our six
distribution divisions, which at December 31, 2021 covered service areas located
in eight states. In addition, we transport natural gas for others through our
distribution and pipeline systems.

We manage and review our consolidated operations through the following reportable segments:

•The distribution segment is primarily comprised of our regulated natural gas
distribution and related sales operations in eight states.
•The pipeline and storage segment is comprised primarily of the pipeline and
storage operations of our Atmos Pipeline-Texas division and our natural gas
transmission operations in Louisiana.
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our condensed consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States. Preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
the related disclosures of contingent assets and liabilities. We based our
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances. On an ongoing basis, we evaluate our
estimates, including those related to the allowance for doubtful accounts, legal
and environmental accruals, insurance accruals, pension and postretirement
obligations, deferred income taxes and the valuation of goodwill and other
long-lived assets. Actual results may differ from such estimates.
Our critical accounting policies used in the preparation of our consolidated
financial statements are described in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2021 and include the following:
•Regulation
•Unbilled revenue
•Pension and other postretirement plans
•Impairment assessments
Our critical accounting policies are reviewed periodically by the Audit
Committee of our Board of Directors. There were no significant changes to these
critical accounting policies during the three months ended December 31, 2021.
RESULTS OF OPERATIONS

Executive Summary
Atmos Energy strives to operate our businesses safely and reliably while
delivering superior shareholder value. Our commitment to modernizing our natural
gas distribution and transmission systems requires a significant level of
capital spending. We have the ability to begin recovering a significant portion
of these investments timely through rate designs and mechanisms that reduce or
eliminate regulatory lag and separate the recovery of our approved rate from
customer usage patterns. The execution of our capital spending program, the
ability to recover these investments timely and our ability to access the
capital markets to satisfy our financing needs are the primary drivers that
affect our financial performance.
During the three months ended December 31, 2021, we recorded net income of
$249.2 million, or $1.86 per diluted share, compared to net income of $217.7
million, or $1.71 per diluted share for the three months ended December 31,
2020.
The 14.5 percent year-over-year increase in net income largely reflects positive
rate outcomes driven by safety and reliability spending and customer growth in
our distribution segment, offset by higher spending on certain operating and
maintenance expenses in both our segments due to the timing of certain
activities.
During the three months ended December 31, 2021, we implemented ratemaking
regulatory actions which resulted in an increase in annual operating income of
$24.9 million. Excluding the impact of the refund of excess deferred income
taxes resulting from previously enacted tax reform legislation, our total rate
outcomes were $68.5 million for the three months ended December 31, 2021.
Additionally, as of December 31, 2021, we had ratemaking efforts in progress
seeking a total increase in annual operating income of $22.0 million.
Capital expenditures for the three months ended December 31, 2021 were $684.2
million. Over 85 percent was invested to improve the safety and reliability of
our distribution and transportation systems, with a significant portion of this
investment incurred under regulatory mechanisms that reduce lag to six months or
less.
During the three months ended December 31, 2021, we completed approximately $862
million of long-term debt and equity financing. As of December 31, 2021, our
equity capitalization was 51.0 percent. Excluding the $2.2 billion of
incremental financing issued in conjunction with Winter Storm Uri, our equity
capitalization was 59.0 percent. As of December 31, 2021, we had approximately
$3.1 billion in total liquidity, including cash and cash equivalents and funds
available through equity forward sales agreements.
As a result of our sustained financial performance, our Board of Directors
increased the quarterly dividend by 8.8 percent for fiscal 2022.
The following discusses the results of operations for each of our operating
segments.
Distribution Segment
The distribution segment is primarily comprised of our regulated natural gas
distribution and related sales operations in eight states. The primary factors
that impact the results of this segment are our ability to earn our authorized
rates of return, competitive factors in the energy industry and economic
conditions in our service areas.
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Our ability to earn our authorized rates of return is based primarily on our
ability to improve the rate design in our various ratemaking jurisdictions to
minimize regulatory lag and, ultimately, separate the recovery of our approved
rates from customer usage patterns. Improving rate design is a long-term process
and is further complicated by the fact that we operate in multiple rate
jurisdictions. Under our current rate design, approximately 70 percent of our
distribution segment revenues are earned through the first six months of the
fiscal year. Additionally, we currently recover approximately 60 percent of our
distribution segment revenue, excluding gas costs, through the base customer
charge, which partially separates the recovery of our approved rate from
customer usage patterns.
Seasonal weather patterns can also affect our distribution operations. However,
the effect of weather that is above or below normal is substantially offset
through weather normalization adjustments, known as WNA, which have been
approved by state regulatory commissions for approximately 96 percent of our
residential and commercial revenues in the following states for the following
time periods:
Kansas, West Texas               October - May
Tennessee                        October - April
Kentucky, Mississippi, Mid-Tex   November - April
Louisiana                        December - March
Virginia                         January - December


