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ATMOS ENERGY CORP - Quarter Report: 2017 March (Form 10-Q)



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission File Number 1-10042
Atmos Energy Corporation
(Exact name of registrant as specified in its charter)
 
Texas and Virginia
 
75-1743247
(State or other jurisdiction of
incorporation or organization)
 
(IRS employer
identification no.)
 
 
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
 
75240
(Zip code)
(Address of principal executive offices)
 
 
(972) 934-9227
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer  þ
  
Accelerated Filer  ¨
  
Non-Accelerated Filer  ¨
  
Smaller Reporting Company  ¨
 
Emerging growth company ¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  þ
Number of shares outstanding of each of the issuer’s classes of common stock, as of April 28, 2017.
Class
  
Shares Outstanding
No Par Value
  
105,288,359




GLOSSARY OF KEY TERMS
 
 
 
AEC
Atmos Energy Corporation
AEH
Atmos Energy Holdings, Inc.
AEM
Atmos Energy Marketing, LLC
AOCI
Accumulated other comprehensive income
Bcf
Billion cubic feet
FASB
Financial Accounting Standards Board
Fitch
Fitch Ratings, Ltd.
GAAP
Generally Accepted Accounting Principles
GRIP
Gas Reliability Infrastructure Program
Mcf
Thousand cubic feet
MMcf
Million cubic feet
Moody’s
Moody’s Investors Services, Inc.
NYMEX
New York Mercantile Exchange, Inc.
PPA
Pension Protection Act of 2006
PRP
Pipeline Replacement Program
RRC
Railroad Commission of Texas
RRM
Rate Review Mechanism
S&P
Standard & Poor’s Corporation
SEC
United States Securities and Exchange Commission
WNA
Weather Normalization Adjustment

2



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS 
 
March 31,
2017
 
September 30,
2016
 
(Unaudited)
 
 
 
(In thousands, except
share data)
ASSETS
 
 
 
Property, plant and equipment
$
10,725,834

 
$
10,142,506

Less accumulated depreciation and amortization
1,987,347

 
1,873,900

Net property, plant and equipment
8,738,487

 
8,268,606

Current assets
 
 
 
Cash and cash equivalents
45,403

 
47,534

Accounts receivable, net
336,637

 
215,880

Gas stored underground
120,026

 
179,070

Current assets of disposal group classified as held for sale

 
151,117

Other current assets
61,018

 
88,085

Total current assets
563,084

 
681,686

Goodwill
729,673

 
726,962

Noncurrent assets of disposal group classified as held for sale

 
28,616

Deferred charges and other assets
330,222

 
305,019

 
$
10,361,466

 
$
10,010,889

CAPITALIZATION AND LIABILITIES
 
 
 
Shareholders’ equity
 
 
 
Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: March 31, 2017 — 105,275,505 shares; September 30, 2016 — 103,930,560 shares
$
526

 
$
520

Additional paid-in capital
2,464,252

 
2,388,027

Accumulated other comprehensive loss
(86,894
)
 
(188,022
)
Retained earnings
1,456,980

 
1,262,534

Shareholders’ equity
3,834,864

 
3,463,059

Long-term debt
2,314,620

 
2,188,779

Total capitalization
6,149,484

 
5,651,838

Current liabilities
 
 
 
Accounts payable and accrued liabilities
185,212

 
196,485

Current liabilities of disposal group classified as held for sale

 
72,900

Other current liabilities
390,253

 
439,085

Short-term debt
670,607

 
829,811

Current maturities of long-term debt
250,000

 
250,000

Total current liabilities
1,496,072

 
1,788,281

Deferred income taxes
1,810,160

 
1,603,056

Regulatory cost of removal obligation
444,848

 
424,281

Pension and postretirement liabilities
305,845

 
297,743

Noncurrent liabilities of disposal group held for sale

 
316

Deferred credits and other liabilities
155,057

 
245,374

 
$
10,361,466

 
$
10,010,889

See accompanying notes to condensed consolidated financial statements.

3



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended 
 March 31
 
2017
 
2016
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Distribution segment
$
962,541

 
$
862,127

Pipeline and storage segment
111,972

 
102,153

Intersegment eliminations
(86,327
)
 
(74,240
)
Total operating revenues
988,186

 
890,040

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
513,096

 
450,671

Pipeline and storage segment
725

 
925

Intersegment eliminations
(86,327
)
 
(74,240
)
Total purchased gas cost
427,494

 
377,356

Operation and maintenance expense
132,239

 
127,857

Depreciation and amortization expense
77,667

 
71,391

Taxes, other than income
65,614

 
61,780

Operating income
285,172

 
251,656

Miscellaneous income (expense)
833

 
(329
)
Interest charges
26,944

 
27,559

Income from continuing operations before income taxes
259,061

 
223,768

Income tax expense
97,049

 
80,765

Income from continuing operations
162,012

 
143,003

Loss from discontinued operations, net of tax ($0 and ($804))

 
(1,193
)
Gain on sale of discontinued operations, net of tax ($10,215 and $0)
2,716

 

Net Income
$
164,728

 
$
141,810

Basic and diluted net income per share
 
 
 
Income per share from continuing operations
$
1.52

 
$
1.39

Income (loss) per share from discontinued operations
0.03

 
(0.01
)
Net income per share - basic and diluted
$
1.55

 
$
1.38

Cash dividends per share
$
0.45

 
$
0.42

Basic and diluted weighted average shares outstanding
105,935

 
102,946

See accompanying notes to condensed consolidated financial statements.








4



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
 
 
 
 
 
 
 
 
Six Months Ended 
 March 31
 
2017
 
2016
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Distribution segment
$
1,717,197

 
$
1,511,570

Pipeline and storage segment
221,924

 
200,569

Intersegment eliminations
(170,767
)
 
(147,346
)
Total operating revenues
1,768,354

 
1,564,793

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
908,442

 
764,662

Pipeline and storage segment
1,080

 
366

Intersegment eliminations
(170,723
)
 
(147,346
)
Total purchased gas cost
738,799

 
617,682

Operation and maintenance expense
257,177

 
247,685

Depreciation and amortization expense
154,625

 
142,047

Taxes, other than income
122,663

 
112,994

Operating income
495,090

 
444,385

Miscellaneous expense
(161
)
 
(1,208
)
Interest charges
57,974

 
57,096

Income from continuing operations before income taxes
436,955

 
386,081

Income tax expense
160,905

 
141,532

Income from continuing operations
276,050

 
244,549

Income from discontinued operations, net of tax ($6,841 and $81)
10,994

 
122

Gain on sale of discontinued operations, net of tax ($10,215 and $0)
2,716

 

Net Income
$
289,760

 
$
244,671

Basic and diluted net income per share
 
 
 
Income per share from continuing operations
$
2.61

 
$
2.38

Income per share from discontinued operations
0.13

 

Net income per share - basic and diluted
$
2.74

 
$
2.38

Cash dividends per share
$
0.90

 
$
0.84

Basic and diluted weighted average shares outstanding
105,610

 
102,837

See accompanying notes to condensed consolidated financial statements.



5




ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(Unaudited)
(In thousands)
Net income
$
164,728

 
$
141,810

 
$
289,760

 
$
244,671

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $879, $(505), $403 and $(947)
1,530

 
(879
)
 
702

 
(1,647
)
Cash flow hedges:
 
 
 
 
 
 
 
Amortization and unrealized gain (loss) on interest rate agreements, net of tax of $2,432, $(30,819), $54,861 and $(28,070)
4,230

 
(53,618
)
 
95,444

 
(48,835
)
Net unrealized gains on commodity cash flow hedges, net of tax of $0, $140, $3,183 and $1,645

 
220

 
4,982

 
2,573

Total other comprehensive income (loss)
5,760

 
(54,277
)
 
101,128

 
(47,909
)
Total comprehensive income
$
170,488

 
$
87,533

 
$
390,888

 
$
196,762


See accompanying notes to condensed consolidated financial statements.

6



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended 
 March 31
 
2017
 
2016
 
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
289,760

 
$
244,671

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
154,810

 
143,211

Deferred income taxes
148,657

 
132,456

Gain on sale of discontinued operations
(12,931
)
 

Discontinued cash flow hedging for natural gas marketing commodity contracts
(10,579
)
 

Other
10,391

 
8,771

Net assets / liabilities from risk management activities
26,757

 
9,528

Net change in operating assets and liabilities
(54,862
)
 
(85,682
)
Net cash provided by operating activities
552,003

 
452,955

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(559,385
)
 
(536,004
)
Acquisition
(85,714
)
 

Proceeds from the sale of discontinued operations
133,560

 

Available-for-sale securities activities, net
(8,918
)
 
(2,117
)
Other, net
3,787

 
4,597

Net cash used in investing activities
(516,670
)
 
(533,524
)
Cash Flows From Financing Activities
 
 
 
Net increase (decrease) in short-term debt
(159,204
)
 
169,002

Net proceeds from equity offering
49,400

 

Issuance of common stock through stock purchase and employee retirement plans
16,984

 
17,641

Proceeds from issuance of long-term debt
125,000

 

Interest rate agreements cash collateral
25,670

 

Cash dividends paid
(95,314
)
 
(86,809
)
Net cash provided by (used in) financing activities
(37,464
)
 
99,834

Net increase (decrease) in cash and cash equivalents
(2,131
)
 
19,265

Cash and cash equivalents at beginning of period
47,534

 
28,653

Cash and cash equivalents at end of period
$
45,403

 
$
47,918


See accompanying notes to condensed consolidated financial statements.

7



ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2017
1.    Nature of Business
Atmos Energy Corporation (“Atmos Energy” or the “Company”) is engaged in the regulated natural gas distribution and pipeline and storage businesses. Our regulated businesses are subject to federal and state regulation and/or regulation by local authorities in each of the states in which our regulated divisions and subsidiaries operate.
Our distribution business delivers natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers through our six natural gas distribution divisions, which at March 31, 2017, covered service areas located in eight states. In addition, we transport natural gas for others through our distribution system and manage our storage assets located in Kentucky and Tennessee, which are used solely to support our regulated natural gas distribution operations in those states.
Our pipeline and storage business includes the transportation of natural gas to our North Texas and Louisiana distribution systems and the management of our underground storage facilities used to support our North Texas distribution business.
Effective January 1, 2017, we completed the sale of all of the equity interests of Atmos Energy Marketing (AEM) to CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. (CES). Accordingly, AEM’s historical financial results are reflected in the Company’s condensed consolidated financial statements as discontinued operations, which required retrospective application to financial information for all periods presented. Refer to Note 6 for further information. Our discontinued natural gas marketing segment was primarily engaged in a nonregulated natural gas marketing business, conducted by AEM. This business provided natural gas management and transportation services to municipalities, regulated distribution companies, including certain divisions of Atmos Energy, and third parties.

2.    Unaudited Financial Information
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. 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, 2016. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2017 are not indicative of our results of operations for the full 2017 fiscal year, which ends September 30, 2017.
We renewed our $25 million unsecured credit facility on April 1, 2017 as discussed in Note 5. In addition, in April 2017, we completed a State of Texas use tax audit that covered the period from October 2011 to June 2015, which resulted in an $18.7 million refund. We are in discussions with the State to update this audit through March 2017. No other events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the 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, 2016.
As discussed in Note 3, due to the realignment of our reportable segments, prior periods' segment information has been recast in accordance with applicable accounting guidance. Additionally, as discussed in Note 6, due to the sale of AEM, prior period amounts have been presented as discontinued operations. The segment realignment and the presentation of discontinued operations do not impact our reported net income, financial position and cash flows. 
During the second quarter of fiscal 2017, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under current guidance.

