0000731802-18-000020.txt : 20180502 0000731802-18-000020.hdr.sgml : 20180502 20180502171615 ACCESSION NUMBER: 0000731802-18-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 65 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180502 DATE AS OF CHANGE: 20180502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATMOS ENERGY CORP CENTRAL INDEX KEY: 0000731802 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 751743247 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10042 FILM NUMBER: 18800725 BUSINESS ADDRESS: STREET 1: 1800 THREE LINCOLN CTR STREET 2: 5430 LBJ FREEWAY CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9729349227 MAIL ADDRESS: STREET 1: 1800 THREE LINCOLN CTR STREET 2: 5430 LBJ FREEWAY CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: ENERGAS CO DATE OF NAME CHANGE: 19881024 10-Q 1 ato201833110-q.htm 10-Q 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, 2018
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 27, 2018.
Class
  
Shares Outstanding
No Par Value
  
111,064,659




GLOSSARY OF KEY TERMS
 
 
 
Adjusted diluted EPS from continuing operations
Non-GAAP measure defined as diluted earnings per share from continuing operations before the one-time, non-cash income tax benefit
Adjusted income from continuing operations
Non-GAAP measure defined as income from continuing operations before the one-time, non-cash income tax benefit
AEC
Atmos Energy Corporation
AEH
Atmos Energy Holdings, Inc.
AEM
Atmos Energy Marketing, LLC
AOCI
Accumulated other comprehensive income
ARM
Annual Rate Mechanism
Bcf
Billion cubic feet
Contribution Margin
Non-GAAP measure defined as operating revenues less purchased gas cost
DARR
Dallas Annual Rate Review
ERISA
Employee Retirement Income Security Act of 1974
FASB
Financial Accounting Standards Board
GAAP
Generally Accepted Accounting Principles
GRIP
Gas Reliability Infrastructure Program
GSRS
Gas System Reliability Surcharge
Mcf
Thousand cubic feet
MMcf
Million cubic feet
Moody’s
Moody’s Investors Services, Inc.
NTSB
National Transportation Safety Board
PPA
Pension Protection Act of 2006
PRP
Pipeline Replacement Program
RRC
Railroad Commission of Texas
RRM
Rate Review Mechanism
RSC
Rate Stabilization Clause
S&P
Standard & Poor’s Corporation
SAVE
Steps to Advance Virginia Energy
SEC
United States Securities and Exchange Commission
SGR
Supplemental Growth Filing
SIR
System Integrity Rider
SRF
Stable Rate Filing
SSIR
System Safety and Integrity Rider
TCJA
Tax Cuts and Jobs Act of 2017
WNA
Weather Normalization Adjustment

2



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS 
 
March 31,
2018
 
September 30,
2017
 
(Unaudited)
 
 
 
(In thousands, except
share data)
ASSETS
 
 
 
Property, plant and equipment
$
11,903,715

 
$
11,301,304

Less accumulated depreciation and amortization
2,142,386

 
2,042,122

Net property, plant and equipment
9,761,329

 
9,259,182

Current assets
 
 
 
Cash and cash equivalents
71,074

 
26,409

Accounts receivable, net
407,134

 
222,263

Gas stored underground
89,265

 
184,653

Other current assets
55,263

 
106,321

Total current assets
622,736

 
539,646

Goodwill
730,132

 
730,132

Deferred charges and other assets
242,125

 
220,636

 
$
11,356,322

 
$
10,749,596

CAPITALIZATION AND LIABILITIES
 
 
 
Shareholders’ equity
 
 
 
Common stock, no par value (stated at $0.005 per share); 200,000,000 shares authorized; issued and outstanding: March 31, 2018 — 111,060,328 shares; September 30, 2017 — 106,104,634 shares
$
555

 
$
531

Additional paid-in capital
2,951,545

 
2,536,365

Accumulated other comprehensive loss
(85,011
)
 
(105,254
)
Retained earnings
1,854,257

 
1,467,024

Shareholders’ equity
4,721,346

 
3,898,666

Long-term debt
2,617,892

 
3,067,045

Total capitalization
7,339,238

 
6,965,711

Current liabilities
 
 
 
Accounts payable and accrued liabilities
230,823

 
233,050

Other current liabilities
538,702

 
332,648

Short-term debt
129,602

 
447,745

Current maturities of long-term debt
450,000

 

Total current liabilities
1,349,127

 
1,013,443

Deferred income taxes
1,107,036

 
1,878,699

Regulatory excess deferred taxes (See Note 6)
737,798

 

Regulatory cost of removal obligation
484,746

 
485,420

Pension and postretirement liabilities
237,448

 
230,588

Deferred credits and other liabilities
100,929

 
175,735

 
$
11,356,322

 
$
10,749,596

See accompanying notes to condensed consolidated financial statements.

