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Atmos Energy 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-15
  4. Ex-31
  5. Ex-32
  6. 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 March 31, 2013

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)

 

Texas and Virginia   75-1743247
(State or other jurisdiction of
incorporation or organization)
  (IRS employer
identification no.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
 

75240

(Zip code)

(Address of principal executive offices)  

(972) 934-9227

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 April 26, 2013.

 

Class

  

Shares Outstanding

No Par Value

   90,549,038


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

Mcf

   Thousand cubic feet

MMcf

   Million cubic feet

Moody’s

   Moody’s Investors Services, Inc.

NYMEX

   New York Mercantile Exchange, Inc.

PPA

   Pension Protection Act of 2006

PRP

   Pipeline Replacement Program

RRC

   Railroad Commission of Texas

RRM

   Rate Review Mechanism

S&P

   Standard & Poor’s Corporation

SEC

   United States Securities and Exchange Commission

WNA

   Weather Normalization Adjustment

 

1


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2013
    September 30,
2012
 
     (Unaudited)        
     (In thousands, except
share data)
 
ASSETS     

Property, plant and equipment

   $ 7,435,103     $ 7,134,470  

Less accumulated depreciation and amortization

     1,724,830       1,658,866  
  

 

 

   

 

 

 

Net property, plant and equipment

     5,710,273       5,475,604  

Current assets

    

Cash and cash equivalents

     65,547       64,239  

Accounts receivable, net

     485,601       234,526  

Gas stored underground

     197,356       256,415  

Other current assets

     253,916       272,782  
  

 

 

   

 

 

 

Total current assets

     1,002,420       827,962  

Goodwill and intangible assets

     740,825       740,847  

Deferred charges and other assets

     500,212       451,262  
  

 

 

   

 

 

 
   $ 7,953,730     $ 7,495,675  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES     

Shareholders’ equity

    

Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: March 31, 2013 — 90,538,114 shares; September 30, 2012 — 90,239,900 shares

   $ 453     $ 451  

Additional paid-in capital

     1,753,024       1,745,467  

Retained earnings

     793,927       660,932  

Accumulated other comprehensive loss

     (3,934     (47,607
  

 

 

   

 

 

 

Shareholders’ equity

     2,543,470       2,359,243  

Long-term debt

     2,455,514       1,956,305  
  

 

 

   

 

 

 

Total capitalization

     4,998,984       4,315,548  

Current liabilities

    

Accounts payable and accrued liabilities

     316,411       215,229  

Other current liabilities

     377,357       489,665  

Short-term debt

     232,998       570,929  

Current maturities of long-term debt

           131  
  

 

 

   

 

 

 

Total current liabilities

     926,766       1,275,954  

Deferred income taxes

     1,168,140       1,015,083  

Regulatory cost of removal obligation

     366,854       381,164  

Pension and postretirement liabilities

     453,548       457,196  

Deferred credits and other liabilities

     39,438       50,730  
  

 

 

   

 

 

 
   $ 7,953,730     $ 7,495,675  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
March 31
 
     2013     2012  
     (Unaudited)  
     (In thousands, except per
share data)
 

Operating revenues

    

Natural gas distribution segment

   $ 905,176     $ 871,067  

Regulated transmission and storage segment

     61,848       58,037  

Nonregulated segment

     428,948       370,763  

Intersegment eliminations

     (86,976     (74,358
  

 

 

   

 

 

 
     1,308,996       1,225,509  

Purchased gas cost

    

Natural gas distribution segment

     558,170       498,739  

Regulated transmission and storage segment

            

Nonregulated segment

     404,641       374,992  

Intersegment eliminations

     (86,566     (74,009
  

 

 

   

 

 

 
     876,245       799,722  
  

 

 

   

 

 

 

Gross profit

     432,751       425,787  

Operating expenses

    

Operation and maintenance

     111,086       109,300  

Depreciation and amortization

     57,180       59,420  

Taxes, other than income

     54,307       54,635  
  

 

 

   

 

 

 

Total operating expenses

     222,573       223,355  
  

 

 

   

 

 

 

Operating income

     210,178       202,432  

Miscellaneous income

     1,712       506  

Interest charges

     33,331       36,643  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     178,559       166,295  

Income tax expense

     66,219       64,211  
  

 

 

   

 

 

 

Income from continuing operations

     112,340       102,084  

Income from discontinued operations, net of tax ($2,258 and $4,031)

     4,085       7,027  
  

 

 

   

 

 

 

Net income

   $ 116,425     $ 109,111  
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 1.24     $ 1.12  

Income per share from discontinued operations

     0.04       0.08  
  

 

 

   

 

 

 

Net income per share — basic

   $ 1.28     $ 1.20  
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 1.23     $ 1.12  

Income per share from discontinued operations

     0.04       0.08  
  

 

 

   

 

 

 

Net income per share — diluted

   $ 1.27     $ 1.20  
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.350     $ 0.345  
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,530       90,020  
  

 

 

   

 

 

 

Diluted

     91,492       90,322  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Six Months Ended
March 31
 
     2013     2012  
     (Unaudited)  
     (In thousands, except per
share data)
 

Operating revenues

    

Natural gas distribution segment

   $ 1,571,963     $ 1,547,180  

Regulated transmission and storage segment

     122,529       114,796  

Nonregulated segment

     828,842       814,939  

Intersegment eliminations

     (180,183     (167,412
  

 

 

   

 

 

 
     2,343,151       2,309,503  

Purchased gas cost

    

Natural gas distribution segment

     945,326       891,257  

Regulated transmission and storage segment

            

Nonregulated segment

     782,076       803,763  

Intersegment eliminations

     (179,364     (166,696
  

 

 

   

 

 

 
     1,548,038       1,528,324  
  

 

 

   

 

 

 

Gross profit

     795,113       781,179  

Operating expenses

    

Operation and maintenance

     217,613       223,944  

Depreciation and amortization

     116,759       117,786  

Taxes, other than income

     95,641       97,546  
  

 

 

   

 

 

 

Total operating expenses

     430,013       439,276  
  

 

 

   

 

 

 

Operating income

     365,100       341,903  

Miscellaneous income (expense)