8



The new guidance will become effective for us October 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.
As of March 31, 2017, we have substantially completed the evaluation of our sources of revenue and are currently assessing the effect that the new guidance will have on our financial position, results of operations and cash flows. The conclusion of our assessment is contingent, in part, upon the completion of deliberations currently in progress by our industry, notably in connection with efforts to produce an accounting guide intended to be developed by the American Institute of Certified Public Accountants (AICPA).
In association with this undertaking, the AICPA formed a number of industry task forces, including a Power & Utilities (P&U) Task Force. Industry representatives and organizations, the largest auditing firms, the AICPA’s Revenue Recognition Working Group and its Financial Reporting Executive Committee have undertaken, and continue to undertake, consideration of several items relevant to our industry as further discussed below. Where applicable or necessary, the FASB’s Transition Resource Group (TRG) is also participating.
Currently, the industry is working to address several items including the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers and the accounting for funds received from third parties to partially or fully reimburse the cost of construction of an asset. A timeline for the resolution of these deliberations has not been established. Additionally, we are actively working with our peers in the rate-regulated natural gas industry and with the public accounting profession to conclude on the accounting treatment for several other issues that are not expected to be addressed by the P&U Task Force. Based on the apparent progress of these deliberations to date, we currently do not believe the implementation of the new guidance will have a material effect on our financial position, results of operations, cash flows or business processes. We are currently still evaluating the transition method we will utilize to adopt the new guidance as well as the impact to our financial statement presentation and related disclosures.
In May 2015, the FASB issued guidance removing the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance was effective for us on October 1, 2016 to be applied retrospectively. We measure certain pension plan assets using the net asset value per share practical expedient which are disclosed on an annual basis in our Form 10-K. The adoption of the new standard will have no impact on our results of operations, consolidated balance sheets or cash flows. 
In January 2016, the FASB issued guidance related to the classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning October 1, 2018; limited early adoption is permitted. We are currently evaluating the potential impact of this new guidance.
In February 2016, the FASB issued a comprehensive new leasing standard that will require lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The new standard will be effective for us beginning on October 1, 2019; early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We are currently evaluating the effect 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 securities that will require credit losses for available-for-sale debt securities to be recorded through an allowance account. The new standard will be effective for us beginning on October 1, 2021; early adoption is permitted beginning on October 1, 2019. We are currently evaluating the potential impact of this new guidance.
In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Under the new guidance, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The new standard will be effective for our fiscal 2021 goodwill impairment test; however, early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new standard will have no impact on our results of operations, consolidated balance sheets or cash flows. 
In March 2017, the FASB issued new guidance related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The new guidance requires entities to disaggregate the current service cost component of the net benefit cost from the other components and present it with other current compensation costs for related employees in the statement of income. The other components of net

9



benefit cost will be presented outside of income from operations on the statement of income. In addition, only the service cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The new guidance is effective for us in the fiscal year beginning on October 1, 2018 and for interim periods within that year. We are currently evaluating the potential impact of this new guidance.
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 substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is reported separately.

Significant regulatory assets and liabilities as of March 31, 2017 and September 30, 2016 included the following:
 
March 31,
2017
 
September 30,
2016
 
(In thousands)
Regulatory assets:
 
 
 
Pension and postretirement benefit costs(1)
$
125,547

 
$
132,348

Infrastructure mechanisms(2)
61,470

 
42,719

Deferred gas costs
9,561

 
45,184

Recoverable loss on reacquired debt
12,482

 
13,761

Deferred pipeline record collection costs
9,079

 
7,336

APT annual adjustment mechanism
4,452

 
7,171

Rate case costs
1,467

 
1,539

Other
13,264

 
13,565

 
$
237,322

 
$
263,623

Regulatory liabilities:
 
 
 
Regulatory cost of removal obligations
$
486,110

 
$
476,891

Deferred gas costs
49,672

 
20,180

Asset retirement obligations
13,404

 
13,404

Other
10,679

 
4,250

 
$
559,865

 
$
514,725

 
(1) 
Includes $11.8 million and $12.4 million of pension and postretirement expense deferred pursuant to regulatory authorization.
(2) 
Infrastructure mechanisms in Texas and Louisiana 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.



10



3.    Segment Information

Through November 30, 2016, our consolidated operations were managed and reviewed through three segments:
The regulated distribution segment, which included our regulated natural gas distribution and related sales operations.
The regulated pipeline segment, which included the pipeline and storage operations of our Atmos Energy Pipeline-Texas division and,
The nonregulated segment, which included our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

 As a result of the sale of Atmos Energy Marketing, we revised the information used by the chief operating decision maker to manage the Company. Accordingly, we have been managing and reviewing our consolidated operations through the following three reportable segments:
The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states and storage assets located in Kentucky and Tennessee, which are used solely to support our natural gas distribution operations in those states. These storage assets were formerly included in our nonregulated segment.
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 which were formerly included in our nonregulated segment.
The natural gas marketing segment is comprised of our discontinued natural gas marketing business.

Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our distribution segment operations are geographically dispersed, they are aggregated and reported as a single segment as each natural gas distribution division has similar economic characteristics. In addition, because the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana have similar economic characteristics, they have been aggregated and reported as a single segment.

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, 2016. We evaluate performance based on net income or loss of the respective operating segments. We allocate interest and pension expense to the pipeline and storage segment; however, there is no debt or pension liability recorded on the pipeline and storage segment balance sheet. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process.
    
Prior periods' segment information has been recast as required by applicable accounting guidance. The segment realignment does not impact our reported consolidated revenues or net income. 

11



Income statements for the three and six months ended March 31, 2017 and 2016 by segment are presented in the following tables:
 
Three Months Ended March 31, 2017
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
962,217

 
$
25,969

 
$

 
$

 
$
988,186

Intersegment revenues
324

 
86,003

 

 
(86,327
)
 

Total operating revenues
962,541

 
111,972

 

 
(86,327
)
 
988,186

Purchased gas cost
513,096

 
725

 

 
(86,327
)
 
427,494

Operation and maintenance expense
103,703

 
28,536

 

 

 
132,239

Depreciation and amortization expense
61,302

 
16,365

 

 

 
77,667

Taxes, other than income
57,636

 
7,978

 

 

 
65,614

Operating income
226,804

 
58,368

 

 

 
285,172

Miscellaneous income (expense)
1,029

 
(196
)
 

 

 
833

Interest charges
16,925

 
10,019

 

 

 
26,944

Income from continuing operations before income taxes
210,908

 
48,153

 

 

 
259,061

Income tax expense
79,763

 
17,286

 

 

 
97,049

Income from continuing operations
131,145

 
30,867

 

 

 
162,012

Income from discontinued operations, net of tax

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

 
2,716

 

 
2,716

Net income
$
131,145

 
$
30,867

 
$
2,716

 
$

 
$
164,728

Capital expenditures
$
208,185

 
$
53,238

 
$

 
$

 
$
261,423

 
Three Months Ended March 31, 2016
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
861,756

 
$
28,284

 
$

 
$

 
$
890,040

Intersegment revenues
371

 
73,869

 

 
(74,240
)
 

Total operating revenues
862,127

 
102,153

 

 
(74,240
)
 
890,040

Purchased gas cost
450,671

 
925

 

 
(74,240
)
 
377,356

Operation and maintenance expense
100,146

 
27,711

 

 

 
127,857

Depreciation and amortization expense
57,941

 
13,450

 

 

 
71,391

Taxes, other than income
54,978

 
6,802

 

 

 
61,780

Operating income
198,391

 
53,265

 

 

 
251,656

Miscellaneous income (expense)
38

 
(367
)
 

 

 
(329
)
Interest charges
18,414

 
9,145

 

 

 
27,559

Income from continuing operations before income taxes
180,015

 
43,753

 

 

 
223,768

Income tax expense
64,935

 
15,830

 

 

 
80,765

Income from continuing operations
115,080

 
27,923

 

 

 
143,003

Loss from discontinued operations, net of tax

 

 
(1,193
)
 

 
(1,193
)
Net income (loss)
$
115,080

 
$
27,923

 
$
(1,193
)
 
$

 
$
141,810

Capital expenditures
$
175,186

 
$
70,357

 
$
49

 
$

 
$
245,592


12




 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2017
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
1,716,483

 
$
51,871

 
$

 
$

 
$
1,768,354

Intersegment revenues
714

 
170,053

 

 
(170,767
)
 

Total operating revenues
1,717,197

 
221,924

 

 
(170,767
)
 
1,768,354

Purchased gas cost
908,442

 
1,080

 

 
(170,723
)
 
738,799

Operation and maintenance expense
196,417

 
60,804

 

 
(44
)
 
257,177

Depreciation and amortization expense
122,459

 
32,166

 

 

 
154,625

Taxes, other than income
108,182

 
14,481

 

 

 
122,663

Operating income
381,697

 
113,393

 

 

 
495,090

Miscellaneous income (expense)
396

 
(557
)
 

 

 
(161
)
Interest charges
38,043

 
19,931

 

 

 
57,974

Income from continuing operations before income taxes
344,050

 
92,905

 

 

 
436,955

Income tax expense
127,541

 
33,364

 

 

 
160,905

Income from continuing operations
216,509

 
59,541

 

 

 
276,050

Income from discontinued operations, net of tax

 

 
10,994

 

 
10,994

Gain on sale of discontinued operations, net of tax

 

 
2,716

 

 
2,716

Net income
$
216,509

 
$
59,541

 
$
13,710

 
$

 
$
289,760

Capital expenditures
$
430,669

 
$
128,716

 
$

 
$

 
$
559,385

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2016
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
1,510,869

 
$
53,924

 
$

 
$

 
$
1,564,793

Intersegment revenues
701

 
146,645

 

 
(147,346
)
 

Total operating revenues
1,511,570

 
200,569

 

 
(147,346
)
 
1,564,793

Purchased gas cost
764,662

 
366

 

 
(147,346
)
 
617,682

Operation and maintenance expense
192,335

 
55,350

 

 

 
247,685

Depreciation and amortization expense
115,555

 
26,492

 

 

 
142,047

Taxes, other than income
100,536

 
12,458

 

 

 
112,994

Operating income
338,482

 
105,903

 

 

 
444,385

Miscellaneous expense
(439
)
 
(769
)
 

 

 
(1,208
)
Interest charges
38,804

 
18,292

 

 

 
57,096

Income from continuing operations before income taxes
299,239

 
86,842

 

 

 
386,081

Income tax expense
110,223

 
31,309

 

 

 
141,532

Income from continuing operations
189,016

 
55,533

 

 

 
244,549

Income from discontinued operations, net of tax

 

 
122

 

 
122

Net income
$
189,016

 
$
55,533

 
$
122

 
$

 
$
244,671

Capital expenditures
$
340,593

 
$
195,338

 
$
73

 
$

 
$
536,004

 

13



Balance sheet information at March 31, 2017 and September 30, 2016 by segment is presented in the following tables:

 
March 31, 2017
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
6,516,911

 
$
2,221,576

 
$

 
$

 
$
8,738,487

Investment in subsidiaries
764,702

 
13,851

 

 
(778,553
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
45,403

 

 

 

 
45,403

Other current assets
495,270

 
24,154

 

 
(1,743
)
 
517,681

Intercompany receivables
1,015,217

 

 

 
(1,015,217
)
 

Total current assets
1,555,890

 
24,154

 

 
(1,016,960
)
 
563,084

Goodwill
586,661

 
143,012

 

 

 
729,673

Deferred charges and other assets
302,827

 
27,395

 

 

 
330,222

 
$
9,726,991

 
$
2,429,988

 
$

 
$
(1,795,513
)
 
$
10,361,466

CAPITALIZATION AND LIABILITIES
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
3,834,864

 
$
778,553

 
$

 
$
(778,553
)
 
$
3,834,864

Long-term debt
2,314,620

 

 

 

 
2,314,620

Total capitalization
6,149,484

 
778,553

 

 
(778,553
)
 
6,149,484

Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
250,000

 

 

 

 
250,000

Short-term debt
670,607

 

 

 

 
670,607

Other current liabilities
543,577

 
33,631

 

 
(1,743
)
 
575,465

Intercompany payables

 
1,015,217

 

 
(1,015,217
)
 

Total current liabilities
1,464,184

 
1,048,848

 

 
(1,016,960
)
 
1,496,072

Deferred income taxes
1,230,279

 
579,881

 

 

 
1,810,160

Regulatory cost of removal obligation
422,191

 
22,657

 

 

 
444,848

Pension and postretirement liabilities
305,845

 

 

 