3



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended 
 March 31
 
2018
 
2017
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Distribution segment
$
1,199,291

 
$
962,541

Pipeline and storage segment
120,955

 
111,972

Intersegment eliminations
(100,837
)
 
(86,327
)
Total operating revenues
1,219,409

 
988,186

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
727,053

 
513,096

Pipeline and storage segment
433

 
725

Intersegment eliminations
(100,526
)
 
(86,327
)
Total purchased gas cost
626,960

 
427,494

Operation and maintenance expense
161,073

 
132,239

Depreciation and amortization expense
89,381

 
77,667

Taxes, other than income
73,007

 
65,614

Operating income
268,988

 
285,172

Miscellaneous (expense) income
(253
)
 
833

Interest charges
27,304

 
26,944

Income from continuing operations before income taxes
241,431

 
259,061

Income tax expense
62,439

 
97,049

Income from continuing operations
178,992

 
162,012

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

 
2,716

Net income
$
178,992

 
$
164,728

Basic and diluted net income per share
 
 
 
Income per share from continuing operations
$
1.60

 
$
1.52

Income per share from discontinued operations

 
0.03

Net income per share - basic and diluted
$
1.60

 
$
1.55

Cash dividends per share
$
0.485

 
$
0.450

Basic and diluted weighted average shares outstanding
111,706

 
105,935

See accompanying notes to condensed consolidated financial statements.

4



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
 
Six Months Ended 
 March 31
 
2018
 
2017
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Distribution segment
$
2,060,083

 
$
1,717,197

Pipeline and storage segment
247,418

 
221,924

Intersegment eliminations
(198,900
)
 
(170,767
)
Total operating revenues
2,108,601

 
1,768,354

 
 
 
 
Purchased gas cost
 
 
 
Distribution segment
1,190,811

 
908,442

Pipeline and storage segment
1,345

 
1,080

Intersegment eliminations
(198,279
)
 
(170,723
)
Total purchased gas cost
993,877

 
738,799

Operation and maintenance expense
290,640

 
257,177

Depreciation and amortization expense
177,755

 
154,625

Taxes, other than income
135,780

 
122,663

Operating income
510,549

 
495,090

Miscellaneous expense
(2,288
)
 
(161
)
Interest charges
58,813

 
57,974

Income from continuing operations before income taxes
449,448

 
436,955

Income tax (benefit) expense
(43,676
)
 
160,905

Income from continuing operations
493,124

 
276,050

Income from discontinued operations, net of tax ($0 and $6,841)

 
10,994

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

 
2,716

Net Income
$
493,124

 
$
289,760

Basic and diluted net income per share
 
 
 
Income per share from continuing operations
$
4.47

 
$
2.61

Income per share from discontinued operations

 
0.13

Net income per share - basic and diluted
$
4.47

 
$
2.74

Cash dividends per share
$
0.97

 
$
0.90

Basic and diluted weighted average shares outstanding
110,135

 
105,610

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
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
(In thousands)
Net income
$
178,992

 
$
164,728

 
$
493,124

 
$
289,760

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $(276), $879, $(338) and $403
(939
)
 
1,530

 
(1,046
)
 
702

Cash flow hedges:
 
 
 
 
 
 
 
Amortization and unrealized gain on interest rate agreements, net of tax of $6,575, $2,432, $6,026 and $54,861
22,244

 
4,230

 
21,289

 
95,444

Net unrealized gains on commodity cash flow hedges, net of tax of $0, $0, $0 and $3,183

 

 

 
4,982

Total other comprehensive income
21,305

 
5,760

 
20,243

 
101,128

Total comprehensive income
$
200,297

 
$
170,488

 
$
513,367

 
$
390,888


See accompanying notes to condensed consolidated financial statements.

6



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended 
 March 31
 
2018
 
2017
 
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
493,124

 
$
289,760

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
177,755

 
154,810

Deferred income taxes
116,023

 
148,657

One-time income tax benefit
(165,675
)
 

Gain on sale of discontinued operations

 
(12,931
)
Discontinued cash flow hedging for natural gas marketing commodity contracts

 
(10,579
)
Other
12,252

 
10,391

Net assets / liabilities from risk management activities
812

 
26,757

Net change in operating assets and liabilities
117,076

 
(54,862
)
Net cash provided by operating activities
751,367

 
552,003

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(693,978
)
 
(559,385
)
Acquisition

 
(85,714
)
Proceeds from the sale of discontinued operations
3,000

 
133,560

Available-for-sale securities activities, net
(1,175
)
 
(8,918
)
Other, net
4,009

 
3,787

Net cash used in investing activities
(688,144
)
 
(516,670
)
Cash Flows From Financing Activities
 
 
 
Net decrease in short-term debt
(318,143
)
 
(159,204
)
Net proceeds from equity offering
395,092

 
49,400

Issuance of common stock through stock purchase and employee retirement plans
11,902

 
16,984

Proceeds from issuance of long-term debt

 
125,000

Interest rate agreements cash collateral

 
25,670

Cash dividends paid
(105,891
)
 
(95,314
)
Other
(1,518
)
 

Net cash used in financing activities
(18,558
)
 
(37,464
)
Net increase (decrease) in cash and cash equivalents
44,665

 
(2,131
)
Cash and cash equivalents at beginning of period
26,409

 
47,534

Cash and cash equivalents at end of period
$
71,074

 
$
45,403


See accompanying notes to condensed consolidated financial statements.

