QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015
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 January 29, 2016.
Class
Shares Outstanding
No Par Value
102,106,896
GLOSSARY OF KEY TERMS
AEC
Atmos Energy Corporation
AEH
Atmos Energy Holdings, Inc.
AEM
Atmos Energy Marketing, LLC
AOCI
Accumulated other comprehensive income
Bcf
Billion cubic feet
FASB
Financial Accounting Standards Board
Fitch
Fitch Ratings, Ltd.
GAAP
Generally Accepted Accounting Principles
GRIP
Gas Reliability Infrastructure Program
Mcf
Thousand cubic feet
MMcf
Million cubic feet
Moody’s
Moody’s Investors Services, Inc.
NYMEX
New York Mercantile Exchange, Inc.
PPA
Pension Protection Act of 2006
PRP
Pipeline Replacement Program
RRC
Railroad Commission of Texas
RRM
Rate Review Mechanism
S&P
Standard & Poor’s Corporation
SEC
United States Securities and Exchange Commission
WNA
Weather Normalization Adjustment
2
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2015
September 30, 2015
(Unaudited)
(In thousands, except
share data)
ASSETS
Property, plant and equipment
$
9,502,944
$
9,240,100
Less accumulated depreciation and amortization
1,849,657
1,809,520
Net property, plant and equipment
7,653,287
7,430,580
Current assets
Cash and cash equivalents
78,903
28,653
Accounts receivable, net
456,904
295,160
Gas stored underground
236,017
236,603
Other current assets
91,446
70,569
Total current assets
863,270
630,985
Goodwill
742,702
742,702
Deferred charges and other assets
295,394
288,678
$
9,554,653
$
9,092,945
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: December 31, 2015 — 102,079,316 shares; September 30, 2015 — 101,478,818 shares
$
510
$
507
Additional paid-in capital
2,242,307
2,230,591
Accumulated other comprehensive loss
(102,962
)
(109,330
)
Retained earnings
1,132,254
1,073,029
Shareholders’ equity
3,272,109
3,194,797
Long-term debt
2,455,474
2,455,388
Total capitalization
5,727,583
5,650,185
Current liabilities
Accounts payable and accrued liabilities
280,487
238,942
Other current liabilities
471,333
457,954
Short-term debt
763,236
457,927
Total current liabilities
1,515,056
1,154,823
Deferred income taxes
1,441,325
1,411,315
Regulatory cost of removal obligation
425,555
427,553
Pension and postretirement liabilities
289,939
287,373
Deferred credits and other liabilities
155,195
161,696
$
9,554,653
$
9,092,945
See accompanying notes to condensed consolidated financial statements.
3
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31
2015
2014
(Unaudited)
(In thousands, except per
share data)
Operating revenues
Regulated distribution segment
$
638,602
$
846,772
Regulated pipeline segment
94,677
83,567
Nonregulated segment
272,524
462,288
Intersegment eliminations
(99,582
)
(133,862
)
906,221
1,258,765
Purchased gas cost
Regulated distribution segment
305,141
522,960
Regulated pipeline segment
—
—
Nonregulated segment
256,766
446,249
Intersegment eliminations
(99,449
)
(133,729
)
462,458
835,480
Gross profit
443,763
423,285
Operating expenses
Operation and maintenance
124,848
118,582
Depreciation and amortization
71,239
67,593
Taxes, other than income
51,471
49,385
Total operating expenses
247,558
235,560
Operating income
196,205
187,725
Miscellaneous expense
(1,209
)
(1,707
)
Interest charges
30,483
29,764
Income before income taxes
164,513
156,254
Income tax expense
61,652
58,659
Net income
$
102,861
$
97,595
Basic and diluted net income per share
$
1.00
$
0.96
Cash dividends per share
$
0.42
$
0.39
Basic and diluted weighted average shares outstanding
102,713
101,581
See accompanying notes to condensed consolidated financial statements.