Our distribution operations are also affected by the cost of natural gas. We are
generally able to pass the cost of gas through to our customers without markup
under purchased gas cost adjustment mechanisms; therefore, increases in the cost
of gas are offset by a corresponding increase in revenues. Revenues in our Texas
and Mississippi service areas include franchise fees and gross receipts taxes,
which are calculated as a percentage of revenue (inclusive of gas costs).
Therefore, the amount of these taxes included in revenues is influenced by the
cost of gas and the level of gas sales volumes. We record the associated tax
expense as a component of taxes, other than income.
The cost of gas typically does not have a direct impact on our operating income
because these costs are recovered through our purchased gas cost adjustment
mechanisms.  However, higher gas costs may adversely impact our accounts
receivable collections, resulting in higher bad debt expense.  This risk is
currently mitigated by rate design that allows us to collect from our customers
the gas cost portion of our bad debt expense on approximately 79 percent of our
residential and commercial revenues.  Additionally, higher gas costs may require
us to increase borrowings under our credit facilities, resulting in higher
interest expense.  Finally, higher gas costs, as well as competitive factors in
the industry and general economic conditions may cause customers to conserve or,
in the case of industrial consumers, to use alternative energy sources.
Three Months Ended December 31, 2021 compared with Three Months Ended December
31, 2020
Financial and operational highlights for our distribution segment for the three
months ended December 31, 2021 and 2020 are presented below.
                                                                            

Three months completed the 31st of December

                                                                        2021                        2020             Change
                                                                           (In thousands, unless otherwise noted)
Operating revenues                                             $       972,422                  $ 876,650          $ 95,772
Purchased gas cost                                                     496,799                    411,072            85,727

Operating expenses                                                     285,126                    256,024            29,102
Operating income                                                       190,497                    209,554           (19,057)
Other non-operating income                                               1,916                        835             1,081
Interest charges                                                         8,548                     10,712            (2,164)
Income before income taxes                                             183,865                    199,677           (15,812)

Income tax expense                                                       4,294                     45,985           (41,691)
Net income                                                     $       179,571                  $ 153,692          $ 25,879
Consolidated distribution sales volumes - MMcf                          69,545                     88,861           (19,316)
Consolidated distribution transportation volumes - MMcf                 38,597                     39,609            (1,012)
Total consolidated distribution throughput - MMcf                      108,142                    128,470           (20,328)

Average consolidated gas distribution cost per Mcf sold $7.14

                  $    4.63          $   2.51


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Operating income for our distribution segment decreased nine percent. During the
three months ended December 31, 2021 we refunded $28.8 million more excess
deferred taxes to customers in the distribution segment compared to the prior
year, which reduced operating income year over year and reduced the interim
effective income tax rate for this segment to 2.3% compared to 23.0% in the
prior year. Additional key drivers for the change in operating income include:
•a $32.2 million increase in rate adjustments, primarily in our Mid-Tex,
Louisiana and Kentucky/Mid-States Divisions.
•a $4.3 million increase in customers, primarily in our Mid-Tex Division.
Partially offset by:
•a $10.1 million increase in depreciation expense and property taxes associated
with increased capital investments.
•a $3.2 million increase in pipeline maintenance and related activities.
•an $11.3 million increase in other operation and maintenance expense, primarily
due to employee related costs, insurance premiums and other administrative
costs.
The following table shows our operating income by distribution division, in
order of total rate base, for the three months ended December 31, 2021 and 2020.
The presentation of our distribution operating income is included for financial
reporting purposes and may not be appropriate for ratemaking purposes.
                              Three Months Ended December 31
                            2021             2020          Change
                                      (In thousands)
Mid-Tex               $   106,358         $ 102,320      $   4,038
Kentucky/Mid-States        25,538            24,106          1,432
Louisiana                  21,154            23,119         (1,965)
West Texas                 20,874            20,047            827
Mississippi                24,700            24,634             66
Colorado-Kansas             2,815            13,230        (10,415)
Other                     (10,942)            2,098        (13,040)
Total                 $   190,497         $ 209,554      $ (19,057)