7



ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2018
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 distribution business is 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 over three million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at March 31, 2018, covered service areas located in eight states.
Our pipeline and storage business, which is also subject to federal and state regulations, includes the transportation of natural gas to our Texas and Louisiana distribution systems and the management of our underground storage facilities used to support our distribution business in various states.

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, 2017. 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, 2017. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2018 are not indicative of our results of operations for the full 2018 fiscal year, which ends September 30, 2018.
Except for the filed formula rate mechanisms as discussed in Note 9, 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, 2017.
During the second quarter of fiscal 2018, we completed our annual goodwill impairment assessment using a qualitative assessment, as permitted under U.S. GAAP. We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit. 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. 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, 2018, we had substantially completed the evaluation of our sources of revenue and the impact that the new guidance will have on our financial position, results of operations, cash flows and business processes. Based on this evaluation, 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 expect to apply the new guidance using the modified retrospective method on the date of adoption. We are currently still evaluating the impact on our financial statement presentation and related disclosures.
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 on our financial position, results of operations and cash flows.

8



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. Additionally, in January 2018, the FASB issued amendments to the standard that provides a practical expedient for entities to not evaluate existing or expired land easements that were not previously accounted for as leases under the current guidance. We are currently evaluating the effect of this standard and amendments 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 on our financial position, results of operations and cash flows. 
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. We early adopted the new standard, effective for our goodwill impairment test performed in our second fiscal quarter of 2018. The new standard did not have a material 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 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 Federal Energy Regulatory Commission (“FERC”), which regulates interstate transmission pipelines and also establishes, through its Uniform System of Accounts, accounting practices of rate-regulated entities, has issued guidance that states it will permit an election to either continue to capitalize non-service benefit costs or to cease capitalizing such costs for regulatory purposes.  Accounting guidelines by the FERC are typically also upheld by state commissions.  As such, we plan to continue to capitalize all components of net periodic benefit cost for ratemaking purposes and will defer the non-service cost components as a regulatory asset for U.S. GAAP reporting purposes. The new guidance will be effective for us in the fiscal year beginning on October 1, 2018 and for interim periods within that year.  The standard requires retrospective application of the amendment related to the presentation of non-service cost components outside of income from operations in the statement of income and prospective application of the change in eligible costs for capitalization. We do not anticipate the new standard will have a material impact on our financial position, results of operations and cash flows.
In February 2018, the FASB issued new guidance as a result of the Tax Cuts and Jobs Act of 2017 (the "TCJA"), related to the treatment of certain tax effects from accumulated other comprehensive income. The new guidance allows entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the adoption of the TCJA. The new guidance will be effective for us in the fiscal year beginning on October 1, 2019 and for interim periods within that year. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We are currently evaluating the impact of this new guidance on our financial results and disclosures.
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.

9



Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and a portion 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 our regulatory excess deferred taxes and regulatory cost of removal obligation is reported separately.
Significant regulatory assets and liabilities as of March 31, 2018 and September 30, 2017 included the following:
 
March 31,
2018
 
September 30,
2017
 
(In thousands)
Regulatory assets:
 
 
 
Pension and postretirement benefit costs(1)
$
20,918

 
$
26,826

Infrastructure mechanisms(2)
65,286

 
46,437

Deferred gas costs

 
65,714

Recoverable loss on reacquired debt
9,954

 
11,208

Deferred pipeline record collection costs
14,646

 
11,692

APT annual adjustment mechanism

 
2,160

Rate case costs
3,016

 
2,629

Other
8,064

 
10,132

 
$
121,884

 
$
176,798

Regulatory liabilities:
 
 
 
Regulatory excess deferred taxes(3)
$
737,798

 
$

Regulatory cost of service reserve(4)
29,042

 

Regulatory cost of removal obligation
526,483

 
521,330

Deferred gas costs
167,036

 
15,559

Asset retirement obligation
12,827

 
12,827

APT annual adjustment mechanism
5,081

 

Other
14,740

 
5,941

 
$
1,493,007

 
$
555,657

 
(1)
Includes $7.8 million and $9.4 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.
(3)
The TCJA resulted in the remeasurement of the net deferred tax liability included in our rate base. The excess deferred taxes will be returned to utility customers in accordance with regulatory requirements. See Note 6 for further information.
(4)
Effective January 1, 2018, regulators in each of our service areas required us to establish a regulatory liability for the difference in recoverable federal taxes included in revenues based on the former 35% federal statutory rate and the new 21% federal statutory rate for service provided on or after January 1, 2018. This liability will be returned to utility customers in accordance with regulatory requirements. See Note 6 for further information.

3.    Segment Information

 We manage and review our consolidated operations through the following reportable segments:

The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states.
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.
The natural gas marketing segment was 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.