 
305,845

Deferred credits and other liabilities
155,008

 
49

 

 

 
155,057

 
$
9,726,991

 
$
2,429,988

 
$

 
$
(1,795,513
)
 
$
10,361,466


14





 
September 30, 2016
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
6,208,465

 
$
2,060,141

 
$

 
$

 
$
8,268,606

Investment in subsidiaries
768,415

 
13,854

 

 
(782,269
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
22,117

 

 
25,417

 

 
47,534

Current assets of disposal group classified as held for sale

 

 
162,508

 
(11,391
)
 
151,117

Other current assets
489,963

 
39,078

 
5

 
(46,011
)
 
483,035

Intercompany receivables
971,665

 

 

 
(971,665
)
 

Total current assets
1,483,745

 
39,078

 
187,930

 
(1,029,067
)
 
681,686

Goodwill
583,950

 
143,012

 

 

 
726,962

Noncurrent assets of disposal group classified as held for sale

 

 
28,785

 
(169
)
 
28,616

Deferred charges and other assets
277,240

 
27,779

 

 

 
305,019

 
$
9,321,815

 
$
2,283,864

 
$
216,715

 
$
(1,811,505
)
 
$
10,010,889

CAPITALIZATION AND LIABILITIES
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
3,463,059

 
$
715,672

 
$
66,597

 
$
(782,269
)
 
$
3,463,059

Long-term debt
2,188,779

 

 

 

 
2,188,779

Total capitalization
5,651,838

 
715,672

 
66,597

 
(782,269
)
 
5,651,838

Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
250,000

 

 

 

 
250,000

Short-term debt
829,811

 

 
35,000

 
(35,000
)
 
829,811

Current liabilities of the disposal group classified as held for sale

 

 
81,908

 
(9,008
)
 
72,900

Other current liabilities
605,790

 
39,911

 
3,263

 
(13,394
)
 
635,570

Intercompany payables

 
957,526

 
14,139

 
(971,665
)
 

Total current liabilities
1,685,601

 
997,437

 
134,310

 
(1,029,067
)
 
1,788,281

Deferred income taxes
1,055,348

 
543,390

 
4,318

 

 
1,603,056

Regulatory cost of removal obligation
397,162

 
27,119

 

 

 
424,281

Pension and postretirement liabilities
297,743

 

 

 

 
297,743

Noncurrent liabilities of disposal group classified as held for sale

 

 
316

 

 
316

Deferred credits and other liabilities
234,123

 
246

 
11,174

 
(169
)
 
245,374

 
$
9,321,815

 
$
2,283,864

 
$
216,715

 
$
(1,811,505
)
 
$
10,010,889


15




4.    Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three and six months ended March 31, 2017 and 2016 are calculated as follows:

 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
Basic and Diluted Earnings Per Share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations
$
162,012

 
$
143,003

 
$
276,050

 
$
244,549

Less: Income from continuing operations allocated to participating securities
193

 
231

 
348

 
405

Income from continuing operations available to common shareholders
$
161,819

 
$
142,772

 
$
275,702

 
$
244,144

Basic and diluted weighted average shares outstanding
105,935

 
102,946

 
105,610

 
102,837

Income from continuing operations per share — Basic and Diluted
$
1.52

 
$
1.39

 
$
2.61

 
$
2.38

 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share from discontinued operations
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
2,716

 
$
(1,193
)
 
$
13,710

 
$
122

Less: Income from discontinued operations allocated to participating securities
2

 

 
15

 

Income (loss) from discontinued operations available to common shareholders
$
2,714

 
$
(1,193
)
 
$
13,695

 
$
122

Basic and diluted weighted average shares outstanding
105,935

 
102,946

 
105,610

 
102,837

Income (loss) from discontinued operations per share — Basic and Diluted
$
0.03

 
$
(0.01
)
 
$
0.13

 
$

Net income per share — Basic and Diluted
$
1.55

 
$
1.38

 
$
2.74

 
$
2.38





16



5.    Debt
The nature and terms of our debt instruments and credit facilities are described in detail in Note 5 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Except as noted below, there were no material changes in the terms of our debt instruments during the six months ended March 31, 2017.
Long-term debt at March 31, 2017 and September 30, 2016 consisted of the following:
 
 
March 31, 2017
 
September 30, 2016
 
(In thousands)
Unsecured 6.35% Senior Notes, due June 2017
$
250,000

 
$
250,000

Unsecured 8.50% Senior Notes, due 2019
450,000

 
450,000

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
500,000

 
500,000

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

Floating-rate term loan, due 2019
125,000

 

Total long-term debt
2,585,000

 
2,460,000

Less:
 
 
 
Original issue discount on unsecured senior notes and debentures
4,099

 
4,270

Debt issuance cost
16,281

 
16,951

Current maturities
250,000

 
250,000

 
$
2,314,620

 
$
2,188,779

 
On September 22, 2016, we entered into a three year, $200 million multi-draw floating-rate term loan agreement with a syndicate of three lenders. Borrowings under the term loan may be made in increments of $1.0 million or higher, may be repaid at any time during the loan period and will bear interest at a rate dependent upon our credit ratings at the time of such borrowing and based, at our election, on a base rate or LIBOR for the applicable interest period. The term loan will be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. At March 31, 2017, there was $125.0 million outstanding under the term loan.
We utilize short-term debt to fund ongoing working capital needs, such as our seasonal requirements for gas supply, general corporate liquidity and capital expenditures. Our short-term borrowing requirements are affected primarily by 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.
We currently finance our short-term borrowing requirements through a combination of a $1.5 billion commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $1.5 billion of total working capital funding. The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility that expires September 25, 2021. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread 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. This facility was amended in October 2016 to increase the total availability from $1.25 billion. At March 31, 2017 and September 30, 2016 a total of $670.6 million and $829.8 million was outstanding under our commercial paper program.

Additionally, we have a $25 million unsecured facility, which was renewed on April 1, 2017, and a $10 million unsecured revolving credit facility, which is used primarily to issue letters of credit. At March 31, 2017, there were no borrowings outstanding under either of these facilities; however, outstanding letters of credit reduced the total amount available to us under our $10 million unsecured revolving facility to $4.1 million.
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

17



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 March 31, 2017, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 47 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. We were in compliance with all of our debt covenants as of March 31, 2017. 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.
AEM had one uncommitted $25 million 364-day bilateral credit facility that was scheduled to expire on July 31, 2017 and one committed $15 million 364-day bilateral credit facility that was scheduled to expire on September 30, 2017. In connection with the sale of AEM discussed in Note 6, both facilities were terminated on January 3, 2017.
6. Divestitures and Acquisitions
Divestiture of Atmos Energy Marketing (AEM)
On October 29, 2016, we entered into a Membership Interest Purchase Agreement (the Agreement) with CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. (CES) to sell all of the equity interests of AEM. The transaction closed on January 3, 2017, with an effective date of January 1, 2017. CES paid a cash purchase price of $38.3 million plus estimated working capital of $103.2 million for total cash consideration of $141.5 million. Of this amount, $7.0 million was placed into escrow and will be paid to the Company within 24 months, net of any indemnification claims agreed upon between the two companies. We recognized a net gain of $0.03 per diluted share on the sale in the second quarter of fiscal 2017 and expect to complete the working capital true–up during the third quarter of fiscal 2017.
The operating results of our natural gas marketing reportable segment have been reported on the condensed consolidated statements of income as income from discontinued operations, net of income tax.  Accordingly, expenses related to allocable general corporate overhead and interest expense are not included in these results.  The decision to report this segment as a discontinued operation was predicated, in part, on the following qualitative and quantitative factors:  1) the disposal results in the company becoming a fully regulated entity; 2) the fact that an entire reportable segment will be disposed and 3) the fact the disposed segment represented in excess of 30 percent of consolidated revenues over the last five fiscal years.
The tables below set forth selected financial and operational information related to assets, liabilities and operating results related to discontinued operations. Operating expenses include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income. Additionally, assets and liabilities related to our natural gas marketing operations are classified as “held for sale” on our consolidated balance sheet at September 30, 2016. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported consolidated net income.

18



The following tables present statement of income data related to discontinued operations.
 
Three Months Ended 
 March 31
 
2017
 
2016
 
(In thousands)
 
 
 
 
Operating revenues
$

 
$
269,519

 
 
 
 
Purchased gas cost

 
264,259

Operating expenses

 
6,900

Operating loss

 
(1,640
)
Other nonoperating expense

 
(357
)
Loss from discontinued operations before income taxes

 
(1,997
)
Income tax benefit

 
(804
)
Loss from discontinued operations

 
(1,193
)
Gain on sale from discontinued operations, net of tax ($10,215 and $0)
2,716

 

Net income (loss) from discontinued operations
$
2,716

 
$
(1,193
)

 
Six Months Ended 
 March 31
 
2017
 
2016
 
(In thousands)
 
 
 
 
Operating revenues
$
303,474

 
$
528,776

 
 
 
 
Purchased gas cost
277,554

 
514,047

Operating expenses
7,874

 
12,893

Operating income
18,046

 
1,836

Other nonoperating expense
(211
)
 
(1,633
)
Income from discontinued operations before income taxes
17,835

 
203

Income tax expense
6,841

 
81

Income from discontinued operations
10,994

 
122

Gain on sale from discontinued operations, net of tax ($10,215 and $0)
2,716

 

Net income from discontinued operations
$
13,710

 
$
122



19



The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of our natural gas marketing's operations to total assets and liabilities classified as held for sale.
 
March 31, 2017
 
September 30, 2016
 
(In thousands)
Assets:
 
 
 
Net property, plant and equipment
$

 
$
11,905

Accounts receivable

 
93,551

Gas stored underground

 
54,246

Other current assets

 
14,711

Goodwill

 
16,445

Deferred charges and other assets

 
435

Total assets of the disposal group classified as held for sale in the statement of financial position (1)

 
191,293

Cash

 
25,417

Other assets

 
5

Total assets of disposal group in the statement of financial position
$

 
$
216,715

 
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$

 
$
72,268

Other current liabilities

 
9,640

Deferred credits and other

 
316

Total liabilities of the disposal group classified as held for sale in the statement of financial position (1)

 
82,224

Intercompany note payable

 
35,000

Tax liabilities

 
15,471

Intercompany payables

 
14,139

Other liabilities

 
3,284

Total liabilities of disposal group in the statement of financial position
$

 
$
150,118


(1) 
Amounts in the comparative period are classified as current and long term in the statement of financial position.
The following table presents statement of cash flow data related to discontinued operations.
 
Six Months Ended 
 March 31
 
2017
 
2016
 
(In thousands)
Depreciation and amortization expense
$
185

 
$
1,164

Capital expenditures
$

 
$
73

Noncash gain (loss) in commodity contract cash flow hedges
$
18,744

 
$
(4,218
)
Acquisition of EnLink Pipeline
On December 20, 2016, we executed a purchase and sale agreement to acquire the general partnership and limited partnership interests in EnLink North Texas Pipeline, LP (EnLink Pipeline) from EnLink Energy GP, LLC and EnLink Midstream Operating, LP for an all–cash price of $85 million, plus estimated working capital. After considering estimated working capital, the total proceeds paid were $85.7 million. The final purchase price is subject to adjustment after the estimated working capital is finalized during the third quarter of fiscal 2017.
EnLink Pipeline's primary asset is a 140–mile natural gas pipeline located on the north side of the Dallas–Fort Worth Metroplex. As of March 31, 2017, the $85 million purchase price has been allocated, based on fair value using observable market inputs, to the net book value of the acquired pipeline. The final purchase price allocation is subject to adjustment pending the completion of our analysis of the fair value of certain contracts included in the acquisition, which we expect to finalize in the third quarter of fiscal 2017.

20




7.    Shareholders' Equity

Shelf Registration and At-the-Market Equity Sales Program
On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to $2.5 billion in common stock and/or debt securities. We also filed a prospectus supplement under the registration statement relating to an at-the-market (ATM) equity distribution program under which we may issue and sell, shares of our common stock, up to an aggregate offering price of $200 million. During the first fiscal quarter of 2017, we sold 690,812 shares of common stock under our existing ATM program for $50.0 million and received net proceeds of $49.4 million. At March 31, 2017, approximately $2.4 billion of securities remain available for issuance under the shelf registration statement and approximately $50.0 million of equity remained available for issuance under the ATM program.

Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale securities, interest rate cash flow hedges and commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges 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
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2016
$
4,484

 
$
(187,524
)
 
$
(4,982
)
 
$
(188,022
)
Other comprehensive income before reclassifications
634

 
95,271

 
9,847

 
105,752

Amounts reclassified from accumulated other comprehensive income
68

 
173

 
(4,865
)
 
(4,624
)
Net current-period other comprehensive income
702

 
95,444

 
4,982

 
101,128

March 31, 2017
$
5,186

 
$
(92,080
)
 
$

 
$
(86,894
)
 
 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2015
$
4,949

 
$
(88,842
)
 
$
(25,437
)
 
$
(109,330
)
Other comprehensive loss before reclassifications
(1,568
)
 
(49,008
)
 
(19,185
)
 
(69,761
)
Amounts reclassified from accumulated other comprehensive income
(79
)
 
173

 
21,758

 
21,852

Net current-period other comprehensive income (loss)
(1,647
)
 
(48,835
)
 
2,573

 
(47,909
)
March 31, 2016
$
3,302

 
$
(137,677
)
 
$
(22,864
)
 
$
(157,239
)


21



The following tables detail reclassifications out of AOCI for the three and six months ended March 31, 2017 and 2016. Amounts in parentheses below indicate decreases to net income in the statement of income.
 
Three Months Ended March 31, 2017
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
(107
)
 
Operation and maintenance expense
 
(107
)
 
Total before tax
 
39

 
Tax benefit
 
$
(68
)
 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(136
)
 
Interest charges
Commodity contracts

 
Purchased gas cost
 
(136
)
 
Total before tax
 
50

 
Tax benefit
 
$
(86
)
 
Net of tax
Total reclassifications
$
(154
)
 
Net of tax
 
Three Months Ended March 31, 2016
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
124

 
Operation and maintenance expense
 
124

 
Total before tax
 
(45
)
 
Tax expense
 
$
79

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(136
)
 
Interest charges
Commodity contracts
(12,703
)
 
Purchased gas cost(1)
 
(12,839
)
 
Total before tax
 
5,004

 
Tax benefit
 
$
(7,835
)
 
Net of tax
Total reclassifications
$
(7,756
)
 
Net of tax

22



 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2017
Accumulated Other Comprehensive Income Components                          
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in  the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
(107
)
 
Operation and maintenance expense
 
(107
)
 
Total before tax
 
39

 
Tax benefit
 
$
(68
)
 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(273
)
 
Interest charges
Commodity contracts
7,976

 
Purchased gas cost(1)
 
7,703

 
Total before tax
 
(3,011
)
 
Tax expense
 
$
4,692

 
Net of tax
Total reclassifications
$
4,624

 
Net of tax
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2016
Accumulated Other Comprehensive Income Components                          
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in  the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
124

 
Operation and maintenance expense
 
124

 
Total before tax
 
(45
)
 
Tax expense
 
$
79

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(273
)
 
Interest charges
Commodity contracts
(35,668
)
 
Purchased gas cost(1)
 
(35,941
)
 
Total before tax
 
14,010

 
Tax benefit
 
$
(21,931
)
 
Net of tax
Total reclassifications
$
(21,852
)
 
Net of tax
(1) 
Amounts are presented as part of income from discontinued operations on the condensed consolidated statements of income.




23



8.     Interim Pension and Other Postretirement Benefit Plan Information
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three and six months ended March 31, 2017 and 2016 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
 
Three Months Ended March 31
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
5,217

 
$
4,697

 
$
3,109

 
$
2,706

Interest cost
6,297

 
7,094

 
2,670

 
3,106

Expected return on assets
(6,994
)
 
(6,880
)
 
(1,797
)
 
(1,566
)
Amortization of transition obligation

 

 

 
20

Amortization of prior service credit
(58
)
 
(56
)
 
(411
)
 
(411
)
Amortization of actuarial (gain) loss
4,249

 
3,320

 
(707
)
 
(542
)
Net periodic pension cost
$
8,711

 
$
8,175

 
$
2,864

 
$
3,313

 
 
 
 
 
 
 
 
 
Six Months Ended March 31
 
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
10,433

 
$
9,395

 
$
6,218

 
$
5,412

Interest cost
12,594

 
14,189

 
5,340

 
6,212

Expected return on assets
(13,988
)
 
(13,761
)
 
(3,593
)
 
(3,132
)
Amortization of transition obligation

 

 

 
41

Amortization of prior service credit
(116
)
 
(113
)
 
(822
)
 
(822
)
Amortization of actuarial (gain) loss
8,498

 
6,640

 
(1,414
)
 
(1,084
)
Net periodic pension cost
$
17,421

 
$
16,350

 
$
5,729

 
$
6,627


The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2017 and 2016 are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
2017
 
2016
 
2017
 
2016
Discount rate
 
3.73%
 
4.55%
 
3.73%
 
4.55%
Rate of compensation increase
 
3.50%
 
3.50%
 
N/A
 
N/A
Expected return on plan assets
 
7.00%
 
7.00%
 
4.45%
 
4.45%
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plan as of January 1, 2017. Based on that determination, we are not required to make a minimum contribution to our defined benefit plan during fiscal 2017; however, we may consider whether a voluntary contribution is prudent to maintain certain funding levels.
We contributed $6.6 million to our other post-retirement benefit plans during the six months ended March 31, 2017. We expect to contribute a total of between $10 million and $20 million to these plans during fiscal 2017.




24



9.    Commitments and Contingencies
Litigation and Environmental Matters
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 11 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2017.
We are a party to various 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, except for our Mid-Tex Division, 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 distribution hubs. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. There were no material changes to the purchase commitments for the six months ended March 31, 2017.
Regulatory Matters
Various regulatory agencies, including the SEC and the Commodities Futures Trading Commission, continue to adopt regulations implementing many of the provisions of the Dodd-Frank Act of 2010. We continue to enact new procedures and modify existing business practices and contractual arrangements to comply with such regulations.  Additional rulemakings are pending which we believe will result in new reporting and disclosure obligations. The costs associated with hedging certain risks inherent in our business may be further increased when these expected additional regulations are adopted.
As of March 31, 2017, formula rate mechanisms were in progress in our Louisiana, Tennessee and Mid-Tex service areas and infrastructure mechanisms were in progress in our Mid-Tex, Mississippi and West Texas service areas. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
10.    Financial Instruments
We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. During the six months ended March 31, 2017, except for the change in the scope of our natural gas marketing commodity risk management activities as a result of the sale of AEM, 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.

Regulated 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 2016-2017 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 27 percent, or 16.2 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.



25



Natural Gas Marketing Commodity Risk Management Activities
Our natural gas marketing segment was exposed to risks associated with changes in the market price of natural gas through the purchase, sale and delivery of natural gas to its customers at competitive prices. Through December 31, 2016, we managed our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Effective January 1, 2017, as a result of the sale of AEM, these activities were discontinued.
Due to the anticipated sale of AEM, we determined that the cash flows associated with our natural gas marketing commodity cash flow hedges were no longer probable of occurring; therefore, we discontinued hedge accounting as of December 31, 2016. As a result, we reclassified the gain in accumulated other comprehensive income associated with the commodity contracts into earnings as a reduction of purchased gas costs and recognized a pre-tax gain of $10.6 million, which is included in income from discontinued operations on the condensed consolidated statement of income for the three months ended December 31, 2016.

Interest Rate Risk Management Activities
We periodically manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
As of March 31, 2017, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $250 million and $450 million unsecured senior notes in fiscal 2017 and fiscal 2019, at 3.37% and 3.78%, which we designated as cash flow hedges at the time the swaps were executed. As of March 31, 2017, we had $18.1 million of net realized losses in accumulated other comprehensive income (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 expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2045.
 
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 income statements.
As of March 31, 2017, 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 March 31, 2017, we had 8,909 MMcf of net short commodity contracts outstanding. These contracts have not been designated as hedges.

26



Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of March 31, 2017 and September 30, 2016. 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 the counterparties.
 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
March 31, 2017
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Interest rate contracts
Other current liabilities
 
$

 
$
(22,199
)
Interest rate contracts
Deferred credits and other liabilities
 

 
(94,256
)
Total
 
 

 
(116,455
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
3,096

 
(645
)
Total
 
 
3,096

 
(645
)
Gross Financial Instruments
 
 
3,096

 
(117,100
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 

 

Net Financial Instruments
 
 
3,096

 
(117,100
)
Cash collateral
 
 

 

Net Assets/Liabilities from Risk Management Activities
 
 
$
3,096

 
$
(117,100
)
 
 

27



 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
September 30, 2016
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
$
6,612

 
$
(21,903
)
Interest rate contracts
Other current assets /
Other current liabilities
 

 
(68,481
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
2,178

 
(3,779
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 

 
(198,008
)
Total
 
 
8,790

 
(292,171
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
21,186

 
(18,812
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
14,165

 
(12,701
)
Total
 
 
35,351

 
(31,513
)
Gross Financial Instruments
 
 
44,141

 
(323,684
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 
(39,290
)
 
39,290

Net Financial Instruments
 
 
4,851

 
(284,394
)
Cash collateral
 
 
6,775

 
43,575

Net Assets/Liabilities from Risk Management Activities
 
 
$
11,626

 
$
(240,819
)
 
Impact of Financial Instruments on the Income Statement
Hedge ineffectiveness for our natural gas marketing segment was recorded as a component of purchased gas cost, which is included in discontinued operations on the condensed consolidated statements of income, and primarily results from differences in the location and timing of the derivative instrument and the hedged item. For the three months ended March 31, 2016, we recognized a loss arising from fair value and cash flow hedge ineffectiveness of $3.3 million. For the six months ended March 31, 2017 and 2016, we recognized gains arising from fair value and cash flow hedge ineffectiveness of $3.4 million and $4.6 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.
 

28



Fair Value Hedges
The impact of our natural gas marketing segment commodity contracts designated as fair value hedges and the related hedged item on the results of discontinued operations on our condensed consolidated income statement for the three and six months ended March 31, 2017 and 2016 is presented below.
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Commodity contracts
$

 
$
4,594

 
$
(9,567
)
 
$
10,338

Fair value adjustment for natural gas inventory designated as the hedged item

 
(7,939
)
 
12,858

 
(5,778
)
Total (increase) decrease in purchased gas cost reflected in income from discontinued operations
$

 
$
(3,345
)
 
$
3,291

 
$
4,560

The (increase) decrease in purchased gas cost reflected in income from discontinued operations is comprised of the following:
 
 
 
 
 
 
 
Basis ineffectiveness
$

 
$
(2,095
)
 
$
(597
)
 
$
(806
)
Timing ineffectiveness

 
(1,250
)
 
3,888

 
5,366

 
$

 
$
(3,345
)
 
$
3,291

 
$
4,560

Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity.

Cash Flow Hedges
The impact of our interest rate and natural gas marketing segment cash flow hedges on our condensed consolidated income statements for the three and six months ended March 31, 2017 and 2016 is presented below.
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
Loss reclassified from AOCI for effective portion of natural gas marketing commodity contracts
$

 
$
(12,703
)
 
$
(2,612
)
 
$
(35,668
)
Gain arising from ineffective portion of natural gas marketing commodity contracts

 
61

 
111

 
18

Gain on discontinuance of cash flow hedging of natural gas marketing commodity contracts reclassified from AOCI

 

 
10,579

 

Total impact on purchased gas cost reflected in income from discontinued operations

 
(12,642
)
 
8,078

 
(35,650
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(136
)
 
(136
)
 
(273
)
 
(273
)
Total Impact from Cash Flow Hedges
$
(136
)
 
$
(12,778
)
 
$
7,805

 
$
(35,923
)


29



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 six months ended March 31, 2017 and 2016. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Increase (decrease) in fair value:
 
 
 
 
 
 
 
Interest rate agreements
$
4,144

 
$
(53,704
)
 
$
95,271

 
$
(49,008
)
Forward commodity contracts

 
(7,529
)
 
9,847

 
(19,185
)
Recognition of (gains) losses in earnings due to settlements:
 
 
 
 
 
 
 
Interest rate agreements
86

 
86

 
173

 
173

Forward commodity contracts

 
7,749

 
(4,865
)
 
21,758

Total other comprehensive income (loss) from hedging, net of tax(1)
$
4,230

 
$
(53,398
)
 
$
100,426

 
$
(46,262
)
 
(1) 
Utilizing an income tax rate ranging from 37 percent to 39 percent based on the effective rates in each taxing jurisdiction.
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, while deferred gains (losses) associated with natural gas marketing segment commodity contracts were recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of March 31, 2017. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those instruments have not yet settled.
 