Recent Ratemaking Developments
The amounts described in the following sections represent the operating income
that was requested or received in each rate filing, which may not necessarily
reflect the stated amount referenced in the final order, as certain operating
costs may have changed as a result of a commission's or other governmental
authority's final ruling. During the first three months of fiscal 2022, we
implemented regulatory proceedings, resulting in a $24.9 million increase in
annual operating income as summarized below. Ratemaking outcomes include the
refund of excess deferred income taxes resulting from previously enacted tax
reform legislation and do not reflect the true economic benefit of the outcomes
because they do not include the corresponding income tax benefit. Excluding
these amounts, our total rate outcomes for ratemaking activities for the three
months ended December 31, 2021 were $68.5 million.
                                     Annual Increase in
Rate Action                           Operating Income
                                       (In thousands)
Annual formula rate mechanisms      $            24,881
Rate case filings                                     -
Other rate activity                                   -
                                    $            24,881










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The following pricing efforts aimed at $22.0 million increase in annual operating income were in progress as of December 31, 2021:

                                                                                                                         Operating Income
Division                                 Rate Action                                    Jurisdiction                     (Loss) Requested
                                                                                                                          (In thousands)
Colorado-Kansas                          Infrastructure Mechanism                       Colorado (1)                  $             2,610
Colorado-Kansas                          Infrastructure Mechanism                       Kansas (2)                                  1,829
Colorado-Kansas                          Ad Valorem                                     Kansas (3)                                   (370)
Kentucky/Mid-States                      Rate Case                                      Kentucky (4)                               14,394
Kentucky/Mid-States                      Infrastructure Mechanism                       Kentucky                                    3,506

                                                                                                                      $            21,969


(1)  The Colorado Public Utilities Commission approved the SSIR implementation
at their December 22, 2021 meeting with rates effective January 1, 2022.
(2)  The Kansas Corporation Commission approved the GSRS filing on January 27,
2022, with rates effective February 1, 2022..
(3)  The Kansas Corporation Commission approved the Ad Valorem filing on January
13, 2022, with rates effective February 1, 2022.
(4)  Included with the Kentucky rate case filing is the $3.5 million filing
related to the annual Kentucky pipeline replacement program.

Annual Formula Rate Mechanisms
As an instrument to reduce regulatory lag, formula rate mechanisms allow us to
refresh our rates on an annual basis without filing a formal rate case. However,
these filings still involve discovery by the appropriate regulatory authorities
prior to the final determination of rates under these mechanisms. We currently
have formula rate mechanisms in our Louisiana, Mississippi and Tennessee
operations and in substantially all the service areas in our Texas divisions.
Additionally, we have specific infrastructure programs in substantially all of
our distribution divisions with tariffs in place to permit the investment
associated with these programs to have their surcharge rate adjusted annually to
recover approved capital costs incurred in a prior test-year period. The
following table summarizes our annual formula rate mechanisms by state:
                                                             Annual Formula Rate Mechanisms
State                             Infrastructure Programs                                 Formula Rate Mechanisms

                            System Safety and Integrity Rider
Colorado                    (SSIR)                                              -
                            Gas System Reliability Surcharge
                            (GSRS), System Integrity Program
Kansas                      (SIP)                                               -
Kentucky                    Pipeline Replacement Program (PRP)                  -
Louisiana                   (1)                                                 Rate Stabilization Clause (RSC)
Mississippi                 System Integrity Rider (SIR)                        Stable Rate Filing (SRF)
Tennessee                   (1)                                             

Annual Rate Mechanism (ARM)

                            Gas Reliability Infrastructure                      Dallas Annual Rate Review (DARR), Rate
Texas                       Program (GRIP), (1)                                 Review Mechanism (RRM)
                            Steps to Advance Virginia Energy
Virginia                    (SAVE)                                              -



(1)  Infrastructure mechanisms in Texas, Louisiana and Tennessee allow for the
deferral of all expenses associated with capital expenditures incurred pursuant
to these rules, which primarily consists of interest, depreciation and other
taxes (Texas only), until the next rate proceeding (rate case or annual rate
filing), at which time investment and costs would be recoverable through base
rates.


