XNYS:ATO Atmos Energy Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

or

 

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

For the transition period from                    to                    

Commission File Number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)

 

Texas and Virginia
  75-1743247

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification no.)

Three Lincoln Centre, Suite 1800

5430 LBJ Freeway, Dallas, Texas

 

75240

(Zip code)

(Address of principal executive offices)  

(972) 934-9227

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  þ

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

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨     No  þ

Number of shares outstanding of each of the issuer’s classes of common stock, as of April 27, 2012.

 

Class

  

Shares Outstanding

No Par Value

   90,030,471


GLOSSARY OF KEY TERMS

 

AEC

   Atmos Energy Corporation

AEH

   Atmos Energy Holdings, Inc.

AEM

   Atmos Energy Marketing, LLC

AOCI

   Accumulated other comprehensive income

APS

   Atmos Pipeline and Storage, LLC

Bcf

   Billion cubic feet

CFTC

   Commodity Futures Trading Commission

FASB

   Financial Accounting Standards Board

Fitch

   Fitch Ratings, Ltd.

GRIP

   Gas Reliability Infrastructure Program

GSRS

   Gas System Reliability Surcharge

ISRS

   Infrastructure System Replacement Surcharge

Mcf

   Thousand cubic feet

MMcf

   Million cubic feet

Moody’s

   Moody’s Investors Services, Inc.

NYMEX

   New York Mercantile Exchange, Inc.

PPA

   Pension Protection Act of 2006

PRP

   Pipeline Replacement Program

RRC

   Railroad Commission of Texas

RRM

   Rate Review Mechanism

S&P

   Standard & Poor’s Corporation

SEC

   United States Securities and Exchange Commission

WNA

   Weather Normalization Adjustment

 

1


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2012
    September 30,
2011
 
     (Unaudited)        
    

(In thousands, except

share data)

 
ASSETS   

Property, plant and equipment

   $ 6,992,899     $ 6,816,794  

Less accumulated depreciation and amortization

     1,658,887       1,668,876  
  

 

 

   

 

 

 

Net property, plant and equipment

     5,334,012       5,147,918  

Current assets

    

Cash and cash equivalents

     47,040       131,419  

Accounts receivable, net

     350,261       273,303  

Gas stored underground

     221,112       289,760  

Other current assets

     275,428       316,471  
  

 

 

   

 

 

 

Total current assets

     893,841       1,010,953  

Goodwill and intangible assets

     740,185       740,207  

Deferred charges and other assets

     400,689       383,793  
  

 

 

   

 

 

 
   $ 7,368,727     $ 7,282,871  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES     

Shareholders’ equity

    

Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: March 31, 2012 — 90,029,852 shares;

    

September 30, 2011 — 90,296,482 shares

   $ 450     $ 451  

Additional paid-in capital

     1,728,150       1,732,935  

Retained earnings

     685,206       570,495  

Accumulated other comprehensive loss

     (53,094     (48,460
  

 

 

   

 

 

 

Shareholders’ equity

     2,360,712       2,255,421  

Long-term debt

     1,956,213       2,206,117  
  

 

 

   

 

 

 

Total capitalization

     4,316,925       4,461,538  

Current liabilities

    

Accounts payable and accrued liabilities

     309,864       291,205  

Other current liabilities

     374,123       367,563  

Short-term debt

     173,996       206,396  

Current maturities of long-term debt

     250,131       2,434  
  

 

 

   

 

 

 

Total current liabilities

     1,108,114       867,598  

Deferred income taxes

     1,062,488       960,093  

Regulatory cost of removal obligation

     414,001       428,947  

Deferred credits and other liabilities

     467,199       564,695  
  

 

 

   

 

 

 
   $ 7,368,727     $ 7,282,871  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
March 31
 
     2012     2011  
     (Unaudited)  
    

(In thousands, except

per share data)

 

Operating revenues

    

Natural gas distribution segment

   $ 889,008     $ 1,077,414  

Regulated transmission and storage segment

     58,037       54,976  

Nonregulated segment

     370,763       583,531  

Intersegment eliminations

     (74,358     (134,424
  

 