Interest Rate
Agreements
 
(In thousands)
Next twelve months
$
(598
)
Thereafter
(17,532
)
Total(1) 
$
(18,130
)
 
(1) 
Utilizing an income tax rate of 37 percent.
 
Financial Instruments Not Designated as Hedges
The impact of the natural gas marketing segment's financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three months ended March 31, 2016 was an increase in purchased gas cost of $2.5 million, which is included in discontinued operations on the condensed consolidated statements of income. For the six months ended March 31, 2017 and 2016 purchased gas cost (increased) decreased by $6.8 million and $(4.7) million.
As discussed above, financial instruments 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 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.
11.    Fair Value Measurements
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully

30



described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. During the six months ended March 31, 2017, 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 7 to the financial statements in our Annual Report on Form 10-K for the fiscal year ending September 30, 2016.
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 March 31, 2017 and September 30, 2016. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)(1)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Netting and
Cash
Collateral
 
March 31, 2017
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
3,096

 
$

 
$

 
$
3,096

Available-for-sale securities
 
 
 
 
 
 
 
 
 
Registered investment companies
37,995

 

 

 

 
37,995

Bond mutual funds
10,438

 

 

 

 
10,438

Bonds

 
30,596

 

 

 
30,596

Money market funds

 
3,623

 

 

 
3,623

Total available-for-sale securities
48,433

 
34,219

 

 

 
82,652

Total assets
$
48,433

 
$
37,315

 
$

 
$

 
$
85,748

Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
117,100

 
$

 
$

 
$
117,100

 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)(1)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Netting and
Cash
Collateral(2)
 
September 30, 2016
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
44,141

 
$

 
$
(32,515
)
 
$
11,626

Hedged portion of gas stored underground
52,578

 

 

 

 
52,578

Available-for-sale securities
 
 
 
 
 
 
 
 
 
Registered investment companies
38,677

 

 

 

 
38,677

Bonds

 
31,394

 

 

 
31,394

Money market funds

 
2,630

 

 

 
2,630

Total available-for-sale securities
38,677

 
34,024

 

 

 
72,701

Total assets
$
91,255

 
$
78,165

 
$

 
$
(32,515
)
 
$
136,905

Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
323,684

 
$

 
$
(82,865
)
 
$
240,819

 

31



(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 which are valued at cost.

(2) 
This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. As of September 30, 2016, we had $50.4 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $43.6 million was used to offset current and noncurrent risk management liabilities under master netting arrangements with the remaining $6.8 million is classified as current risk management assets.
 
Available-for-sale securities are comprised of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(In thousands)
As of March 31, 2017
 
 
 
 
 
 
 
Domestic equity mutual funds
$
25,158

 
$
6,956

 
$
(101
)
 
$
32,013

Foreign equity mutual funds
4,581

 
1,401

 

 
5,982

Bond mutual funds
10,469

 

 
(31
)
 
10,438

Bonds
30,588

 
43

 
(35
)
 
30,596

Money market funds
3,623

 

 

 
3,623

 
$
74,419

 
$
8,400

 
$
(167
)
 
$
82,652

As of September 30, 2016
 
 
 
 
 
 
 
Domestic equity mutual funds
$
26,692

 
$
6,419

 
$
(590
)
 
$
32,521

Foreign equity mutual funds
4,954

 
1,202

 

 
6,156

Bonds
31,296

 
108

 
(10
)
 
31,394

Money market funds
2,630

 

 

 
2,630

 
$
65,572

 
$
7,729

 
$
(600
)
 
$
72,701

At March 31, 2017 and September 30, 2016, our available-for-sale securities included $41.6 million and $41.3 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At March 31, 2017, we maintained investments in bonds that have contractual maturity dates ranging from April 2017 through September 2020.
These securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on a fund by fund basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related fund is written down to its estimated fair value and the other-than-temporary impairment is recognized in the income statement.
Other Fair Value Measures
Our debt is recorded at carrying value. The fair value of our debt 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 following table presents the carrying value and fair value of our debt as of March 31, 2017 and September 30, 2016:
 
March 31, 2017
 
September 30, 2016
 
(In thousands)
Carrying Amount
$
2,585,000

 
$
2,460,000

Fair Value
$
2,806,986

 
$
2,844,990



32



12.    Concentration of Credit Risk
Information regarding our concentration of credit risk is disclosed in Note 16 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Except for the sale of AEM, during the six months ended March 31, 2017, there were no material changes in our concentration of credit risk.

33



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Atmos Energy Corporation
We have reviewed the condensed consolidated balance sheet of Atmos Energy Corporation and subsidiaries as of March 31, 2017 and the related condensed consolidated statements of income and comprehensive income for the three and six-month periods ended March 31, 2017 and 2016 and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2017 and 2016. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Atmos Energy Corporation and subsidiaries as of September 30, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated November 14, 2016 except for the effects of the change in segments described in Note 3 and the discontinued operations described in Note 15, to which the date is April 12, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheets from which it has been derived.
/s/    ERNST & YOUNG LLP
Dallas, Texas
May 4, 2017

34



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2016.
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: our ability to continue to access the credit and capital markets to satisfy our liquidity requirements; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; the impact of adverse economic conditions on our customers; the effects of inflation and changes in the availability and price of natural gas; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty creditworthiness or performance and interest rate risk; the concentration of our distribution, pipeline and storage operations in Texas; increased competition from energy suppliers and alternative forms of energy; adverse weather conditions; the capital-intensive nature of our natural gas distribution business; increased costs of providing health care benefits along with pension and postretirement health care benefits and increased funding requirements; the inability to continue to hire, train and retain appropriate personnel; possible increased federal, state and local regulation of the safety of our operations; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the impact of climate changes or related additional legislation or regulation in the future; the inherent hazards and risks involved in operating our distribution and pipeline and storage businesses; the threat of cyber-attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems; 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. 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 primarily in the regulated natural gas distribution and transmission and storage businesses, as well as our natural gas marketing business through December 31, 2016. We distribute natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers throughout our six distribution divisions, which at March 31, 2017 covered service areas located in eight states. In addition, we transport natural gas for others through our distribution and pipeline systems.
Through December 31, 2016, our natural gas marketing business provided natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast. We completed the sale of this business in January 2017.

We manage and review our consolidated operations through the following three reportable segments:
The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states, and storage assets located in Kentucky and Tennessee, which are used solely to support our natural gas distribution operations in those states. These storage assets were formerly included in our nonregulated segment.
The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Energy Pipeline-Texas division and our natural gas transmission operations in Louisiana which were included in our former nonregulated segment.
The natural gas marketing segment is comprised of our discontinued natural gas marketing business.




35



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 risk management and trading activities, the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets 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, 2016 and include the following:

Regulation
Unbilled revenue
Pension and other postretirement plans
Contingencies
Financial instruments and hedging activities
Fair value measurements
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 six months ended March 31, 2017.
RESULTS OF OPERATIONS

Executive Summary
Atmos Energy strives to operate its businesses safely and reliably while delivering superior shareholder value. In recent years, we have implemented rate designs that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. Additionally, we have significantly increased investments in the safety and reliability of our natural gas distribution and transmission infrastructure. This increased level of investment and timely recovery of these investments through our regulatory mechanisms has resulted in increased earnings and operating cash flows in recent years.
The pursuit of our strategy was the primary driver for our decision to sell our nonregulated natural gas marketing business and to fully exit that business. The sale was announced in October 2016 and closed in January 2017 with the receipt of $133.6 million in cash proceeds, including estimated working capital. We recorded a net gain of $0.03 per diluted share on the sale in the second quarter of fiscal 2017. The proceeds received from the transaction will be used to fund infrastructure in our remaining businesses. As a result of the sale, the results of operations for the divested business have been presented as discontinued operations.

 
Three Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, except per share data)
Distribution operations
$
131,145

 
$
115,080

 
$
16,065

Pipeline and storage operations
30,867

 
27,923

 
2,944

Net income from continuing operations
162,012

 
143,003

 
19,009

Net income (loss) from discontinued operations
2,716

 
(1,193
)
 
3,909

Net income
$
164,728

 
$
141,810

 
$
22,918

 
 
 
 
 
 
Diluted EPS from continuing operations
$
1.52

 
$
1.39

 
$
0.13

Diluted EPS from discontinued operations
0.03

 
(0.01
)
 
0.04

Consolidated diluted EPS
$
1.55

 
$
1.38

 
$
0.17


36



 
 
 
 
 
 
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, except per share data)
Distribution operations
$
216,509

 
$
189,016

 
$
27,493

Pipeline and storage operations
59,541

 
55,533

 
4,008

Net income from continuing operations
276,050

 
244,549

 
31,501

Net income from discontinued operations
13,710

 
122

 
13,588

Net income
$
289,760

 
$
244,671

 
$
45,089

 
 
 
 
 
 
Diluted EPS from continuing operations
$
2.61

 
$
2.38

 
$
0.23

Diluted EPS from discontinued operations
0.13

 

 
0.13

Consolidated diluted EPS
$
2.74

 
$
2.38

 
$
0.36

Net income from continuing operations increased 13 percent, compared to the prior-year period, despite weather that was 29 percent warmer than normal and 12 percent warmer than the prior-year period, primarily due to positive rate outcomes and customer growth in our distribution business. During the six months ended March 31, 2017, our distribution segment completed 11 regulatory proceedings, resulting in an increase in annual operating income of $25.4 million and had nine ratemaking efforts in progress at March 31, 2017 seeking $80.8 million of additional annual operating income. Additionally, on January 6, 2017, our Atmos Pipeline - Texas Division filed its statement of intent seeking $55.2 million in additional annual operating income. Our discontinued natural gas marketing results for the six months ended March 31, 2017 primarily include a pre-tax gain of $10.6 million recognized in the first fiscal quarter related to the discontinuance of cash flow hedging for our natural gas marketing commodity contracts and a $2.7 million net gain on sale recognized in January 2017 upon completion of the sale.
Capital expenditures for the first six months of fiscal 2017 were $559.4 million. Approximately 77 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. We expect our capital expenditures to range between $1.1 billion and $1.25 billion for fiscal 2017. We funded our capital expenditure program primarily through operating cash flows of $552.0 million, $125 million in borrowings under our three-year $200 million multi-draw term loan, $49.4 million in proceeds from the issuance of common stock under our at-the-market equity distribution program and net short-term debt borrowings. In addition, we acquired EnLink Pipeline in the first fiscal quarter of 2017 for an all–cash price of $85.0 million, plus estimated working capital. The acquisition of EnLink Pipeline increases the capacity on our APT intrastate pipeline to serve transportation customers in North Texas, which continues to experience significant population growth.
As a result of our sustained financial performance, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 7.1 percent for fiscal 2017.
Distribution Segment
The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states, and storage assets located in Kentucky and Tennessee, which are solely used to support our regulated natural gas distribution operations in those states. These storage assets were previously included in our former nonregulated segment. The primary factors that impact the results of this segment are our ability to earn our authorized rates of return, the cost of natural gas, competitive factors in the energy industry and economic conditions in our service areas.
Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and, ultimately, separating the recovery of our approved margins 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.