4
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended December 31
2015
2014
(Unaudited)
(In thousands)
Net income
$
102,861
$
97,595
Other comprehensive income (loss), net of tax
Net unrealized holding losses on available-for-sale securities, net of tax of $442 and $613
(768
)
(1,067
)
Cash flow hedges:
Amortization and unrealized gain (loss) on interest rate agreements, net of tax of $2,749 and $(29,768)
4,783
(51,787
)
Net unrealized gains (losses) on commodity cash flow hedges, net of tax of $1,505 and $(18,696)
2,353
(28,952
)
Total other comprehensive income (loss)
6,368
(81,806
)
Total comprehensive income
$
109,229
$
15,789
See accompanying notes to condensed consolidated financial statements.
5
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
2015
2014
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
Net income
$
102,861
$
97,595
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization:
Charged to depreciation and amortization
71,239
67,593
Charged to other accounts
326
275
Deferred income taxes
59,299
55,418
Other
4,407
4,889
Net assets / liabilities from risk management activities
(7,495
)
(20,828
)
Net change in operating assets and liabilities
(160,144
)
(177,527
)
Net cash provided by operating activities
70,493
27,415
Cash Flows From Investing Activities
Capital expenditures
(291,674
)
(261,313
)
Other, net
1,029
(739
)
Net cash used in investing activities
(290,645
)
(262,052
)
Cash Flows From Financing Activities
Net increase in short-term debt
305,309
350,574
Net proceeds from issuance of long-term debt
—
493,538
Settlement of interest rate agreements
—
13,364
Repayment of long-term debt
—
(500,000
)
Cash dividends paid
(43,636
)
(39,592
)
Repurchase of equity awards
—
(7,985
)
Issuance of common stock
8,729
6,312
Net cash provided by financing activities
270,402
316,211
Net increase in cash and cash equivalents
50,250
81,574
Cash and cash equivalents at beginning of period
28,653
42,258
Cash and cash equivalents at end of period
$
78,903
$
123,832
See accompanying notes to condensed consolidated financial statements.
6
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2015
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 pipeline businesses as well as other nonregulated natural gas businesses. Historically, our regulated businesses have generated over 90 percent of our consolidated net income.
Through our regulated 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 distribution divisions, which at December 31, 2015, covered service areas located in eight states. In addition, we transport natural gas for others through our distribution system. Our regulated businesses also include our regulated pipeline and storage operations, which include the transportation of natural gas to our North Texas 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 regulated 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.
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, 2015. 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, 2015. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2015 are not indicative of our results of operations for the full 2016 fiscal year, which ends September 30, 2016.
No events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.
Significant accounting policies
Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. The new standard is currently scheduled to become effective for us beginning on October 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the effect on our financial position, results of operations and cash flows, as well as the transition approach we will select.
In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard will be effective for us beginning on October 1, 2016, and will be applied retrospectively. We are currently evaluating the impact this standard may have on our financial position, results of operations and cash flows.
In November 2015, the FASB issued guidance that requires all deferred income tax liabilities and assets to be presented as noncurrent in a classified balance sheet. Currently, entities are required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. The new standard will become effective for us beginning on October 1, 2017, with the option to early adopt, and can be applied either prospectively or retrospectively. The adoption of this
7
guidance will have no impact on our results of operations or cash flows. The reclassification of amounts from current to noncurrent will affect the presentation of our balance sheet.
Regulatory assets and liabilities
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is reported separately.
Significant regulatory assets and liabilities as of December 31, 2015 and September 30, 2015 included the following:
December 31, 2015
September 30, 2015
(In thousands)
Regulatory assets:
Pension and postretirement benefit costs(1)
$
116,485
$
121,183
Infrastructure mechanisms(2)
43,385
32,813
Deferred gas costs
16,310
9,715
Recoverable loss on reacquired debt
15,680
16,319
APT annual adjustment mechanism
—
1,002
Rate case costs
1,568
1,533
Other
11,878
9,774
$
205,306
$
192,339
Regulatory liabilities:
Regulatory cost of removal obligation
$
482,544
$
483,676
Deferred gas costs
32,895
28,100
Asset retirement obligation
9,063
9,063
APT annual adjustment mechanism
1,721
—
Other
3,415
3,693
$
529,638
$
524,532
(1)
Includes $14.3 million and $16.6 million of pension and postretirement expense deferred pursuant to regulatory authorization.
