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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, 2020, 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.

These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis, aside from accounting policy changes noted below, 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, 2019. 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, 2019. Because of seasonal and other factors, the results of operations for the nine-month period ended June 30, 2020 are not indicative of our results of operations for the full 2020 fiscal year, which ends September 30, 2020.

Except as noted below related to recent ratemaking activity and in Note 12 to the unaudited condensed consolidated financial statements regarding new cash flow hedges, 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, 2019.

During the second quarter of fiscal 2020, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.

Accounting pronouncements adopted in fiscal 2020

In February 2016, the Financial Accounting Standards Board (FASB) issued a comprehensive new leasing standard that requires lessees to recognize a lease liability and a right-of-use (ROU) asset for all leases, including operating leases on its balance sheet. The new standard was effective for us beginning on October 1, 2019. See Note 6 to the unaudited condensed consolidated financial statements for further details regarding our adoption of the new lease standard and the related disclosures.

Accounting pronouncements that will be effective after fiscal 2020

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.

In December 2019, the FASB issued new guidance related to accounting for income taxes which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocations and calculating income taxes in interim periods. The new standard also adds guidance to reduce complexity in certain areas, such as recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new standard will be effective for us beginning

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on October 1, 2021; early adoption is permitted. We are currently evaluating the potential impact of this new guidance on our financial position, results of operations and cash flows. 

In June 2016, the FASB issued new guidance which will require credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. In contrast, current U.S. GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable the loss has been incurred. The new guidance also introduces a new impairment recognition model for available-for-sale debt securities that will require credit losses to be recorded through an allowance account. The new standard will be effective for us beginning on October 1, 2020. We are currently evaluating the potential impact of this new guidance 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 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 and our regulatory excess deferred taxes and regulatory cost of removal obligation are reported separately.

Significant regulatory assets and liabilities as of June 30, 2020 and September 30, 2019 included the following:

	June 30, 2020				September 30, 2019
	(In thousands)
Regulatory assets:
Pension and postretirement benefit costs	$	79,108			$	86,089
Infrastructure mechanisms(1)	180,390				131,894
Deferred gas costs	—				23,766
Recoverable loss on reacquired debt	5,259				6,551
Deferred pipeline record collection costs	28,700				26,418
Rate case costs	401				1,346
Other	6,173				8,483
	$	300,031			$	284,547
Regulatory liabilities:
Regulatory excess deferred taxes(2)	$	723,400			$	726,307
Regulatory cost of service reserve	2,559				5,238
Regulatory cost of removal obligation	528,932				528,893
Deferred gas costs	48,917				14,112
Asset retirement obligation	17,054				17,054
APT annual adjustment mechanism	62,461				78,402
Other	21,923				16,120
	$	1,405,246			$	1,386,126

 

(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)

Due to the passage of the Kansas House Bill 2585, on June 1, 2020, we remeasured our deferred tax liability and updated our state deferred tax rate resulting in a $12.1 million regulatory liability as of June 30, 2020. See further details in Note 11. The remaining amount reflects the remeasurement of the net deferred tax liability included in our rate base as a result of the Tax Cuts and Jobs Act of 2017 (the "TCJA"). Of this amount, $20.9 million as of June 30, 2020 and $21.2 million as of September 30, 2019 is recorded in other current liabilities. These liabilities are being returned to customers in most of our jurisdictions on a provisional basis over 15 to 46 years until formal orders establish the final refund periods.

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During the nine months ended June 30, 2020, we received regulatory orders in Louisiana, Mississippi, Texas (including APT) and Virginia to defer into a regulatory asset all expenses, beyond the normal course of business, related to Coronavirus Disease 2019 (COVID-19 or virus), including bad debt expense. Subsequent to June 30, 2020, we also received a regulatory order in Kansas to defer into a regulatory asset these expenses. As of June 30, 2020, no amounts have been recorded as regulatory assets or liabilities for expenses related to COVID-19, including bad debt expense.

 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, 2019.

Income statements and capital expenditures for the three and nine months ended June 30, 2020 and 2019 by segment are presented in the following tables:

	Three Months Ended June 30, 2020
	Distribution				Pipeline and Storage				Eliminations				Consolidated
	(In thousands)
Operating revenues from external parties	$	434,650			$	58,345			$	—			$	492,995
Intersegment revenues	658				99,663				(100,321		)		—
Total operating revenues	435,308				158,008				(100,321		)		492,995
Purchased gas cost	126,093				(11		)		(100,010		)		26,072
Operation and maintenance expense	107,537				42,234				(311		)		149,460
Depreciation and amortization expense	77,187				29,917				—				107,104
Taxes, other than income	61,980				9,344				—				71,324
Operating income	62,511				76,524				—				139,035
Other non-operating income	5,167				2,068				—				7,235
Interest charges	7,969				11,611				—				19,580
Income before income taxes	59,709				66,981				—				126,690
Income tax expense	810				8,089				—				8,899
Net income	$	58,899			$	58,892			$	—			$	117,791
Capital expenditures	$	342,385			$	68,551			$	—			$	410,936