10




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, 2017. We evaluate performance based on net income or loss of the respective operating units. 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. Income taxes are allocated to each segment as if each segment’s taxes were calculated on a separate return basis.
Income statements and capital expenditures for the three and six months ended March 31, 2018 and 2017 by segment are presented in the following tables:
 
Three Months Ended March 31, 2018
 
Distribution
 
Pipeline and Storage
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
1,198,309

 
$
21,100

 
$

 
$
1,219,409

Intersegment revenues
982

 
99,855

 
(100,837
)
 

Total operating revenues
1,199,291

 
120,955

 
(100,837
)
 
1,219,409

Purchased gas cost
727,053

 
433

 
(100,526
)
 
626,960

Operation and maintenance expense
131,991

 
29,393

 
(311
)
 
161,073

Depreciation and amortization expense
65,649

 
23,732

 

 
89,381

Taxes, other than income
64,692

 
8,315

 

 
73,007

Operating income
209,906

 
59,082

 

 
268,988

Miscellaneous income (expense)
393

 
(646
)
 

 
(253
)
Interest charges
16,898

 
10,406

 

 
27,304

Income before income taxes
193,401

 
48,030

 

 
241,431

Income tax expense
48,158

 
14,281

 

 
62,439

Net income
$
145,243

 
$
33,749

 
$

 
$
178,992

Capital expenditures
$
224,235

 
$
86,505

 
$

 
$
310,740



11



 
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

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


 
Six Months Ended March 31, 2018
 
Distribution
 
Pipeline and Storage
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
2,058,762

 
$
49,839

 
$

 
$
2,108,601

Intersegment revenues
1,321

 
197,579

 
(198,900
)
 

Total operating revenues
2,060,083

 
247,418

 
(198,900
)
 
2,108,601

Purchased gas cost
1,190,811

 
1,345

 
(198,279
)
 
993,877

Operation and maintenance expense
235,728

 
55,533

 
(621
)
 
290,640

Depreciation and amortization expense
131,083

 
46,672

 

 
177,755

Taxes, other than income
119,799

 
15,981

 

 
135,780

Operating income
382,662

 
127,887

 

 
510,549

Miscellaneous expense
(1,007
)
 
(1,281
)
 

 
(2,288
)
Interest charges
38,266

 
20,547

 

 
58,813

Income before income taxes
343,389

 
106,059

 

 
449,448

Income tax (benefit) expense
(50,953
)
 
7,277

 

 
(43,676
)
Net income
$
394,342

 
$
98,782

 
$

 
$
493,124

Capital expenditures
$
465,484

 
$
228,494

 
$

 
$
693,978



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

 

Balance sheet information at March 31, 2018 and September 30, 2017 by segment is presented in the following tables:
 
March 31, 2018
 
Distribution
 
Pipeline and Storage
 
Eliminations
 
Consolidated
 
(In thousands)
Property, plant and equipment, net
$
7,202,673

 
$
2,558,656

 
$

 
$
9,761,329

Total assets
$
10,723,398

 
$
2,779,330

 
$
(2,146,406
)
 
$
11,356,322

 
September 30, 2017
 
Distribution
 
Pipeline and Storage
 
Eliminations
 
Consolidated
 
(In thousands)
Property, plant and equipment, net
$
6,849,517

 
$
2,409,665

 
$

 
$
9,259,182

Total assets
$
10,050,164

 
$
2,621,601

 
$
(1,922,169
)
 
$
10,749,596



13



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, 2018 and 2017 are calculated as follows:

 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share amounts)
Basic and Diluted Earnings Per Share from continuing operations
 
 
 
 
 
 
 
Income from continuing operations
$
178,992

 
$
162,012

 
$
493,124

 
$
276,050

Less: Income from continuing operations allocated to participating securities
161

 
193

 
459

 
348

Income from continuing operations available to common shareholders
$
178,831

 
$
161,819

 
$
492,665

 
$
275,702

Basic and diluted weighted average shares outstanding
111,706

 
105,935

 
110,135

 
105,610

Income from continuing operations per share — Basic and Diluted
$
1.60

 
$
1.52

 
$
4.47

 
$
2.61

 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share from discontinued operations
 
 
 
 
 
 
 
Income from discontinued operations
$

 
$
2,716

 
$

 
$
13,710

Less: Income from discontinued operations allocated to participating securities

 
2

 

 
15

Income from discontinued operations available to common shareholders
$

 
$
2,714

 
$

 
$
13,695

Basic and diluted weighted average shares outstanding
111,706

 
105,935

 
110,135

 
105,610

Income from discontinued operations per share — Basic and Diluted
$

 
$
0.03

 
$

 
$
0.13

Net income per share — Basic and Diluted
$
1.60

 
$
1.55

 
$
4.47

 
$
2.74




14



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, 2017. There were no material changes in the terms of our debt instruments during the six months ended March 31, 2018.
Long-term debt at March 31, 2018 and September 30, 2017 consisted of the following:
 
 
March 31, 2018
 
September 30, 2017
 
(In thousands)
Unsecured 8.50% Senior Notes, due March 2019
$
450,000

 
$
450,000

Unsecured 3.00% Senior Notes, due 2027
500,000

 
500,000

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
750,000

 
750,000

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 September 2019(1)
125,000

 
125,000

Total long-term debt
3,085,000

 
3,085,000

Less:
 
 
 
Original issue premium / discount on unsecured senior notes and debentures
(4,412
)
 
(4,384
)
Debt issuance cost
21,520

 
22,339

Current maturities
450,000

 

 
$
2,617,892

 
$
3,067,045

    
(1)
Up to $200 million can be drawn under this term loan.
    