     2,410       (1,510

Interest charges

     63,853       72,369  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     303,657       268,024  

Income tax expense

     113,969       103,556  
  

 

 

   

 

 

 

Income from continuing operations

     189,688       164,468  

Income from discontinued operations, net of tax ($3,986 and $7,547)

     7,202       13,150  
  

 

 

   

 

 

 

Net income

   $ 196,890     $ 177,618  
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 2.09     $ 1.81  

Income per share from discontinued operations

     0.08       0.14  
  

 

 

   

 

 

 

Net income per share — basic

   $ 2.17     $ 1.95  
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 2.07     $ 1.80  

Income per share from discontinued operations

     0.08       0.14  
  

 

 

   

 

 

 

Net income per share — diluted

   $ 2.15     $ 1.94  
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.700     $ 0.690  
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,445       90,137  
  

 

 

   

 

 

 

Diluted

     91,406       90,440  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
March 31
    Six Months Ended
March 31
 
     2013     2012     2013     2012  
    

(Unaudited)

(In thousands)

 

Net income

   $ 116,425     $ 109,111     $ 196,890     $ 177,618  

Other comprehensive income (loss), net of tax

        

Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $(110), $1,203, $(330) and $1,717

     (200     2,046       (573     2,947  

Cash flow hedges:

        

Amortization and unrealized gain on interest rate agreements, net of tax of $13,513, $9,042, $20,562 and $8,404

     23,509       15,396       35,773       14,309  

Net unrealized gains (losses) on commodity cash flow hedges, net of tax of $5,650, $(3,399), $5,417 and $(13,996)

     8,838       (5,315     8,473       (21,890
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     32,147       12,127       43,673       (4,634
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 148,572     $ 121,238     $ 240,563     $ 172,984  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
March 31
 
     2013     2012  
     (Unaudited)  
     (In thousands)  

Cash Flows From Operating Activities

    

Net income

   $ 196,890     $ 177,618  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization:

    

Charged to depreciation and amortization

     118,608       122,532  

Charged to other accounts

     265       203  

Deferred income taxes

     106,891       102,052  

Other

     5,519       9,874  

Net assets / liabilities from risk management activities

     (14,709     15,690  

Net change in operating assets and liabilities

     (37,123     (67,246
  

 

 

   

 

 

 

Net cash provided by operating activities

     376,341       360,723  

Cash Flows From Investing Activities

    

Capital expenditures

     (389,117     (311,123

Other, net

     (3,700     (3,878
  

 

 

   

 

 

 

Net cash used in investing activities

     (392,817     (315,001

Cash Flows From Financing Activities

    

Net decrease in short-term debt

     (342,141     (48,945

Net proceeds from issuance of long-term debt

     493,793        

Settlement of Treasury lock agreements

     (66,626      

Repayment of long-term debt

     (131     (2,369

Cash dividends paid

     (64,008     (62,907

Repurchase of common stock

           (12,535

Repurchase of equity awards

     (3,124     (3,509

Issuance of common stock

     21       164  
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     17,784       (130,101
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,308       (84,379

Cash and cash equivalents at beginning of period

     64,239       131,419  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 65,547     $ 47,040  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2013

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. For the fiscal year ended September 30, 2012, our regulated businesses comprised over 95 percent of our consolidated net income.

Through our natural gas distribution business, we deliver natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions, which at March 31, 2013, covered service areas located in nine states. In addition, we transport natural gas for others through our distribution system. On April 1, 2013, we completed the divestiture of our natural gas distribution operations in Georgia, representing approximately 64,000 customers. Our regulated businesses 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.

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 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, 2012. 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, 2012. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2013 are not indicative of our results of operations for the full 2013 fiscal year, which ends September 30, 2013.

We have evaluated subsequent events from the March 31, 2013 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). On April 1, 2013, we completed the sale of our Georgia natural gas distribution assets. Except as discussed in Note 6, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.

 

7


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, 2012.

During the second quarter of fiscal 2013, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.

Due to the April 1, 2013 sale of our Georgia distribution operations, at March 31, 2013, the financial results for this service area are shown in discontinued operations. Accordingly, certain prior-year amounts have been reclassified to conform with the current-year presentation.

During the six months ended March 31, 2013, two new accounting standards were announced that will become applicable to the Company in future periods. The first standard clarifies the enhanced disclosure of offsetting arrangements for financial instruments that will become effective for us for annual and interim periods beginning on October 1, 2013. The second standard, which became effective during our second fiscal quarter, requires the presentation of amounts reclassified out of accumulated other comprehensive income by component as well as significant amounts reclassified out of accumulated other comprehensive income by the respective line item in the statement of net income. We have presented the disclosures relating to reclassifications out of accumulated other comprehensive income in Note 4. 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 six months ended March 31, 2013.

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.

 

8


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Significant regulatory assets and liabilities as of March 31, 2013 and September 30, 2012 included the following:

 

     March 31,
2013
     September 30,
2012
 
     (In thousands)  

Regulatory assets:

     

Pension and postretirement benefit costs(1)

     $289,003      $ 296,160  

Merger and integration costs, net

     5,502        5,754  

Deferred gas costs

     525        31,359  

Regulatory cost of removal asset

     10,183        10,500  

Rate case costs

     6,256        4,661  

Deferred franchise fees

     265        2,714  

Texas Rule 8.209(2)

     14,912        5,370  

APT annual adjustment mechanism

     4,965        4,539  

Other

     5,716        7,262  
  

 

 

    

 

 

 
   $ 337,327      $ 368,319  
  

 

 

    

 

 

 

Regulatory liabilities:

     

Deferred gas costs

   $ 43,112      $ 23,072  

Deferred franchise fees

     2,943         

Regulatory cost of removal obligation

     433,617        459,688  

Other

     5,429        5,637  
  

 

 

    

 

 

 
   $ 485,101      $ 488,397  
  

 

 

    

 

 

 

 

  (1) 

Includes $13.5 million and $7.6 million of pension and postretirement expense deferred in our Texas service areas pursuant to the Texas Gas Utility Regulatory Act.