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	Three Months Ended June 30, 2019
	Distribution				Pipeline and Storage				Eliminations				Consolidated
	(In thousands)
Operating revenues from external parties	$	444,287			$	41,451			$	—			$	485,738
Intersegment revenues	657				107,747				(108,404		)		—
Total operating revenues	444,944				149,198				(108,404		)		485,738
Purchased gas cost	139,518				(96		)		(108,096		)		31,326
Operation and maintenance expense	123,998				40,855				(308		)		164,545
Depreciation and amortization expense	70,611				27,089				—				97,700
Taxes, other than income	62,134				7,831				—				69,965
Operating income	48,683				73,519				—				122,202
Other non-operating income (expense)	3,005				(1,360		)		—				1,645
Interest charges	10,597				8,995				—				19,592
Income before income taxes	41,091				63,164				—				104,255
Income tax expense	8,693				15,096				—				23,789
Net income	$	32,398			$	48,068			$	—			$	80,466
Capital expenditures	$	316,825			$	104,788			$	—			$	421,613

	Nine Months Ended June 30, 2020
	Distribution				Pipeline and Storage				Eliminations				Consolidated
	(In thousands)
Operating revenues from external parties	$	2,194,786			$	151,437			$	—			$	2,346,223
Intersegment revenues	2,031				300,984				(303,015		)		—
Total operating revenues	2,196,817				452,421				(303,015		)		2,346,223
Purchased gas cost	942,586				290				(302,053		)		640,823
Operation and maintenance expense	337,740				112,751				(962		)		449,529
Depreciation and amortization expense	229,526				88,556				—				318,082
Taxes, other than income	190,636				23,899				—				214,535
Operating income	496,329				226,925				—				723,254
Other non-operating income	1,930				7,203				—				9,133
Interest charges	35,128				33,852				—				68,980
Income before income taxes	463,131				200,276				—				663,407
Income tax expense	87,411				39,886				—				127,297
Net income	$	375,720			$	160,390			$	—			$	536,110
Capital expenditures	$	1,119,945			$	285,728			$	—			$	1,405,673

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	Nine Months Ended June 30, 2019
	Distribution				Pipeline and Storage				Eliminations				Consolidated
	(In thousands)
Operating revenues from external parties	$	2,339,660			$	118,505			$	—			$	2,458,165
Intersegment revenues	2,008				300,813				(302,821		)		—
Total operating revenues	2,341,668				419,318				(302,821		)		2,458,165
Purchased gas cost	1,147,598				(544		)		(301,887		)		845,167
Operation and maintenance expense	347,386				106,120				(934		)		452,572
Depreciation and amortization expense	210,224				80,313				—				290,537
Taxes, other than income	189,377				24,169				—				213,546
Operating income	447,083				209,260				—				656,343
Other non-operating income (expense)	1,791				(3,637		)		—				(1,846		)
Interest charges	44,703				29,687				—				74,390
Income before income taxes	404,171				175,936				—				580,107
Income tax expense	85,195				41,912				—				127,107
Net income	$	318,976			$	134,024			$	—			$	453,000
Capital expenditures	$	912,640			$	286,559			$	—			$	1,199,199

 

Balance sheet information at June 30, 2020 and September 30, 2019 by segment is presented in the following tables:

	June 30, 2020
	Distribution				Pipeline and Storage				Eliminations				Consolidated
	(In thousands)
Property, plant and equipment, net	$	9,644,503			$	3,236,347			$	—			$	12,880,850
Total assets	$	14,098,715			$	3,471,282			$	(2,699,015	)		$	14,870,982

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 8 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, 2020 and 2019 are calculated as follows:

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	Three Months Ended June 30								Nine Months Ended June 30
	2020				2019				2020				2019
	(In thousands, except per share amounts)
Basic Earnings Per Share
Net income	$	117,791			$	80,466			$	536,110			$	453,000
Less: Income allocated to participating securities	88				64				408				386
Income available to common shareholders	$	117,703			$	80,402			$	535,702			$	452,614
Basic weighted average shares outstanding	123,026				118,075				122,352				116,485
Net income per share — Basic	$	0.96			$	0.68			$	4.38			$	3.89
Diluted Earnings Per Share
Income available to common shareholders	$	117,703			$	80,402			$	535,702			$	452,614
Effect of dilutive shares	—				—				—				—
Income available to common shareholders	$	117,703			$	80,402			$	535,702			$	452,614
Basic weighted average shares outstanding	123,026				118,075				122,352				116,485
Dilutive shares	6				355				111				188
Diluted weighted average shares outstanding	123,032				118,430				122,463				116,673
Net income per share - Diluted	$	0.96			$	0.68			$	4.37			$	3.88

Our revenue recognition policy is fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. 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, 2020 and 2019.

