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Atmos Energy 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-12
  4. Ex-15
  5. Ex-31
  6. Ex-32
  7. Ex-32
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 December 31, 2011

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 corporate Web site, 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  þ

  Accelerated Filer  ¨   Non-Accelerated Filer  ¨   Smaller Reporting Company   ¨

(Do not check if a smaller reporting company)

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 February 3, 2012.

 

Class

  

Shares Outstanding

No Par Value

   90,016,074

 

 

 


GLOSSARY OF KEY TERMS

 

AEC

   Atmos Energy Corporation

AEH

   Atmos Energy Holdings, Inc.

AEM

   Atmos Energy Marketing, LLC

AOCI

   Accumulated other comprehensive income

APS

   Atmos Pipeline and Storage, LLC

Bcf

   Billion cubic feet

CFTC

   Commodity Futures Trading Commission

FASB

   Financial Accounting Standards Board

Fitch

   Fitch Ratings, Ltd.

GAAP

   Generally Accepted Accounting Principles

GRIP

   Gas Reliability Infrastructure Program

GSRS

   Gas System Reliability Surcharge

ISRS

   Infrastructure System Replacement Surcharge

LPSC

   Louisiana Public Service Commission

Mcf

   Thousand cubic feet

MMcf

   Million cubic feet

MPSC

   Mississippi Public Service Commission

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

 

1


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     December 31,
2011
    September 30,
2011
 
     (Unaudited)        
    

(In thousands, except

share data)

 
ASSETS   

Property, plant and equipment

   $ 6,896,521     $ 6,816,794  

Less accumulated depreciation and amortization

     1,650,308       1,668,876  
  

 

 

   

 

 

 

Net property, plant and equipment

     5,246,213       5,147,918  

Current assets

    

Cash and cash equivalents

     85,160       131,419  

Accounts receivable, net

     489,797       273,303  

Gas stored underground

     325,669       289,760  

Other current assets

     360,615       316,471  
  

 

 

   

 

 

 

Total current assets

     1,261,241       1,010,953  

Goodwill and intangible assets

     740,196       740,207  

Deferred charges and other assets

     387,982       383,793  
  

 

 

   

 

 

 
   $ 7,635,632     $ 7,282,871  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES   

Shareholders’ equity

    

Common stock, no par value (stated at $.005 per share);
200,000,000 shares authorized; issued and outstanding:

    

December 31, 2011 — 90,007,057 shares

    

September 30, 2011 — 90,296,482 shares

   $ 448     $ 451  

Additional paid-in capital

     1,725,050       1,732,935  

Retained earnings

     607,485       570,495  

Accumulated other comprehensive loss

     (65,221     (48,460
  

 

 

   

 

 

 

Shareholders’ equity

     2,267,762       2,255,421  

Long-term debt

     2,206,193       2,206,117  
  

 

 

   

 

 

 

Total capitalization

     4,473,955       4,461,538  

Current liabilities

    

Accounts payable and accrued liabilities

     432,332       291,205  

Other current liabilities

     357,353       367,563  

Short-term debt

     389,985       206,396  

Current maturities of long-term debt

     131       2,434  
  

 

 

   

 

 

 

Total current liabilities

     1,179,801       867,598  

Deferred income taxes

     981,559       960,093  

Regulatory cost of removal obligation

     437,660       428,947  

Deferred credits and other liabilities

     562,657       564,695  
  

 

 

   

 

 

 
   $ 7,635,632     $ 7,282,871  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

2


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
December 31
 
     2011     2010  
    

(Unaudited)

(In thousands, except

per share data)

 

Operating revenues

    

Natural gas distribution segment

   $ 693,292     $ 703,462  

Regulated transmission and storage segment

     56,759       49,007  

Nonregulated segment

     444,176       475,640  

Intersegment eliminations

     (93,054     (94,847
  

 

 

   

 

 

 
     1,101,173       1,133,262  

Purchased gas cost

    

Natural gas distribution segment

     402,207       412,526  

Regulated transmission and storage segment

              

Nonregulated segment

     428,771       450,462  

Intersegment eliminations

     (92,687     (94,450
  

 

 

   

 

 

 
     738,291       768,538  
  

 

 

   

 

 

 

Gross profit

     362,882       364,724  

Operating expenses

    

Operation and maintenance

     116,062       114,490  

Depreciation and amortization

     59,215       54,777  

Taxes, other than income

     43,198       40,168  
  

 

 

   

 

 

 

Total operating expenses

     218,475       209,435  
  

 

 

   

 

 

 

Operating income

     144,407       155,289  

Miscellaneous expense

     (1,875     (726

Interest charges

     35,442       38,895  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     107,090       115,668  

Income tax expense

     41,302       44,568  
  

 

 

   

 

 

 

Income from continuing operations

     65,788       71,100  

Income from discontinued operations, net of tax ($1,559 and $1,890)

     2,719       2,897  
  

 

 

   

 

 

 

Net income

   $ 68,507     $ 73,997  
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 0.72     $ 0.78  

Income per share from discontinued operations

     0.03       0.03  
  

 

 

   

 

 

 

Net income per share — basic

   $ 0.75     $ 0.81  
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 0.72     $ 0.78  

Income per share from discontinued operations

     0.03       0.03  
  

 

 

   

 

 

 

Net income per share — diluted

   $ 0.75     $ 0.81  
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.345     $ 0.340  
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,254       90,082  
  

 

 

   

 

 

 

Diluted

     90,546       90,408  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Three Months Ended
December 31
 
    2011     2010  
   

(Unaudited)

(In thousands)

 

Cash Flows From Operating Activities

   

Net income

  $ 68,507     $ 73,997  

Adjustments to reconcile net income to net cash provided (used) by operating activities:

   

Depreciation and amortization:

   

Charged to depreciation and amortization

    60,733       56,161  

Charged to other accounts

    78       46  

Deferred income taxes

    40,042       43,423  

Other

    4,692       4,712  

Net assets / liabilities from risk management activities

    (8,426     5,304  

Net change in operating assets and liabilities

    (180,917     (137,819
 

 

 

   

 

 

 

Net cash provided (used) by operating activities

    (15,291     45,824  

Cash Flows From Investing Activities

   

Capital expenditures

    (154,394     (123,162

Other, net

    (1,080     (370
 

 

 

   

 

 

 

Net cash used in investing activities

    (155,474     (123,532

Cash Flows From Financing Activities

   

Net increase in short-term debt

    173,905       112,628  

Repayment of long-term debt

    (2,303     (10,000

Cash dividends paid

    (31,517     (31,002

Repurchase of common stock

    (12,535       

Repurchase of equity awards

    (3,120     (3,231

Issuance of common stock

    76       7,253  
 

 

 

   

 

 

 

Net cash provided by financing activities

    124,506       75,648  
 

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (46,259     (2,060

Cash and cash equivalents at beginning of period

    131,419       131,952  
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 85,160     $ 129,892  
 

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

4


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2011

1.    Nature of Business

Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as certain other nonregulated businesses. Our corporate headquarters and shared-services function are located in Dallas, Texas and our customer support centers are located in Amarillo and Waco, Texas.

Through our natural gas distribution business, we deliver natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system. In May 2011, we announced that we had entered into a definitive agreement to sell our natural gas distribution operations in Missouri, Illinois and Iowa, representing approximately 84,000 customers. After the closing of this transaction, which we currently anticipate will occur during fiscal 2012, we will operate in nine states. Our regulated activities also include our regulated pipeline and storage operations, which include the transportation of natural gas to our distribution system and the management of our underground storage facilities. Our regulated businesses are subject to federal and state regulation and/or regulation by local authorities in each of the states in which our natural gas distribution divisions operate.