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The following annual formula rate mechanisms were approved during the three months ended December 31, 2021:

                                                                                                               Increase
                                                                                                             (Decrease) in
                                                                                                                Annual
                                                                                        Test Year              Operating               Effective
Division                                              Jurisdiction                        Ended                 Income                   Date
                                                                                                             (In thousands)
2022 Filings:

Mid-Tex                                     Mid-Tex Cities RRM (1)                         12/31/2020       $     21,673                   12/01/2021
West Texas                                  West Texas Cities RRM (1)                      12/31/2020                151                   12/01/2021
Mississippi                                 Mississippi - SIR (1)                          10/31/2022              8,354                   11/01/2021
Mississippi                                 Mississippi - SRF (1)                          10/31/2022             (5,624)                  11/01/2021
Kentucky/Mid-States                         Virginia - SAVE                                09/30/2022                327                   10/01/2021

Total 2022 Filings                                                                                          $     24,881


(1)  The rate change for the RRM and Mississippi filings include $33.8 million
for the Mid-Tex Cities RRM filing, $3.3 million for the West Texas Cities RRM
filing, $2.1 million for the Mississippi SIR filing and $4.3 million for the
Mississippi SRF filing related to the refund of excess deferred income taxes
that will be offset by lower income tax expense. Excluding the amounts related
to the refund of excess deferred taxes, our total rate outcomes for our
formulate rate mechanisms for the three months ended December 31, 2021 were
$68.5 million.
Rate Case Filings
A rate case is a formal request from Atmos Energy to a regulatory authority to
increase rates that are charged to our customers. Rate cases may also be
initiated when the regulatory authorities request us to justify our rates. This
process is referred to as a "show cause" action. Adequate rates are intended to
provide for recovery of the Company's costs as well as a fair rate of return and
ensure that we continue to deliver reliable, reasonably priced natural gas
service safely to our customers. There was no rate case activity completed
during the three months ended December 31, 2021.


Other pricing activity
The company had no other pricing activity in the past three months
December 31, 2021.



Pipeline and Storage Segment
Our pipeline and storage segment consists of the pipeline and storage operations
of our Atmos Pipeline-Texas Division (APT) and our natural gas transmission
operations in Louisiana. APT is one of the largest intrastate pipeline
operations in Texas with a heavy concentration in the established natural gas
producing areas of central, northern and eastern Texas, extending into or near
the major producing areas of the Barnett Shale, the Texas Gulf Coast and the
Permian Basin of West Texas. APT provides transportation and storage services to
our Mid-Tex Division, other third-party local distribution companies, industrial
and electric generation customers, as well as marketers and producers. Over 80
percent of this segment's revenues are derived from these services. As part of
its pipeline operations, APT owns and operates five underground storage
facilities in Texas.
Our natural gas transmission operations in Louisiana are comprised of a 21-mile
pipeline located in the New Orleans, Louisiana area that is primarily used to
aggregate gas supply for our distribution division in Louisiana under a
long-term contract and, on a more limited basis, to third parties. The demand
fee charged to our Louisiana distribution division for these services is subject
to regulatory approval by the Louisiana Public Service Commission. We also
manage two asset management plans, which have been approved by applicable state
regulatory commissions. Generally, these asset management plans require us to
share with our distribution customers a significant portion of the cost savings
earned from these arrangements.
Our pipeline and storage segment is impacted by seasonal weather patterns,
competitive factors in the energy industry and economic conditions in our Texas
and Louisiana service areas. Natural gas prices do not directly impact the
results of this segment as revenues are derived from the transportation and
storage of natural gas. However, natural gas prices and demand for natural gas
could influence the level of drilling activity in the supply areas that we
serve, which may influence the level of throughput we may be able to transport
on our pipelines. Further, natural gas price differences between the various
hubs that we serve in Texas could influence the volumes of gas transported for
shippers through our Texas pipeline system and rates for such transportation.
The results of APT are also significantly impacted by the natural gas
requirements of its local distribution company customers. Additionally, its
operations may be impacted by the timing of when costs and expenses are incurred
and when these costs and expenses are recovered through its tariffs.
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Three Months Ended December 31, 2021 compared with Three Months Ended
December 31, 2020
Financial and operational highlights for our pipeline and storage segment for
the three months ended December 31, 2021 and 2020 are presented below.
                                                                            

Three months completed the 31st of December

                                                                        2021                         2020              Change
                                                                            (In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation revenue                     $       127,323                   $ 125,261          $   2,062
Third-party transportation revenue                                      30,625                      30,821               (196)