	Three Months Ended June 30, 2020								Three Months Ended June 30, 2019
	Distribution				Pipeline and Storage				Distribution				Pipeline and Storage
	(In thousands)
Gas sales revenues:
Residential	$	286,937			$	—			$	269,484			$	—
Commercial	101,055				—				113,591				—
Industrial	17,019				—				25,277				—
Public authority and other	7,063				—				6,305				—
Total gas sales revenues	412,074				—				414,657				—
Transportation revenues	22,532				164,675				22,923				166,864
Miscellaneous revenues	2,793				2,277				6,125				2,407
Revenues from contracts with customers	437,399				166,952				443,705				169,271
Alternative revenue program revenues(1)	(2,567		)		(8,944		)		748				(20,073		)
Other revenues	476				—				491				—
Total operating revenues	$	435,308			$	158,008			$	444,944			$	149,198

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	Nine Months Ended June 30, 2020								Nine Months Ended June 30, 2019
	Distribution				Pipeline and Storage				Distribution				Pipeline and Storage
	(In thousands)
Gas sales revenues:
Residential	$	1,435,328			$	—			$	1,513,239			$	—
Commercial	543,148				—				611,474				—
Industrial	67,572				—				95,701				—
Public authority and other	34,747				—				36,677				—
Total gas sales revenues	2,080,795				—				2,257,091				—
Transportation revenues	77,676				471,433				76,005				456,558
Miscellaneous revenues	16,565				8,767				20,439				6,862
Revenues from contracts with customers	2,175,036				480,200				2,353,535				463,420
Alternative revenue program revenues(1)	20,320				(27,779		)		(13,388		)		(44,102		)
Other revenues	1,461				—				1,521				—
Total operating revenues	$	2,196,817			$	452,421			$	2,341,668			$	419,318

(1)	In our distribution segment, we have weather-normalization adjustment mechanisms that serve to mitigate the effects of weather on our revenue. Additionally, APT has a regulatory mechanism that requires that we share with its tariffed customers 75% of the difference between the total non-tariffed revenues earned during a test period and a revenue benchmark.

We adopted the provisions of the new lease accounting standard beginning on October 1, 2019, using the optional transition method, which allowed us to apply the provisions of the new standard to all leases that existed as of the date of adoption. Therefore, results for reporting periods beginning on October 1, 2019 are presented under the new lease accounting standard and prior periods are presented under the former lease accounting standard.

The new guidance included several practical expedients to facilitate the implementation of the new standard. The following summarizes the practical expedients we used to implement the standard.

•	We elected to bundle our lease and non-lease components as a single component for all asset classes.

•	We elected not to perform the following:

◦	Evaluate existing or expired land easements prior to October 1, 2019 to determine if they are leases.

◦	Include short-term leases in the calculation of our lease liability.

◦	Evaluate existing or expired contracts to determine if they are leases.

◦	Assess lease classification for existing or expired leases.

◦	Review initial direct costs for existing leases.

◦	Use hindsight in order to determine the lease term or impairment of our ROU assets.

Upon adoption of this new guidance, we recorded ROU assets and lease liabilities of $231.3 million. Additionally, we reclassified a net $6.5 million of accrued and prepaid lease costs to the ROU asset and $2.5 million related to an existing finance lease from deferred credits and other liabilities to long-term debt.

Implementation of the new lease accounting guidance had no material impact on our condensed consolidated statements of comprehensive income or our condensed consolidated statements of cash flows. Additionally, we did not record a cumulative-effect adjustment to retained earnings on the opening balance sheet.

New Lease Accounting Policy

We determine if an arrangement is a lease at the inception of the agreement based on the terms and conditions in the contract. A contract contains a lease if there is an identified asset and we have the right to control the asset. We are the lessee for substantially all of our leasing activity, which primarily includes operating leases for office and warehouse space, tower space, vehicles and heavy equipment used in our operations. We are also a lessee in finance leases for service centers.

We record a lease liability and a corresponding ROU asset for all of our leases with a term greater than 12 months. For lease contracts containing renewal and termination options, we include the option period in the lease term when it is reasonably certain the option will be exercised. We most frequently assume renewal options at the inception of the arrangement for our

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tower and fleet leases, based on our anticipated use of the assets. Real estate leases that contain a renewal option are evaluated on a lease-by-lease basis to determine if the option period should be included in the lease term. Currently, we have not included material renewal options for real estate leases in our ROU asset or lease liability. The following table presents our weighted average remaining lease term for our leases.

	June 30, 2020
Weighted average remaining lease term (years)
Finance leases	19.36
Operating leases	10.69

The lease liability represents the present value of all lease payments over the lease term. The discount rate used to determine the present value of the lease liability is the rate implicit in the lease unless that rate cannot be readily determined. We use the implicit rate stated in the agreement to determine the lease liability for our fleet leases. We use our corporate collateralized incremental borrowing rate as the discount rate for all other lease agreements. This rate is appropriate because we believe it represents the rate we would have incurred to borrow funds to acquire the leased asset over a similar term. We calculated this rate using a combination of inputs, including our current credit rating, quoted market prices of interest rates for our publicly traded unsecured debt, observable market yield curve data for peer companies with a credit rating one notch higher than our current credit rating and the lease term.

The following table represents our weighted average discount rate:

	June 30, 2020
Weighted average discount rate
Finance leases	8.02	%
Operating leases	2.91	%

The ROU asset represents the right to use the underlying asset for the lease term, and is equal to the lease liability, adjusted for prepaid or accrued lease payments and any lease incentives that have been paid to us or when we are reasonably certain to incur costs equal to or greater than the allowance defined in the contract.