We utilize short-term debt to provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company’s desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. 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.
Currently, our short-term borrowing requirements are satisfied 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. On March 26, 2018, we executed one of our two one-year extension options which extended the maturity date from September 25, 2021 to September 25, 2022. 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. At March 31, 2018 and September 30, 2017, a total of $129.6 million and $447.7 million was outstanding under our commercial paper program.
Additionally, we have a $25 million 364-day unsecured facility, which was renewed effective April 1, 2018 and expires March 31, 2019, and a $10 million 364-day unsecured revolving credit facility, which is used primarily to issue letters of credit. At March 31, 2018, 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 facility to $4.4 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 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, 2018, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 41 percent. In addition, both

15



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, 2018. 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.    Impact of the Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was signed into law. The TCJA introduced several significant changes to corporate income tax laws in the United States. The most significant change that affects Atmos Energy is the reduction of the federal statutory income tax rate from 35% to 21%. As a rate-regulated entity, the accelerated capital expensing and the limitation on interest deductibility provisions included in the TCJA are not applicable to us.
Under generally accepted accounting principles, we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
At September 30, 2017, we measured our net deferred tax liability using the enacted federal statutory tax rate of 35%. The enactment of the TCJA on December 22, 2017 required us to remeasure our deferred tax assets and liabilities, including our U.S. federal income tax net operating loss carryforwards, at the newly enacted federal statutory income tax rate. As the Company’s fiscal year end is September 30, the Internal Revenue Code requires the Company to use a blended statutory federal corporate income tax rate of 24.5% for fiscal 2018.
The decrease in the federal statutory income tax rate reduced our net deferred tax liability by $903.5 million. Of this amount, $737.8 million relates to regulated operations and has been recorded as a regulatory liability, which will be returned to utility customers. The period and timing of these revenue adjustments are subject to Internal Revenue Code provisions and regulatory actions in each of the eight states in which we operate. The remaining $165.7 million has been reflected as a one-time income tax benefit in our condensed consolidated statement of income for the six months ended March 31, 2018, because these taxes were not considered in our cost of service ratemaking. During the three months ended March 31, 2018, we refined the calculations performed to remeasure the Company's net deferred tax liabilities, which resulted in the recognition of a $3.8 million income tax benefit.
At March 31, 2018, we had $274.7 million of remeasured federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset future taxable income and will begin to expire in 2029. The Company also has $10.1 million of federal alternative minimum tax credit carryforwards that do not expire and are expected to be fully refunded to us between 2019 and 2022 as a result of changes introduced by the TCJA. These credit carryforwards are now reflected as taxes receivable within the deferred charges and other assets line item on our condensed consolidated balance sheet. In addition, the Company has $5.2 million in remeasured charitable contribution carryforwards to offset future taxable income. The Company’s charitable contribution carryforwards expire between 2018 and 2023.
The Company also has $21.5 million of state net operating loss carryforwards and $1.5 million of state tax credit carryforwards (net of $5.7 million and $0.4 million of remeasured federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards will begin to expire between 2018 and 2032.
Due to the changes introduced by the TCJA, we now believe it is more likely than not that the benefit from certain charitable contribution carryforwards for which a valuation allowance was previously established will be realized. As a result, we reduced our valuation allowance by $4.2 million during the first quarter. This amount is included in the $165.7 million one-time income tax benefit.
The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118), which allows us to record provisional amounts during a one-year measurement period, similar to the measurement period in accounting for business combinations. The Company has determined a reasonable estimate for the measurement and accounting for certain effects of the TCJA, including the remeasurement of our net deferred tax liabilities and the establishment of a regulatory liability, which have been reflected as provisional amounts in the March 31, 2018 condensed consolidated financial statements and are described in further detail above. The amounts represent our best estimates based upon records, information and current guidance. We are still analyzing certain aspects of the TCJA, refining our calculations and expecting additional guidance relating to the TCJA from the U.S.

16



Department of the Treasury and the Internal Revenue Service.  Any additional guidance issued or future actions of our regulators could potentially affect the final determination of the accounting effects arising from the implementation of the TCJA.
We are actively working with our regulators in each jurisdiction to address the impact of the TCJA on our cost of service based rates. Accounting orders have been issued for all our service areas that required us to establish, effective January 1, 2018, a separate regulatory liability for the difference in taxes included in our rates that have been calculated based on a 35% statutory income tax rate and the new 21% statutory income tax rate. The establishment of this regulatory liability relating to our cost of service rates resulted in a reduction to our revenues beginning in the second quarter of fiscal 2018. The period and timing of the return of these liabilities to utility customers will be determined by regulators in each of our jurisdictions.
During the fiscal 2018 second quarter, we received approval from regulators to update our cost of service rates to reflect the decrease in the statutory income tax rate in our Colorado, Kansas, Kentucky and Texas service areas. The return to customers of regulatory liabilities recorded for differences in our cost of service rates due to the change in the federal statutory income tax rate and the excess deferred taxes created upon implementation of the TCJA will be addressed in future regulatory proceedings. We are still working with regulators in Louisiana, Mississippi, Tennessee and Virginia to reflect the effects of the TCJA in our cost of service in rates.