Other revenue                                                            4,970                       3,631              1,339
Total operating revenues                                               162,918                     159,713              3,205
Total purchased gas cost                                                (3,411)                     (1,244)            (2,167)

Operating expenses                                                      80,965                      71,671              9,294
Operating income                                                        85,364                      89,286             (3,922)
Other non-operating income                                               6,786                       5,237              1,549
Interest charges                                                        11,303                      11,298                  5
Income before income taxes                                              80,847                      83,225             (2,378)

Income tax expense                                                      11,209                      19,239             (8,030)
Net income                                                     $        69,638                   $  63,986          $   5,652
Gross pipeline transportation volumes - MMcf                           181,468                     204,865            (23,397)
Consolidated pipeline transportation volumes - MMcf                    136,067                     144,587             (8,520)


Operating income for our pipeline and storage segment decreased four percent.
During the three months ended December 31, 2021, we refunded $10.0 million in
excess deferred taxes to pipeline and storage customers, which reduced operating
income year over year and reduced the interim effective income tax rate for this
segment to 13.9% compared to 23.1% in the prior year. Additional drivers for the
change in operating income include:
•a $14.5 million increase due to rate adjustments from the GRIP filing approved
in May 2021. The increase in rates was driven by increased safety and
reliability spending.
Partially offset by:
•a $5.8 million increase in system maintenance expense primarily due to spending
on hydro testing.
•a $2.5 million net decrease in APT's thru-system activities primarily
associated with the tightening of regional spreads driven by increased competing
takeaway capacity in the Permian Basin.
•a $3.1 million increase in depreciation expense and property taxes associated
with increased capital investments.


Liquidity and Capital Resources
The liquidity required to fund our working capital, capital expenditures and
other cash needs is provided from a combination of internally generated cash
flows and external debt and equity financing. Additionally, we have a $1.5
billion commercial paper program and four committed revolving credit facilities
with $2.5 billion in total availability from third-party lenders. The commercial
paper program and credit facilities provide cost-effective, short-term financing
until it can be replaced with a balance of long-term debt and equity financing
that achieves the Company's desired capital structure with an
equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term
and short-term debt. Additionally, we have various uncommitted trade credit
lines with our gas suppliers that we utilize to purchase natural gas on a
monthly basis.
We have a shelf registration statement on file with the Securities and Exchange
Commission (SEC) that allows us to issue up to $5.0 billion in common stock
and/or debt securities. As of the date of this report, $3.2 billion of
securities were available for issuance under the shelf registration statement,
which expires June 29, 2024.
We also have an at-the-market (ATM) equity sales program that allows us to issue
and sell shares of our common stock up to an aggregate offering price of $1.0
billion (including shares of common stock that may be sold pursuant to forward
sale agreements entered into in connection with the ATM equity sales program),
which expires June 29, 2024. As of December 31, 2021, $499.7 million of equity
was available for issuance under this ATM equity sales program. Additionally, as
of
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December 31, 2021, we had $294.7 million in proceeds from executed forward sale
agreements available through June 30, 2023. Additional details are summarized in
Note 7 to the unaudited condensed consolidated financial statements.
The liquidity provided by these sources is expected to be sufficient to fund the
Company's working capital needs and capital expenditure program for the
remainder of fiscal year 2022. Additionally, we expect to continue to be able to
obtain financing upon reasonable terms as necessary.
The following table presents our capitalization inclusive of short-term debt and
the current portion of long-term debt as of December 31, 2021, September 30,
2021 and December 31, 2020:

                                             December 31, 2021                              September 30, 2021                              December 

31, 2020

                                                                                    (In thousands, except percentages)
Short-term debt                   $               -                   -  %       $                -                   -  %       $               -                   -  %
Long-term debt(1)                         7,956,554                49.0  %                7,330,657                48.1  %               5,125,033                41.5  %
Shareholders' equity(2)                   8,289,545                51.0  %                7,906,889                51.9  %               7,213,156                58.5  %
Total                             $      16,246,099               100.0  %       $       15,237,546               100.0  %       $      12,338,189               100.0  %


(1)   Inclusive of our finance leases.
(2)   Excluding the $2.2 billion of incremental financing issued to pay for the
purchased gas costs incurred during Winter Storm Uri, our equity capitalization
ratio was 59.0% at December 31, 2021 and 60.6% at September 30, 2021 .