Our nonregulated businesses operate primarily in the Midwest and Southeast through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc. (AEH). AEH is wholly owned by the Company and based in Houston, Texas. Through AEH, we provide natural gas management and transportation services to municipalities, natural gas distribution companies, including certain divisions of Atmos Energy and third parties. AEH also seeks to maximize, through asset optimization activities, the economic value associated with storage and transportation capacity it owns or controls. Certain of these arrangements are with regulated affiliates of the Company, which have been approved by applicable state regulatory commissions.

We operate the Company through the following three segments:

 

   

the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,

 

   

the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division and

 

   

the nonregulated segment, which includes our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

2.    Unaudited Interim 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, 2011. 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, 2011. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2011 are not indicative of our results of operations for the full 2012 fiscal year, which ends September 30, 2012.

 

5


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We have evaluated subsequent events from the December 31, 2011 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). No 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, 2011. During the three months ended December 31, 2011, two new accounting standards were announced that will become applicable to the Company in future periods. The first standard requires enhanced disclosure of offsetting arrangements for financial instruments and will become effective for annual periods beginning after January 1, 2013 and for interim periods within those annual periods. The second standard defers the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income as prescribed by a previously issued standard, which were initially to be effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards should not have an impact on our financial position, results of operations or cash flows. There were no other significant changes to our accounting policies during the quarter ended December 31, 2011.

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.

 

6


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Significant regulatory assets and liabilities as of December 31, 2011 and September 30, 2011 included the following:

 

    December 31,
2011
     September 30,
2011
 
    (In thousands)  

Regulatory assets:

    

Pension and postretirement benefit costs

  $ 249,882      $ 254,666  

Merger and integration costs, net

    6,120        6,242  

Deferred gas costs

    88,799        33,976  

Regulatory cost of removal asset

    9,875        8,852  

Environmental costs

    288        385  

Rate case costs

    4,493        4,862  

Deferred franchise fees

    365        379  

Other

    3,345        3,534  
 

 

 

    

 

 

 
  $ 363,167      $ 312,896  
 

 

 

    

 

 

 

Regulatory liabilities:

    

Deferred gas costs

  $ 1,871      $ 8,130  

Regulatory cost of removal obligation

    469,685        464,025  

Other

    14,558        14,025  
 

 

 

    

 

 

 
  $ 486,114      $ 486,180  
 

 

 

    

 

 

 

The amounts above do not include regulatory assets and liabilities related to our Missouri, Illinois and Iowa service areas, which are classified as assets held for sale as discussed in Note 5.

During the prior fiscal year, the Railroad Commission of Texas’ Division of Public Safety issued a new rule requiring natural gas distribution companies to develop and implement a risk-based program for the renewal or replacement of distribution facilities, including steel service lines. The rule allows for the deferral of all expenses associated with capital expenditures incurred pursuant to this rule, including the recording of interest on the deferred expenses until the next rate proceeding (rate case or annual rate filing) at which time investment and costs would be recovered through base rates. As of December 31, 2011, we had deferred $0.1 million associated with the requirements of this rule which are recorded as other costs in the regulatory assets table above.

Currently authorized rates do not include a return on certain of our merger and integration costs; however, we recover the amortization of these costs. Merger and integration costs, net, are generally amortized on a straight-line basis over estimated useful lives ranging up to 20 years. Environmental costs have been deferred to be included in future rate filings in accordance with rulings received from applicable state regulatory commissions.

 

7


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Comprehensive income

The following table presents the components of comprehensive income, net of related tax, for the three-month periods ended December 31, 2011 and 2010:

 

     Three Months Ended
December 31
 
     2011     2010  
     (In thousands)  

Net income

   $ 68,507     $ 73,997  

Unrealized holding gains on investments, net of tax expense of $514 and $455 for the three months ended December 31, 2011 and 2010

     901       776  

Amortization and unrealized gain (loss) on treasury lock agreements, net of tax expense (benefit) of $(638) and $18,704 for the three months ended December 31, 2011 and 2010

     (1,087     31,847  

Net unrealized gains (losses) on cash flow hedging transactions, net of tax expense (benefit) of $(10,597) and $6,617 for the three months ended December 31, 2011 and 2010

     (16,575     10,350  
  

 

 

   

 

 

 

Comprehensive income

   $ 51,746     $ 116,970  
  

 

 

   

 

 

 

Accumulated other comprehensive loss, net of tax, as of December 31, 2011 and September 30, 2011 consisted of the following unrealized gains (losses):

 

      December 31,
2011
    September 30,
2011
 
     (In thousands)  
    

Accumulated other comprehensive loss:

    

Unrealized holding gains on investments

   $ 3,459     $ 2,558  

Treasury lock agreements

     (35,244     (34,157

Cash flow hedges

     (33,436     (16,861
  

 

 

   

 

 

 
   $ (65,221   $ (48,460
  

 

 

   

 

 

 

3.    Financial Instruments

We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. The accounting for these financial instruments is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the first quarter there were no changes in our objectives, strategies and accounting for these financial instruments. Currently, we utilize financial instruments in our natural gas distribution and nonregulated segments. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.

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.

Regulated Commodity Risk Management Activities

Although our purchased gas cost adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our customers are exposed to the effects of volatile natural gas prices. We

 

8


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

Our natural gas distribution gas supply department is responsible for executing this segment’s commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2011-2012 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we anticipate hedging approximately 25 percent, or 25.7 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges.

The costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas costs adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas costs when the related costs are recovered through our rates and recognized in revenue in accordance with applicable authoritative accounting guidance. Accordingly, there is no earnings impact on our natural gas distribution segment as a result of the use of financial instruments.

Nonregulated Commodity Risk Management Activities

The primary business in our nonregulated operations is to aggregate and purchase gas supply, arrange transportation and/or storage logistics and ultimately deliver gas to our customers at competitive prices. We utilize proprietary and customer-owned transportation and storage assets to serve these customers, and will seek to maximize the value of this storage capacity through the arbitrage of pricing differences that occur over time by selling financial instruments at advantageous prices to lock in a gross profit margin to enhance our gross profit by maximizing the economic value associated with the storage and transportation capacity we own or control.

As a result of these activities, our nonregulated segment is exposed to risks associated with changes in the market price of natural gas. We manage 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. Future contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.

We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our nonregulated operations associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 59 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our nonregulated segment.

Also, in our nonregulated operations, we use storage swaps and futures to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges.

 

9


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Interest Rate Risk Management Activities

We periodically manage interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings.

As of December 31, 2011, we had three Treasury lock agreements outstanding to fix the Treasury yield component of $350 million 30-year unsecured notes, which we plan to issue to refinance our $250 million unsecured 5.125% Senior Notes that mature in January 2013.

In prior years, we entered into Treasury lock agreements to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes. The gains and losses realized upon settlement of these Treasury locks were recorded as a component of accumulated other comprehensive income (loss) when they were settled and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for the settled Treasury locks extend through fiscal 2041.