 

  (2) 

Texas Rule 8.209 is a Railroad Commission rule that 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.

The amounts above do not include regulatory assets and liabilities related to our Georgia operations, which are classified as assets held for sale as discussed in Note 6.

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.

3.    Financial Instruments

We use financial instruments to mitigate commodity price risk and 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, 2012. During the six months ended March 31, 2013 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.

 

9


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 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 2012-2013 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 33 percent, or 22.8 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.

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 cost 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 cost 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

Our nonregulated operations aggregate and purchase gas supply, arrange transportation and/or storage logistics and ultimately deliver gas to our customers at competitive prices. To provide these services, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers request. In an effort to offset the demand fees paid to contract for storage capacity and to maximize the value of this capacity, AEH sells financial instruments to earn a gross profit margin through the arbitrage of pricing differences in various locations and by recognizing pricing differences that occur over time.

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 obligation, to buy or sell the commodity at a fixed price. Option 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 57 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in asset optimization activities in our nonregulated segment.

 

10


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our nonregulated operations also 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 for accounting purposes.

Interest Rate Risk Management Activities

We have periodically managed interest rate risk by entering into financial instruments to fix the Treasury yield component of the interest cost associated with anticipated financings. Prior to fiscal 2012, we used Treasury locks to mitigate interest rate risk; however, beginning in the fourth quarter of fiscal 2012 we started utilizing interest rate swaps and forward starting interest rate swaps to manage this risk.

In August 2011, we entered into three Treasury lock agreements to fix the Treasury yield component of the interest cost associated with $350 million out of a total $500 million of senior notes that were issued on January 11, 2013. This offering is discussed in Note 7. We designated these Treasury locks as cash flow hedges. The Treasury locks were settled on January 8, 2013 with a payment of $66.6 million to the counterparties due to a decrease in the 30-year Treasury lock rates between inception of the Treasury locks and settlement. Because the Treasury locks were effective, the $66.6 million unrealized loss was recorded as a component of accumulated other comprehensive income and is being recognized as a component of interest expense over the 30-year life of the senior notes.

In the fourth quarter of fiscal 2012, we entered into an interest rate swap to fix the LIBOR component of our $260 million short-term financing facility that terminated on December 27, 2012. We recorded an immaterial loss upon settlement of the swap, which was recorded as a component of interest expense as we did not designate the interest rate swap as a hedge.

In October 2012, we entered into forward starting interest rate swaps to fix the Treasury yield component associated with the anticipated issuance of $500 million and $250 million unsecured senior notes in fiscal 2015 and fiscal 2017, which we designated as cash flow hedges at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the forward starting interest rate swaps are being recorded as a component of accumulated other comprehensive income (loss). When the forward starting interest rate swaps settle, the realized gain or loss will be recorded as a component of accumulated other comprehensive income (loss) and recognized as a component of interest expense over the life of the related financing arrangement. Hedge ineffectiveness to the extent incurred is reported as a component of interest expense.

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. As of March 31, 2013, the remaining amortization periods for the settled Treasury locks extend through fiscal 2043.

 

11


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Quantitative Disclosures Related to Financial Instruments

The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.

As of March 31, 2013, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of March 31, 2013, 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

            (22,490
  

Cash Flow

            23,768  
  

Not designated

     5,890        55,387  
     

 

 

    

 

 

 
        5,890        56,665  
     

 

 

    

 

 

 

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 March 31, 2013 and September 30, 2012. 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 $12.0 million and $23.7 million of cash held on deposit in margin accounts as of March 31, 2013 and September 30, 2012 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 5.

 

   

Balance Sheet Location

  Natural Gas
Distribution
    Nonregulated     Total  
              (In thousands)        

March 31, 2013

       

Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets   $      $ 10,447     $ 10,447  

Noncurrent commodity contracts

  Deferred charges and other assets     36,546       777       37,323  

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities            (17,622     (17,622

Noncurrent commodity contracts

  Deferred credits and other liabilities            (2,229     (2,229
   

 

 

   

 

 

   

 

 

 

Total

      36,546       (8,627     27,919  

Not Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets(1)     3,603       76,426       80,029  

Noncurrent commodity contracts

  Deferred charges and other assets     36       52,274       52,310  

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities     (59     (77,518     (77,577

Noncurrent commodity contracts

  Deferred credits and other liabilities            (46,574     (46,574
   

 

 

   

 

 

   

 

 

 

Total

      3,580       4,608       8,188  
   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

    $ 40,126     $ (4,019   $ 36,107  
   

 

 

   

 

 

   

 

 

 

 

  (1) 

Other current assets not designated as hedges in our natural gas distribution segment include $0.2 million related to risk management assets that were classified as assets held for sale at March 31, 2013.

 

12


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

   

Balance Sheet Location

  Natural Gas
Distribution
    Nonregulated     Total  
              (In thousands)        

September 30, 2012

       

Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets   $     $ 19,301     $ 19,301  

Noncurrent commodity contracts

  Deferred charges and other assets            1,923       1,923  

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities     (85,040     (23,787     (108,827

Noncurrent commodity contracts

  Deferred credits and other liabilities            (4,999     (4,999
   

 

 

   

 

 

   

 

 

 

Total

      (85,040     (7,562     (92,602

Not Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets(1)     7,082       98,393       105,475  

Noncurrent commodity contracts

  Deferred charges and other assets     2,283       60,932       63,215  

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities(2)     (585     (99,824     (100,409

Noncurrent commodity contracts

  Deferred credits and other liabilities            (67,062     (67,062
   

 

 

   

 

 

   

 

 

 

Total

      8,780       (7,561     1,219  
   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

    $ (76,260   $ (15,123   $ (91,383
   

 

 

   

 

 

   

 

 

 

 

  (1)

Other current assets not designated as hedges in our natural gas distribution segment include $0.1 million related to risk management assets that were classified as assets held for sale at September 30, 2012.

 

  (2) 

Other current liabilities not designated as hedges in our natural gas distribution segment include $0.3 million related to risk management liabilities that were classified as liabilities held for sale at September 30, 2012.