Variable payments included in our leasing arrangements are expensed in the period in which the obligation for these payments is incurred. Variable payments are dependent on usage, output or may vary for other reasons. Most of our variable lease expense is related to tower leases that have escalating payments based on changes to a stated CPI index, and usage of certain office equipment.

We have not provided material residual value guarantees for our leases, nor do our leases contain material restrictions or covenants.

Lease costs for the three and nine months ended June 30, 2020 are presented in the table below. These costs include both amounts recognized in expense and amounts capitalized. For the three and nine months ended June 30, 2020, we did not have material short-term lease costs or variable lease costs.

	Three Months Ended June 30, 2020			Nine Months Ended June 30, 2020
	(In thousands)
Finance lease cost	$	197		$	376
Operating lease cost	10,371			30,461
Total lease cost	$	10,568		$	30,837

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Our ROU assets and lease liabilities are presented as follows on the condensed consolidated balance sheets (unaudited):

	Balance Sheet Classification	June 30, 2020
		(In thousands)
Assets
Finance leases	Net Property, Plant and Equipment	$	8,554
Operating leases	Deferred charges and other assets	225,311
Total right-of-use assets		$	233,865
Liabilities
Current
Finance leases	Current maturities of long-term debt	$	157
Operating leases	Other current liabilities	33,884
Noncurrent
Finance leases	Long-term debt	8,479
Operating leases	Deferred credits and other liabilities	200,390
Total lease liabilities		$	242,910

Other pertinent information related to leases was as follows. During the nine months ended June 30, 2020, amounts paid in cash for our finance leases were not material.

	Nine Months Ended June 30, 2020
	(In thousands)
Cash paid amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	28,011
Right-of-use assets obtained in exchange for lease obligations
Finance leases	$	6,143
Operating leases	$	23,628

Maturities of our lease liabilities as of June 30, 2020, presented on a rolling 12-month basis, were as follows:

	Total			Finance Leases			Operating Leases
	(In thousands)
Year 1	$	39,017		$	738		$	38,279
Year 2	37,983			749			37,234
Year 3	33,112			759			32,353
Year 4	26,386			770			25,616
Year 5	17,607			781			16,826
Thereafter	139,172			12,862			126,310
Total lease payments	293,277			16,659			276,618
Less: Imputed interest	50,367			8,023			42,344
Total	$	242,910		$	8,636		$	234,274
Reported as of June 30, 2020
Short-term lease liabilities	$	34,041		$	157		$	33,884
Long-term lease liabilities	208,869			8,479			200,390
Total lease liabilities	$	242,910		$	8,636		$	234,274

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Disclosures Related to Prior Periods

The future minimum lease payments as of September 30, 2019 were as follows:

	Operating Leases(1)				Capital Lease
	(In thousands)
2020	$	21,017			$	243
2021	20,416				248
2022	19,370				253
2023	18,071				258
2024	15,718				263
Thereafter	105,544				4,343
Total minimum lease payments	$	200,136			5,608
Less amount representing interest					3,018
Present value of net minimum lease payments					$	2,590

(1)

Future minimum lease payments do not include amounts for fleet leases and other de minimis items that can be renewed beyond the initial lease term. The Company anticipates renewing the leases beyond the initial term, but the anticipated payments associated with the renewals do not meet the definition of expected minimum lease payments and therefore are not included above. Expected payments are $17.6 million in 2020, $18.0 million in 2021, $11.8 million in 2022, $8.5 million in 2023, $5.4 million 2024 and $2.7 million thereafter.

The nature and terms of our debt instruments and credit facilities are described in detail in Note 6 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Other than as described below, there were no material changes in the terms of our debt instruments during the nine months ended June 30, 2020.

Long-term debt at June 30, 2020 and September 30, 2019 consisted of the following:

	June 30, 2020				September 30, 2019
	(In thousands)
Unsecured 3.00% Senior Notes, due 2027	$	500,000			$	500,000
Unsecured 2.625% Senior Notes, due 2029	300,000				—
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				—
Floating-rate term loan, due 2022	200,000				—
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 (see Note 6)	8,636				—
Total long-term debt	4,568,636				3,560,000
Less:
Original issue (premium) / discount on unsecured senior notes and debentures	623				193
Debt issuance cost	36,515				30,355
Current maturities	157				—
	$	4,531,341			$	3,529,452

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On April 9, 2020, we entered into a two year, $200 million term loan agreement that bears interest at a rate of LIBOR plus 1.25 percent. The term loan was used to pay down borrowings pursuant to our commercial paper program.

On October 2, 2019, we completed a public offering of $300 million of 2.625% senior notes due 2029 and $500 million of 3.375% senior notes due 2049. We received net proceeds from the offering, after the underwriting discount and offering expenses, of $791.7 million, that were used for general corporate purposes, including the repayment of borrowings pursuant to our commercial paper program. The effective interest rate on these notes is 2.72% and 3.42%, after giving effect to the offering costs.

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. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.