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 December 31, 2011, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of December 31, 2011, we had net long/(short) commodity contracts outstanding in the following quantities:

 

Contract Type

  

Hedge

Designation

   Natural
Gas
Distribution
    Nonregulated  
          Quantity (MMcf)  

Commodity contracts

  

Fair Value

            (26,690
  

Cash Flow

            44,428  
  

Not designated

     13,964       46,944  
     

 

 

   

 

 

 
        13,964       64,682  
     

 

 

   

 

 

 

 

10


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Financial Instruments on the Balance Sheet

The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of December 31, 2011 and September 30, 2011. As required by authoritative accounting literature, the fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include $22.1 million and $28.8 million of cash held on deposit as of December 31, 2011 and September 30, 2011 to collateralize certain financial instruments. Therefore, these gross balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not be equal to the amounts presented on our condensed consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 4.

 

   

Balance Sheet Location

  Natural
Gas
Distribution
    Nonregulated     Total  
              (In thousands)        

December 31, 2011:

       

Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets   $      $ 60,222     $ 60,222  

Noncurrent commodity contracts

  Deferred charges and other assets            58       58  

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities            (57,988     (57,988

Noncurrent commodity contracts

  Deferred credits and other liabilities     (69,755     (12,012     (81,767
   

 

 

   

 

 

   

 

 

 

Total

      (69,755     (9,720     (79,475

Not Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets     292       148,669       148,961  

Noncurrent commodity contracts

  Deferred charges and other assets     180       80,916       81,096  
       

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities(1)     (16,196     (166,878     (183,074

Noncurrent commodity contracts

  Deferred credits and other liabilities     (350     (68,250     (68,600
   

 

 

   

 

 

   

 

 

 

Total

      (16,074     (5,543     (21,617
   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

    $ (85,829   $ (15,263   $ (101,092
   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Other current liabilities not designated as hedges in our natural gas distribution segment include $1.7 million related to risk management liabilities that were classified as assets held for sale at December 31, 2011.

 

11


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    

Balance Sheet Location

  Natural
Gas
Distribution
    Nonregulated     Total  
               (In thousands)        

September 30, 2011:

        

Designated As Hedges:

        

Asset Financial Instruments

        

Current commodity contracts

   Other current assets   $      $ 22,396     $ 22,396  

Noncurrent commodity contracts

   Deferred charges and other assets            174       174  

Liability Financial Instruments

        

Current commodity contracts

   Other current liabilities            (31,064     (31,064

Noncurrent commodity contracts

   Deferred credits and other liabilities     (67,527     (7,709     (75,236
    

 

 

   

 

 

   

 

 

 

Total

       (67,527     (16,203     (83,730

Not Designated As Hedges:

        

Asset Financial Instruments

        

Current commodity contracts

   Other current assets     843       67,710       68,553  

Noncurrent commodity contracts

   Deferred charges and other assets     998       22,379       23,377  

Liability Financial Instruments

        

Current commodity contracts

   Other current liabilities(1)     (13,256     (73,865     (87,121

Noncurrent commodity contracts

   Deferred credits and other liabilities     (335     (25,071     (25,406
    

 

 

   

 

 

   

 

 

 

Total

       (11,750     (8,847     (20,597
    

 

 

   

 

 

   

 

 

 

Total Financial Instruments

     $ (79,277   $ (25,050   $ (104,327
    

 

 

   

 

 

   

 

 

 

 

  (1) 

Other current liabilities not designated as hedges in our natural gas distribution segment include $1.3 million related to risk management liabilities that were classified as assets held for sale at September 30, 2011.

Impact of Financial Instruments on the Income Statement

Hedge ineffectiveness for our nonregulated segment is recorded as a component of unrealized gross profit and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended December 31, 2011 and 2010 we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $8.4 million and $13.5 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

 

12


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Fair Value Hedges

The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three months ended December 31, 2011 and 2010 is presented below.

 

     Three Months Ended
December 31
 
     2011     2010  
     (In thousands)  

Commodity contracts

   $ 24,064     $ (1,723

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

     (15,249     15,625  
  

 

 

   

 

 

 

Total impact on revenue

   $ 8,815     $ 13,902  
  

 

 

   

 

 

 

The impact on revenue is comprised of the following:

    

Basis ineffectiveness

   $ 841     $ 921  

Timing ineffectiveness

     7,974       12,981  
  

 

 

   

 

 

 
   $ 8,815     $ 13,902  
  

 

 

   

 

 

 

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. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on revenue.

To the extent that the Company’s natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market. During the three months ended December 31, 2011, we recorded a $1.7 million charge to write down nonqualifying natural gas inventory to market. We did not record a writedown for nonqualifying natural gas inventory for the three months ended December 31, 2010.

 

13


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Cash Flow Hedges

The impact of cash flow hedges on our condensed consolidated income statements for the three months ended December 31, 2011 and 2010 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

 

     Three Months Ended December 31, 2011  
     Natural
Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI into revenue for effective portion of commodity contracts

   $      $ (11,642   $ (11,642

Loss arising from ineffective portion of commodity contracts

            (430     (430
  

 

 

   

 

 

   

 

 

 

Total impact on revenue

            (12,072     (12,072

Loss on settled Treasury lock agreements reclassified from AOCI into interest expense

     (502            (502
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (502   $ (12,072   $ (12,574
  

 

 

   

 

 

   

 

 

 

 

     Three Months Ended December 31, 2010  
     Natural
Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI into revenue for effective portion of commodity contracts

   $      $ (14,253   $ (14,253

Loss arising from ineffective portion of commodity contracts

            (444     (444
  

 

 

   

 

 

   

 

 

 

Total impact on revenue

            (14,697     (14,697

Loss on settled Treasury lock agreements reclassified from AOCI into interest expense

     (670            (670
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (670   $ (14,697   $ (15,367
  

 

 

   

 

 

   

 

 

 

 

14


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three months ended December 31, 2011 and 2010. 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
December 31
 
     2011     2010  
     (In thousands)  

Increase (decrease) in fair value:

    

Treasury lock agreements

   $ (1,403   $ 31,425  

Forward commodity contracts

     (23,678     1,657  

Recognition of losses in earnings due to settlements:

    

Treasury lock agreements

     316       422  

Forward commodity contracts

     7,103       8,693  
  

 

 

   

 

 

 

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

   $ (17,662   $ 42,197  
  

 

 

   

 

 

 

 

 

  (1) 

Utilizing an income tax rate ranging from 37 percent to 39 percent comprised of the effective rates in each taxing jurisdiction.

Deferred gains (losses) recorded in accumulated other comprehensive income (AOCI) associated with our Treasury lock agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of December 31, 2011. However, the table below does not include the expected recognition in earnings of our outstanding Treasury lock agreements as those instruments have not yet settled.

 

     Treasury
Lock
Agreements
    Commodity
Contracts
    Total  
     (In thousands)  

Next twelve months

   $ (1,266   $ (25,900   $ (27,166

Thereafter

     9,967       (7,536     2,431  
  

 

 

   

 

 

   

 

 

 

Total(1)

   $ 8,701     $ (33,436   $ (24,735
  

 

 

   

 

 

   

 

 

 

 

 

  (1) 

Utilizing an income tax rate ranging from 37 percent to 39 percent comprised of the effective rates in each taxing jurisdiction.

Financial Instruments Not Designated as Hedges

The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statement for the three months ended December 31, 2011 and 2010 was an increase (decrease) in revenue of ($2.2) million and $4.2 million. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact on our natural gas distribution segment as a result of the use of

 

15


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

4.    Fair Value Measurements

We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the first quarter of fiscal 2012, there were no changes in these methods.

Fair value measurements also apply to the valuation of our pension and post-retirement 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 9 to the financial statements in our Annual Report on Form 10-K for the fiscal year ending September 30, 2011.