7.    Shareholders' Equity

Shelf Registration, At-the-Market Equity Sales Program and Equity Issuance
On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to $2.5 billion in common stock and/or debt securities, which expires March 28, 2019. At March 31, 2018, approximately $1.2 billion of securities remained available for issuance under the shelf registration statement.
On November 14, 2017, we filed a prospectus supplement under the registration statement relating to an at-the-market (ATM) equity sales program under which we may issue and sell shares of our common stock up to an aggregate offering price of $500 million, which expires March 28, 2019. During the six months ended March 31, 2018, no shares of common stock were sold under the ATM program.
On November 30, 2017, we filed a prospectus supplement under the registration statement relating to an underwriting agreement to sell 4,558,404 shares of our common stock. We received aggregate gross proceeds of $400 million and received net proceeds, after expenses, of $395.1 million from the offering.

Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale securities, interest rate cash flow hedges and prior to the sale of Atmos Energy Marketing, LLC (AEM) on January 3, 2017, commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings as they are amortized. The following tables provide the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income (loss):
 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2017
$
7,048

 
$
(112,302
)
 
$
(105,254
)
Other comprehensive income (loss) before reclassifications
(167
)
 
20,454

 
20,287

Amounts reclassified from accumulated other comprehensive income
(879
)
 
835

 
(44
)
Net current-period other comprehensive income (loss)
(1,046
)
 
21,289

 
20,243

March 31, 2018
$
6,002

 
$
(91,013
)
 
$
(85,011
)
 

17



 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2016
$
4,484

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

 
95,271

 
9,847

 
105,752

Amounts reclassified from accumulated other comprehensive income
68

 
173

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

 
95,444

 
4,982

 
101,128

March 31, 2017
$
5,186

 
$
(92,080
)
 
$

 
$
(86,894
)

The following tables detail reclassifications out of AOCI for the three and six months ended March 31, 2018 and 2017. Amounts in parentheses below indicate decreases to net income in the statement of income:
 
Three Months Ended March 31, 2018
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
1,139

 
Operation and maintenance expense
 
1,139

 
Total before tax
 
(260
)
 
Tax expense
 
$
879

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(593
)
 
Interest charges
 
(593
)
 
Total before tax
 
135

 
Tax benefit
 
$
(458
)
 
Net of tax
Total reclassifications
$
421

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

 
Tax benefit
 
$
(68
)
 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(136
)
 
Interest charges
 
(136
)
 
Total before tax
 
50

 
Tax benefit
 
$
(86
)
 
Net of tax
Total reclassifications
$
(154
)
 
Net of tax

18



 
Six Months Ended March 31, 2018
Accumulated Other Comprehensive Income Components                          
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in  the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
1,139

 
Operation and maintenance expense
 
1,139

 
Total before tax
 
(260
)
 
Tax expense
 
$
879

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(1,187
)
 
Interest charges
 
(1,187
)
 
Total before tax
 
352

 
Tax benefit
 
$
(835
)
 
Net of tax
Total reclassifications
$
44

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

 
Tax benefit
 
$
(68
)
 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(273
)
 
Interest charges
Commodity contracts
7,967

 
Purchased gas cost(1)
 
7,694

 
Total before tax
 
(3,002
)
 
Tax expense
 
$
4,692

 
Net of tax
Total reclassifications
$
4,624

 
Net of tax
(1)
Amount is presented as part of income from discontinued operations in the condensed consolidated statement of income.
8.     Interim Pension and Other Postretirement Benefit Plan Information
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three and six months ended March 31, 2018 and 2017 are presented in the following tables. Most of these costs are recoverable through our tariff rates; however, a portion of these costs is capitalized into our rate base. The remaining costs are recorded as a component of operation and maintenance expense. In the second quarter of fiscal 2018, due to the retirement of certain executives, we recognized a settlement loss of $2.4 million associated with our Supplemental Executive Retirement Plan and revalued the net periodic pension cost for the remainder of fiscal 2018. The revaluation of the net periodic pension cost for our Supplemental Executive Retirement Plan resulted in an increase in the discount rate, effective March 1, 2018, to 4.12%, which will increase our net periodic pension cost by approximately $0.1 million for the remainder of the fiscal year.

