Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 2, 2017)
  • 10-Q (May 4, 2017)
  • 10-Q (Feb 7, 2017)
  • 10-Q (Aug 3, 2016)
  • 10-Q (May 4, 2016)
  • 10-Q (Feb 2, 2016)

 
8-K

 
Other

Atmos Energy 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-15
  4. Ex-31
  5. Ex-32
  6. Ex-32
Document


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




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

2



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

 
$
10,142,506

Less accumulated depreciation and amortization
1,987,347

 
1,873,900

Net property, plant and equipment
8,738,487

 
8,268,606

Current assets
 
 
 
Cash and cash equivalents
45,403

 
47,534

Accounts receivable, net
336,637

 
215,880

Gas stored underground
120,026

 
179,070

Current assets of disposal group classified as held for sale

 
151,117

Other current assets
61,018

 
88,085

Total current assets
563,084

 
681,686

Goodwill
729,673

 
726,962

Noncurrent assets of disposal group classified as held for sale

 
28,616

Deferred charges and other assets
330,222

 
305,019

 
$
10,361,466

 
$
10,010,889

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

 
$
520

Additional paid-in capital
2,464,252

 
2,388,027

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

 
1,262,534

Shareholders’ equity
3,834,864

 
3,463,059

Long-term debt
2,314,620

 
2,188,779

Total capitalization
6,149,484

 
5,651,838

Current liabilities
 
 
 
Accounts payable and accrued liabilities
185,212

 
196,485

Current liabilities of disposal group classified as held for sale

 
72,900

Other current liabilities
390,253

 
439,085

Short-term debt
670,607

 
829,811

Current maturities of long-term debt
250,000

 
250,000

Total current liabilities
1,496,072

 
1,788,281

Deferred income taxes
1,810,160

 
1,603,056

Regulatory cost of removal obligation
444,848

 
424,281

Pension and postretirement liabilities
305,845

 
297,743

Noncurrent liabilities of disposal group held for sale

 
316

Deferred credits and other liabilities
155,057

 
245,374

 
$
10,361,466

 
$
10,010,889

See accompanying notes to condensed consolidated financial statements.

3



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

 
$
862,127

Pipeline and storage segment
111,972

 
102,153

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

 
890,040

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
513,096

 
450,671

Pipeline and storage segment
725

 
925

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

 
377,356

Operation and maintenance expense
132,239

 
127,857

Depreciation and amortization expense
77,667

 
71,391

Taxes, other than income
65,614

 
61,780

Operating income
285,172

 
251,656

Miscellaneous income (expense)
833

 
(329
)
Interest charges
26,944

 
27,559

Income from continuing operations before income taxes
259,061

 
223,768

Income tax expense
97,049

 
80,765

Income from continuing operations
162,012

 
143,003

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

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

 

Net Income
$
164,728

 
$
141,810

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

 
$
1.39

Income (loss) per share from discontinued operations
0.03

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

 
$
1.38

Cash dividends per share
$
0.45

 
$
0.42

Basic and diluted weighted average shares outstanding
105,935

 
102,946

See accompanying notes to condensed consolidated financial statements.








4



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 
$
1,511,570

Pipeline and storage segment
221,924

 
200,569

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

 
1,564,793

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
908,442

 
764,662

Pipeline and storage segment
1,080

 
366

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

 
617,682

Operation and maintenance expense
257,177

 
247,685

Depreciation and amortization expense
154,625

 
142,047

Taxes, other than income
122,663

 
112,994

Operating income
495,090

 
444,385

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

 
57,096

Income from continuing operations before income taxes
436,955

 
386,081

Income tax expense
160,905

 
141,532

Income from continuing operations
276,050

 
244,549

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

 
122

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

 

Net Income
$
289,760

 
$
244,671

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

 
$
2.38

Income per share from discontinued operations
0.13

 

Net income per share - basic and diluted
$
2.74

 
$
2.38

Cash dividends per share
$
0.90

 
$
0.84

Basic and diluted weighted average shares outstanding
105,610

 
102,837

See accompanying notes to condensed consolidated financial statements.



5




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

 
$
141,810

 
$
289,760

 
$
244,671

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

 
(879
)
 
702

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

 
(53,618
)
 
95,444

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

 
220

 
4,982

 
2,573

Total other comprehensive income (loss)
5,760

 
(54,277
)
 
101,128

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

 
$
87,533

 
$
390,888

 
$
196,762


See accompanying notes to condensed consolidated financial statements.