(2)
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all expenses associated with capital expenditures incurred pursuant to these rules, which primarily consists of interest, depreciation and other taxes, until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.
3. Segment Information
We operate the Company through the following three segments:
•
The regulated distribution segment, which includes our regulated natural gas distribution and related sales operations,
•
The regulated pipeline segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division and
•
The nonregulated segment, which is comprised of our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our regulated distribution segment operations are geographically dispersed, they are reported as a single segment as each regulated distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant
8
accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. We evaluate performance based on net income or loss of the respective operating units.
Income statements for the three month periods ended December 31, 2015 and 2014 by segment are presented in the following tables:
Three Months Ended December 31, 2015
Regulated
Distribution
Regulated
Pipeline
Nonregulated
Eliminations
Consolidated
(In thousands)
Operating revenues from external parties
$
637,167
$
23,407
$
245,647
$
—
$
906,221
Intersegment revenues
1,435
71,270
26,877
(99,582
)
—
638,602
94,677
272,524
(99,582
)
906,221
Purchased gas cost
305,141
—
256,766
(99,449
)
462,458
Gross profit
333,461
94,677
15,758
(133
)
443,763
Operating expenses
Operation and maintenance
91,349
27,088
6,544
(133
)
124,848
Depreciation and amortization
57,334
12,770
1,135
—
71,239
Taxes, other than income
45,261
5,571
639
—
51,471
Total operating expenses
193,944
45,429
8,318
(133
)
247,558
Operating income
139,517
49,248
7,440
—
196,205
Miscellaneous income (expense)
(752
)
(429
)
379
(407
)
(1,209
)
Interest charges
20,705
9,147
1,038
(407
)
30,483
Income before income taxes
118,060
39,672
6,781
—
164,513
Income tax expense
44,805
14,086
2,761
—
61,652
Net income
$
73,255
$
25,586
$
4,020
$
—
$
102,861
Capital expenditures
$
166,544
$
125,283
$
(153
)
$
—
$
291,674
Three Months Ended December 31, 2014
Regulated Distribution
Regulated Pipeline
Nonregulated
Eliminations
Consolidated
(In thousands)
Operating revenues from external parties
$
845,404
$
20,551
$
392,810
$
—
$
1,258,765
Intersegment revenues
1,368
63,016
69,478
(133,862
)
—
846,772
83,567
462,288
(133,862
)
1,258,765
Purchased gas cost
522,960
—
446,249
(133,729
)
835,480
Gross profit
323,812
83,567
16,039
(133
)
423,285
Operating expenses
Operation and maintenance
86,985
24,615
7,115
(133
)
118,582
Depreciation and amortization
55,086
11,382
1,125
—
67,593
Taxes, other than income
43,644
4,865
876
—
49,385
Total operating expenses
185,715
40,862
9,116
(133
)
235,560
Operating income
138,097
42,705
6,923
—
187,725
Miscellaneous income (expense)
(1,329
)
(252
)
300
(426
)
(1,707
)
Interest charges
21,640
8,324
226
(426
)
29,764
Income before income taxes
115,128
34,129
6,997
—
156,254
Income tax expense
43,741
12,094
2,824
—
58,659
Net income
$
71,387
$
22,035
$
4,173
$
—
$
97,595
Capital expenditures
$
166,247
$
94,754
$
312
$
—
$
261,313
9
Balance sheet information at December 31, 2015 and September 30, 2015 by segment is presented in the following tables:
December 31, 2015
Regulated Distribution
Regulated Pipeline
Nonregulated
Eliminations
Consolidated
(In thousands)
ASSETS
Property, plant and equipment, net
$
5,779,479
$
1,821,114
$
52,694
$
—
$
7,653,287
Investment in subsidiaries
1,020,629
—
—
(1,020,629
)
—
Current assets
Cash and cash equivalents
57,691
—
21,212
—
78,903
Assets from risk management activities
716
—
18,229
—
18,945
Other current assets
589,257