37



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 has been approved by state regulatory commissions for approximately 97 percent of our residential and commercial meters 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. The cost of gas is passed through to our customers without markup. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe gross profit, which is defined as operating revenues less purchased gas cost, is a better indicator of our financial performance than revenues. However, gross profit in our Texas and Mississippi service areas includes 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. Although changes in these revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income.
As discussed above, the cost of gas typically does not have a direct impact on our gross profit. However, higher gas costs mean higher bills for our customers, which may adversely impact our accounts receivable collections, resulting in higher bad debt expense and may require us to increase borrowings under our credit facilities resulting in higher interest expense. In addition, 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. However, gas cost risk has been mitigated in recent years through improvements in rate design that allow us to collect from our customers the gas cost portion of our bad debt expense on approximately 75 percent of our residential and commercial margins.
Three Months Ended March 31, 2017 compared with Three Months Ended March 31, 2016
Financial and operational highlights for our distribution segment for the three months ended March 31, 2017 and 2016 are presented below.
 
Three Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Gross profit
$
449,445

 
$
411,456

 
$
37,989

Operating expenses
222,641

 
213,065

 
9,576

Operating income
226,804

 
198,391

 
28,413

Miscellaneous income
1,029

 
38

 
991

Interest charges
16,925

 
18,414

 
(1,489
)
Income before income taxes
210,908

 
180,015

 
30,893

Income tax expense
79,763

 
64,935

 
14,828

Net income
$
131,145

 
$
115,080

 
$
16,065

Consolidated distribution sales volumes — MMcf
97,754

 
116,370

 
(18,616
)
Consolidated distribution transportation volumes — MMcf
39,915

 
40,677

 
(762
)
Total consolidated distribution throughput — MMcf
137,669

 
157,047

 
(19,378
)
Consolidated distribution average cost of gas per Mcf sold
$
5.25

 
$
3.87

 
$
1.38

Income for our distribution segment increased 14 percent, primarily due to a $38.0 million increase in gross profit, which is defined as operating revenues less purchased gas cost, partially offset with a $9.6 million increase in operating expenses. The quarter-over-quarter increase in gross profit primarily reflects:
a $29.5 million net increase in rate adjustments, primarily in our Mid-Tex, Louisiana and Mississippi Divisions.
Customer growth, primarily in our Mid-Tex and Tennessee service areas, which contributed an incremental net $2.5 million.
a $0.6 million net decrease in consumption, primarily due to weather that was 34 percent warmer than normal and 23 percent warmer than the prior-year quarter.

38



The increase in operating expenses, which includes operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, was primarily due to higher levels of employee-related costs and line locate activities, primarily in our Mid-Tex Division, and higher depreciation and property tax expense associated with increased capital investments, partially offset by lower legal expenses.
The following table shows our operating income by distribution division, in order of total rate base, for the three months ended March 31, 2017 and 2016. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
Three Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands)
Mid-Tex
$
90,809

 
$
80,377

 
$
10,432

Kentucky/Mid-States
34,010

 
30,647

 
3,363

Louisiana
30,362

 
24,860

 
5,502

West Texas
21,023

 
20,245

 
778

Mississippi
25,802

 
23,661

 
2,141

Colorado-Kansas
18,331

 
17,986

 
345

Other
6,467

 
615

 
5,852

Total
$
226,804

 
$
198,391

 
$
28,413


Six Months Ended March 31, 2017 compared with Six Months Ended March 31, 2016
Financial and operational highlights for our distribution segment for the six months ended March 31, 2017 and 2016 are presented below.
 
 
 
 
 
 
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Gross profit
$
808,755

 
$
746,908

 
$
61,847

Operating expenses
427,058

 
408,426

 
18,632

Operating income
381,697

 
338,482

 
43,215

Miscellaneous income (expense)
396

 
(439
)
 
835

Interest charges
38,043

 
38,804

 
(761
)
Income before income taxes
344,050

 
299,239

 
44,811

Income tax expense
127,541

 
110,223

 
17,318

Net income
$
216,509

 
$
189,016

 
$
27,493

Consolidated regulated distribution sales volumes — MMcf
172,184

 
188,624

 
(16,440
)
Consolidated regulated distribution transportation volumes — MMcf
76,090

 
72,888

 
3,202

Total consolidated regulated distribution throughput — MMcf
248,274

 
261,512

 
(13,238
)
Consolidated regulated distribution average cost of gas per Mcf sold
$
5.28

 
$
4.05

 
$
1.23

Income for our distribution segment increased 15 percent, primarily due to a $61.8 million increase in gross profit, which is defined as operating revenues less purchased gas cost, partially offset with an $18.6 million increase in operating expenses. The year-over-year increase in gross profit primarily reflects:
a $46.6 million net increase in rate adjustments, primarily in our Mid-Tex, Louisiana and Mississippi Divisions.
Customer growth, primarily in our Mid-Tex and Tennessee service areas, which contributed an incremental $4.2 million.
a $3.8 million increase in revenue-related taxes in our Mid-Tex and West Texas Divisions, offset by a corresponding $2.0 million increase in the related tax expense.
a $2.7 million increase in transportation primarily in our West Texas and Kentucky/Mid-States Divisions.
a $1.0 million net decrease in consumption due to warmer weather compared to the prior-year period.


39



The increase in operating expenses, which includes operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, was primarily due to an increase in employee-related costs, higher levels of line locate and pipeline integrity activities, primarily in our Mid-Tex Division, and higher depreciation and property tax expense associated with increased capital investments.
Net income for the prior-year period includes a $3.3 million income tax benefit for stock awards that vested during fiscal 2016 as a result of adopting new stock-based accounting guidance in the prior year.
The following table shows our operating income by distribution division, in order of total rate base, for the six months ended March 31, 2017 and 2016. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands)
Mid-Tex
$
163,552

 
$
148,296

 
$
15,256

Kentucky/Mid-States
56,748

 
49,785

 
6,963

Louisiana
50,225

 
40,703

 
9,522

West Texas
35,951

 
33,134

 
2,817

Mississippi
37,760

 
36,453

 
1,307

Colorado-Kansas
30,036

 
28,078

 
1,958

Other
7,425

 
2,033

 
5,392

Total
$
381,697

 
$
338,482

 
$
43,215


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 six months of fiscal 2017, we completed 11 regulatory proceedings, resulting in a $25.4 million increase in annual operating income as summarized below:
Rate Action
 
Annual Increase in
Operating Income
 
 
(In thousands)
Annual formula rate mechanisms
 
$
24,637

Rate case filings
 
6

Other rate activity
 
784

 
 
$
25,427


40



Additionally, the following ratemaking efforts seeking $80.8 million in annual operating income were in progress as of March 31, 2017:
Division
 
Rate Action
 
Jurisdiction
 
Operating Income
Requested
 
 
 
 
 
 
(In thousands)
Kentucky/Mid-States
 
Formula Rate Mechanism (1)
 
Tennessee
 
$
2,200

Louisiana
 
Formula Rate Mechanism (2)
 
Trans La
 
4,392

Louisiana
 
Formula Rate Mechanism
 
LGS
 
6,237

Mid-Tex
 
Formula Rate Mechanism
 
Dallas
 
9,976

Mid-Tex
 
Formula Rate Mechanism
 
Mid-Tex Cities
 
43,320

Mid-Tex
 
Infrastructure Mechanism
 
Environs
 
1,568

Mississippi
 
Infrastructure Mechanism
 
Mississippi
 
7,600

West Texas
 
Infrastructure Mechanism (3)
 
Cities of Amarillo,Channing, Lubbock, & Dalhart
 
4,682

West Texas
 
Infrastructure Mechanism
 
Environs
 
872

 
 
 
 
 
 
$
80,847


(1) 
The Tennessee Regulatory Authority (TRA) is currently evaluating a gross filing amount of $6.8 million, of which the TRA issued a final order approving a $4.6 million increase related to the prior year's true-up. The remaining $2.2 million is still under review.
(2) 
The proposed increase for Trans La customers was implemented on April 1, 2017, subject to refund.
(3) 
The 2016 GRIP increase was implemented on April 25, 2017.
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 of our Texas divisions. Additionally, we have specific infrastructure programs in substantially all of our distribution divisions with tariffs in place to permit the investment associated with these programs to have their surcharge rate adjusted annually to recover approved capital costs incurred in a prior test-year period. The following table summarizes our annual formula rate mechanisms by state.
 
 
Annual Formula Rate Mechanisms
State
 
Infrastructure Programs
 
Formula Rate Mechanisms
 
 
 
 
 
Colorado
 
System Safety and Integrity Rider (SSIR)
 
Kansas
 
Gas System Reliability Surcharge (GSRS)
 
Kentucky
 
Pipeline Replacement Program (PRP)
 
Louisiana
 
(1)
 
Rate Stabilization Clause (RSC)
Mississippi
 
System Integrity Rider (SIR)
 
Stable Rate Filing (SRF), Supplemental Growth Filing (SGR)
Tennessee
 
 
Annual Rate Mechanism (ARM)
Texas
 
Gas Reliability Infrastructure Program (GRIP), (1)
 
Dallas Annual Rate Review (DARR), Rate Review Mechanism (RRM)
Virginia
 
Steps to Advance Virginia Energy (SAVE)
 

(1)  
Infrastructure mechanisms in Texas and Louisiana 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.

41



The following annual formula rate mechanisms were approved during the six months ended March 31, 2017.
Division
 
Jurisdiction
 
Test Year
Ended
 
Increase in
Annual
Operating
Income
 
Effective
Date
 
 
 
 
(In thousands)
2017 Filings:
 
 
 
 
 
 
 
 
Kentucky/Mid-States
 
Tennessee
 
05/31/2016
 
$
4,612

 
06/01/2017
West Texas
 
West Texas Cities
 
09/30/2016
 
4,255

 
03/15/2017
Colorado-Kansas
 
Kansas
 
09/30/2016
 
801

 
02/09/2017
Mississippi
 
Mississippi SRF
 
10/31/2017
 
4,390

 
01/12/2017
Mississippi
 
Mississippi SIR
 
10/31/2017
 
3,334

 
01/01/2017
Mississippi
 
Mississippi SGR
 
10/31/2017
 
1,292

 
01/01/2017
Colorado-Kansas
 
Colorado
 
12/31/2017
 
1,350

 
01/01/2017
Kentucky/Mid-States
 
Kentucky
 
09/30/2017
 
4,981

 
10/14/2016
Kentucky/Mid-States
 
Virginia
 
09/30/2017
 
(378
)
 
10/01/2016
Total 2017 Filings
 
 
 
 
 
$
24,637

 
 
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. The following table summarizes the rate cases that were completed during the six months ended March 31, 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Division
 
State
 
Increase in Annual
Operating Income
 
Effective
Date
 
 
(In thousands)
2017 Rate Case Filings:
 
 
 
 
 
 
Kentucky/Mid-States (1)
 
Virginia
 
$
6

 
12/27/2016
Total 2017 Rate Case Filings
 
 
 
$
6

 
 
(1)  
The Virginia State Corporation Commission issued a final order approving a re-basing of the Company's SAVE rates into base rates and a decrease to depreciation expense. The Company had implemented rates on April 1, 2016, subject to refund, of $0.5 million.
Other Ratemaking Activity
The following table summarizes other ratemaking activity during the six months ended March 31, 2017.
 
 
 
 
 
 
 
 
 
Division
 
Jurisdiction
 
Rate Activity
 
Additional
Annual
Operating
Income
 
Effective
Date
 
 
 
 
(In thousands)
2017 Other Rate Activity:
 
 
 
 
 
 
 
 
Colorado-Kansas
 
Kansas
 
 Ad-Valorem(1)
 
$
784

 
2/1/2017
Total 2017 Other Rate Activity
 
 
 
 
 
$
784

 
 
(1) 
The Ad Valorem filing relates to a collection of property taxes in excess of the amount included in our Kansas service area's base rates.