 

16


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Quantitative Disclosures

Financial Instruments

The classification of our fair value measurements requires judgment regarding the degree to which market data are 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 table summarizes, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 and September 30, 2011. As required under authoritative accounting literature, 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(2)
    December 31,
2011
 
     (In thousands)  

Assets:

           

Financial instruments

           

Natural gas distribution segment

   $      $ 472      $       —       $      $ 472  

Nonregulated segment

     33,768        256,098                (272,938     16,928  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total financial instruments

     33,768        256,570                (272,938     17,400  
           

Hedged portion of gas stored underground

     77,551                              77,551  

Available-for-sale securities

           

Money market funds

            1,151                       1,151  

Registered investment companies

     38,008                              38,008  

Bonds

            18,346                       18,346  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     38,008        19,497                       57,505  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 149,327      $ 276,067      $       $ (272,938   $ 152,456  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

           

Financial instruments

           

Natural gas distribution segment

   $      $ 86,301      $       $      $ 86,301  

Nonregulated segment

     51,117        254,012                (295,022     10,107  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 51,117      $ 340,313      $       $ (295,022   $ 96,408  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

17


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Quoted
Prices in
Active
Markets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)(1)
    Significant
Other
Unobservable
Inputs
(Level 3)
     Netting and
Cash
Collateral(3)
    September 30,
2011
 
     (In thousands)  

Assets:

           

Financial instruments

           

Natural gas distribution segment

   $      $ 1,841      $       —       $      $ 1,841  

Nonregulated segment

     15,262        97,396                (95,156 )       17,502  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total financial instruments

     15,262        99,237                (95,156 )       19,343  
           

Hedged portion of gas stored underground

     47,940                               47,940  

Available-for-sale securities

           

Money market funds

            1,823                       1,823  

Registered investment companies

     36,444                              36,444  

Bonds

            14,366                       14,366  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     36,444        16,189                       52,633  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 99,646      $ 115,426      $       $ (95,156   $ 119,916  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

           

Financial instruments

           

Natural gas distribution segment

   $      $ 81,118      $       $      $ 81,118  

Nonregulated segment

     22,091        115,617                (123,943     13,765  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 22,091      $ 196,735      $       $ (123,943   $ 94,883  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

  (1) 

Our Level 2 measurements primarily consist of non-exchange-traded financial instruments, such as over-the-counter options and swaps where market data for pricing is observable. The fair values for these assets and liabilities are determined 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. This level also includes municipal and corporate bonds where market data for pricing is observable.

 

  (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. In addition, as of December 31, 2011, we had $22.1 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $11.4 million was used to offset current risk management liabilities under master netting arrangements and the remaining $10.7 million is classified as current risk management assets.

 

  (3) 

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. In addition, as of September 30, 2011 we had $28.8 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $12.4 million was used to offset current risk management liabilities under master netting arrangements and the remaining $16.4 million is classified as current risk management assets.

 

18


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Available-for-sale securities are comprised of the following:

 

     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair
Value
 
     (In thousands)  

As of December 31, 2011

          

Domestic equity mutual funds

   $ 27,881      $ 5,447      $      $ 33,328  

Foreign equity mutual funds

     4,659        305        (284     4,680  

Bonds

     18,323        45        (22     18,346  

Money market funds

     1,151                       1,151  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 52,014      $ 5,797      $ (306   $ 57,505  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2011

          

Domestic equity mutual funds

   $ 27,748      $ 4,074      $      $ 31,822  

Foreign equity mutual funds

     4,597        267        (242     4,622  

Bonds

     14,390        10        (34     14,366  

Money market funds

     1,823                       1,823  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 48,558      $ 4,351      $ (276   $ 52,633  
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2011 and September 30, 2011, our available-for-sale securities included $39.2 million and $38.3 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At December 31, 2011 we maintained investments in bonds that have contractual maturity dates ranging from January 2012 through July 2016.

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.

We maintained an investment in one foreign equity mutual fund with a fair value of $2.2 million in an unrealized loss position of $0.3 million as of December 31, 2011. This fund has been in an unrealized loss position for less than twelve months. Because this fund is only used to fund the supplemental plans, we evaluate investment performance over a long-term horizon. Based upon our intent and ability to hold this investment, our ability to direct the source of the payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that this fund continues to receive good ratings from mutual fund rating companies, we do not consider this impairment to be other than temporary as of December 31, 2011. We also maintained several bonds with a cumulative fair value of $6.5 million in an unrealized loss position of less than $0.1 million as of December 31, 2011. These bonds have been in an unrealized loss position for less than twelve months. Based upon our intent and ability to hold these investments, our ability to direct the source of payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that these bonds are investment grade, we do not consider this impairment to be other than temporary as of December 31, 2011.

 

19


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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. The following table presents the carrying value and fair value of our debt as of December 31, 2011:

 

     December 31,
2011
 
     (In thousands)  

Carrying Amount

   $ 2,210,262  

Fair Value

   $ 2,572,094  

5.    Discontinued Operations

On May 12, 2011, we entered into a definitive agreement to sell substantially all of our natural gas distribution assets located in Missouri, Illinois and Iowa to Liberty Energy (Midstates) Corporation, an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $124 million. The agreement contains terms and conditions customary for transactions of this type, including typical adjustments to the purchase price at closing, if applicable. The closing of the transaction is subject to the satisfaction of customary conditions including the receipt of applicable regulatory approvals, which we currently anticipate will occur during fiscal 2012.

As required under generally accepted accounting principles, the operating results of our Missouri, Illinois and Iowa operations have been aggregated and reported on the consolidated statements of income as income from discontinued operations, net of income tax. Expenses related to general corporate overhead and interest expense allocated to their operations are not included in discontinued operations.

The tables below set forth selected financial and operational information related to net assets and operating results related to discontinued operations. Additionally, assets and liabilities related to our Missouri, Illinois and Iowa operations are classified as “held for sale” in other current assets and liabilities in our consolidated balance sheets at December 31, 2011 and September 30, 2011. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported net income.

The following table presents statement of income data related to discontinued operations.

 

     Three Months Ended
December 31
 
     2011     2010  
     (In thousands)  

Operating revenues

   $ 23,451     $ 23,733  

Purchased gas cost

     14,951       14,897  
  

 

 

   

 

 

 

Gross profit

     8,500       8,836  

Operating expenses

     4,174       4,016  
  

 

 

   

 

 

 

Operating income

     4,326       4,820  

Other nonoperating expense

     (48     (33
  

 

 

   

 

 

 

Income from discontinued operations before income taxes

     4,278       4,787  

Income tax expense

     1,559       1,890  
  

 

 

   

 

 

 

Net income

   $ 2,719     $ 2,897  
  

 

 

   

 

 

 

 

20


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table presents balance sheet data related to assets held for sale.

 

     December 31,
2011
     September 30,
2011
 
     (In thousands)  

Net plant, property & equipment

   $ 127,227      $ 127,577  

Gas stored underground

     14,257        11,931  

Other current assets

     3,773        786  

Deferred charges and other assets

     62        277  
  

 

 

    

 

 

 

Assets held for sale

   $ 145,319      $ 140,571  
  

 

 

    

 

 

 

Accounts payable and accrued liabilities

   $ 9,945      $ 1,917  

Other current liabilities

     5,459        4,877  

Regulatory cost of removal obligation

     10,367        10,498  

Deferred credits and other liabilities

     1,175        1,153  
  

 

 

    

 

 

 

Liabilities held for sale

   $ 26,946      $ 18,445  
  

 

 

    

 

 

 

6.    Debt

The nature and terms of our debt instruments are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes in the terms of our debt instruments during the three months ended December 31, 2011.