20,008
420,897
(264,740
)
765,422
Intercompany receivables
943,005
—
—
(943,005
)
—
Total current assets
1,590,669
20,008
460,338
(1,207,745
)
863,270
Goodwill
575,449
132,542
34,711
—
742,702
Noncurrent assets from risk management activities
96
—
—
—
96
Deferred charges and other assets
277,662
17,095
541
—
295,298
$
9,243,984
$
1,990,759
$
548,284
$
(2,228,374
)
$
9,554,653
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
$
3,272,109
$
602,861
$
417,768
$
(1,020,629
)
$
3,272,109
Long-term debt
2,455,474
—
—
—
2,455,474
Total capitalization
5,727,583
602,861
417,768
(1,020,629
)
5,727,583
Current liabilities
Short-term debt
1,017,236
—
—
(254,000
)
763,236
Liabilities from risk management activities
6,738
—
—
—
6,738
Other current liabilities
625,055
28,197
102,570
(10,740
)
745,082
Intercompany payables
—
923,366
19,639
(943,005
)
—
Total current liabilities
1,649,029
951,563
122,209
(1,207,745
)
1,515,056
Deferred income taxes
1,008,353
434,497
(1,525
)
—
1,441,325
Noncurrent liabilities from risk management activities
103,337
—
—
—
103,337
Regulatory cost of removal obligation
425,555
—
—
—
425,555
Pension and postretirement liabilities
289,939
—
—
—
289,939
Deferred credits and other liabilities
40,188
1,838
9,832
—
51,858
$
9,243,984
$
1,990,759
$
548,284
$
(2,228,374
)
$
9,554,653
10
September 30, 2015
Regulated Distribution
Regulated Pipeline
Nonregulated
Eliminations
Consolidated
(In thousands)
ASSETS
Property, plant and equipment, net
$
5,670,306
$
1,706,449
$
53,825
$
—
$
7,430,580
Investment in subsidiaries
1,038,670
—
(2,096
)
(1,036,574
)
—
Current assets
Cash and cash equivalents
23,863
—
4,790
—
28,653
Assets from risk management activities
378
—
8,854
—
9,232
Other current assets
426,270
24,628
480,503
(338,301
)
593,100
Intercompany receivables
887,713
—
—
(887,713
)
—
Total current assets
1,338,224
24,628
494,147
(1,226,014
)
630,985
Goodwill
575,449
132,542
34,711
—
742,702
Noncurrent assets from risk management activities
368
—
—
—
368
Deferred charges and other assets
265,693
17,288
5,329
—
288,310
$
8,888,710
$
1,880,907
$
585,916
$
(2,262,588
)
$
9,092,945
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
$
3,194,797
$
577,275
$
461,395
$
(1,038,670
)
$
3,194,797
Long-term debt
2,455,388
—
—
—
2,455,388
Total capitalization
5,650,185
577,275
461,395
(1,038,670
)
5,650,185
Current liabilities
Short-term debt
782,927
—
—
(325,000
)
457,927
Liabilities from risk management activities
9,568
—
—
—
9,568
Other current liabilities
569,273
29,780
99,480
(11,205
)
687,328
Intercompany payables
—
867,409
20,304
(887,713
)
—
Total current liabilities
1,361,768
897,189
119,784
(1,223,918
)
1,154,823
Deferred income taxes
1,008,091
406,254
(3,030
)
—
1,411,315
Noncurrent liabilities from risk management activities
110,539
—
—
—
110,539
Regulatory cost of removal obligation
427,553
—
—
—
427,553
Pension and postretirement liabilities
287,373
—
—
—
287,373
Deferred credits and other liabilities
43,201
189
7,767
—
51,157
$
8,888,710
$
1,880,907
$
585,916
$
(2,262,588
)
$
9,092,945
11
4. Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three months ended December 31, 2015 and 2014 are calculated as follows:
Three Months Ended December 31
2015
2014
(In thousands, except per share amounts)
Basic and Diluted Earnings Per Share
Net income
$
102,861
$
97,595
Less: Income allocated to participating securities
172
216
Income available to common shareholders
$
102,689
$
97,379
Basic and diluted weighted average shares outstanding
102,713
101,581
Net income per share - Basic and Diluted
$
1.00
$
0.96
2011 Share Repurchase Program
We did not repurchase any shares during the three months ended December 31, 2015 and 2014 under our 2011 share repurchase program, which is scheduled to end on September 30, 2016.