As of June 30, 2020, our short-term borrowing requirements were satisfied through a combination of a $1.5 billion commercial paper program and four committed revolving credit facilities with third-party lenders that provide approximately $2.2 billion of total working capital funding.

The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility that expires on September 25, 2023. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a margin ranging from zero percent to 1.25 percent, 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, 2020, there were no amounts outstanding under our commercial paper program. At September 30, 2019, a total of $464.9 million was outstanding.

Additionally, we had a $25 million 364-day unsecured facility that was renewed effective April 1, 2020 and increased to $50 million, which is used to provide working capital funding. There were no borrowings outstanding under this facility as of June 30, 2020.

Finally, we had a $10 million 364-day unsecured revolving credit facility, which was replaced on April 30, 2020, with a new $50 million 364-day unsecured revolving credit facility, which is used primarily to issue letters of credit. At June 30, 2020, there were no borrowings outstanding under the new facility; however, outstanding letters of credit reduced the total amount available to us under our $50 million facility to $44.4 million.

On April 23, 2020, we executed a new $600 million 364-day unsecured revolving credit facility to provide additional working capital funding. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a margin ranging from zero percent to 1.25 percent, based on the Company's credit ratings. At June 30, 2020, there were no borrowings outstanding under this facility.

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, 2020, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 43 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, 2020. 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.

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The following tables present a reconciliation of changes in stockholders' equity for the three and nine months ended June 30, 2020 and 2019.

	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, 2019	119,338,925			$	597			$	3,712,194			$	(114,583	)		$	2,152,015			$	5,750,223
Net income	—			—				—				—				178,673				178,673
Other comprehensive income	—			—				—				1,052				—				1,052
Cash dividends ($0.575 per share)	—			—				—				—				(69,557		)		(69,557		)
Common stock issued:
Public and other stock offerings	2,758,929			13				263,259				—				—				263,272
Stock-based compensation plans	164,549			1				4,111				—				—				4,112
Balance, December 31, 2019	122,262,403			611				3,979,564				(113,531		)		2,261,131				6,127,775
Net income	—			—				—				—				239,646				239,646
Other comprehensive income	—			—				—				890				—				890
Cash dividends ($0.575 per share)	—			—				—				—				(70,520		)		(70,520		)
Common stock issued:
Public and other stock offerings	38,662			1				3,095				—				—				3,096
Stock-based compensation plans	7,660			—				3,528				—				—				3,528
Balance, March 31, 2020	122,308,725			612				3,986,187				(112,641		)		2,430,257				6,304,415
Net income	—			—				—				—				117,791				117,791
Other comprehensive loss	—			—				—				(4,086		)		—				(4,086		)
Cash dividends ($0.575 per share)	—			—				—				—				(70,597		)		(70,597		)
Common stock issued:
Public and other stock offerings	965,576			5				105,799				—				—				105,804
Stock-based compensation plans	76,966			—				8,144				—				—				8,144
Balance, June 30, 2020	123,351,267			$	617			$	4,100,130			$	(116,727	)		$	2,477,451			$	6,461,471

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	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, 2018	111,273,683			$	556			$	2,974,926			$	(83,647	)		$	1,878,116			$	4,769,951
Net income	—			—				—				—				157,646				157,646
Other comprehensive loss	—			—				—				(22,258		)		—				(22,258		)
Cash dividends ($0.525 per share)	—			—				—				—				(58,722		)		(58,722		)
Cumulative effect of accounting change	—			—				—				(8,210		)		8,210				—
Common stock issued:
Public and other stock offerings	5,434,812			27				498,948				—				—				498,975
Stock-based compensation plans	184,464			1				2,602				—				—				2,603
Balance, December 31, 2018	116,892,959			584				3,476,476				(114,115		)		1,985,250				5,348,195
Net income	—			—				—				—				214,888				214,888
Other comprehensive loss	—			—				—				(2,695		)		—				(2,695		)
Cash dividends ($0.525 per share)	—			—				—				—				(61,606		)		(61,606		)
Common stock issued:
Public and other stock offerings	61,006			1				5,453				—				—				5,454
Stock-based compensation plans	28,938			—				3,865				—				—				3,865
Balance, March 31, 2019	116,982,903			585				3,485,794				(116,810		)		2,138,532				5,508,101
Net income	—			—				—				—				80,466				80,466
Other comprehensive income	—			—				—				1,147				—				1,147
Cash dividends ($0.525 per share)	—			—				—				—				(61,654		)		(61,654		)
Common stock issued:
Public and other stock offerings	1,127,244			5				103,425				—				—				103,430
Stock-based compensation plans	85,966			1				10,505				—				—				10,506
Balance, June 30, 2019	118,196,113			$	591			$	3,599,724			$	(115,663	)		$	2,157,344			$	5,641,996

Shelf Registration, At-the-Market Equity Sales Program and Equity Issuances

On February 11, 2020, we filed a shelf registration statement with the Securities and Exchange Commission (SEC) that allows us to issue up to $4.0 billion in common stock and/or debt securities, which expires February 11, 2023. This shelf registration statement replaced our previous shelf registration statement which was filed on November 13, 2018 (2018 Registration Statement). At June 30, 2020, approximately $3.0 billion of securities remained available for issuance under the shelf registration statement.