Long-term debt

Long-term debt at December 31, 2011 and September 30, 2011 consisted of the following:

 

     December 31,
2011
    September 30,
2011
 
     (In thousands)  

Unsecured 10% Notes, redeemed December 2011

   $      $ 2,303  

Unsecured 5.125% Senior Notes, due January 2013

     250,000       250,000  

Unsecured 4.95% Senior Notes, due 2014

     500,000       500,000  

Unsecured 6.35% Senior Notes, due 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  

Medium term notes

    

Series A, 1995-1, 6.67%, due 2025

     10,000       10,000  

Unsecured 6.75% Debentures, due 2028

     150,000       150,000  

Rental property term note due in installments through 2013

     262       262  
  

 

 

   

 

 

 

Total long-term debt

     2,210,262       2,212,565  

Less:

    

Original issue discount on unsecured senior notes and debentures

     (3,938     (4,014

Current maturities

     (131     (2,434
  

 

 

   

 

 

 
   $ 2,206,193     $ 2,206,117  
  

 

 

   

 

 

 

 

21


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our unsecured 10% notes were paid on their maturity date on December 31, 2011, and were not replaced.

Short-term debt

Our short-term borrowing requirements are affected 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 finance our short-term borrowing requirements through a combination of a $750 million commercial paper program and four committed revolving credit facilities with third-party lenders. As a result, we have approximately $985 million of working capital funding. Additionally, our $750 million unsecured credit facility has an accordion feature which, if utilized, would increase borrowing capacity to $1.0 billion. At December 31, 2011 and September 30, 2011, there was $390.0 million and $206.4 million outstanding under our commercial paper program. We also use intercompany credit facilities to supplement the funding provided by these third-party committed credit facilities.

Regulated Operations

We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $785 million of working capital funding, including a five-year $750 million unsecured facility, a $25 million unsecured facility and a $10 million revolving credit facility, which is used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $4.2 million at December 31, 2011.

In addition to these third-party facilities, our regulated operations had a $350 million intercompany revolving credit facility with AEH. This facility was replaced on January 1, 2012 with a $500 million intercompany revolving credit facility with AEH. This facility bears interest at the lower of (i) the Eurodollar rate under the five-year revolving credit facility or (ii) the lowest rate outstanding under the commercial paper program. Applicable state regulatory commissions have approved our use of this facility through December 31, 2012.

Nonregulated Operations

Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH, has a three-year $200 million committed revolving credit facility, expiring in December 2013, with a syndicate of third-party lenders with an accordion feature that could increase AEM’s borrowing capacity to $500 million. The credit facility is primarily used to issue letters of credit and, on a less frequent basis, to borrow funds for gas purchases and other working capital needs. This facility is collateralized by substantially all of the assets of AEM and is guaranteed by AEH. Due to outstanding letters of credit and various covenants, including covenants based on working capital, the amount available to AEM under this credit facility was $110.0 million at December 31, 2011.

To supplement borrowings under this facility, AEH had a $350 million intercompany demand credit facility with AEC. This facility was replaced on January 1, 2012 with a $500 million intercompany facility with AEC, which bears interest at a rate equal to the greater of (i) the one-month LIBOR rate plus 3.00 percent or (ii) the rate for AEM’s offshore borrowings under its committed credit facility plus 0.75 percent. Applicable state regulatory commissions have approved our use of this facility through December 31, 2012.

Shelf Registration

We have an effective shelf registration statement with the Securities and Exchange Commission (SEC) that permits us to issue a total of $1.3 billion in common stock and/or debt securities. The shelf registration statement

 

22


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

has been approved by all requisite state regulatory commissions. At December 31, 2011, $900 million remains available for issuance. Of this amount, $550 million is available for the issuance of debt securities and $350 million remains available for the issuance of equity securities under the shelf until March 2013.

Debt Covenants

The availability of funds under our regulated credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At December 31, 2011, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 56 percent. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.

AEM is required by the financial covenants in its facility to maintain a ratio of total liabilities to tangible net worth that does not exceed a maximum of 5 to 1. At December 31, 2011, AEM’s ratio of total liabilities to tangible net worth, as defined, was 1.39 to 1. Additionally, AEM must maintain minimum levels of net working capital and net worth ranging from $20 million to $40 million. As defined in the financial covenants, at December 31, 2011, AEM’s net working capital was $118.2 million and its tangible net worth was $147.8 million.

In addition to these financial covenants, our credit facilities and 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 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.

Further, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate.

Finally, AEM’s credit agreement contains a provision that would limit the amount of credit available if Atmos Energy were downgraded below an S&P rating of BBB and a Moody’s rating of Baa2. We have no other triggering events in our debt instruments that are tied to changes in specified credit ratings or stock price, nor have we entered into any transactions that would require us to issue equity, based on our credit rating or other triggering events.

We were in compliance with all of our debt covenants as of December 31, 2011. 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.

 

23


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

7.    Earnings Per Share

Since we have non-vested share-based payments with a nonforfeitable right to dividends or dividend equivalents (referred to as participating securities) we are required to use the two-class method of computing earnings per share. The Company’s non-vested restricted stock and restricted stock units, for which vesting is predicated solely on the passage of time granted under the 1998 Long-Term Incentive Plan, are considered to be participating securities. 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 months ended December 31, 2011 and 2010 are calculated as follows:

 

     Three Months Ended
December 31
 
     2011      2010  
     (In thousands, except
per share amounts)
 

Basic Earnings Per Share from continuing operations

     

Income from continuing operations

   $ 65,788      $ 71,100  

Less: Income from continuing operations allocated to participating securities

     685        748  
  

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 65,103      $ 70,352  
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,254        90,082  
  

 

 

    

 

 

 

Income from continuing operations per share — Basic

   $ 0.72      $ 0.78  
  

 

 

    

 

 

 

Basic Earnings Per Share from discontinued operations

     

Income from discontinued operations

   $ 2,719      $ 2,897  

Less: Income from discontinued operations allocated to participating securities

     28        31  
  

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 2,691      $ 2,866  
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,254        90,082  
  

 

 

    

 

 

 

Income from discontinued operations per share — Basic

   $ 0.03      $ 0.03  
  

 

 

    

 

 

 

Net income per share — Basic

   $ 0.75      $ 0.81  
  

 

 

    

 

 

 

Diluted Earnings Per Share from continuing operations

     

Income from continuing operations available to common shareholders

   $ 65,103      $ 70,352  

Effect of dilutive stock options and other shares

     1        2  
  

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 65,104      $ 70,354  
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,254        90,082  

Additional dilutive stock options and other shares

     292        326  
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,546        90,408  
  

 

 

    

 

 

 

Income from continuing operations per share — Diluted

   $ 0.72      $ 0.78  
  

 

 

    

 

 

 

 

24


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
December 31
 
     2011      2010  
     (In thousands, except
per share amounts)
 

Diluted Earnings Per Share from discontinued operations

     

Income from discontinued operations available to common shareholders

   $ 2,691      $ 2,866  

Effect of dilutive stock options and other shares

               
  

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 2,691      $ 2,866  
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,254        90,082  

Additional dilutive stock options and other shares

     292        326  
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,546        90,408  
  

 

 

    

 

 

 

Income from discontinued operations per share — Diluted

   $ 0.03      $ 0.03  
  

 

 

    

 

 

 

Net income per share — Diluted

   $ 0.75      $ 0.81  
  

 

 

    

 

 

 

There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the three months ended December 31, 2011 and 2010 as their exercise price was less than the average market price of the common stock during that period.