5. Debt
The nature and terms of our debt instruments and credit facilities are described in detail in Note 5 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. Except as noted below, there were no material changes in the terms of our debt instruments during the three months ended December 31, 2015.
Long-term debt
Long-term debt at December 31, 2015 and September 30, 2015 consisted of the following:
December 31, 2015
September 30, 2015
(In thousands)
Unsecured 6.35% Senior Notes, due June 2017
$
250,000
$
250,000
Unsecured 8.50% Senior Notes, due 2019
450,000
450,000
Unsecured 5.95% Senior Notes, due 2034
200,000
200,000
Unsecured 5.50% Senior Notes, due 2041
400,000
400,000
Unsecured 4.15% Senior Notes, due 2043
500,000
500,000
Unsecured 4.125% Senior Notes, due 2044
500,000
500,000
Medium-term note Series A, 1995-1, 6.67%, due 2025
10,000
10,000
Unsecured 6.75% Debentures, due 2028
150,000
150,000
Total long-term debt
2,460,000
2,460,000
Less:
Original issue discount on unsecured senior notes and debentures
4,526
4,612
$
2,455,474
$
2,455,388
On October 15, 2014, we issued $500 million of 4.125% 30-year unsecured senior notes, which replaced, on a long-term basis, our $500 million unsecured 4.95% senior notes. The effective rate of these notes is 4.086%, after giving effect to the offering costs and the settlement of the associated forward starting interest rate swaps. The net proceeds of approximately $494 million were used to repay our $500 million 4.95% senior unsecured notes at maturity on October 15, 2014.
12
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 primarily by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.
We currently finance our short-term borrowing requirements through a combination of a $1.25 billion commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility with third-party lenders. These facilities provide approximately $1.3 billion of working capital funding. At December 31, 2015 and September 30, 2015 a total of $763.2 million and $457.9 million was outstanding under our commercial paper program.
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 $1.3 billion of working capital funding, including a five-year $1.25 billion unsecured facility with an accordion feature, which, if utilized would increase the borrowing capacity to $1.5 billion, a $25 million unsecured facility and a $10 million unsecured revolving credit facility, which is used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $4.1 million at December 31, 2015.
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, 2016.
Nonregulated Operations
Atmos Energy Marketing, LLC (AEM), which is wholly owned by AEH, has one uncommitted $25 million bilateral credit facility and one committed $15 million bilateral credit facility that were renewed and extended in December 2015. The uncommitted $25 million bilateral credit facility currently expires in March 2016 and the $15 million bilateral credit facility expires in September 2016. 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 $36.2 million at December 31, 2015.
AEH has a $500 million intercompany demand credit facility with AEC. This facility bears interest at a rate equal to the one-month LIBOR rate plus 3.00 percent. Applicable state regulatory commissions have approved our use of this facility through December 31, 2016.
Shelf Registration
We filed a shelf registration statement with the Securities and Exchange Commission (SEC) on March 28, 2013 that originally permitted us to issue a total of $1.75 billion in common stock and/or debt securities. At December 31, 2015, $845 million of securities remain available for issuance under the shelf registration statement until March 28, 2016.
Debt Covenants
The availability of funds under our regulated credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At December 31, 2015, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 51 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
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 certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity.
13
We were in compliance with all of our debt covenants as of December 31, 2015. 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.
6. Interim Pension and Other Postretirement Benefit Plan Information
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three months ended December 31, 2015 and 2014 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
Three Months Ended December 31
Pension Benefits
Other Benefits
2015
2014
2015
2014
(In thousands)
Components of net periodic pension cost:
Service cost
$
4,698
$
5,051
$
2,706
$
3,896
Interest cost
7,095
6,699
3,106
3,596
Expected return on assets
(6,881
)
(6,436
)
(1,566
)
(1,608
)
Amortization of transition obligation
—
—
21
68
Amortization of prior service credit
(57
)
(49
)
(411
)
(411
)
Amortization of actuarial loss
3,320
3,917
(542
)
—
Net periodic pension cost
$
8,175
$
9,182
$
3,314
$
5,541
The assumptions used to develop our net periodic pension cost for the three months ended December 31, 2015 and 2014 are as follows:
Pension Benefits
Other Benefits
2015
2014
2015
2014
Discount rate
4.55
%
4.43
%
4.55
%
4.43
%
Rate of compensation increase
3.50
%
3.50
%
N/A
N/A
Expected return on plan assets
7.00
%
7.25
%
4.45
%
4.60
%
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 2016. Based on that determination, we are not required to make a minimum contribution to our defined benefit plans during the first quarter of fiscal 2016, nor do we anticipate making a contribution during the remainder of the fiscal year.