On February 12, 2020, we filed a prospectus supplement under the shelf registration statement relating to an at-the-market (ATM) equity sales program (February 2020 ATM) under which we may 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 concurrently with the ATM equity sales program). This ATM equity sales program replaced our previous ATM equity sales program, filed on November 19, 2018 (November 2018 ATM), which was exhausted during the second quarter of fiscal 2020 with the execution of forward sales.

During the nine months ended June 30, 2020, we executed forward sales under the February 2020 ATM and the November 2018 ATM equity sales programs with various forward sellers who borrowed and sold 4,148,057 shares of our common stock at an aggregate price of $453.9 million. Additionally, during the nine months ended June 30, 2020, we settled forward sale agreements with respect to 3,146,108 shares that had been borrowed and sold by various forward sellers during fiscal 2019 under the November 2018 ATM for net proceeds of $314.6 million. As of June 30, 2020, the February 2020 ATM program had approximately $621 million of equity available for issuance.

On November 30, 2018, we filed a prospectus supplement under the 2018 Registration Statement relating to an underwriting agreement to sell 5,390,836 shares of our common stock for $500 million. After expenses, net proceeds from the offering were $494.1 million. Concurrently, we entered into separate forward sales agreements with two forward sellers who

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borrowed and sold 2,668,464 shares of our common stock at an aggregate price of $247.5 million. During the nine months ended June 30, 2019, we settled forward sale agreements with respect to 1,089,700 of the shares that had been borrowed and sold for net proceeds of $99.6 million. During the nine months ended June 30, 2020, we settled the remaining 485,189 shares under these forward sale agreements for net proceeds of $44.4 million.

During the nine months ended June 30, 2019, we executed forward sales under the November 2018 ATM with various forward sellers who borrowed and sold 2,721,072 shares of our common stock at an aggregate price of $268.7 million.

If we had settled all shares that remain available under our outstanding forward sale agreements as of June 30, 2020, we would have received proceeds of $547.2 million, based on a net price of $106.33 per share. Additional details are presented below.

Maturity	Shares Available			Net Proceeds Available (In thousands)				Forward Price
September 30, 2020	1,662,270			$	174,142			$	104.76
March 31, 2021	2,089,927			229,650				$	109.88
June 30, 2021	1,394,423			143,430				$	102.86
Total	5,146,620			$	547,222

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 as they are amortized. 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, 2019	$	132			$	(114,715	)		$	(114,583	)
Other comprehensive income (loss) before reclassifications	202				(4,932		)		(4,730		)
Amounts reclassified from accumulated other comprehensive income	(2		)		2,588				2,586
Net current-period other comprehensive income (loss)	200				(2,344		)		(2,144		)
June 30, 2020	$	332			$	(117,059	)		$	(116,727	)

 

	Available- for-Sale Securities				Interest Rate Agreement Cash Flow Hedges				Total
	(In thousands)
September 30, 2018	$	8,124			$	(91,771	)		$	(83,647	)
Other comprehensive income (loss) before reclassifications	192				(25,966		)		(25,774		)
Amounts reclassified from accumulated other comprehensive income	(1		)		1,969				1,968
Net current-period other comprehensive income (loss)	191				(23,997		)		(23,806		)
Cumulative effect of accounting change	(8,210		)		—				(8,210		)
June 30, 2019	$	105			$	(115,768	)		$	(115,663	)

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, 2020 and 2019 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.

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	Three Months Ended June 30
	Pension Benefits								Other Benefits
	2020				2019				2020				2019
	(In thousands)
Components of net periodic pension cost:
Service cost	$	4,652			$	4,044			$	3,366			$	2,702
Interest cost(1)	5,843				6,799				2,653				2,960
Expected return on assets(1)	(7,079		)		(7,113		)		(2,625		)		(2,664		)
Amortization of prior service cost (credit)(1)	(58		)		(57		)		43				43
Amortization of actuarial (gain) loss(1)	3,242				1,606				(334		)		(2,045		)
Net periodic pension cost	$	6,600			$	5,279			$	3,103			$	996

	Nine Months Ended June 30
	Pension Benefits								Other Benefits
	2020				2019				2020				2019
	(In thousands)
Components of net periodic pension cost:
Service cost	$	13,957			$	12,134			$	10,099			$	8,107
Interest cost(1)	17,529				20,399				7,959				8,879
Expected return on assets(1)	(21,237		)		(21,339		)		(7,874		)		(7,994		)
Amortization of prior service cost (credit)(1)	(174		)		(173		)		130				130
Amortization of actuarial (gain) loss(1)	9,725				4,821				(1,003		)		(6,134		)
Net periodic pension cost	$	19,800			$	15,842			$	9,311			$	2,988

(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 financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

The amount of funding required for our defined benefit plan is determined in accordance with the Pension Protection Act of 2006 (PPA) and is influenced by the funded position of the plan when the funding requirements are determined on January 1 of each year. Based upon the determination as of January 1, 2020, we are not required to make a minimum contribution to our defined benefit plan during fiscal 2020. However, we may consider whether a voluntary contribution is prudent to maintain certain funding levels.