6



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

 
$
244,671

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

 
143,211

Deferred income taxes
148,657

 
132,456

Gain on sale of discontinued operations
(12,931
)
 

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

Other
10,391

 
8,771

Net assets / liabilities from risk management activities
26,757

 
9,528

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

 
452,955

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

Proceeds from the sale of discontinued operations
133,560

 

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

 
4,597

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

Net proceeds from equity offering
49,400

 

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

 
17,641

Proceeds from issuance of long-term debt
125,000

 

Interest rate agreements cash collateral
25,670

 

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

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

Cash and cash equivalents at beginning of period
47,534

 
28,653

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

 
$
47,918


See accompanying notes to condensed consolidated financial statements.

7



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

2.    Unaudited Financial Information
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2017 are not indicative of our results of operations for the full 2017 fiscal year, which ends September 30, 2017.
We renewed our $25 million unsecured credit facility on April 1, 2017 as discussed in Note 5. In addition, in April 2017, we completed a State of Texas use tax audit that covered the period from October 2011 to June 2015, which resulted in an $18.7 million refund. We are in discussions with the State to update this audit through March 2017. No other events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.

Significant accounting policies
Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
As discussed in Note 3, due to the realignment of our reportable segments, prior periods' segment information has been recast in accordance with applicable accounting guidance. Additionally, as discussed in Note 6, due to the sale of AEM, prior period amounts have been presented as discontinued operations. The segment realignment and the presentation of discontinued operations do not impact our reported net income, financial position and cash flows. 
During the second quarter of fiscal 2017, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under current guidance.

8



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

9



benefit cost will be presented outside of income from operations on the statement of income. In addition, only the service cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The new guidance is effective for us in the fiscal year beginning on October 1, 2018 and for interim periods within that year. We are currently evaluating the potential impact of this new guidance.
Regulatory assets and liabilities
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is reported separately.

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

 
$
132,348

Infrastructure mechanisms(2)
61,470

 
42,719

Deferred gas costs
9,561

 
45,184

Recoverable loss on reacquired debt
12,482

 
13,761

Deferred pipeline record collection costs
9,079

 
7,336

APT annual adjustment mechanism
4,452

 
7,171

Rate case costs
1,467

 
1,539

Other
13,264

 
13,565

 
$
237,322

 
$
263,623

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

 
$
476,891

Deferred gas costs
49,672

 
20,180

Asset retirement obligations
13,404

 
13,404

Other
10,679

 
4,250

 
$
559,865

 
$
514,725

 
(1) 
Includes $11.8 million and $12.4 million of pension and postretirement expense deferred pursuant to regulatory authorization.
(2) 
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.



10



3.    Segment Information

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

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

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. We evaluate performance based on net income or loss of the respective operating segments. We allocate interest and pension expense to the pipeline and storage segment; however, there is no debt or pension liability recorded on the pipeline and storage segment balance sheet. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process.
    
Prior periods' segment information has been recast as required by applicable accounting guidance. The segment realignment does not impact our reported consolidated revenues or net income. 

11



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

 
$
25,969

 
$

 
$

 
$
988,186

Intersegment revenues
324

 
86,003

 

 
(86,327
)
 

Total operating revenues
962,541

 
111,972

 

 
(86,327
)
 
988,186

Purchased gas cost
513,096

 
725

 

 
(86,327
)
 
427,494

Operation and maintenance expense
103,703

 
28,536

 

 

 
132,239

Depreciation and amortization expense
61,302

 
16,365

 

 

 
77,667

Taxes, other than income
57,636

 
7,978

 

 

 
65,614

Operating income
226,804

 
58,368

 

 

 
285,172

Miscellaneous income (expense)
1,029

 
(196
)
 

 

 
833

Interest charges
16,925

 
10,019

 

 

 
26,944

Income from continuing operations before income taxes
210,908

 
48,153

 

 

 
259,061

Income tax expense
79,763

 
17,286

 

 

 
97,049

Income from continuing operations
131,145

 
30,867

 

 

 
162,012

Income from discontinued operations, net of tax

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

 
2,716

 

 
2,716

Net income
$
131,145

 
$
30,867

 
$
2,716

 
$

 
$
164,728

Capital expenditures
$
208,185

 
$
53,238

 
$

 
$

 
$
261,423

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

 
$
28,284

 
$

 
$

 
$
890,040

Intersegment revenues
371

 
73,869

 