 

   

 

 

 
     1,243,450       1,581,497  

Purchased gas cost

    

Natural gas distribution segment

     508,206       698,410  

Regulated transmission and storage segment

              

Nonregulated segment

     374,992       563,473  

Intersegment eliminations

     (74,009     (134,054
  

 

 

   

 

 

 
     809,189       1,127,829  
  

 

 

   

 

 

 

Gross profit

     434,261       453,668  

Operating expenses

    

Operation and maintenance

     110,708       114,162  

Depreciation and amortization

     60,272       55,467  

Taxes, other than income

     54,919       53,558  

Asset impairment

            19,282  
  

 

 

   

 

 

 

Total operating expenses

     225,899       242,469  
  

 

 

   

 

 

 

Operating income

     208,362       211,199  

Miscellaneous income

     616       26,202  

Interest charges

     36,660       37,875  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     172,318       199,526  

Income tax expense

     66,408       71,366  
  

 

 

   

 

 

 

Income from continuing operations

     105,910       128,160  

Income from discontinued operations, net of tax ($1,834 and $2,642)

     3,201       4,049  
  

 

 

   

 

 

 

Net income

   $ 109,111     $ 132,209  
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 1.16     $ 1.41  

Income per share from discontinued operations

     0.04       0.04  
  

 

 

   

 

 

 

Net income per share — basic

   $ 1.20     $ 1.45  
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 1.16     $ 1.41  

Income per share from discontinued operations

     0.04       0.04  
  

 

 

   

 

 

 

Net income per share — diluted

   $ 1.20     $ 1.45  
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.345     $ 0.340  
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,020       90,246  
  

 

 

   

 

 

 

Diluted

     90,322       90,533  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Six Months Ended
March 31
 
     2012     2011  
     (Unaudited)  
    

(In thousands, except

per share data)

 

Operating revenues

    

Natural gas distribution segment

   $ 1,582,300     $ 1,780,876  

Regulated transmission and storage segment

     114,796       103,983  

Nonregulated segment

     814,939       1,059,171  

Intersegment eliminations

     (167,412     (229,271
  

 

 

   

 

 

 
     2,344,623       2,714,759  

Purchased gas cost

    

Natural gas distribution segment

     910,413       1,110,936  

Regulated transmission and storage segment

              

Nonregulated segment

     803,763       1,013,935  

Intersegment eliminations

     (166,696     (228,504
  

 

 

   

 

 

 
     1,547,480       1,896,367  
  

 

 

   

 

 

 

Gross profit

     797,143       818,392  

Operating expenses

    

Operation and maintenance

     226,770       228,652  

Depreciation and amortization

     119,487       110,244  

Taxes, other than income

     98,117       93,726  

Asset impairment

            19,282  
  

 

 

   

 

 

 

Total operating expenses

     444,374       451,904  
  

 

 

   

 

 

 

Operating income

     352,769       366,488  

Miscellaneous income (expense)

     (1,259     25,476  

Interest charges

     72,102       76,770  
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     279,408       315,194  

Income tax expense

     107,710       115,934  
  

 

 

   

 

 

 

Income from continuing operations

     171,698       199,260  

Income from discontinued operations, net of tax ($3,393 and $4,532)

     5,920       6,946  
  

 

 

   

 

 

 

Net income

   $ 177,618     $ 206,206  
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 1.89     $ 2.18  

Income per share from discontinued operations

     0.06       0.08  
  

 

 

   

 

 

 

Net income per share — basic

   $ 1.95     $ 2.26  
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 1.88     $ 2.18  

Income per share from discontinued operations

     0.06       0.08  
  

 

 

   

 

 

 

Net income per share — diluted

   $ 1.94     $ 2.26  
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.690     $ 0.680  
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,137       90,157  
  

 

 

   

 

 

 

Diluted

     90,440       90,455  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
March 31
 
     2012     2011  
    

(Unaudited)

(In thousands)

 

Cash Flows From Operating Activities

    

Net income

   $ 177,618     $ 206,206  

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

    

Asset impairment

            19,282  

Depreciation and amortization:

    