42



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, which were previously included in our former nonregulated segment. 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 Delaware and Val Verde Basins 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. As part of its pipeline operations, APT manages five underground storage reservoirs in Texas.
Our natural gas transmission operations in Louisiana are comprised of a proprietary 21-mile pipeline located in New Orleans, Louisiana 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. They 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 markets that we serve, which may influence the level of throughput we may be able to transport on our pipeline. 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 the 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.
APT annually uses GRIP to recover capital costs incurred in the prior calendar year. However, GRIP also requires a utility to file a statement of intent at least once every five years to review its costs and expenses, including capital costs filed for recovery under GRIP. On January 6, 2017, APT filed its statement of intent seeking $55.2 million in additional annual operating income. APT customarily submits an annual GRIP filing during the second fiscal quarter of each fiscal year. However, APT is precluded from submitting a GRIP filing until a final order has been issued on the statement of intent. Accordingly, APT did not submit its annual GRIP filing during the second quarter of fiscal 2017. The Railroad Commission of Texas has 185 days to issue a final order in this proceeding.
On December 21, 2016, the Louisiana Public Service Commission approved an annual increase of five percent to the demand fee charged by our natural gas transmission pipeline for each of the next 10 years, effective October 1, 2017. This agreement will replace the existing agreement that expires in September 2017.


43



Three Months Ended March 31, 2017 compared with Three Months Ended March 31, 2016
Financial and operational highlights for our pipeline and storage segment for the three months ended March 31, 2017 and 2016 are presented below.
 
Three Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation
$
84,277

 
$
74,653

 
$
9,624

Third-party transportation
22,839

 
20,391

 
2,448

Other
4,131

 
6,184

 
(2,053
)
Gross profit
111,247

 
101,228

 
10,019

Operating expenses
52,879

 
47,963

 
4,916

Operating income
58,368

 
53,265

 
5,103

Miscellaneous expense
(196
)
 
(367
)
 
171

Interest charges
10,019

 
9,145

 
874

Income before income taxes
48,153

 
43,753

 
4,400

Income tax expense
17,286

 
15,830

 
1,456

Net income
$
30,867

 
$
27,923

 
$
2,944

Gross pipeline transportation volumes — MMcf
195,233

 
187,922

 
7,311

Consolidated pipeline transportation volumes — MMcf
131,151

 
115,040

 
16,111

Net income for our pipeline and storage segment increased 11 percent, primarily due to a $10.0 million increase in gross profit, which is defined as operating revenues less purchased gas cost, offset by a $4.9 million increase in operating expenses. The increase in gross profit primarily reflects a $10.8 million increase in rates from the GRIP filings approved in fiscal 2016. Gross pipeline transportation volumes increased four percent, despite weather that was 34 percent warmer than normal and 23 percent warmer than the prior-year quarter primarily due to volumes associated with EnLink Pipeline, which we acquired in the first fiscal quarter of 2017.
Operating expenses, which includes operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, increased $4.9 million, primarily due to higher depreciation expense and property taxes associated with increased capital investments.


44



Six Months Ended March 31, 2017 compared with Six Months Ended March 31, 2016
Financial and operational highlights for our pipeline and storage segment for the six months ended March 31, 2017 and 2016 are presented below.
 
 
 
 
 
 
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Mid-Tex / Affiliate transportation
$
166,760

 
$
144,686

 
$
22,074

Third-party transportation
45,044

 
42,484

 
2,560

Other
9,040

 
13,033

 
(3,993
)
Gross profit
220,844

 
200,203

 
20,641

Operating expenses
107,451

 
94,300

 
13,151

Operating income
113,393

 
105,903

 
7,490

Miscellaneous expense
(557
)
 
(769
)
 
212

Interest charges
19,931

 
18,292

 
1,639

Income before income taxes
92,905

 
86,842

 
6,063

Income tax expense
33,364

 
31,309

 
2,055

Net income
$
59,541

 
$
55,533

 
$
4,008

Gross pipeline transportation volumes — MMcf
382,013

 
367,774

 
14,239

Consolidated pipeline transportation volumes — MMcf
266,127

 
244,199

 
21,928

Net income for our pipeline and storage segment increased seven percent, primarily due to a $20.6 million increase in gross profit, which is defined as operating revenues less purchased gas cost, offset by a $13.2 million increase in operating expenses. The increase in gross profit primarily reflects a $21.5 million increase in rates from the GRIP filings approved in fiscal 2016. Gross pipeline transportation volumes increased four percent, despite weather that was 29 percent warmer than normal and 12 percent warmer than the prior-year period, primarily due to volumes associated with EnLink Pipeline.
Operating expenses, which includes operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, increased $13.2 million, primarily due to increased levels of pipeline maintenance and integrity activities and higher depreciation expense and property taxes associated with increased capital investments.
Natural Gas Marketing Segment
Through December 31, 2016, we were engaged in an unregulated natural gas marketing business, which was conducted by Atmos Energy Marketing (AEM). AEM’s primary business was to aggregate and purchase gas supply, arrange transportation and storage logistics and ultimately deliver gas to customers at competitive prices. Additionally, AEM utilized proprietary and customer–owned transportation and storage assets to provide various services its customers requested. AEM served most of its customers under contracts generally having one to two year terms. As a result, AEM’s margins arose from the types of commercial transactions it had structured with its customers and its ability to identify the lowest cost alternative among the natural gas supplies, transportation and markets to which it had access to serve those customers.
As more fully described in Note 6, effective January 1, 2017, we sold all of the equity interests of AEM to CenterPoint Energy Services, Inc. (CES), a subsidiary of CenterPoint Energy Inc. As a result of the sale, Atmos Energy has fully exited the nonregulated natural gas marketing business. Accordingly, these operations have been reported as discontinued operations.


45



Three Months Ended March 31, 2017 compared with Three Months Ended March 31, 2016
Financial and operating highlights for our natural gas marketing segment for the three months ended March 31, 2017 and 2016 are presented below.
 
Three Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Gross profit
$

 
$
5,260

 
$
(5,260
)
Operating expenses

 
6,900

 
(6,900
)
Operating loss

 
(1,640
)
 
1,640

Miscellaneous income

 
39

 
(39
)
Interest charges

 
396

 
(396
)
Loss before income taxes

 
(1,997
)
 
1,997

Income tax benefit

 
(804
)
 
804

Loss from discontinued operations

 
(1,193
)
 
1,193

Gain on sale of discontinued operations, net of tax
2,716

 

 
2,716

Net income (loss) from discontinued operations
$
2,716

 
$
(1,193
)
 
$
3,909

Gross natural gas marketing delivered gas sales volumes — MMcf

 
102,977

 
(102,977
)
Consolidated natural gas marketing delivered gas sales volumes — MMcf

 
91,366

 
(91,366
)
Net physical position (Bcf)

 
35.2

 
(35.2
)
 
The $3.9 million quarter-over-quarter increase in net income from discontinued operations primarily reflects the recognition of a net $2.7 million gain on sale upon completion of the sale of AEM to CES in January 2017.
Six Months Ended March 31, 2017 compared with Six Months Ended March 31, 2016
Financial and operating highlights for our natural gas marketing segment for the six months ended March 31, 2017 and 2016 are presented below.
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands, unless otherwise noted)
Gross profit
$
25,920

 
$
14,729

 
$
11,191

Operating expenses
7,874

 
12,893

 
(5,019
)
Operating income
18,046

 
1,836

 
16,210

Miscellaneous income
30

 
115

 
(85
)
Interest charges
241

 
1,748

 
(1,507
)
Income before income taxes
17,835

 
203

 
17,632

Income tax expense
6,841

 
81

 
6,760

Income from discontinued operations
10,994

 
122

 
10,872

Gain on sale of discontinued operations, net of tax
2,716

 

 
2,716

Net income from discontinued operations
$
13,710

 
$
122

 
$
13,588

Gross nonregulated delivered gas sales volumes — MMcf
90,223

 
196,173

 
(105,950
)
Consolidated nonregulated delivered gas sales volumes — MMcf
78,646

 
172,960

 
(94,314
)
Net physical position (Bcf)

 
35.2

 
(35.2
)

The $13.6 million year-over-year increase in net income from discontinued operations primarily reflects the recognition of a net $6.6 million noncash gain from unwinding hedge accounting for certain of the natural gas marketing business's financial positions. Due to the anticipated sale of AEM, we determined that the cash flows associated with our natural gas marketing commodity cash flow hedges were no longer probable of occurring; therefore, we discontinued hedge accounting as

46



of December 31, 2016. As a result, we reclassified the gains in accumulated other comprehensive income associated with the commodity contracts into earnings as a reduction of purchased gas costs and recognized a pre-tax gain of $10.6 million during the first fiscal quarter of 2017. Additionally, we recognized a $2.7 million net gain on sale upon completion of the sale of AEM to CES in January 2017.

Liquidity and Capital Resources
The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a variety of sources, including internally generated funds and borrowings under our commercial paper program and bank credit facilities. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we utilize to purchase natural gas on a monthly basis. Finally, from time to time, we raise funds from the public debt and equity capital markets to fund our liquidity needs.
We regularly evaluate our funding strategy and capital structure to ensure that we (i) have sufficient liquidity for our short-term and long-term needs in a cost-effective manner and (ii) maintain a balanced capital structure with a debt-to-capitalization ratio in a target range of 45 to 55 percent. We also evaluate the levels of committed borrowing capacity that we require. We currently have over $1.5 billion of capacity under our short-term facilities.
We plan to continue to fund our growth through the use of operating cash flows, debt and equity securities while maintaining a balanced capital structure. To support our capital market activities, we have a registration statement on file with the SEC that permits us to issue a total of $2.5 billion in common stock and/or debt securities. Under the shelf registration statement, we have filed a prospectus supplement for an at–the-market (ATM) equity distribution program under which we may issue and sell, shares of our common stock, up to an aggregate offering price of $200 million. At March 31, 2017, approximately $2.4 billion of securities remain available for issuance under the shelf registration statement and approximately $50 million of equity remained available for issuance under the ATM program.
The following table presents our capitalization inclusive of short-term debt and the current portion of long-term debt as of March 31, 2017September 30, 2016 and March 31, 2016:
 
 
March 31, 2017
 
September 30, 2016
 
March 31, 2016
 
(In thousands, except percentages)
Short-term debt
$
670,607

 
9.5
%
 
$
829,811

 
12.3
%
 
$
626,929

 
9.8
%
Long-term debt(1)
2,564,620

 
36.3
%
 
2,438,779

 
36.2
%
 
2,438,304

 
38.0
%
Shareholders’ equity
3,834,864

 
54.2
%
 
3,463,059

 
51.5
%
 
3,344,565

 
52.2
%
Total
$
7,070,091

 
100.0
%
 
$
6,731,649

 
100.0
%
 
$
6,409,798

 
100.0
%

(1)
In June 2017, $250 million of long-term debt will mature. We plan to issue new senior notes to replace this maturing debt. We have executed forward starting interest rate swaps to effectively fix the Treasury yield component associated with this anticipated issuance at 3.37%.

47



Cash Flows
Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, prices for our products and 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 six months ended March 31, 2017 and 2016 are presented below.
 