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 March 31, 2013 and 2012 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $1.7 million and $(6.2) million. For the six months ended March 31, 2013 and 2012 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $17.8 million and $2.2 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

 

13


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 and six months ended March 31, 2013 and 2012 is presented below.

 

     Three Months Ended
March 31
 
         2013             2012      
     (In thousands)  

Commodity contracts

   $ (17,846   $ 29,090  

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

     19,586       (35,087
  

 

 

   

 

 

 

Total (increase) decrease in purchased gas cost

   $ 1,740     $ (5,997
  

 

 

   

 

 

 

The (increase) decrease in purchased gas cost is comprised of the following:

    

Basis ineffectiveness

   $ 1,458     $ (739

Timing ineffectiveness

     282       (5,258
  

 

 

   

 

 

 
   $ 1,740     $ (5,997
  

 

 

   

 

 

 

 

     Six Months Ended
March 31
 
         2013             2012      
     (In thousands)  

Commodity contracts

   $ (10,532   $ 53,153  

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

     28,405       (50,335
  

 

 

   

 

 

 

Total decrease in purchased gas cost

   $ 17,873     $ 2,818  
  

 

 

   

 

 

 

The decrease in purchased gas cost is comprised of the following:

    

Basis ineffectiveness

   $ 1,218     $ 102  

Timing ineffectiveness

     16,655       2,716  
  

 

 

   

 

 

 
   $ 17,873     $ 2,818  
  

 

 

   

 

 

 

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 purchased gas cost.

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. We did not record a writedown for nonqualifying natural gas inventory for the six months ended March 31, 2013. During the six months ended March 31, 2012, we recorded a $1.7 million charge to write down nonqualifying natural gas inventory to market.

 

14


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 and six months ended March 31, 2013 and 2012 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 March 31, 2013  
     Natural
Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $     $ (5,199   $ (5,199

Loss arising from ineffective portion of commodity contracts

           (83     (83
  

 

 

   

 

 

   

 

 

 

Total impact on purchased gas costs

           (5,282     (5,282

Loss on settled interest rate agreements reclassified from AOCI into interest expense

     (873           (873
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (873   $ (5,282   $ (6,155
  

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2012  
     Natural
Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $     $ (21,181   $ (21,181

Loss arising from ineffective portion of commodity contracts

           (238     (238
  

 

 

   

 

 

   

 

 

 

Total impact on purchased gas costs

           (21,419     (21,419

Loss on settled interest rate agreements reclassified from AOCI into interest expense

     (502           (502
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (502   $ (21,419   $ (21,921
  

 

 

   

 

 

   

 

 

 

 

     Six Months Ended March 31, 2013  
     Natural
Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $     $ (10,359   $ (10,359

Loss arising from ineffective portion of commodity contracts

           (102     (102
  

 

 

   

 

 

   

 

 

 

Total impact on purchased gas costs

           (10,461     (10,461

Loss on settled interest rate agreements reclassified from AOCI into interest expense

     (1,375           (1,375
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (1,375   $ (10,461   $ (11,836
  

 

 

   

 

 

   

 

 

 

 

15


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Six Months Ended March 31, 2012  
     Natural Gas
Distribution
    Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $     $ (32,823   $ (32,823

Loss arising from ineffective portion of commodity contracts

           (668     (668
  

 

 

   

 

 

   

 

 

 

Total impact on purchased gas costs

           (33,491     (33,491

Loss on settled interest rate agreements reclassified from AOCI into interest expense

     (1,004           (1,004
  

 

 

   

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (1,004   $ (33,491   $ (34,495
  

 

 

   

 

 

   

 

 

 

The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and six months ended March 31, 2013 and 2012. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.

 

     Three Months Ended
March 31
    Six Months Ended
March 31
 
     2013      2012     2013      2012  
     (In thousands)  

Increase (decrease) in fair value:

          

Interest rate agreements

   $ 22,955      $ 15,079     $ 34,900      $ 13,676  

Forward commodity contracts

     5,666        (18,234     2,153        (41,912

Recognition of losses in earnings due to settlements:

          

Interest rate agreements

     554        317       873        633  

Forward commodity contracts

     3,172        12,919       6,320        20,022  
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 32,347      $ 10,081     $ 44,246      $ (7,581
  

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1) 

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

Deferred gains (losses) recorded in 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 March 31, 2013. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those instruments have not yet settled.

 

     Interest Rate
Agreements
    Commodity
Contracts
    Total  
     (In thousands)  

Next twelve months

   $ (2,686   $ 317     $ (2,369

Thereafter

     (29,021     (839     (29,860
  

 

 

   

 

 

   

 

 

 

Total(1)

   $ (31,707   $ (522   $ (32,229
  

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

16


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Financial Instruments Not Designated as Hedges

The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three months ended March 31, 2013 and 2012 was an increase (decrease) in gross profit of $6.8 million and $(12.8) million. For the six months ended March 31, 2013 and 2012 gross profit increased (decreased) $6.7 million and $(15.0) 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 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.    Accumulated Other Comprehensive Income

We record deferred gains (losses) in accumulated other comprehensive income (AOCI) related to available-for-sale securities, interest rate agreement cash flow hedges and commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings as they are amortized. The following table provides the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income.

 

     Available-
for-Sale
Securities
    Interest
Rate
Agreement
Cash Flow
Hedges
    Commodity
Contracts
Cash Flow
Hedges
    Total  
     (In thousands)  

September 30, 2012

   $ 5,661     $ (44,273   $ (8,995   $ (47,607

Other comprehensive income before reclassifications

     1,135       34,900       2,153       38,188  

Amounts reclassified from accumulated other comprehensive income

     (1,708     873       6,320       5,485  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     (573     35,773       8,473       43,673  
  

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2013

   $ 5,088     $ (8,500   $ (522   $ (3,934
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following tables detail reclassifications out of AOCI for the three and six months ended March 31, 2013. Amounts in parentheses below indicate decreases to net income in the statement of income.