Charged to depreciation and amortization

     122,532       113,297  

Charged to other accounts

     203       98  

Deferred income taxes

     102,052       115,302  

Other

     9,874       10,255  

Net assets / liabilities from risk management activities

     15,690       (17,478

Net change in operating assets and liabilities

     (67,246     (8,491
  

 

 

   

 

 

 

Net cash provided by operating activities

     360,723       438,471  

Cash Flows From Investing Activities

    

Capital expenditures

     (311,123     (246,663

Other, net

     (3,878     (1,535
  

 

 

   

 

 

 

Net cash used in investing activities

     (315,001     (248,198

Cash Flows From Financing Activities

    

Net decrease in short-term debt

     (48,945     (128,884

Unwinding of Treasury lock agreements

            27,803  

Repayment of long-term debt

     (2,369     (10,066

Cash dividends paid

     (62,907     (62,067

Repurchase of common stock

     (12,535       

Repurchase of equity awards

     (3,509     (3,333

Issuance of common stock

     164       7,568  
  

 

 

   

 

 

 

Net cash used in financing activities

     (130,101     (168,979
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (84,379     21,294  

Cash and cash equivalents at beginning of period

     131,419       131,952  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,040     $ 153,246  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2012

1.    Nature of Business

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

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

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

We operate the Company through the following three segments:

 

   

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

 

   

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

 

   

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

2.    Unaudited Financial Information

These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2012 are not indicative of our results of operations for the full 2012 fiscal year, which ends September 30, 2012.

 

6


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We have evaluated subsequent events from the March 31, 2012 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). Except as discussed in Note 6, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.

Significant accounting policies

Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Due to the pending sale of our distribution operations in our Missouri, Illinois and Iowa service areas, the financial results for these service areas are shown in discontinued operations. Accordingly, certain prior-year amounts have been reclassified to conform with the current year presentation.

During the second quarter of fiscal 2012, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.

During the six months ended March 31, 2012, two new accounting standards were announced that will become applicable to the Company in future periods. The first standard requires enhanced disclosure of offsetting arrangements for financial instruments and will become effective for annual periods beginning after January 1, 2013 and for interim periods within those annual periods. The second standard indefinitely defers the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income as prescribed by a previously issued standard, which were initially to be effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards should not have an impact on our financial position, results of operations or cash flows. There were no other significant changes to our accounting policies during the six months ended March 31, 2012.

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.

 

7


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Significant regulatory assets and liabilities as of March 31, 2012 and September 30, 2011 included the following:

 

     March 31,
2012
     September 30,
2011
 
     (In thousands)  

Regulatory assets:

     

Pension and postretirement benefit costs

   $ 245,096      $ 254,666  

Merger and integration costs, net

     5,998        6,242  

Deferred gas costs

     19,547        33,976  

Regulatory cost of removal asset

     10,233        8,852  

Environmental costs

     117        385  

Rate case costs

     4,503        4,862  

Deferred franchise fees

     333        379  

Other

     8,861        3,534  
  

 

 

    

 

 

 
   $ 294,688      $ 312,896  
  

 

 

    

 

 

 

Regulatory liabilities:

     

Deferred gas costs

   $ 15,232      $ 8,130  

Regulatory cost of removal obligation

     463,740        464,025  

Other

     13,090        14,025  
  

 

 

    

 

 

 
   $ 492,062      $ 486,180  
  

 

 

    

 

 

 

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

During the prior fiscal year, the Railroad Commission of Texas’ Division of Public Safety issued a new rule requiring natural gas distribution companies to develop and implement a risk-based program for the renewal or replacement of distribution facilities, including steel service lines. The rule allows for the deferral of all expenses associated with capital expenditures incurred pursuant to this rule, including the recording of interest on the deferred expenses until the next rate proceeding (rate case or annual rate filing) at which time investment and costs would be recovered through base rates. As of March 31, 2012, we had deferred $0.7 million associated with the requirements of this rule which are recorded in “Other” in the regulatory assets table above.