Cash Flows
Our internally generated funds may change in the future due to a number of
factors, some of which we cannot control. These factors include regulatory
changes, the price for our services, demand for such products and services,
margin requirements resulting from significant changes in commodity prices,
operational risks and other factors.
Cash flows from operating, investing and financing activities for the three
months ended December 31, 2021 and 2020 are presented below.
                                                          Three Months Ended December 31
                                                       2021            2020           Change
                                                                  (In thousands)
Total cash provided by (used in)
Operating activities                               $    61,824      $ 157,069      $  (95,245)
Investing activities                                  (679,748)      (453,592)       (226,156)
Financing activities                                   765,206        733,314          31,892
Change in cash and cash equivalents                    147,282        436,791        (289,509)
Cash and cash equivalents at beginning of period       116,723         20,808          95,915
Cash and cash equivalents at end of period         $   264,005      $ 457,599      $ (193,594)


Cash flows from operating activities
For the three months ended December 31, 2021, we generated cash flow from
operating activities of $61.8 million compared with $157.1 million for the three
months ended December 31, 2020. The $95.2 million decrease in operating cash
flows reflects working capital changes, primarily due to the timing of gas cost
recoveries under our purchase gas cost mechanisms partially offset by the
positive effects of successful rate case outcomes achieved in fiscal 2021.
Cash flows from investing activities
Our capital expenditures are primarily used to improve the safety and
reliability of our distribution and transmission system through pipeline
replacement and system modernization and to enhance and expand our system to
meet customer needs. Over the last three fiscal years, approximately 88 percent
of our capital spending has been committed to improving the safety and
reliability of our system.
For the three months ended December 31, 2021, cash used for investing activities
was $679.7 million compared to $453.6 million for the three months ended
December 31, 2020. Capital spending increased $227.4 million, primarily as a
result of timing of spending in our distribution and pipeline and storage
segments.
Cash flows from financing activities
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For the three months ended December 31, 2021, our financing activities provided
$765.2 million of cash compared with $733.3 million of cash provided by
financing activities in the prior-year period.
In the three months ended December 31, 2021, we received $851.7 million in net
proceeds from the issuance of long-term debt and equity. We completed a public
offering of $600 million of 2.85% senior notes due 2052 and received net
proceeds from the offering, after the underwriting discount and offering
expenses, of $589.8 million. Additionally, during the three months ended
December 31, 2021, we settled 2,689,327 shares that had been sold on a forward
basis for net proceeds of $261.9 million. The net proceeds were used primarily
to support capital spending and for other general corporate purposes.
Cash dividends increased due to an 8.8 percent increase in our dividend rate and
an increase in shares outstanding.
In the three months ended December 31, 2020, we received $808.3 million in net
proceeds from the issuance of long-term debt and equity. The net proceeds were
used primarily to support capital spending and for other general corporate
purposes. Cash dividends increased due to an 8.7 percent increase in our
dividend rate and an increase in shares outstanding.
The following table summarizes our share issuances for the three months ended
December 31, 2021 and 2020:
                                           Three Months Ended December 31
                                          2021                          2020
Shares issued:
Direct Stock Purchase Plan              20,983                          19,918
1998 Long-Term Incentive Plan          275,212                         

144,366

Retirement Savings Plan and Trust       19,805                          20,708

Equity Issuance                      2,689,327                       2,085,492
Total shares issued                  3,005,327                       2,270,484


Credit Ratings
Our credit ratings directly affect our ability to obtain short-term and
long-term financing, in addition to the cost of such financing. In determining
our credit ratings, the rating agencies consider a number of quantitative
factors, including but not limited to, debt to total capitalization, operating
cash flow relative to outstanding debt, operating cash flow coverage of interest
and pension liabilities. In addition, the rating agencies consider qualitative
factors such as consistency of our earnings over time, the quality of our
management and business strategy, the risks associated with our businesses and
the regulatory structures that govern our rates in the states where we operate.
Our debt is rated by two rating agencies: Standard & Poor's Corporation (S&P)
and Moody's Investors Service (Moody's). As of December 31, 2021, our outlook
and current debt ratings, which are all considered investment grade are as
follows:
                                                       S&P              Moody's
              Senior unsecured long-term debt           A-                A1
              Short-term debt                          A-2                P-1
              Outlook                                Negative          Negative