 

     Three Months ended March 31, 2013

Accumulated Other Comprehensive
Income Components

   Amount Reclassified from
Accumulated Other
      Comprehensive Income      
    Affected Line Item in the
Statement of Income
     (In thousands)      

Available-for-sale securities

   $ 2,689     Operation and maintenance expense
  

 

 

   
     2,689     Total before tax
     (981   Tax expense
  

 

 

   
   $ 1,708     Net of tax
  

 

 

   

Cash flow hedges

    

Interest rate agreements

   $ (873   Interest charges

Commodity contracts

     (5,201   Purchased gas cost
  

 

 

   
     (6,074   Total before tax
     2,348     Tax benefit
  

 

 

   
   $ (3,726   Net of tax
  

 

 

   

Total reclassifications

   $ (2,018   Net of tax
  

 

 

   

 

     Six Months ended March 31, 2013

Accumulated Other Comprehensive
Income Components

   Amount Reclassified from
Accumulated Other
      Comprehensive Income      
    Affected Line Item in  the
Statement of Income
     (In thousands)      

Available-for-sale securities

   $ 2,689     Operation and maintenance expense
  

 

 

   
     2,689     Total before tax
     (981   Tax expense
  

 

 

   
   $ 1,708     Net of tax
  

 

 

   

Cash flow hedges

    

Interest rate agreements

   $ (1,375   Interest charges

Commodity contracts

     (10,361   Purchased gas cost
  

 

 

   
     (11,736   Total before tax
     4,543     Tax benefit
  

 

 

   
   $ (7,193   Net of tax
  

 

 

   

Total reclassifications

   $ (5,485   Net of tax
  

 

 

   

5.    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

 

18


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, 2012. During the three and six months ended March 31, 2013, there were no changes in these methods.

Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 9 to the financial statements in our Annual Report on Form 10-K for the fiscal year ending September 30, 2012.

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 tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2013 and September 30, 2012. 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)
    March 31,
2013
 
     (In thousands)  

Assets:

             

Financial instruments

             

Natural gas distribution segment

   $      $ 40,185      $       —       $     $ 40,185  

Nonregulated segment

     489        139,435               (131,972     7,952  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total financial instruments

     489        179,620               (131,972     48,137  

Hedged portion of gas stored underground

     89,342                            89,342  

Available-for-sale securities

             

Money market funds

            11,761                     11,761  

Registered investment companies

     31,092                            31,092  

Bonds

            23,617                     23,617  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     31,092        35,378                     66,470  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 120,923      $ 214,998      $       $ (131,972   $ 203,949  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Financial instruments

             

Natural gas distribution segment

   $      $ 59      $       $     $ 59  

Nonregulated segment

     969        142,974               (143,943      
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 969      $ 143,033      $       $ (143,943   $ 59  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

19


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,
2012
 
     (In thousands)  

Assets:

             

Financial instruments

             

Natural gas distribution segment

   $      $ 9,365      $       —       $     $ 9,365  

Nonregulated segment

     714        179,835               (162,776     17,773  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total financial instruments

     714        189,200               (162,776     27,138  

Hedged portion of gas stored underground

     67,192                            67,192  

Available-for-sale securities

             

Money market funds

            1,634                     1,634  

Registered investment companies

     40,212                            40,212  

Bonds

            22,552                     22,552  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     40,212        24,186                     64,398  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 108,118      $ 213,386      $       $ (162,776   $ 158,728  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Financial instruments

             

Natural gas distribution segment

   $      $ 85,625      $       $     $ 85,625  

Nonregulated segment

     4,563        191,109               (186,451     9,221  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 4,563      $ 276,734      $       $ (186,451   $ 94,846  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

  (1) 

Our Level 2 measurements consist of over-the-counter options and swaps which are valued using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds which are valued based on the most recent available quoted market prices and money market funds which are valued at cost.

 

  (2) 

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of March 31, 2013, we had $12.0 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $8.3 million was used to offset current risk management liabilities under master netting arrangements and the remaining $3.7 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, 2012 we had $23.7 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $5.9 million was used to offset current risk management liabilities under master netting arrangements and the remaining $17.8 million is classified as current risk management assets.

 

20


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 March 31, 2013:

          

Domestic equity mutual funds

   $ 17,998      $ 6,656      $      $ 24,654  

Foreign equity mutual funds

     5,168        1,270              6,438  

Bonds

     23,388        230        (1     23,617  

Money market funds

     11,761                     11,761  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 58,315      $ 8,156      $ (1   $ 66,470  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2012:

          

Domestic equity mutual funds

   $ 25,779      $ 8,183      $      $ 33,962  

Foreign equity mutual funds

     5,568        682              6,250  

Bonds

     22,358        196        (2     22,552  

Money market funds

     1,634                     1,634  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 55,339      $ 9,061      $ (2   $ 64,398  
  

 

 

    

 

 

    

 

 

   

 

 

 

At March 31, 2013 and September 30, 2012, our available-for-sale securities included $42.9 million and $41.8 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At March 31, 2013, we maintained investments in bonds that have contractual maturity dates ranging from May 2013 through June 2017. During the six months ended March 31, 2013, we recognized a gain of $2.7 million on the sale of certain assets in the rabbi trusts.

These securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on a fund by fund basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related fund is written down to its estimated fair value and the other-than-temporary impairment is recognized in the income statement.

Other Fair Value Measures

Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations, which are considered Level 1 fair value measurements for debt instruments with a recent, observable trade or Level 2 fair value measurements for debt instruments where fair value is determined using the most recent available quoted market price. The following table presents the carrying value and fair value of our debt as of March 31, 2013:

 

     March 31,
2013
 
     (In thousands)  

Carrying Amount

   $ 2,460,000  

Fair Value

   $ 2,876,673  

6.    Discontinued Operations

On April 1, 2013, we completed the sale of substantially all of our natural gas distribution assets and certain related nonregulated assets located in Georgia to Liberty Energy (Georgia) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $155 million, subject to post-closing adjustments. The

 

21


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

sale was previously announced on August 8, 2012. In connection with the sale, we expect to recognize a net of tax gain of approximately $6 million, subject to post-closing adjustments.