 
(74,240
)
 

Total operating revenues
862,127

 
102,153

 

 
(74,240
)
 
890,040

Purchased gas cost
450,671

 
925

 

 
(74,240
)
 
377,356

Operation and maintenance expense
100,146

 
27,711

 

 

 
127,857

Depreciation and amortization expense
57,941

 
13,450

 

 

 
71,391

Taxes, other than income
54,978

 
6,802

 

 

 
61,780

Operating income
198,391

 
53,265

 

 

 
251,656

Miscellaneous income (expense)
38

 
(367
)
 

 

 
(329
)
Interest charges
18,414

 
9,145

 

 

 
27,559

Income from continuing operations before income taxes
180,015

 
43,753

 

 

 
223,768

Income tax expense
64,935

 
15,830

 

 

 
80,765

Income from continuing operations
115,080

 
27,923

 

 

 
143,003

Loss from discontinued operations, net of tax

 

 
(1,193
)
 

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

 
$
27,923

 
$
(1,193
)
 
$

 
$
141,810

Capital expenditures
$
175,186

 
$
70,357

 
$
49

 
$

 
$
245,592


12




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

 
$
51,871

 
$

 
$

 
$
1,768,354

Intersegment revenues
714

 
170,053

 

 
(170,767
)
 

Total operating revenues
1,717,197

 
221,924

 

 
(170,767
)
 
1,768,354

Purchased gas cost
908,442

 
1,080

 

 
(170,723
)
 
738,799

Operation and maintenance expense
196,417

 
60,804

 

 
(44
)
 
257,177

Depreciation and amortization expense
122,459

 
32,166

 

 

 
154,625

Taxes, other than income
108,182

 
14,481

 

 

 
122,663

Operating income
381,697

 
113,393

 

 

 
495,090

Miscellaneous income (expense)
396

 
(557
)
 

 

 
(161
)
Interest charges
38,043

 
19,931

 

 

 
57,974

Income from continuing operations before income taxes
344,050

 
92,905

 

 

 
436,955

Income tax expense
127,541

 
33,364

 

 

 
160,905

Income from continuing operations
216,509

 
59,541

 

 

 
276,050

Income from discontinued operations, net of tax

 

 
10,994

 

 
10,994

Gain on sale of discontinued operations, net of tax

 

 
2,716

 

 
2,716

Net income
$
216,509

 
$
59,541

 
$
13,710

 
$

 
$
289,760

Capital expenditures
$
430,669

 
$
128,716

 
$

 
$

 
$
559,385

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

 
$
53,924

 
$

 
$

 
$
1,564,793

Intersegment revenues
701

 
146,645

 

 
(147,346
)
 

Total operating revenues
1,511,570

 
200,569

 

 
(147,346
)
 
1,564,793

Purchased gas cost
764,662

 
366

 

 
(147,346
)
 
617,682

Operation and maintenance expense
192,335

 
55,350

 

 

 
247,685

Depreciation and amortization expense
115,555

 
26,492

 

 

 
142,047

Taxes, other than income
100,536

 
12,458

 

 

 
112,994

Operating income
338,482

 
105,903

 

 

 
444,385

Miscellaneous expense
(439
)
 
(769
)
 

 

 
(1,208
)
Interest charges
38,804

 
18,292

 

 

 
57,096

Income from continuing operations before income taxes
299,239

 
86,842

 

 

 
386,081

Income tax expense
110,223

 
31,309

 

 

 
141,532

Income from continuing operations
189,016

 
55,533

 

 

 
244,549

Income from discontinued operations, net of tax

 

 
122

 

 
122

Net income
$
189,016

 
$
55,533

 
$
122

 
$

 
$
244,671

Capital expenditures
$
340,593

 
$
195,338

 
$
73

 
$

 
$
536,004

 

13



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

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

 
$
2,221,576

 
$

 
$

 
$
8,738,487

Investment in subsidiaries
764,702

 
13,851

 

 
(778,553
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
45,403

 

 

 

 
45,403

Other current assets
495,270

 
24,154

 

 
(1,743
)
 
517,681

Intercompany receivables
1,015,217

 

 

 
(1,015,217
)
 

Total current assets
1,555,890

 
24,154

 

 
(1,016,960
)
 
563,084

Goodwill
586,661

 
143,012

 

 

 
729,673

Deferred charges and other assets
302,827

 
27,395

 

 