We contributed $5.5 million to our other post-retirement benefit plans during the three months ended December 31, 2015. We expect to contribute between $15 million and $25 million to these plans during fiscal 2016.
7. Commitments and Contingencies
Litigation and Environmental Matters
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 10 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, there were no material changes in the status of such litigation and environmental-related matters or claims during the three months ended December 31, 2015.
We are a party to various litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
14
Purchase Commitments
Our regulated distribution divisions, except for our Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at prices indexed to natural gas distribution hubs. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. There were no material changes to the purchase commitments for the three months ended December 31, 2015.
AEH has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. Except for purchases made in the normal course of business under these contracts, there were no material changes to the purchase commitments for the three months ended December 31, 2015.
Our nonregulated segment maintains long-term contracts related to storage and transportation. These 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, 2015. There were no material changes to the estimated storage and transportation fees for the three months ended December 31, 2015.
Regulatory Matters
Various regulatory agencies, including the SEC and the Commodities Futures Trading Commission, continue to adopt regulations implementing many of the provisions of the Dodd-Frank Act of 2010. We continue to enact new procedures and modify existing business practices and contractual arrangements to comply with such regulations. Additional rulemakings are pending which we believe will result in new reporting and disclosure obligations. The costs associated with hedging certain risks inherent in our business may be further increased when these expected additional regulations are adopted.
As of December 31, 2015, rate cases were in progress in our Colorado, Kansas and Kentucky service areas and formula rate filing mechanisms were in progress in Colorado, Kansas, Louisiana and West Texas. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
8. Financial Instruments
We currently use financial instruments in our regulated distribution and nonregulated segments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments, which have been tailored to our regulated distribution and nonregulated segments, and the related accounting for these financial instruments are fully described in Notes 2 and 12 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. During the three months ended December 31, 2015 there were no changes in our objectives, strategies and accounting for using financial instruments. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions. The following summarizes those objectives and strategies.
Regulated Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our regulated distribution segment from commodity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2015-2016 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we anticipate hedging approximately 33 percent, or 23.0 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.
Nonregulated Commodity Risk Management Activities
Our nonregulated segment is exposed to risks associated with changes in the market price of natural gas through the purchase, sale and delivery of natural gas to its customers at competitive prices. 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. Specifically, these operations use financial instruments in the following ways:
15
•
Gas delivery and related services - Certain financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, are used to mitigate the commodity price risk associated with deliveries under fixed-priced forward contracts to either deliver gas to customers or purchase gas from suppliers. These financial instruments have maturity dates ranging from one to 58 months.
•
Transportation and storage services - Our nonregulated operations 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.
•
Aggregating and purchasing gas supply - Certain financial instruments, designated as fair value hedges, are used to hedge our natural gas inventory used in asset optimization activities.
Interest Rate Risk Management Activities
We periodically manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
As of December 31, 2015, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $250 million and $450 million unsecured senior notes in fiscal 2017 and fiscal 2019, at 3.37% and 3.78%, which we designated as cash flow hedges at the time the swaps were executed. As of December 31, 2015, we had $18.6 million of net realized losses in accumulated other comprehensive income (AOCI) associated with the settlement of financial instruments used to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes, which will be recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2045.
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.
As of December 31, 2015, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of December 31, 2015, we had net long/(short) commodity contracts outstanding in the following quantities:
Contract Type
Hedge Designation
Regulated
Distribution
Nonregulated
Quantity (MMcf)
Commodity contracts
Fair Value
—
(23,528
)
Cash Flow
—
63,305
Not designated
11,792
51,663
11,792
91,440
16
Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of December 31, 2015 and September 30, 2015. The gross amounts of recognized assets and liabilities are netted within our unaudited Condensed Consolidated Balance Sheets to the extent that we have netting arrangements with the counterparties.