As required under generally accepted accounting principles, the operating results of our Georgia operations have been aggregated and reported on the condensed consolidated statements of income as income from discontinued operations, net of income tax. For the three and six months ended March 31, 2013, net income for discontinued operations includes the operating results of our Georgia operations. For the three and six months ended March 31, 2012, net income from discontinued operations includes the operating results of our Georgia operations and the operating results of our Missouri, Illinois and Iowa operations that were sold on August 1, 2012. 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 Georgia operations are classified as “held for sale” in other current assets and liabilities in our condensed consolidated balance sheets at March 31, 2013 and September 30, 2012. 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
March 31
     Six Months Ended
March 31
 
     
     2013      2012      2013      2012  
     (In thousands)  

Operating revenues

   $ 21,678      $ 44,315      $ 37,962      $ 84,945  

Purchased gas cost

     12,497        26,493        21,464        51,133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     9,181        17,822        16,498        33,812  

Operating expenses

     3,038        6,819        5,858        13,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     6,143        11,003        10,640        20,265  

Other nonoperating income

     200        55        548        432  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations before income taxes

     6,343        11,058        11,188        20,697  

Income tax expense

     2,258        4,031        3,986        7,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income from discontinued operations

   $ 4,085      $ 7,027      $ 7,202      $ 13,150  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

     March  31,
2013
     September  30,
2012
 
     
     (In thousands)  

Net plant, property & equipment

   $ 144,962      $ 142,865  

Gas stored underground

     302        4,688  

Other current assets

     9,961        6,931  

Deferred charges and other assets

     207        87  
  

 

 

    

 

 

 

Assets held for sale

   $ 155,432      $ 154,571  
  

 

 

    

 

 

 

Accounts payable and accrued liabilities

   $ 2,600      $ 2,114  

Other current liabilities

     5,307        3,776  

Regulatory cost of removal

     83        3,257  

Deferred credits and other liabilities

     216        2,426  
  

 

 

    

 

 

 

Liabilities held for sale

   $ 8,206      $ 11,573  
  

 

 

    

 

 

 

7.    Debt

The nature and terms of our debt instruments and credit facilities are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. Except as noted below, there were no material changes in the terms of our debt instruments during the six months ended March 31, 2013.

Long-term debt

Long-term debt at March 31, 2013 and September 30, 2012 consisted of the following:

 

     March 31,
2013
     September 30,
2012
 
     (In thousands)  

Unsecured 4.95% Senior Notes, due October 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  

Unsecured 4.15% Senior Notes, due 2043

     500,000         

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

            131  
  

 

 

    

 

 

 

Total long-term debt

     2,460,000        1,960,131  

Less:

     

Original issue discount on unsecured senior notes and debentures

     4,486        3,695  

Current maturities

            131  
  

 

 

    

 

 

 
   $ 2,455,514      $ 1,956,305  
  

 

 

    

 

 

 

 

23


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our $250 million Unsecured 5.125% Senior Notes were originally scheduled to mature in January 2013. On August 28, 2012 we redeemed these notes with proceeds received through the issuance of commercial paper. On September 27, 2012, we entered into a $260 million short-term financing facility that was scheduled to mature on February 1, 2013 to repay the commercial paper borrowings utilized to redeem the Unsecured 5.125% Senior Notes. The short-term facility was repaid with the proceeds received through the issuance of 30-year unsecured senior notes on January 11, 2013, as discussed below.

We issued $500 million Unsecured 4.15% Senior Notes on January 11, 2013. The effective interest rate of these notes is 4.64 percent, after giving effect to offering costs and the settlement of the associated Treasury locks discussed in Note 3. Of the net proceeds of approximately $494 million, $260 million was used to repay our short-term financing facility. The remaining $234 million of net proceeds was used to partially repay our commercial paper borrowings and for general corporate purposes.

Short-term debt

Our short-term debt is utilized to fund ongoing working capital needs, such as our seasonal requirements for gas supply, general corporate liquidity and capital expenditures. Our short-term borrowing requirements are affected by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.

We currently finance our short-term borrowing requirements through a combination of a $750 million commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility with third-party lenders. On December 7, 2012, we amended the terms of our former $750 million unsecured credit facility to increase the borrowing capacity to $950 million, with an accordion feature, which, if utilized, would increase the borrowing capacity to $1.2 billion. The amendment also permits us to obtain same-day funding on base rate loans. There were no other material changes to the credit facility. These facilities provide approximately $1.0 billion of working capital funding. At March 31, 2013 and September 30, 2012, a total of $233.0 million and $310.9 million was 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 $989 million of working capital funding, including a five-year $950 million unsecured facility, a $25 million unsecured facility and a $14 million unsecured revolving credit facility, which is used primarily to issue letters of credit. The $25 million facility was renewed on April 1, 2013. Due to outstanding letters of credit, the total amount available to us under our $14 million revolving credit facility was $8.2 million at March 31, 2013.

In addition to these third-party facilities, our regulated operations have a $500 million intercompany revolving credit facility with AEH, which 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, 2013.

Nonregulated Operations

Prior to December 5, 2012, Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH, had a three-year $200 million committed revolving credit facility, expiring in December 2014, with a syndicate of third-party lenders with an accordion feature that could increase AEM’s borrowing capacity to $500 million. The

 

24


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

credit facility was 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 was collateralized by substantially all of the assets of AEM and was guaranteed by AEH. AEM terminated the committed revolving credit facility on December 5, 2012, primarily in order to reduce external credit expense. AEM incurred no penalties in connection with the termination. This facility was replaced with two $25 million, 364-day bilateral credit facilities, one of which is a committed facility. These facilities are used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under these bilateral credit facilities was $36.9 million at March 31, 2013.

AEH has a $500 million intercompany demand credit facility with AEC. This facility 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 borrowings under its committed credit facility plus 0.75 percent. Applicable state regulatory commissions have approved our use of this facility through December 31, 2013.

Shelf Registration

On March 28, 2013, we filed a registration statement with the SEC to issue, from time to time, up to $1.75 billion in common stock and/or debt securities available for issuance, which replaces our registration statement that expired on March 31, 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 March 31, 2013, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 53 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.

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.

We were in compliance with all of our debt covenants as of March 31, 2013. 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.