 
330,222

 
$
9,726,991

 
$
2,429,988

 
$

 
$
(1,795,513
)
 
$
10,361,466

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

 
$
778,553

 
$

 
$
(778,553
)
 
$
3,834,864

Long-term debt
2,314,620

 

 

 

 
2,314,620

Total capitalization
6,149,484

 
778,553

 

 
(778,553
)
 
6,149,484

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

 

 

 

 
250,000

Short-term debt
670,607

 

 

 

 
670,607

Other current liabilities
543,577

 
33,631

 

 
(1,743
)
 
575,465

Intercompany payables

 
1,015,217

 

 
(1,015,217
)
 

Total current liabilities
1,464,184

 
1,048,848

 

 
(1,016,960
)
 
1,496,072

Deferred income taxes
1,230,279

 
579,881

 

 

 
1,810,160

Regulatory cost of removal obligation
422,191

 
22,657

 

 

 
444,848

Pension and postretirement liabilities
305,845

 

 

 

 
305,845

Deferred credits and other liabilities
155,008

 
49

 

 

 
155,057

 
$
9,726,991

 
$
2,429,988

 
$

 
$
(1,795,513
)
 
$
10,361,466


14





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

 
$
2,060,141

 
$

 
$

 
$
8,268,606

Investment in subsidiaries
768,415

 
13,854

 

 
(782,269
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
22,117

 

 
25,417

 

 
47,534

Current assets of disposal group classified as held for sale

 

 
162,508

 
(11,391
)
 
151,117

Other current assets
489,963

 
39,078

 
5

 
(46,011
)
 
483,035

Intercompany receivables
971,665

 

 

 
(971,665
)
 

Total current assets
1,483,745

 
39,078

 
187,930

 
(1,029,067
)
 
681,686

Goodwill
583,950

 
143,012

 

 

 
726,962

Noncurrent assets of disposal group classified as held for sale

 

 
28,785

 
(169
)
 
28,616

Deferred charges and other assets
277,240

 
27,779

 

 

 
305,019

 
$
9,321,815

 
$
2,283,864

 
$
216,715

 
$
(1,811,505
)
 
$
10,010,889

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

 
$
715,672

 
$
66,597

 
$
(782,269
)
 
$
3,463,059

Long-term debt
2,188,779

 

 

 

 
2,188,779

Total capitalization
5,651,838

 
715,672

 
66,597

 
(782,269
)
 
5,651,838

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

 

 

 

 
250,000

Short-term debt
829,811

 

 
35,000

 
(35,000
)
 
829,811

Current liabilities of the disposal group classified as held for sale

 

 
81,908

 
(9,008
)
 
72,900

Other current liabilities
605,790

 
39,911

 
3,263

 
(13,394
)
 
635,570

Intercompany payables

 
957,526

 
14,139

 
(971,665
)
 

Total current liabilities
1,685,601

 
997,437

 
134,310

 
(1,029,067
)
 
1,788,281

Deferred income taxes
1,055,348

 
543,390

 
4,318

 

 
1,603,056

Regulatory cost of removal obligation
397,162

 
27,119

 

 

 
424,281

Pension and postretirement liabilities
297,743

 

 

 

 
297,743

Noncurrent liabilities of disposal group classified as held for sale

 

 
316

 

 
316

Deferred credits and other liabilities
234,123

 
246

 
11,174

 
(169
)
 
245,374

 
$
9,321,815

 
$
2,283,864

 
$
216,715

 
$
(1,811,505
)
 
$
10,010,889


15




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

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

 
$
143,003

 
$
276,050

 
$
244,549

Less: Income from continuing operations allocated to participating securities
193

 
231

 
348

 
405

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

 
$
142,772

 
$
275,702

 
$
244,144

Basic and diluted weighted average shares outstanding
105,935

 
102,946

 
105,610

 
102,837

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

 
$
1.39

 
$
2.61

 
$
2.38

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

 
$
(1,193
)
 
$
13,710

 
$
122

Less: Income from discontinued operations allocated to participating securities
2

 

 
15

 

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

 
$
(1,193
)
 
$
13,695

 
$
122

Basic and diluted weighted average shares outstanding
105,935

 
102,946

 
105,610

 
102,837

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

 
$
(0.01
)
 