Share Repurchase Program

On September 28, 2011, the Board of Directors approved a new program authorizing the repurchase of up to five million shares of common stock over a five-year period. Although the program is authorized for a five-year period, it may be terminated or limited at any time. Shares may be repurchased in the open market or in privately negotiated transactions in amounts the company deems appropriate. The program is primarily intended to minimize the dilutive effect of equity grants under various benefit related incentive compensation plans of the company. As of December 31, 2011, 387,991 shares had been repurchased for an aggregate value of $12.5 million.

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 months ended December 31, 2011 and 2010 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 December 31  
     Pension Benefits     Other Benefits  
     2011     2010     2011     2010  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 4,298     $ 4,380     $ 4,088     $ 3,601  

Interest cost

     6,677       6,924       3,465       3,203  

Expected return on assets

     (5,368     (5,963     (652     (682

Amortization of transition asset

                   378       378  

Amortization of prior service cost

     (35     (112     (362     (362

Amortization of actuarial loss

     4,142       3,494       662       87  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 9,714     $ 8,723     $ 7,579     $ 6,225  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The assumptions used to develop our net periodic pension cost for the three months ended December 31, 2011 and 2010 are as follows:

 

     Pension Benefits     Other Benefits  
       2011         2010         2011         2010    

Discount rate

     5.05     5.39     5.05     5.39

Rate of compensation increase

     3.50     4.00     N/A        N/A   

Expected return on plan assets

     7.75     8.25     4.70     5.00

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 plans as of January 1, 2012. Based upon this valuation, we expect we will be required to contribute between $25 million and $30 million to our pension plans by September 15, 2012.

We contributed $4.8 million to our other post-retirement benefit plans during the three months ended December 31, 2011. We expect to contribute between $20 million and $25 million to these plans during fiscal 2012.

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 13 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, except as noted below, there were no material changes in the status of such litigation and environmental-related matters or claims during the three months ended December 31, 2011.

Since April 2009, Atmos Energy and two subsidiaries of AEH, AEM and Atmos Gathering Company, LLC (AGC) (collectively, the Atmos Entities), have been involved in a lawsuit filed in the Circuit Court of Edmonson County, Kentucky, Billy Joe Honeycutt et al. vs. Atmos Energy Corporation, et al., which is related to our Park City Gathering Project. The dispute which gave rise to the litigation involves the amount of royalties due from a third party producer to landowners (who own the mineral rights) for natural gas produced from the landowners’ properties. The third party producer was operating pursuant to leases between the landowners and certain investors/working interest owners. The third party producer filed a petition in bankruptcy, which was subsequently dismissed due to the lack of meaningful assets to reorganize or liquidate.

Although certain Atmos Energy companies entered into contracts with the third party producer to gather, treat and ultimately sell natural gas produced from the landowners’ properties, no Atmos Energy company had a contractual relationship with the landowners or the investors/working interest owners. After the lawsuit was filed, the landowners were successful in terminating for non-payment of royalties the leases related to the production of natural gas from their properties. Subsequent to termination, the investors/working interest owners under such leases filed additional claims against us for the termination of the leases.

During the trial, the landowners and the investors/working interest owners requested an award of compensatory damages plus punitive damages against us. On December 17, 2010, the jury returned a verdict in favor of the landowners and investor/working interest owners and awarded compensatory damages of $3.8 million and punitive damages of $27.5 million payable by Atmos Energy and the two AEH subsidiaries.

A hearing was held on February 28, 2011 to hear a number of motions, including a motion to dismiss the jury verdict and a motion for a new trial. The motions to dismiss the jury verdict and for a new trial were denied.

 

26


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

However, the total punitive damages award was reduced from $27.5 million to $24.7 million. On October 17, 2011, we filed our brief of appellants with the Kentucky Court of Appeals, appealing the verdict of the trial court. The appellees in this case subsequently filed their reply brief with the Court of Appeals on January 16, 2012, with our reply brief due to be filed with the Court by March 16, 2012.

In addition, in a related development, on July 12, 2011, the Atmos Entities filed a lawsuit in the United States District Court, Western District of Kentucky, Atmos Energy Corporation et al.vs. Resource Energy Technologies, LLC and Robert Thorpe and John F. Charles, against the third party producer and its affiliates to recover all costs, including attorneys’ fees, incurred by the Atmos Entities, which are associated with the defense and appeal of the case discussed above as well as for all damages awarded to the plaintiffs in such case against the Atmos Entities. The total amount of damages being claimed in the lawsuit is “open-ended” since the appellate process and related costs are ongoing. This lawsuit is based upon the indemnification provisions agreed to by the third party producer in favor of Atmos Gathering that are contained in an agreement entered into between Atmos Gathering and the third party producer in May 2009. The defendants filed a motion to dismiss the case on August 25, 2011, with Atmos Energy filing a brief in response to such motion on September 19, 2011. As of this date, the Court has not yet ruled on the motion.

We have accrued what we believe is an adequate amount for the anticipated resolution of this matter; however, the amount accrued is less than the amount of the verdict. The Company does not have insurance coverage that could mitigate any losses that may arise from the resolution of this matter. However, we continue to believe that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows.

We are a party to other litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.

Purchase Commitments

AEH has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At December 31, 2011, AEH was committed to purchase 103.1 Bcf within one year, 35.3 Bcf within one to three years and 0.3 Bcf after three years under indexed contracts. AEH is committed to purchase 3.4 Bcf within one year and 0.2 Bcf within one to three years under fixed price contracts with prices ranging from $2.82 to $6.36 per Mcf. Purchases under these contracts totaled $312.1 million and $334.2 million for the three months ended December 31, 2011 and 2010.

Our natural gas 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.

 

27


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our Mid-Tex Division maintains 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 market and fixed prices. The estimated commitments under these contracts as of December 31, 2011 are as follows (in thousands):

 

2012

   $ 149,788  

2013

     82,778  

2014

     68,124  

Thereafter

       
  

 

 

 
   $ 300,690  
  

 

 

 

Our nonregulated segment maintains long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes to the estimated storage and transportation fees for the quarter ended December 31, 2011.

Regulatory Matters

As previously described in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, in December 2007, the Company received data requests from the Division of Investigations of the Office of Enforcement of the Federal Energy Regulatory Commission (the “Commission”) in connection with its investigation into possible violations of the Commission’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines. Since that time, we have fully cooperated with the Commission during this investigation.

The Company and the Commission entered into a stipulation and consent agreement, which was approved by the Commission on December 9, 2011, thereby resolving this investigation. The Commission’s findings of violations were limited to the nonregulated operations of the Company. Under the terms of the agreement, the Company has paid to the United States Treasury a total civil penalty of approximately $6.4 million and to energy assistance programs approximately $5.6 million in disgorgement of unjust profits plus interest for violations identified during the investigation. The resolution of this matter did not have a material adverse impact on the Company’s financial position, results of operations or cash flows and none of the payments were charged to any of the Company’s customers. In addition, none of the services the Company provides to any of its regulated or nonregulated customers were affected by the agreement.

As discussed in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, in 2010, our Mid-Tex Division agreed to install 100,000 steel service line replacements by September 30, 2012. As of December 31, 2011, we had replaced 60,184 lines and are on schedule for completion in September 2012. Under the terms of the agreement, special rate recovery of the associated return, depreciation and taxes is approved for lines replaced between October 1, 2010 and September 30, 2012. Since October 1, 2010, we have spent $64.0 million on steel service line replacements.