 

25


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8.    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 units, for which vesting is predicated solely on the passage of time granted under our 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 and six months ended March 31, 2013 and 2012 are calculated as follows:

 

     Three Months Ended
March 31
     Six Months Ended
March 31
 
     2013      2012      2013      2012  
     (In thousands, except per share amounts)  

Basic Earnings Per Share from continuing operations

           

Income from continuing operations

   $ 112,340      $ 102,084      $ 189,688      $ 164,468  

Less: Income from continuing operations allocated to participating securities

     304        1,069        634        1,719  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 112,036      $ 101,015      $ 189,054      $ 162,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,530        90,020        90,445        90,137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share — Basic

   $ 1.24      $ 1.12      $ 2.09      $ 1.81  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share from discontinued operations

           

Income from discontinued operations

   $ 4,085      $ 7,027      $ 7,202      $ 13,150  

Less: Income from discontinued operations allocated to participating securities

     11        74        24        137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 4,074      $ 6,953      $ 7,178      $ 13,013  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,530        90,020        90,445        90,137  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations per share — Basic

   $ 0.04      $ 0.08      $ 0.08      $ 0.14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — Basic

   $ 1.28      $ 1.20      $ 2.17      $ 1.95  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
March 31
     Six Months Ended
March 31
 
     2013      2012      2013      2012  
     (In thousands, except per share amounts)  

Diluted Earnings Per Share from continuing operations

           

Income from continuing operations available to common shareholders

   $ 112,036      $ 101,015      $ 189,054      $ 162,749  

Effect of dilutive stock options and other shares

     2        3        5        4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 112,038      $ 101,018      $ 189,059      $ 162,753  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,530        90,020        90,445        90,137  

Additional dilutive stock options and other shares

     962        302        961        303  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     91,492        90,322        91,406        90,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share — Diluted

   $ 1.23      $ 1.12      $ 2.07      $ 1.80  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share from discontinued operations

           

Income from discontinued operations available to common shareholders

   $ 4,074      $ 6,953      $ 7,178      $ 13,013  

Effect of dilutive stock options and other shares

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 4,074      $ 6,953      $ 7,178      $ 13,013  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,530        90,020        90,445        90,137  

Additional dilutive stock options and other shares

     962        302        961        303  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     91,492        90,322        91,406        90,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations per share — Diluted

   $ 0.04      $ 0.08      $ 0.08      $ 0.14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — Diluted

   $ 1.27      $ 1.20      $ 2.15      $ 1.94  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2013 and 2012 as their exercise price was less than the average market price of the common stock during those periods.

Share Repurchase Program

We did not repurchase any shares during the six months ended March 31, 2013 as part of our 2011 share repurchase program. For the six months ended March 31, 2012, we repurchased and retired 387,991 shares for an aggregate value of $12.5 million as part of the program.

 

27


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9.     Interim Pension and Other Postretirement Benefit Plan Information

The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three and six months ended March 31, 2013 and 2012 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.

 

     Three Months Ended March 31  
     Pension Benefits     Other Benefits  
     2013     2012     2013     2012  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 5,203     $ 4,298     $ 4,700     $ 4,088  

Interest cost

     6,023       6,678       3,241       3,466  

Expected return on assets

     (5,738     (5,369     (997     (652

Amortization of transition asset

                 270       378  

Amortization of prior service cost

     (36     (36     (363     (363

Amortization of actuarial loss

     5,562       4,143       1,049       662  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 11,014     $ 9,714     $ 7,900     $ 7,579  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended March 31  
     Pension Benefits     Other Benefits  
     2013     2012     2013     2012  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 10,405     $ 8,596     $ 9,400     $ 8,176  

Interest cost

     12,048       13,355       6,482       6,931  

Expected return on assets

     (11,477     (10,737     (1,994     (1,304

Amortization of transition asset

                 540       756  

Amortization of prior service cost

     (71     (71     (725     (725

Amortization of actuarial loss

     11,123       8,285       2,098       1,324  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 22,028     $ 19,428     $ 15,801     $ 15,158  
  

 

 

   

 

 

   

 

 

   

 

 

 

The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2013 and 2012 are as follows:

 

     Pension Benefits     Other Benefits  
     2013     2012     2013     2012  

Discount rate

     4.04     5.05     4.04     5.05

Rate of compensation increase

     3.50     3.50     N/A        N/A   

Expected return on plan assets

     7.75     7.75     4.70     4.70

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

 

28


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, 2013. During the first six months of fiscal 2013, we contributed $13.4 million to our defined benefit plans and we anticipate contributing approximately $23 million during the remainder of the fiscal year.

We contributed $13.2 million to our other post-retirement benefit plans during the six months ended March 31, 2013. We expect to contribute a total of approximately $10 million to $15 million to these plans during the remainder of the fiscal year.

10.    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, 2012, except as noted below, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2013.

Since September 2009, Atmos Energy and two subsidiaries of AEH, Atmos Energy Marketing, LLC (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 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. 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 appellees’ brief with the Court of Appeals on January 16, 2012, with our reply brief being filed with the Court of Appeals on March 19, 2012. Oral arguments were held in the case on August 27, 2012.

In an opinion handed down on January 25, 2013, the Court of Appeals overturned the $28.5 million jury verdict returned against the Atmos Entities. In a unanimous decision by a three-judge panel, the Court of Appeals reversed the claims asserted by the landowners and investors/working interest owners. The Court of Appeals concluded that all of such claims that the Atmos Entities appealed should have been dismissed by the trial court as a matter of law. The Court of Appeals let stand the jury verdict on one claim that Atmos Energy and our subsidiaries chose not to appeal, which was a trespass claim. The jury had awarded a total of $10,000 in

 

29


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

compensatory damages to one landowner on that claim. The Court of Appeals vacated all of the other damages awarded by the jury and remanded the case to the trial court for a new trial, solely on the issue of whether punitive damages should be awarded to that landowner and, if so, in what amount.

The investors/working interest owners, on February 25, 2013, and the landowners, on March 19, 2013, each filed with the Supreme Court of Kentucky, separate motions for discretionary review of the opinion of the Court of Appeals. We filed a response to the motion filed by the investors/working owners on March 27, 2013 and are in the process of preparing a response to the landowners’ motion, which response was filed on April 17, 2013. The decision of the Court of Appeals will not become final until the appellate process is completed. We had previously accrued what we believed to be an adequate amount for the anticipated resolution of this matter and we will continue to maintain this amount in legal reserves until the appellate process in this case has been completed. 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.