Six Months Ended March 31
 
2017
 
2016
 
Change
 
(In thousands)
Total cash provided by (used in)
 
 
 
 
 
Operating activities
$
552,003

 
$
452,955

 
$
99,048

Investing activities
(516,670
)
 
(533,524
)
 
16,854

Financing activities
(37,464
)
 
99,834

 
(137,298
)
Change in cash and cash equivalents
(2,131
)
 
19,265

 
(21,396
)
Cash and cash equivalents at beginning of period
47,534

 
28,653

 
18,881

Cash and cash equivalents at end of period
$
45,403

 
$
47,918

 
$
(2,515
)
Cash flows from operating activities
Period-over-period changes in our operating cash flows are primarily attributable to changes in net income and working capital changes, particularly within our distribution segment resulting from changes in the price of natural gas and the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries.
For the six months ended March 31, 2017, we generated cash flow of $552.0 million from operating activities compared with $453.0 million for the six months ended March 31, 2016. The $99.0 million increase in operating cash flows reflects the positive cash effects of successful rate case outcomes achieved in fiscal 2016 and changes in working capital.
Cash flows from investing activities
In executing our regulatory strategy, we target our capital spending on regulatory mechanisms that permit us to earn an adequate return timely on our investment without compromising the safety or reliability of our system. Substantially all of our regulated jurisdictions have rate tariffs that provide the opportunity to include in their rate base approved capital costs on a periodic basis without being required to file a rate case.
In recent years, a substantial portion of our cash resources has been used to fund our ongoing construction program, which enables us to enhance the safety and reliability of the systems used to provide natural gas distribution services to our existing customer base, expand our natural gas distribution services into new markets, enhance the integrity of our pipelines and, more recently, expand our intrastate pipeline network. Over the last three fiscal years, approximately 80 percent of our capital spending has been committed to improving the safety and reliability of our system. We anticipate our annual capital spending will be in the range of $1 billion to $1.4 billion through fiscal 2020.
For the six months ended March 31, 2017, cash used for investing activities was $516.7 million compared to $533.5 million in the prior-year period. Capital spending rose a net $23.4 million, or 4.4 percent, as a result of planned increases in our distribution segment to repair and replace vintage pipelines, partially offset by a decrease in spending in our pipeline and storage segment as a result of the substantial completion of an APT project to improve the reliability of gas service to its local distribution company customers. Cash flows from investing activities also include proceeds of $133.6 million received from the sale of AEM, and the $85.7 million purchase price for EnLink Pipeline in the first fiscal quarter of 2017.
Cash flows from financing activities
For the six months ended March 31, 2017, our financing activities used $37.5 million of cash compared with $99.8 million generated in the prior-year period. The $137.3 million increase in cash used for financing is primarily due to net repayments of short-term debt in the current-year period, offset by borrowings under our three year, $200 million multi-draw floating-rate term loan agreement, proceeds received from the issuance of common stock under our ATM program during the first quarter and the return of cash collateral related to our forward-starting interest rate swaps due to an increase in interest rates in the first quarter.

48



The following table summarizes our share issuances for the six months ended March 31, 2017 and 2016.
 
Six Months Ended 
 March 31
 
2017
 
2016
Shares issued:
 
 
 
Direct Stock Purchase Plan
54,366

 
78,652

1998 Long-Term Incentive Plan
426,835

 
458,929

Retirement Savings Plan and Trust
172,932

 
193,106

At-the-Market (ATM) Equity Distribution Program
690,812

 

Total shares issued
1,344,945

 
730,687


The year-over-year increase in the number of shares issued primarily reflects shares issued under the ATM Program in the current year.

Credit Facilities

Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business and the level of our capital expenditures. Changes in the price of natural gas, the amount of natural gas we need to supply to meet our customers’ needs and our capital spending activities could significantly affect our borrowing requirements. However, our short-term borrowings typically reach their highest levels in the winter months.
We finance our short-term borrowing requirements through a combination of a $1.5 billion commercial paper program and three committed revolving credit facilities with third-party lenders that provide a total of approximately $1.5 billion of working capital funding. As of March 31, 2017, the amount available to us under our credit facilities, net of commercial paper and outstanding letters of credit, was $0.9 billion.
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 debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities and funding status. 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 three rating agencies: Standard & Poor’s Corporation (S&P), Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch). As of March 31, 2017, all three rating agencies maintained a stable outlook. Our current debt ratings are all considered investment grade and are as follows:
 
S&P
 
Moody’s
 
Fitch
Senior unsecured long-term debt
A
  
A2
  
A
Short-term debt
A-1
  
P-1
  
F-2
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 three 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, Aaa for Moody’s and AAA for Fitch. The lowest investment grade credit rating is BBB- for S&P, Baa3 for Moody’s and BBB- for Fitch. 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 March 31, 2017. Our debt covenants are described in greater detail in Note 5 to the unaudited condensed consolidated financial statements.

49



Contractual Obligations and Commercial Commitments
Except as noted in Note 9 to the unaudited condensed consolidated financial statements, there were no significant changes in our contractual obligations and commercial commitments during the six months ended March 31, 2017.

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 entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings. Through December 31, 2016, we managed our exposure to the risk of natural gas price changes in our natural gas marketing segment by locking in our gross profit margin through a combination of storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties.
The following table shows the components of the change in fair value of our financial instruments for the three and six months ended March 31, 2017 and 2016:
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Fair value of contracts at beginning of period
$
(121,722
)
 
$
(130,282
)
 
$
(279,543
)
 
$
(153,981
)
Contracts realized/settled
1,793

 
(6,279
)
 
11,756

 
(11
)
Fair value of new contracts
(2,560
)
 
240

 
(1,597
)
 
57

Other changes in value
8,485

 
(67,628
)
 
155,380

 
(50,014
)
Fair value of contracts at end of period
(114,004
)
 
(203,949
)
 
(114,004
)
 
(203,949
)
Netting of cash collateral

 
25,582

 

 
25,582

Cash collateral and fair value of contracts at period end
$
(114,004
)
 
$
(178,367
)
 
$
(114,004
)
 
$
(178,367
)
The fair value of our financial instruments at March 31, 2017 is presented below by time period and fair value source:
 
Fair Value of Contracts at March 31, 2017
 
Maturity in Years
 
 
Source of Fair Value
Less
Than 1
 
1-3
 
4-5
 
Greater
Than 5
 
Total
Fair
Value
 
(In thousands)
Prices actively quoted
$
(19,748
)
 
$
(94,256
)
 
$

 
$

 
$
(114,004
)
Prices based on models and other valuation methods

 

 

 

 

Total Fair Value
$
(19,748
)
 
$
(94,256
)
 
$

 
$

 
$
(114,004
)
Pension and Postretirement Benefits Obligations
For the six months ended March 31, 2017 and 2016, our total net periodic pension and other benefits costs were $23.2 million and $23.0 million. A substantial portion of those costs relating to our natural gas distribution operations are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
Our fiscal 2017 costs were determined using a September 30, 2016 measurement date. As of September 30, 2016, interest and corporate bond rates were lower than the rates as of September 30, 2015. Therefore, we decreased the discount rate used to measure our fiscal 2017 net periodic cost from 4.55 percent to 3.73 percent. We maintained the expected return on plan assets of 7.00 percent in the determination of our fiscal 2017 net periodic pension cost based upon expected market returns for our targeted asset allocation. As a result of the net impact of changes in these and other assumptions, we expect our fiscal 2017 net periodic pension cost to be generally consistent with fiscal 2016.
The amount with which we fund 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, 2017, we are not required to make a minimum contribution to our defined benefit plan during fiscal 2017. However, we will consider whether a voluntary contribution is prudent to maintain certain funding levels.
For the six months ended March 31, 2017 we contributed $6.6 million to our postretirement medical plans. We anticipate contributing a total of between $10 million and $20 million to our postretirement plans during fiscal 2017.

50



The projected pension liability, future funding requirements and the amount of pension expense or income recognized for the plans are subject to change, depending upon the actuarial value of plan assets in the plans and the determination of future benefit obligations as of each subsequent actuarial calculation date. These amounts will be determined by actual investment returns, changes in interest rates, values of assets in the plans and changes in the demographic composition of the participants in the plans.


51




OPERATING STATISTICS AND OTHER INFORMATION
The following tables present certain operating statistics for our distribution and pipeline and storage segments for the three and six-month periods ended March 31, 2017 and 2016.
Distribution Sales and Statistical Data
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
METERS IN SERVICE, end of period
 
 
 
 
 
 
 
Residential
2,929,455

 
2,899,265

 
2,929,455

 
2,899,265

Commercial
269,055

 
267,213

 
269,055

 
267,213

Industrial
1,690

 
1,828

 
1,690

 
1,828

Public authority and other
8,332

 
8,410

 
8,332

 
8,410

Total meters
3,208,532

 
3,176,716

 
3,208,532

 
3,176,716

 
 
 
 
 
 
 
 
INVENTORY STORAGE BALANCE — Bcf
40.0

 
40.2

 
40.0

 
40.2

SALES VOLUMES — MMcf(1)
 
 
 
 
 
 
 
Gas sales volumes
 
 
 
 
 
 
 
Residential
56,931

 
68,758

 
98,431

 
108,927

Commercial
31,739

 
35,854

 
55,475

 
59,272

Industrial
6,708

 
8,897

 
14,140

 
15,890

Public authority and other
2,376

 
2,861

 
4,138

 
4,535

Total gas sales volumes
97,754

 
116,370

 
172,184

 
188,624

Transportation volumes
42,142

 
43,986

 
81,207

 
79,110

Total throughput
139,896

 
160,356

 
253,391

 
267,734

OPERATING REVENUES (000’s)(1)
 
 
 
 
 
 
 
Gas sales revenues
 
 
 
 
 
 
 
Residential
$
609,771

 
$
563,565

 
$
1,091,444

 
$
979,550

Commercial
251,174

 
222,480

 
451,662

 
394,505

Industrial
47,986

 
29,643

 
78,017

 
54,401

Public authority and other
17,607

 
16,560

 
29,716

 
27,093

Total gas sales revenues
926,538

 
832,248

 
1,650,839

 
1,455,549

Transportation revenues
24,307

 
22,623

 
46,788

 
42,105

Other gas revenues
11,696

 
7,256

 
19,570

 
13,916

Total operating revenues
$
962,541

 
$
862,127

 
$
1,717,197

 
$
1,511,570

Average cost of gas per Mcf sold
$
5.25

 
$
3.87

 
$
5.28

 
$
4.05

See footnote following these tables.


52



Pipeline and Storage Operations Sales and Statistical Data
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2017
 
2016
 
2017
 
2016
CUSTOMERS, end of period
 
 
 
 
 
 
 
Industrial
91

 
88

 
91

 
88

Other
226

 
221

 
226

 
221

Total
317

 
309

 
317

 
309

 
 
 
 
 
 
 
 
INVENTORY STORAGE BALANCE — Bcf
0.6

 
1.8

 
0.6

 
1.8

PIPELINE TRANSPORTATION VOLUMES — MMcf(1)
195,233

 
187,922

 
382,013

 
367,774

OPERATING REVENUES (000’s)(1)
$
111,972

 
$
102,153

 
$
221,924

 
$
200,569

Note to preceding tables:
 
(1) 
Sales volumes and revenues 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.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Information regarding our quantitative and qualitative disclosures about market risk are disclosed in Item 7A in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. During the six months ended March 31, 2017, except for the effects of the sale of AEM on our market risk, there were no material changes in our quantitative and qualitative disclosures about market risk.

Item 4.
Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2017 to provide reasonable assurance that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, including a reasonable level of assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
    
We did not make any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter of the fiscal year ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


53



PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
During the six months ended March 31, 2017, there were no material changes in the status of the litigation and other matters that were disclosed in Note 11 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. We continue to believe that the final outcome of such litigation and other matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Item 6.
Exhibits
A list of exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the Exhibits Index, which immediately precedes such exhibits.

54



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
ATMOS ENERGY CORPORATION
               (Registrant)
 
 
 
By: /s/    CHRISTOPHER T. FORSYTHE
 
 
 
Christopher T. Forsythe
Senior Vice President and Chief Financial Officer
(Duly authorized signatory)
Date: May 4, 2017

55



EXHIBITS INDEX
Item 6
 
Exhibit
Number
  
Description
Page Number or
Incorporation by
Reference to
2.1
 
Membership Interest Purchase Agreement by and between Atmos Energy Holdings, Inc. as Seller and CenterPoint Energy Services, Inc. as Buyer, dated as of October 29, 2016
Exhibit 2.1 to Form 8-K dated October 29, 2016 (File No. 1-10042)
10
  
Equity Distribution Agreement, dated as of March 28, 2016, among Atmos Energy Corporation, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC.
Exhibit 1.1 to Form 8-K dated March 28, 2016 (File No. 1-10042)
12
  
Computation of ratio of earnings to fixed charges
 
15
  
Letter regarding unaudited interim financial information
 
31
  
Rule 13a-14(a)/15d-14(a) Certifications
 
32
  
Section 1350 Certifications*
 
101.INS
  
XBRL Instance Document
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase
 
101.LAB
  
XBRL Taxonomy Extension Labels Linkbase
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase
 
 
*
These certifications, which were made pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer and Chief Financial Officer, furnished as Exhibit 32 to this Quarterly Report on Form 10-Q, will not be deemed to be filed with the Commission or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference.

56