19



 
Three Months Ended March 31
 
Pension Benefits
 
Other Benefits
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
4,575

 
$
5,217

 
$
3,019

 
$
3,109

Interest cost
6,433

 
6,297

 
2,727

 
2,670

Expected return on assets
(6,916
)
 
(6,994
)
 
(2,001
)
 
(1,797
)
Amortization of prior service cost (credit)
(58
)
 
(58
)
 
3

 
(411
)
Amortization of actuarial (gain) loss
3,085

 
4,249

 
(1,619
)
 
(707
)
Settlements
2,415

 

 

 

Net periodic pension cost
$
9,534

 
$
8,711

 
$
2,129

 
$
2,864

 
Six Months Ended March 31
 
Pension Benefits
 
Other Benefits
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
9,135

 
$
10,433

 
$
6,039

 
$
6,218

Interest cost
12,863

 
12,594

 
5,454

 
5,340

Expected return on assets
(13,833
)
 
(13,988
)
 
(4,003
)
 
(3,593
)
Amortization of prior service cost (credit)
(116
)
 
(116
)
 
6

 
(822
)
Amortization of actuarial (gain) loss
6,174

 
8,498

 
(3,237
)
 
(1,414
)
Settlements
2,415

 

 

 

Net periodic pension cost
$
16,638

 
$
17,421

 
$
4,259

 
$
5,729


The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2018 and 2017 are as follows:
 
 
Supplemental Executive Retirement Plan
 
Pension Benefits
 
Other Benefits
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Discount rate
 
4.12%
 
3.73%
 
3.89%
 
3.73%
 
3.89%
 
3.73%
Rate of compensation increase
 
3.50%
 
3.50%
 
3.50%
 
3.50%
 
N/A
 
N/A
Expected return on plan assets
 
N/A
 
N/A
 
6.75%
 
7.00%
 
4.29%
 
4.45%
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plan as of January 1, 2017. Based on that determination, we are not required to make a minimum contribution to our defined benefit plan during fiscal 2018; however, we may consider whether a voluntary contribution is prudent to maintain certain funding levels.
We contributed $7.5 million to our other post-retirement benefit plans during the six months ended March 31, 2018. We expect to contribute a total of between $10 million and $20 million to these plans during fiscal 2018.
9.    Commitments and Contingencies
Litigation and Environmental Matters
In the normal course of business, we are subject to various legal and regulatory proceedings. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts, our historical experience, and our estimates of the ultimate outcome or resolution of the liability in the future. While the outcome of these proceedings is uncertain and a loss in excess of the amount we have accrued is possible though not reasonably estimable, it is the opinion of management that any amounts exceeding the accruals will not have a material adverse impact on our financial position, results of operations, or cash flows.

20



We maintain liability insurance for various risks associated with the operation of our natural gas pipelines and facilities, including for property damage and bodily injury. These liability insurance policies generally require us to be responsible for the first $1.0 million (self-insured retention) of each incident.
The National Transportation Safety Board (NTSB) is investigating an incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. Together with the Railroad Commission of Texas and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with the NTSB to help determine the cause of this incident.
On March 29, 2018, a civil action was filed in Dallas, Texas against Atmos Energy in response to the February 23rd incident. The plaintiffs seek over $1.0 million in damages for, among with others, wrongful death and personal injury.
We are a party to various other litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Purchase Commitments
Our distribution divisions 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 hubs. At March 31, 2018, we were committed to purchase 55.0 Bcf within one year and 64.7 Bcf within two to three years under indexed contracts.
Regulatory Matters
Various regulatory agencies, including the SEC and the Commodities Futures Trading Commission, continue to adopt regulations implementing many of the provisions of the Dodd-Frank Act of 2010. We continue to enact new procedures and modify existing business practices and contractual arrangements to comply with such regulations.  Additional rulemakings are pending which we believe will result in new reporting and disclosure obligations. The costs associated with hedging certain risks inherent in our business may be further increased when these expected additional regulations are adopted.
As of March 31, 2018, formula rate mechanisms were pending regulatory approval in our Louisiana and Tennessee service areas, infrastructure mechanisms were pending regulatory approval in our Mid-Tex, Mississippi and West Texas service areas as well as the Atmos Pipeline–Texas Division and rate cases were pending regulatory approval in our Colorado and Kentucky service areas. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments. On April 3, 2018, we filed formula rate mechanisms in our Mid-Tex and West Texas service areas, seeking increases in operating income. Additionally, as discussed in further detail in Note 6, all jurisdictions are addressing impacts of the TCJA.
10.    Financial Instruments
We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. During the six months ended March 31, 2018, there were no material changes in our objectives, strategies and accounting for using financial instruments. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions. The following summarizes those objectives and strategies.

Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our distribution segment from commodity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.

21



We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2017-2018 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 26 percent, or 15.0 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.

Interest Rate Risk Management Activities
We periodically manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
As of March 31, 2018, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $450 million unsecured senior notes in fiscal 2019 at 3.78%, which we designated as a cash flow hedge at the time the swaps were executed. As of March 31, 2018, we had $49.1 million of net realized losses in accumulated other comprehensive income (AOCI) associated with the settlement of financial instruments used to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes, which will be recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2045.
 