In addition, in a related matter, 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. On March 27, 2012 the court denied the motion to dismiss. Since that time, we have continued to be engaged in discovery activities in this case.

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 March 31, 2013, AEH was committed to purchase 95.1 Bcf within one year, 37.6 Bcf within one to three years and 23.4 Bcf after three years under indexed contracts. AEH is committed to purchase 1.3 Bcf within one year and 0.5 Bcf within one to three years under fixed price contracts with prices ranging from $3.50 to $6.36 per Mcf. Purchases under these contracts totaled $327.8 million and $264.3 million for the three months ended March 31, 2013 and 2012 and $617.3 million and $576.4 million for the six months ended March 31, 2013 and 2012.

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.

 

30


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 March 31, 2013 are as follows (in thousands):

 

2013

   $ 66,443  

2014

     78,398  

2015

      

2016

      

2017

      

Thereafter

      
  

 

 

 
   $ 144,841  
  

 

 

 

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, 2012. There were no material changes to the estimated storage and transportation fees for the six months ended March 31, 2013.

Regulatory Matters

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. The costs of participating in financial markets for hedging certain risks inherent in our business have been increased as a result of the new legislation and related rules and regulations. We also are subject to additional recordkeeping and reporting obligations with regard to certain of our swap transactions. Although the CFTC and SEC have issued a number of required rules and regulations, we expect additional rules and regulations to be adopted, which should provide further clarity regarding the extent of the impact of this legislation on us.

As of March 31, 2013, annual rate filing mechanisms were in progress in Louisiana and the City of Dallas service area in our Mid-Tex Division and infrastructure program filings were in progress for Atmos Pipeline — Texas and Georgia. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.

11.    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, 2012. During the six months ended March 31, 2013, there were no material changes in our concentration of credit risk.

12.    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.

 

31


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, 2012. We evaluate performance based on net income or loss of the respective operating units.

Income statements for the three and six month periods ended March 31, 2013 and 2012 by segment are presented in the following tables:

 

     Three Months Ended March 31, 2013  
     Natural
Gas
Distribution
     Regulated
Transmission
and Storage
    Nonregulated     Eliminations     Consolidated  
     (In thousands)  

Operating revenues from external parties

   $ 904,181      $ 19,655     $ 385,160     $     $ 1,308,996  

Intersegment revenues

     995        42,193       43,788       (86,976      
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     905,176        61,848       428,948       (86,976     1,308,996  

Purchased gas cost

     558,170              404,641       (86,566     876,245  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     347,006        61,848       24,307       (410     432,751  

Operating expenses

           

Operation and maintenance

     89,344        15,390       6,763       (411     111,086  

Depreciation and amortization

     47,631        8,690       859             57,180  

Taxes, other than income

     49,592        4,277       438             54,307  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     186,567        28,357       8,060       (411     222,573  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     160,439        33,491       16,247       1       210,178  

Miscellaneous income (expense)

     2,591        (99     (91     (689     1,712  

Interest charges

     25,664        7,857       498       (688     33,331  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     137,366        25,535       15,658             178,559  

Income tax expense

     51,176        9,005       6,038             66,219  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     86,190        16,530       9,620             112,340  

Income from discontinued operations, net of tax

     4,085                          4,085  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 90,275      $ 16,530     $ 9,620     $     $ 116,425  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 131,465      $ 67,208     $ 417     $     $ 199,090  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

32


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended March 31, 2012  
     Natural
Gas
Distribution
     Regulated
Transmission
and Storage
    Nonregulated     Eliminations     Consolidated  
     (In thousands)  

Operating revenues from external parties

   $ 870,744      $ 20,430     $ 334,335     $     $ 1,225,509  

Intersegment revenues

     323        37,607       36,428       (74,358      
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     871,067        58,037       370,763       (74,358     1,225,509  

Purchased gas cost

     498,739              374,992       (74,009     799,722  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     372,328        58,037       (4,229     (349     425,787  

Operating expenses

           

Operation and maintenance

     88,035        15,847       5,769       (351     109,300  

Depreciation and amortization

     50,903        7,792       725             59,420  

Taxes, other than income

     50,029        3,915       691             54,635  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     188,967        27,554       7,185       (351     223,355  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     183,361        30,483       (11,414     2       202,432  

Miscellaneous income (expense)

     623        (56     567       (628     506  

Interest charges

     28,816        7,614       839       (626     36,643  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     155,168        22,813       (11,686           166,295  

Income tax expense (benefit)

     60,693        8,193       (4,675           64,211  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     94,475        14,620       (7,011           102,084  

Income from discontinued operations, net of tax

     7,027                          7,027  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 101,502      $ 14,620     $ (7,011   $     $ 109,111  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 114,402      $ 38,871     $ 3,456     $     $ 156,729  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

33


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

<
     Six Months Ended March 31, 2013  
     Natural
Gas
Distribution
     Regulated
Transmission
and Storage
    Nonregulated      Eliminations     Consolidated  
     (In thousands)  

Operating revenues from external parties

   $ 1,569,730      $ 38,354     $ 735,067      $     $ 2,343,151  

Intersegment revenues

     2,233        84,175       93,775        (180,183      
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     1,571,963        122,529       828,842        (180,183     2,343,151  

Purchased gas cost

     945,326              782,076        (179,364     1,548,038  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     626,637        122,529       46,766        (819     795,113  

Operating expenses

            

Operation and maintenance

     173,080        31,710       13,645        (822     217,613  

Depreciation and amortization

     97,691        17,080       1,988              116,759  

Taxes, other than income

     86,343        8,226       1,072              95,641  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     357,114        57,016       16,705        (822     430,013  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     269,523        65,513       30,061        3       365,100  

Miscellaneous income (expense)

     2,460        (226     1,576        (1,400     2,410  

Interest charges

     49,227        14,728       1,295        (1,397     63,853  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     222,756