For the nine months ended June 30, 2020 we contributed $12.2 million to our postretirement medical plans. We anticipate contributing a total of between $10 million and $20 million to our postretirement plans during fiscal 2020.

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) is investigating an incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. Together with the Railroad Commission of Texas (RRC) and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with the NTSB to help determine the cause of this incident.

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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. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. At June 30, 2020, we were committed to purchase 59.3 Bcf within one year, 71.5 Bcf within two to three years and 0.2 Bcf beyond three years under indexed contracts.

Rate Regulatory Proceedings

As of June 30, 2020, routine rate regulatory proceedings were in progress in some 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, 2020.

On June 1, 2020, the Kansas legislature passed House Bill 2585 which eliminated the assessment of state income taxes on regulated utilities. This legislation will become effective for the Company on October 1, 2020. Due to the change in the Kansas state tax law, we completed a study of the calculations used to estimate the rate at which state deferred taxes will reverse in the future. As a result, we reduced our deferred tax liability by $32.5 million during the fiscal third quarter. We established a $12.1 million regulatory liability for excess deferred taxes that will be returned to Kansas customers. We are currently working with the Kansas Corporation Commission to determine the amortization period for this liability. We recognized $21.0 million as a one-time income tax benefit in our condensed consolidated statement of comprehensive income for the three and nine months ended June 30, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have an impact on our condensed consolidated financial statements for the three and nine months ended June 30, 2020.

We currently use financial instruments to mitigate commodity price risk and to mitigate 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 14 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. During the nine months ended June 30, 2020, 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 2019-2020 heating season (generally October through March), in the jurisdictions where we are permitted

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to utilize financial instruments, we hedged approximately 49 percent, or 19.9 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.

In July 2020, we entered into forward starting interest rate swaps to effectively fix the Treasury yield component associated with $300 million of a planned issuance of unsecured senior notes in fiscal 2023 at 1.36% and $300 million of a planned issuance of unsecured senior notes in fiscal 2025 at 1.35%, which we designated as cash flow hedges at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the forward starting interest rate swaps will be recorded as a component of accumulated other comprehensive income (loss). When the forward starting interest rate swaps settle, the realized gain or loss will be recorded as a component of accumulated other comprehensive income (loss) and recognized as a component of interest charges over the life of the related financing arrangement. Hedge ineffectiveness to the extent incurred, will be reported as a component of interest charges.

As of June 30, 2020, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with $500 million of a planned issuance of unsecured senior notes in fiscal 2021 at 0.69% and $450 million of a planned issuance of unsecured senior notes in fiscal 2022 at 1.33%, which we designated as cash flow hedges at the time the agreements were executed.

As of June 30, 2020, we had $112.1 million of net realized losses in AOCI associated with the settlement of financial instruments used to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes, which will be recognized as a component of interest charges over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2049.

 

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, 2020, 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, 2020, we had 10,050 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, 2020 and September 30, 2019. 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, for June 30, 2020 and September 30, 2019, no gross amounts and no cash collateral were netted within our consolidated balance sheet.

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	Balance Sheet Location		Assets				Liabilities
			(In thousands)
June 30, 2020
Designated As Hedges:
Interest rate swaps	Other current assets / Other current liabilities		$	66			$	(5,305	)
Interest rate swaps	Deferred charges and other assets / Deferred credits and other liabilities		4,181				(5,300		)
Total			4,247				(10,605		)
Not Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities		1,370				(461		)
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities		247				(37		)
Total			1,617				(498		)
Gross / Net Financial Instruments			$	5,864			$	(11,103	)

 

	Balance Sheet Location		Assets				Liabilities
			(In thousands)
September 30, 2019
Not Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities		$	1,586			$	(4,552	)
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities		225				(1,249		)
Total			1,811				(5,801		)
Gross / Net Financial Instruments			$	1,811			$	(5,801	)

 

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, 2020 and 2019 was $1.4 million and $1.4 million and for the nine months ended June 30, 2020 and 2019 was $4.1 million and $2.6 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, 2020 and 2019. 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
	2020				2019				2020				2019
	(In thousands)
Increase (decrease) in fair value:
Interest rate agreements	$	(4,932	)		$	—			$	(4,932	)		$	(25,966	)
Recognition of losses in earnings due to settlements:
Interest rate agreements	482				1,053				2,588				1,969
Total other comprehensive income (loss) from hedging, net of tax	$	(4,450	)		$	1,053			$	(2,344	)		$	(23,997	)

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. The following amounts, net of deferred taxes, represent the expected recognition in earnings, as of June 30, 2020, of the deferred losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments at the date of settlement. However, the table below does not include the expected recognition in earnings of our outstanding interest rate swaps as those instruments have not yet settled.

	Interest Rate Agreements
	(In thousands)
Next twelve months	$	(4,234	)
Thereafter	(107,893		)
Total	$	(112,127	)

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.