A significant degradation in our operating performance or a significant
reduction in our liquidity caused by more limited access to the private and
public credit markets as a result of deteriorating global or national financial
and credit conditions could trigger a negative change in our ratings outlook or
even a reduction in our credit ratings by the two credit rating agencies. This
would mean more limited access to the private and public credit markets and an
increase in the costs of such borrowings.
A credit rating is not a recommendation to buy, sell or hold securities. The
highest investment grade credit rating is AAA for S&P and Aaa for Moody's. The
lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody's. Our
credit ratings may be revised or withdrawn at any time by the rating agencies,
and each rating should be evaluated independently of any other rating. There can
be no assurance that a rating will remain in effect for any given period of time
or that a rating will not be lowered, or withdrawn entirely, by a rating agency
if, in its judgment, circumstances so warrant.
Debt Covenants
We were in compliance with all of our debt covenants as of December 31, 2021.
Our debt covenants are described in greater detail in Note 6 to the unaudited
condensed consolidated financial statements.
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Contractual Obligations and Commercial Commitments
Except as noted in Note 10 to the unaudited condensed consolidated financial
statements, there were no significant changes in our contractual obligations and
commercial commitments during the three months ended December 31, 2021.
Risk Management Activities
In our distribution and pipeline and storage segments, we use a combination of
physical storage, fixed physical contracts and fixed financial contracts to
reduce our exposure to unusually large winter-period gas price increases.
Additionally, we manage interest rate risk by periodically entering into
financial instruments to effectively fix the Treasury yield component of the
interest cost associated with anticipated financings.
The following table shows the components of the change in fair value of our
financial instruments for the three months ended December 31, 2021 and 2020:
                                                                            

Three months completed the 31st of December

                                                                               2021                2020
                                                                                    (In thousands)
Fair value of contracts at beginning of period                             $  225,417          $  78,663
Contracts realized/settled                                                     22,601              1,332
Fair value of new contracts                                                     1,184                 87
Other changes in value                                                       (129,284)            68,473
Fair value of contracts at end of period                                      119,918            148,555
Netting of cash collateral                                                          -                  -
Cash collateral and fair value of contracts at period end                  

$119,918 $148,555

The fair value of our financial instruments at December 31, 2021 is presented below by period and by source of fair value:

                                                                Fair Value 

of contracts to December 31, 2021

                                                                    Maturity in Years
                                                                                                                         Total
                                               Less                                                  Greater              Fair
Source of Fair Value                          Than 1               1-3               4-5              Than 5             Value
                                                                               (In thousands)
Prices actively quoted                    $    67,198          $ 60,088          $ (7,368)         $       -          $ 119,918
Prices based on models and other
valuation methods                                   -                 -                 -                  -                  -
Total Fair Value                          $    67,198          $ 60,088          $ (7,368)         $       -          $ 119,918


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OPERATING STATISTICS AND OTHER INFORMATION
The following tables present certain operating statistics for our distribution
and pipeline and storage segments for the three months ended December 31, 2021
and 2020.
Distribution Sales and Statistical Data
                                          Three Months Ended December 31
                                         2021                          2020
METERS IN SERVICE, end of period
Residential                         3,120,873                       3,077,786
Commercial                            282,155                         281,840
Industrial                              1,653                           1,673
Public authority and other              8,248                           8,323
Total meters                        3,412,929                       3,369,622

INVENTORY STORAGE BALANCE - Bcf          70.5                            58.1
SALES VOLUMES - MMcf (1)
Gas sales volumes
Residential                            37,834                          53,530
Commercial                             23,008                          26,687
Industrial                              7,073                           6,651
Public authority and other              1,630                           1,993
Total gas sales volumes                69,545                          88,861
Transportation volumes                 40,315                          41,285
Total throughput                      109,860                         130,146

Pipeline and Storage Operations Sales and Statistical Data

                                                  Three Months Ended December 31
                                                  2021                        2020
CUSTOMERS, end of period
Industrial                                         95                            92
Other                                             202                           217
Total                                             297                           309

INVENTORY STORAGE BALANCE - Bcf                   1.4                       

1.3

PIPELINE TRANSPORTATION VOLUMES - MMcf (1)    181,468                       204,865


Note to preceding tables:

(1)Sales and transportation volumes reflect segment operations, including
intercompany sales and transportation amounts.
RECENT ACCOUNTING DEVELOPMENTS
Recent accounting developments and their impact on our financial position,
results of operations and cash flows are described in Note 2 to the unaudited
condensed consolidated financial statements.


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