In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act calls for various regulatory agencies, including the SEC and the Commodities Futures Trading Commission (CFTC) to establish rules and regulations for implementation of many of the provisions of the Dodd-Frank Act. Although the CFTC and SEC have issued a number of rules and regulations, we expect additional rules and regulations to be issued, which should provide additional clarity regarding the extent of the impact of this legislation on us. The costs of participating in financial markets for hedging certain risks inherent in our business may be increased as a result of the new legislation and related rules and regulations. We also anticipate additional reporting and disclosure obligations will be imposed.

 

28


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As of December 31, 2011, annual rate filing mechanisms were in progress in our Louisiana and Mississippi service areas and there was one other ratemaking activity in progress in our Kansas service area. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.

10.    Concentration of Credit Risk

Information regarding our concentration of credit risk is disclosed in Note 15 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the three months ended December 31, 2011, there were no material changes in our concentration of credit risk.

11.    Segment Information

As discussed in Note 1 above, we operate the Company through the following three segments:

 

   

The natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,

 

   

The regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division and

 

   

The nonregulated segment, which is comprised of our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

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 natural gas distribution segment operations are geographically dispersed, they are reported as a single segment as each natural gas distribution division has similar economic characteristics. 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, 2011. We evaluate performance based on net income or loss of the respective operating units.

 

29


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Income statements for the three month periods ended December 31, 2011 and 2010 by segment are presented in the following tables:

 

     Three Months Ended December 31, 2011  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated      Eliminations     Consolidated  
     (In thousands)  

Operating revenues from external parties

   $ 693,068     $ 19,440     $ 388,665      $     $ 1,101,173  

Intersegment revenues

     224       37,319       55,511        (93,054       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     693,292       56,759       444,176        (93,054     1,101,173  

Purchased gas cost

     402,207              428,771        (92,687     738,291  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     291,085       56,759       15,405        (367     362,882  

Operating expenses

           

Operation and maintenance

     93,414       16,965       6,051        (368     116,062  

Depreciation and amortization

     50,831       7,651       733               59,215  

Taxes, other than income

     38,479       3,784       935               43,198  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     182,724       28,400       7,719        (368     218,475  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     108,361       28,359       7,686        1       144,407  

Miscellaneous income (expense)

     (1,756     (280     36        125       (1,875

Interest charges

     27,855       7,209       252        126       35,442  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     78,750       20,870       7,470               107,090  

Income tax expense

     30,845       7,456       3,001               41,302  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     47,905       13,414       4,469               65,788  

Income from discontinued operations, net of tax

     2,719                             2,719  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 50,624     $ 13,414     $ 4,469      $      $ 68,507  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures

   $ 128,733     $ 24,120     $ 1,541      $      $ 154,394  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

30


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended December 31, 2010  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated      Eliminations     Consolidated  
     (In thousands)  

Operating revenues from external parties

   $ 703,261     $ 21,233     $ 408,768      $     $ 1,133,262  

Intersegment revenues

     201       27,774       66,872        (94,847       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     703,462       49,007       475,640        (94,847     1,133,262  

Purchased gas cost

     412,526              450,462        (94,450     768,538  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     290,936       49,007       25,178        (397     364,724  

Operating expenses

           

Operation and maintenance

     89,229       15,574       10,084        (397     114,490  

Depreciation and amortization

     47,894       5,799       1,084               54,777  

Taxes, other than income

     34,448       3,553       2,167               40,168  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     171,571       24,926       13,335        (397     209,435  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     119,365       24,081       11,843               155,289  

Miscellaneous income (expense)

     (698     (282     290        (36     (726

Interest charges

     29,697       8,064       1,170        (36     38,895  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     88,970       15,735       10,963               115,668  

Income tax expense

     34,549       5,633       4,386               44,568  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     54,421       10,102       6,577               71,100  

Income from discontinued operations, net of tax

     2,897                             2,897  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 57,318     $ 10,102     $ 6,577      $      $ 73,997  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures

   $ 109,499     $ 12,739     $ 924      $      $ 123,162  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

31


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Balance sheet information at December 31, 2011 and September 30, 2011 by segment is presented in the following tables.

 

    December 31, 2011  
    Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated     Eliminations     Consolidated  
    (In thousands)  

ASSETS

         

Property, plant and equipment, net

  $ 4,328,612     $ 855,245     $ 62,356     $      $ 5,246,213  

Investment in subsidiaries

    672,300              (2,096     (670,204       

Current assets

         

Cash and cash equivalents

    63,031              22,129              85,160  

Assets from risk management activities

    292              10,732              11,024  

Other current assets

    912,185       13,418       453,571       (214,117     1,165,057  

Intercompany receivables

    567,587                     (567,587       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,543,095       13,418       486,432       (781,704     1,261,241  

Intangible assets

                  196              196  

Goodwill

    572,908       132,381       34,711              740,000  

Noncurrent assets from risk management activities

    180              6,196              6,376  

Deferred charges and other assets

    359,860       11,297       10,449              381,606  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,476,955     $ 1,012,341     $ 598,244     $ (1,451,908   $ 7,635,632  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

         

Shareholders’ equity

  $ 2,267,762     $ 278,515     $ 393,785     $ (672,300   $ 2,267,762  

Long-term debt

    2,206,062              131              2,206,193  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

    4,473,824       278,515       393,916       (672,300     4,473,955  

Current liabilities

         

Current maturities of long-term debt

                  131              131  

Short-term debt

    583,980                     (193,995     389,985  

Liabilities from risk management activities

    14,521              4,623              19,144  

Other current liabilities

    606,357       11,929       170,281       (18,026     770,541  

Intercompany payables

           531,126       36,461       (567,587       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,204,858       543,055       211,496       (779,608     1,179,801  

Deferred income taxes

    813,423       181,641       (13,505            981,559  

Noncurrent liabilities from risk management activities

    70,105              5,484              75,589  

Regulatory cost of removal obligation

    437,660                            437,660  

Deferred credits and other liabilities

    477,085       9,130       853              487,068  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,476,955     $ 1,012,341     $ 598,244     $ (1,451,908   $ 7,635,632  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    September 30, 2011  
    Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated     Eliminations     Consolidated  
    (In thousands)  

ASSETS

         

Property, plant and equipment, net

  $ 4,248,198     $ 838,302     $ 61,418     $      $ 5,147,918  

Investment in subsidiaries

    670,993              (2,096     (668,897       

Current assets

         

Cash and cash equivalents

    24,646              106,773              131,419  

Assets from risk management activities

    843              17,501              18,344  

Other current assets

    655,716       15,413       386,215       (196,154     861,190  

Intercompany receivables

    569,898                     (569,898       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,251,103       15,413       510,489       (766,052     1,010,953  

Intangible assets

                  207              207  

Goodwill

    572,908       132,381       34,711              740,000  

Noncurrent assets from risk management activities

    998                            998  

Deferred charges and other assets

    353,960       18,028       10,807              382,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,098,160     $ 1,004,124     $ 615,536     $ (1,434,949   $ 7,282,871  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

         

Shareholders’ equity

  $ 2,255,421     $ 265,102     $ 405,891     $ (670,993   $ 2,255,421  

Long-term debt

    2,205,986              131              2,206,117  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

    4,461,407       265,102       406,022       (670,993     4,461,538  

Current liabilities

         

Current maturities of long-term debt

    2,303              131              2,434  

Short-term debt

    387,691                     (181,295     206,396  

Liabilities from risk management activities

    11,916              3,537              15,453  

Other current liabilities

    474,783       10,369       170,926       (12,763     643,315  

Intercompany payables

           543,084       26,814       (569,898       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    876,693       553,453       201,408       (763,956     867,598  

Deferred income taxes

    789,649       173,351       (2,907            960,093  

Noncurrent liabilities from risk management activities

    67,862              10,227              78,089  

Regulatory cost of removal obligation

    428,947                            428,947  

Deferred credits and other liabilities

    473,602       12,218       786              486,606  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,098,160     $ 1,004,124     $ 615,536     $ (1,434,949   $ 7,282,871  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 December 31, 2011, the related condensed consolidated statements of income for the three-month periods ended December 31, 2011 and 2010, and the condensed consolidated statements of cash flows for the three-month periods ended December 31, 2011 and 2010. 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, 2011, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated November 22, 2011, 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, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/    ERNST & YOUNG LLP

Dallas, Texas

February 8, 2012

 

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, 2011.