$
0.13

 
$

Net income per share — Basic and Diluted
$
1.55

 
$
1.38

 
$
2.74

 
$
2.38





16



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

 
$
250,000

Unsecured 8.50% Senior Notes, due 2019
450,000

 
450,000

Unsecured 5.95% Senior Notes, due 2034
200,000

 
200,000

Unsecured 5.50% Senior Notes, due 2041
400,000

 
400,000

Unsecured 4.15% Senior Notes, due 2043
500,000

 
500,000

Unsecured 4.125% Senior Notes, due 2044
500,000

 
500,000

Medium-term note Series A, 1995-1, 6.67%, due 2025
10,000

 
10,000

Unsecured 6.75% Debentures, due 2028
150,000

 
150,000

Floating-rate term loan, due 2019
125,000

 

Total long-term debt
2,585,000

 
2,460,000

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

 
4,270

Debt issuance cost
16,281

 
16,951

Current maturities
250,000

 
250,000

 
$
2,314,620

 
$
2,188,779

 
On September 22, 2016, we entered into a three year, $200 million multi-draw floating-rate term loan agreement with a syndicate of three lenders. Borrowings under the term loan may be made in increments of $1.0 million or higher, may be repaid at any time during the loan period and will bear interest at a rate dependent upon our credit ratings at the time of such borrowing and based, at our election, on a base rate or LIBOR for the applicable interest period. The term loan will be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. At March 31, 2017, there was $125.0 million outstanding under the term loan.
We utilize short-term debt to fund ongoing working capital needs, such as our seasonal requirements for gas supply, general corporate liquidity and capital expenditures. Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.
We currently finance our short-term borrowing requirements through a combination of a $1.5 billion commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $1.5 billion of total working capital funding. The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility that expires September 25, 2021. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from zero percent to 1.25 percent, based on the Company’s credit ratings. Additionally, the facility contains a $250 million accordion feature, which provides the opportunity to increase the total committed loan to $1.75 billion. This facility was amended in October 2016 to increase the total availability from $1.25 billion. At March 31, 2017 and September 30, 2016 a total of $670.6 million and $829.8 million was outstanding under our commercial paper program.

Additionally, we have a $25 million unsecured facility, which was renewed on April 1, 2017, and a $10 million unsecured revolving credit facility, which is used primarily to issue letters of credit. At March 31, 2017, there were no borrowings outstanding under either of these facilities; however, outstanding letters of credit reduced the total amount available to us under our $10 million unsecured revolving facility to $4.1 million.
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy

17



of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At March 31, 2017, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 47 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. We were in compliance with all of our debt covenants as of March 31, 2017. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.
AEM had one uncommitted $25 million 364-day bilateral credit facility that was scheduled to expire on July 31, 2017 and one committed $15 million 364-day bilateral credit facility that was scheduled to expire on September 30, 2017. In connection with the sale of AEM discussed in Note 6, both facilities were terminated on January 3, 2017.
6. Divestitures and Acquisitions
Divestiture of Atmos Energy Marketing (AEM)
On October 29, 2016, we entered into a Membership Interest Purchase Agreement (the Agreement) with CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. (CES) to sell all of the equity interests of AEM. The transaction closed on January 3, 2017, with an effective date of January 1, 2017. CES paid a cash purchase price of $38.3 million plus estimated working capital of $103.2 million for total cash consideration of $141.5 million. Of this amount, $7.0 million was placed into escrow and will be paid to the Company within 24 months, net of any indemnification claims agreed upon between the two companies. We recognized a net gain of $0.03 per diluted share on the sale in the second quarter of fiscal 2017 and expect to complete the working capital true–up during the third quarter of fiscal 2017.
The operating results of our natural gas marketing reportable segment have been reported on the condensed consolidated statements of income as income from discontinued operations, net of income tax.  Accordingly, expenses related to allocable general corporate overhead and interest expense are not included in these results.  The decision to report this segment as a discontinued operation was predicated, in part, on the following qualitative and quantitative factors:  1) the disposal results in the company becoming a fully regulated entity; 2) the fact that an entire reportable segment will be disposed and 3) the fact the disposed segment represented in excess of 30 percent of consolidated revenues over the last five fiscal years.
The tables below set forth selected financial and operational information related to assets, liabilities and operating results related to discontinued operations. Operating expenses include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income. Additionally, assets and liabilities related to our natural gas marketing operations are classified as “held for sale” on our consolidated balance sheet at September 30, 2016. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported consolidated net income.

18



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

 
$
269,519

 
 
 
 
Purchased gas cost

 
264,259

Operating expenses

 
6,900

Operating loss