Effective January 1, 2012, the Texas Legislature amended its Gas Utility Regulatory Act (GURA) to permit natural gas utilities to defer into a regulatory asset or liability the difference between a gas utility’s actual pension and postretirement expense and the level of such expense recoverable in its existing rates. The deferred amount will become eligible for inclusion in the utility’s rates in its next rate proceeding. During the quarter, we elected to utilize this provision of GURA, effective January 1, 2012, and established a regulatory asset totaling $2.5 million, which is recorded in “Other” in the regulatory assets table above. Of this amount, $1.4 million represented a reduction to operation and maintenance expense during the second quarter of fiscal 2012.

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

 

8


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Comprehensive income

The following table presents the components of comprehensive income (loss), net of related tax, for the three-month and six-month periods ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31
    Six Months Ended
March 31
 
     2012     2011     2012     2011  
     (In thousands)  

Net income

   $ 109,111     $ 132,209     $ 177,618     $ 206,206  

Unrealized holding gains on investments, net of tax expense of $1,203 and $477 for the three months ended March 31, 2012 and 2011 and of $1,717 and $932 for the six months ended March 31, 2012 and 2011

     2,046       810       2,947       1,586  

Amortization, unrealized gain and unwinding of treasury lock agreements, net of tax expense (benefit) of $9,042 and $(6,125) for the three months ended March 31, 2012 and 2011 and $8,404 and $12,579 for the six month ended March 31, 2012 and 2011

     15,396       (10,427     14,309       21,420  

Net unrealized gains (losses) on cash flow hedging transactions, net of tax expense (benefit) of $(3,399) and $2,573 for the three months ended March 31, 2012 and 2011 and $(13,996) and $9,190 for the six months ended March 31, 2012 and 2011

     (5,315     4,025       (21,890     14,375  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 121,238     $ 126,617     $ 172,984     $ 243,587  
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), net of tax, as of March 31, 2012 and September 30, 2011 consisted of the following unrealized gains (losses):

 

      March 31,
2012
    September 30,
2011
 
     (In thousands)  

Accumulated other comprehensive income (loss):

    

Unrealized holding gains on investments

   $ 5,505     $ 2,558  

Treasury lock agreements

     (19,848     (34,157

Cash flow hedges

     (38,751     (16,861
  

 

 

   

 

 

 
   $ (53,094   $ (48,460
  

 

 

   

 

 

 

3.    Financial Instruments

We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. The accounting for these financial instruments is fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the six months ended March 31, 2012 there were no changes in our objectives, strategies and accounting for these financial instruments. Currently, we utilize finan-

 

9


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

cial instruments in our natural gas distribution and nonregulated segments. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.

Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions.

Regulated Commodity Risk Management Activities

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

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

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

Nonregulated Commodity Risk Management Activities

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

As a result of these activities, our nonregulated segment is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange traded options and swap contracts with counterparties. Future contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.

We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our nonregulated operations associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 56 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our nonregulated segment.

 

10


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

Interest Rate Risk Management Activities

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

As of March 31, 2012, we had three Treasury lock agreements outstanding to fix the Treasury yield component of 30-year unsecured notes, which we plan to issue to refinance our $250 million unsecured 5.125% Senior Notes that mature in January 2013.

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

Quantitative Disclosures Related to Financial Instruments

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

As of March 31, 2012, 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, 2012, we had net long/(short) commodity contracts outstanding in the following quantities:

 

Contract Type

  

Hedge

Designation

   Natural
Gas
Distribution
    Nonregulated  
          Quantity (MMcf)  

Commodity contracts

  

Fair Value

            (38,340
  

Cash Flow

            49,098  
  

Not designated

     6,033       28,190  
     

 

 

   

 

 

 
        6,033       38,948  
     

 

 

   

 

 

 

 

11


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Financial Instruments on the Balance Sheet

The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of March 31, 2012 and September 30, 2011. As required by authoritative accounting literature, the fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include $5.7 million and $28.8 million of cash held on deposit in margin accounts as of March 31, 2012 and September 30, 2011 to collateralize certain financial instruments. Therefore, these gross balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not be equal to the amounts presented on our condensed consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 4.