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 markets to satisfy our liquidity requirements; the impact of adverse economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements along with increased costs of health care benefits; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; 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 possible future additional regulatory and financial risks associated with global warming and climate change on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the inherent hazards and risks involved in operating our gas distribution business, 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 its subsidiaries are engaged primarily in the regulated natural gas distribution and transportation and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers throughout our six regulated natural gas distribution divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our regulated distribution and pipeline systems. In May 2011, we announced that we had entered into a definitive agreement to sell our natural gas distribution operations in Missouri, Illinois and Iowa, representing approximately 84,000 customers. After the closing of this transaction, which we currently anticipate will occur during fiscal 2012, we will operate in nine states.

Through our nonregulated businesses, we provide natural gas management and transportation services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and

 

35


Southeast and natural gas transportation and storage services to certain of our natural gas distribution divisions and to third parties. Through our asset optimization activities, we also seek to maximize the economic value associated with the storage and transportation capacity we own or control.

As discussed in Note 11, we operate the Company through the following three segments:

 

   

the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,

 

   

the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division and

 

   

the nonregulated segment, which includes our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

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, 2011 and include the following:

 

   

Regulation

 

   

Revenue Recognition

 

   

Allowance for Doubtful Accounts

 

   

Financial Instruments and Hedging Activities

 

   

Impairment Assessments

 

   

Pension and Other Postretirement Plans

 

   

Fair Value Measurements

Our critical accounting policies are reviewed quarterly by the Audit Committee. There were no significant changes to these critical accounting policies during the three months ended December 31, 2011.

RESULTS OF OPERATIONS

We reported net income of $68.5 million, or $0.75 per diluted share for the three months ended December 31, 2011 compared with net income of $74.0 million, or $0.81 per diluted share in the prior-year quarter. Regulated operations contributed 93 percent of our net income during this period with our nonregulated operations contributing the remaining seven percent. Excluding the impact of unrealized margins, diluted earnings per share decreased $0.20 compared with the prior-year quarter. The $0.20 per diluted share decrease primarily reflects the adverse impact of unfavorable natural gas market conditions on our nonregulated segment and increased operating expenses in our natural gas distribution segment. These decreases were partially offset by a five percent increase in consolidated throughput in our regulated transmission and storage segment and the favorable impact of ratemaking efforts in our natural gas distribution segment.

 

36


Due to the pending sale of our Missouri, Illinois and Iowa service areas, the results of operations for these three service areas are shown in discontinued operations. During the current-year quarter, discontinued operations generated net income of $2.7 million, or $0.03 per diluted share, compared with net income of $2.9 million, or $0.03 per diluted share in the prior-year quarter. Continuing operations in the current quarter generated net income of $65.8 million, or $0.72 per diluted share, compared with net income of $71.1 million, or $0.78 per diluted share from continuing operations in the prior-year quarter.

The following table presents our consolidated financial highlights for the three months ended December 31, 2011 and 2010:

 

     Three Months Ended
December 31
 
     2011     2010  
     (In thousands, except per
share data)
 

Operating revenues

   $ 1,101,173     $ 1,133,262  

Gross profit

     362,882       364,724  

Operating expenses

     218,475       209,435  

Operating income

     144,407       155,289  

Miscellaneous expense

     (1,875     (726

Interest charges

     35,442       38,895  

Income from continuing operations before income taxes

     107,090       115,668  

Income tax expense

     41,302       44,568  

Income from continuing operations

     65,788       71,100  

Income from discontinued operations, net of tax

     2,719       2,897  

Net income

   $ 68,507     $ 73,997  

Diluted net income per share from continuing operations

   $ 0.72     $ 0.78  

Diluted net income per share from discontinued operations

     0.03       0.03  

Diluted net income per share

   $ 0.75     $ 0.81  

The following table reflects our consolidated net income and diluted earnings per share in our regulated and nonregulated operations:

 

     Three Months Ended December 31  
     2011      2010      Change  
     (In thousands, except per share data)  

Regulated operations

   $ 61,319      $ 64,523      $ (3,204

Nonregulated operations

     4,469        6,577        (2,108
  

 

 

    

 

 

    

 

 

 

Net income from continuing operations

     65,788        71,100        (5,312

Net income from discontinued operations

     2,719        2,897        (178
  

 

 

    

 

 

    

 

 

 

Net income

   $ 68,507      $ 73,997      $ (5,490
  

 

 

    

 

 

    

 

 

 

Diluted EPS from continuing regulated operations

   $ 0.67      $ 0.71      $ (0.04

Diluted EPS from nonregulated operations

     0.05        0.07        (0.02
  

 

 

    

 

 

    

 

 

 

Diluted EPS from continuing operations

     0.72        0.78        (0.06

Diluted EPS from discontinued operations

     0.03        0.03          
  

 

 

    

 

 

    

 

 

 

Consolidated diluted EPS

   $ 0.75      $ 0.81      $ (0.06
  

 

 

    

 

 

    

 

 

 

 

37


Three Months Ended December 31, 2011 compared with Three Months Ended December 31, 2010

Natural Gas Distribution Segment

The primary factors that impact the results of our natural gas distribution operations 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.

Seasonal weather patterns can also affect our natural gas 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 over 90 percent of our residential and commercial meters in the following states for the following time periods:

 

Georgia, Kansas, West Texas

   October — May

Kentucky, Mississippi, Tennessee, Mid-Tex

   November — April

Louisiana

   December — March

Virginia

   January — December

Our natural gas 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 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.

Higher gas costs may also 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. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or use alternative energy sources.

In May 2011, we announced that we had entered into a definitive agreement to sell substantially all of our natural gas distribution operations in Missouri, Illinois and Iowa. The results of these operations have been separately reported in the following tables as discontinued operations and exclude general corporate overhead and interest expense that would normally be allocated to these operations.

 

38


Review of Financial and Operating Results

Financial and operational highlights for our natural gas distribution segment for the three months ended December 31, 2011 and 2010 are presented below.

 

     Three Months Ended
December 31
 
     2011     2010     Change  
     (In thousands, unless otherwise noted)  

Gross profit

   $ 291,085     $ 290,936     $ 149  

Operating expenses

     182,724       171,571       11,153  
  

 

 

   

 

 

   

 

 

 

Operating income

     108,361       119,365       (11,004

Miscellaneous expense

     (1,756     (698     (1,058

Interest charges

     27,855       29,697       (1,842
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     78,750       88,970       (10,220

Income tax expense

     30,845       34,549       (3,704
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     47,905       54,421       (6,516

Income from discontinued operations, net of tax

     2,719       2,897       (178
  

 

 

   

 

 

   

 

 

 

Net income

   $ 50,624