Regulated Distribution
Nonregulated
Balance Sheet Location
Assets
Liabilities
Assets
Liabilities
(In thousands)
December 31, 2015
Designated As Hedges:
Commodity contracts
Other current assets /
Other current liabilities
$
—
$
—
$
24,704
$
(38,275
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
—
—
432
(8,821
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
—
(103,142
)
—
—
Total
—
(103,142
)
25,136
(47,096
)
Not Designated As Hedges:
Commodity contracts
Other current assets /
Other current liabilities
716
(6,738
)
41,780
(42,232
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
96
(195
)
17,577
(16,184
)
Total
812
(6,933
)
59,357
(58,416
)
Gross Financial Instruments
812
(110,075
)
84,493
(105,512
)
Gross Amounts Offset on Consolidated Balance Sheet:
Contract netting
—
—
(84,493
)
84,493
Net Financial Instruments
812
(110,075
)
—
(21,019
)
Cash collateral
—
—
18,229
21,019
Net Assets/Liabilities from Risk Management Activities
$
812
$
(110,075
)
$
18,229
$
—
17
Regulated Distribution
Nonregulated
Balance Sheet Location
Assets
Liabilities
Assets
Liabilities
(In thousands)
September 30, 2015
Designated As Hedges:
Commodity contracts
Other current assets /
Other current liabilities
$
—
$
—
$
11,680
$
(36,067
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
—
—
126
(9,918
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
—
(110,539
)
—
—
Total
—
(110,539
)
11,806
(45,985
)
Not Designated As Hedges:
Commodity contracts
Other current assets /
Other current liabilities
378
(9,568
)
65,239
(65,780
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
368
—
14,318
(14,218
)
Total
746
(9,568
)
79,557
(79,998
)
Gross Financial Instruments
746
(120,107
)
91,363
(125,983
)
Gross Amounts Offset on Consolidated Balance Sheet:
Contract netting
—
—
(91,363
)
91,363
Net Financial Instruments
746
(120,107
)
—
(34,620
)
Cash collateral
—
—
8,854
34,620
Net Assets/Liabilities from Risk Management Activities
$
746
$
(120,107
)
$
8,854
$
—
Impact of Financial Instruments on the Income Statement
Hedge ineffectiveness for our nonregulated segment is recorded as a component of purchased gas cost and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended December 31, 2015 and 2014 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $7.9 million and $(2.2) million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.
Fair Value Hedges
The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three months ended December 31, 2015 and 2014 is presented below.
Three Months Ended December 31
2015
2014
(In thousands)
Commodity contracts
$
5,744
$
15,090
Fair value adjustment for natural gas inventory designated as the hedged item
2,161
(16,782
)
Total (increase) decrease in purchased gas cost
$
7,905
$
(1,692
)
The (increase) decrease in purchased gas cost is comprised of the following:
Basis ineffectiveness
$
1,289
$
986
Timing ineffectiveness
6,616
(2,678
)
$
7,905
$
(1,692
)
18
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.
Cash Flow Hedges
The impact of cash flow hedges on our condensed consolidated income statements for the three months ended December 31, 2015 and 2014 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.
Three Months Ended December 31, 2015
Regulated Distribution
Nonregulated
Consolidated
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
—
$
(22,965
)
$
(22,965
)
Loss arising from ineffective portion of commodity contracts
—
(43
)
(43
)
Total impact on purchased gas cost
—
(23,008
)
(23,008
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(137
)
—
(137
)
Total Impact from Cash Flow Hedges
$
(137
)
$
(23,008
)
$
(23,145
)
Three Months Ended December 31, 2014
Regulated Distribution
Nonregulated
Consolidated
(In thousands)
Gain reclassified from AOCI for effective portion of commodity contracts
$
—
$
344
$
344
Loss arising from ineffective portion of commodity contracts
—
(490
)
(490
)
Total impact on purchased gas cost
—
(146
)
(146
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(444
)
—
—
(444
)
Total Impact from Cash Flow Hedges
$
(444
)
$
(146
)
$
(590
)
19
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three months ended December 31, 2015 and 2014. 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.