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 financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. During the nine months ended June 30, 2020, 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 8 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

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, 2020 and September 30, 2019. 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, 2020
	(In thousands)
Assets:
Financial instruments	$	—			$	5,864			$	—			$	—			$	5,864
Debt and equity securities
Registered investment companies	37,229				—				—				—				37,229
Bond mutual funds	28,954				—				—				—				28,954
Bonds(2)	—				34,408				—				—				34,408
Money market funds	—				5,126				—				—				5,126
Total debt and equity securities	66,183				39,534				—				—				105,717
Total assets	$	66,183			$	45,398			$	—			$	—			$	111,581
Liabilities:
Financial instruments	$	—			$	11,103			$	—			$	—			$	11,103

	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, 2019
	(In thousands)
Assets:
Financial instruments	$	—			$	1,811			$	—			$	—			$	1,811
Debt and equity securities
Registered investment companies	41,406				—				—				—				41,406
Bond mutual funds	25,966				—				—				—				25,966
Bonds(2)	—				31,915				—				—				31,915
Money market funds	—				2,596				—				—				2,596
Total debt and equity securities	67,372				34,511				—				—				101,883
Total assets	$	67,372			$	36,322			$	—			$	—			$	103,694
Liabilities:
Financial instruments	$	—			$	5,801			$	—			$	—			$	5,801

 

(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. We regularly 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 and current returns. If a determination is made that a decline in fair value is other than temporary, the related investment is written down to its estimated fair value and the other-than-temporary impairment is recognized in the statement of comprehensive income. At June 30, 2020 and September 30, 2019, the amortized cost of our available-for-sale debt securities was $34.0 million and $31.7 million. At June 30, 2020, we maintained investments in bonds that have contractual maturity dates ranging from July 2020 through May 2023.

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

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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, 2020 and September 30, 2019:

	June 30, 2020				September 30, 2019
	(In thousands)
Carrying Amount	$	4,560,000			$	3,560,000
Fair Value	$	5,563,300			$	4,216,249

Information regarding our concentration of credit risk is disclosed in Note 17 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. During the nine months ended June 30, 2020, there were no material changes in our concentration of credit risk.

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•	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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•	Regulation

•	Unbilled revenue

•	Pension and other postretirement plans

•	Impairment assessments

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•	a $14.8 million net increase in rate adjustments, primarily in our Mid-Tex, Mississippi, Louisiana and West Texas Divisions.

•	a $1.8 million increase from customer growth primarily in our Mid-Tex Division.

•	a $12.5 million decrease in operating expense in response to COVID-19:

•	$6.6 million associated with lower overtime/standby costs, benefit costs and other employee related costs.

•	$3.5 million associated with travel and entertainment and training.

•	$2.4 million related to the deferral of pipeline maintenance and related activities.

•	a $10.1 million decrease attributable to COVID-19:

•	$6.8 million decrease in net consumption and transportation, primarily due to an 18 percent period over period decrease in commercial volumes.

•	$3.3 million decrease in service order revenues primarily due to the cessation of collection activities during the third quarter.

•	a $9.2 million increase in depreciation expense and property taxes associated with increased capital investments.

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•	a $70.8 million net increase in rate adjustments, primarily in our Mid-Tex, Mississippi, Louisiana and West Texas Divisions.

•	a $10.3 million increase from customer growth primarily in our Mid-Tex Division.

•	a $12.5 million decrease in operating expense in response to COVID-19:

•	$6.6 million associated with lower overtime/standby costs, benefit costs and other employee related costs.

•	$3.5 million associated with travel and entertainment and training.

•	$2.4 million related to the deferral of pipeline maintenance and related activities.

•	a $10.1 million decrease attributable to COVID-19:

•	$6.8 million decrease in net consumption and transportation, primarily due to a 10 percent period over period decrease in commercial volumes.

•	$3.3 million decrease in service order revenues primarily during the third quarter due to the cessation of collection activities during the third quarter.

•	a $3.9 million increase in software maintenance expenses.

•	a $24.8 million increase in depreciation expense and property taxes associated with increased capital investments.

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(1)	Rates under this mechanism were implemented beginning July 1, 2020, subject to refund.

(2)	On July 1, 2020, this filing was updated to request an operating income increase of $10.5 million.

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(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.

(1)	The rate increases for our Texas GRIP filings have been approved; however, new rates will not be implemented until September 1, 2020.

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(1)	The Ad Valorem filing relates to property taxes that are either over or undercollected compared to the amount included in our Kansas service area's base rates.

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(1)	Inclusive of our finance leases as of June 30, 2020.

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(1)	Sales and transportation volumes reflect segment operations, including intercompany sales and transportation amounts.

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•	impact customer demand for natural gas, particularly from commercial and industrial customers;

•	reduce the availability and productivity of our employees and contractors;

•	cause us to experience an increase in costs as a result of our emergency measures, delayed payments from our customers and uncollectable accounts;

•	cause the Company’s contractors, suppliers and other business partners to be unable to fulfill their contractual obligations;

•	result in our inability to meet the requirements of the covenants in our existing credit facilities, including covenants regarding the ratio of indebtedness to total capitalization;

•	cause a deterioration in our financial metrics or the business environment that impacts our credit ratings;

•	impact our liquidity position and cost of and ability to access funds from financial institutions and capital markets; and

•	cause other unpredictable events.

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