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.
As of March 31, 2018, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of March 31, 2018, we had 6,251 MMcf of net short commodity contracts outstanding. These contracts have not been designated as hedges.
Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of March 31, 2018 and September 30, 2017. 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 our counterparties.
 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
March 31, 2018
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Interest rate contracts
Other current assets /
Other current liabilities
 
$

 
$
(85,948
)
Total
 
 

 
(85,948
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
602

 
(996
)
Total
 
 
602

 
(996
)
Gross Financial Instruments
 
 
602

 
(86,944
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 

 

Net Financial Instruments
 
 
602

 
(86,944
)
Cash collateral
 
 

 

Net Assets/Liabilities from Risk Management Activities
 
 
$
602

 
$
(86,944
)
 

22



 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
September 30, 2017
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
$

 
$
(112,076
)
Total
 
 

 
(112,076
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
2,436

 
(322
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
803

 

Total
 
 
3,239

 
(322
)
Gross Financial Instruments
 
 
3,239

 
(112,398
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 

 

Net Financial Instruments
 
 
3,239

 
(112,398
)
Cash collateral
 
 

 

Net Assets/Liabilities from Risk Management Activities
 
 
$
3,239

 
$
(112,398
)
 
Impact of Financial Instruments on the Income Statement
Cash Flow Hedges
As discussed above, our distribution segment has interest rate swap agreements, which we designated as a cash flow hedge at the time the swaps were executed. The net loss on settled interest rate agreements reclassified from AOCI into interest charges on our condensed consolidated statements of income for the three months ended March 31, 2018 and 2017 was $0.6 million and $0.1 million and for the six months ended March 31, 2018 and 2017 was $1.2 million and $0.3 million.
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and six months ended March 31, 2018 and 2017. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.
 
Three Months Ended 
 March 31
 
Six Months Ended 
 March 31
 
2018
 
2017 (1)
 
2018
 
2017 (1)
 
(In thousands)
Increase in fair value:
 
 
 
 
 
 
 
Interest rate agreements
$
21,786

 
$
4,144

 
$
20,454

 
$
95,271

Forward commodity contracts(2)

 

 

 
9,847

Recognition of (gains) losses in earnings due to settlements:
 
 
 
 
 
 
 
Interest rate agreements
458

 
86

 
835

 
173

Forward commodity contracts(2)

 

 

 
(4,865
)
Total other comprehensive income from hedging, net of tax
$
22,244

 
$
4,230

 
$
21,289

 
$
100,426

 
(1)
Utilizing an income tax rate ranging from 37 percent to 39 percent based on the effective rates in each taxing jurisdiction for the three and six-month period ended March 31, 2017.
(2)
Due to the sale of AEM, these amounts are included in income from discontinued operations.

23



Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments. The following amounts, net of deferred taxes, represent the expected recognition in earnings, as of March 31, 2018, of the deferred losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments at the date of settlement. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those instruments have not yet settled.
 
Interest Rate
Agreements
 
(In thousands)
Next twelve months
$
(1,833
)
Thereafter
(47,281
)
Total
$
(49,114
)
 
Financial Instruments Not Designated as Hedges
As discussed above, financial instruments used in our distribution segment are not designated as hedges. However, there is no earnings impact on our distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
11.    Fair Value Measurements
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. During the six months ended March 31, 2018, there were no changes in these methods.
Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 7 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Quantitative Disclosures
Financial Instruments
The classification of our fair value measurements requires judgment regarding the degree to which market data is observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2018 and September 30, 2017. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.

24



 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)(1)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Netting and
Cash
Collateral
 
March 31, 2018
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
602

 
$

 
$

 
$
602

Available-for-sale securities
 
 
 
 
 
 
 
 
 
Registered investment companies
39,783

 

 

 

 
39,783

Bond mutual funds
16,308

 

 

 

 
16,308

Bonds

 
31,137

 

 

 
31,137

Money market funds

 
6,437

 

 

 
6,437

Total available-for-sale securities
56,091

 
37,574

 

 

 
93,665

Total assets
$
56,091

 
$
38,176

 
$

 
$

 
$
94,267

Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
86,944

 
$

 
$

 
$
86,944



 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)(1)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Netting and
Cash
Collateral
 
September 30, 2017
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
3,239

 
$

 
$

 
$
3,239

Available-for-sale securities
 
 
 
 
 
 
 
 
 
Registered investment companies
41,097

 

 

 

 
41,097

Bond mutual funds
16,371

 

 

 

 
16,371

Bonds

 
29,104

 

 

 
29,104

Money market funds

 
1,837

 

 

 
1,837

Total available-for-sale securities
57,468

 
30,941

 

 

 
88,409

Total assets
$
57,468

 
$
34,180

 
$

 
$

 
$
91,648

Liabilities:
 
 
 
 
 
 
 
 
 
Financial instruments
$

 
$
112,398

 
$

 
$

 
$
112,398

 
(1)
Our Level 2 measurements consist of over-the-counter options and swaps which are valued using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds which are valued based on the most recent available quoted market prices and money market funds which are valued at cost.


25




Available-for-sale securities are comprised of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(In thousands)
As of March 31, 2018
 
 
 
 
 
 
 
Domestic equity mutual funds
$
25,515

 
$
8,194

 
$
(95
)
 
$
33,614

Foreign equity mutual funds
4,138

 
2,031

 

 
6,169

Bond mutual funds
16,548

 

 
(240
)
 
16,308

Bonds
31,295