 

   

Balance Sheet Location

  Natural
Gas
Distribution
    Nonregulated     Total  
              (In thousands)        

March 31, 2012

       

Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets   $      $ 77,441      $ 77,441  

Noncurrent commodity contracts

  Deferred charges and other assets                     

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities     (45,818     (59,301 )       (105,119

Noncurrent commodity contracts

  Deferred credits and other liabilities            (10,914 )       (10,914
   

 

 

   

 

 

   

 

 

 

Total

      (45,818 )       7,226        (38,592

Not Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets     502       137,934        138,436  

Noncurrent commodity contracts

  Deferred charges and other assets            85,951        85,951  
       

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities(1)     (2,215     (164,189     (166,404

Noncurrent commodity contracts

  Deferred credits and other liabilities     (1     (69,496 )       (69,497
   

 

 

   

 

 

   

 

 

 

Total

      (1,714     (9,800 )       (11,514
   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

    $ (47,532)      $ (2,574 )     $ (50,106
   

 

 

   

 

 

   

 

 

 

 

  (1) 

Other current liabilities not designated as hedges in our natural gas distribution segment include $0.8 million related to risk management liabilities that were classified as assets held for sale at March 31, 2012.

 

12


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    

Balance Sheet Location

  Natural
Gas
Distribution
    Nonregulated     Total  
               (In thousands)        

September 30, 2011

        

Designated As Hedges:

        

Asset Financial Instruments

        

Current commodity contracts

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

Noncurrent commodity contracts

   Deferred charges and other assets            174        174  

Liability Financial Instruments

        

Current commodity contracts

   Other current liabilities            (31,064     (31,064

Noncurrent commodity contracts

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

 

 

   

 

 

   

 

 

 

Total

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

Not Designated As Hedges:

        

Asset Financial Instruments

        

Current commodity contracts

   Other current assets     843       67,710        68,553  

Noncurrent commodity contracts

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

Liability Financial Instruments

        

Current commodity contracts

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

Noncurrent commodity contracts

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

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

 

Total Financial Instruments

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

 

 

   

 

 

   

 

 

 

 

  (1) 

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

Impact of Financial Instruments on the Income Statement

Hedge ineffectiveness for our nonregulated segment is recorded as a component of unrealized gross profit and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended March 31, 2012 and 2011 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $(6.2) million and $4.1 million. For the six months ended March 31, 2012 and 2011 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $2.2 million and $17.5 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

 

13


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Fair Value Hedges

The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three and six months ended March 31, 2012 and 2011 is presented below.

 

     Three Months Ended
March 31
 
         2012             2011      
     (In thousands)  

Commodity contracts

   $ 29,090     $ (1,279

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

     (35,087     5,586  
  

 

 

   

 

 

 

Total impact on revenue

   $ (5,997   $ 4,307  
  

 

 

   

 

 

 

The impact on revenue is comprised of the following:

    

Basis ineffectiveness

   $ (739   $ (509

Timing ineffectiveness

     (5,258     4,816  
  

 

 

   

 

 

 
   $ (5,997   $ 4,307  
  

 

 

   

 

 

 

 

     Six Months Ended
March  31
 
         2012             2011      
     (In thousands)  

Commodity contracts

   $ 53,153     $ (3,003

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

     (50,335     21,211  
  

 

 

   

 

 

 

Total impact on revenue

   $ 2,818     $ 18,208  
  

 

 

   

 

 

 

The impact on revenue is comprised of the following:

    

Basis ineffectiveness

   $ 102     $ 412  

Timing ineffectiveness

     2,716       17,796  
  

 

 

   

 

 

 
   $ 2,818     $ 18,208  
  

 

 

   

 

 

 

Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on revenue.

To the extent that the Company’s natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market. During the six months ended March 31, 2012, we recorded a $1.7 million charge to write down nonqualifying natural gas inventory to market. We did not record a writedown for nonqualifying natural gas inventory for the six months ended March 31, 2011.

 

14


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Cash Flow Hedges

The impact of cash flow hedges on our condensed consolidated income statements for the three and six months ended March 31, 2012 and 2011 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

 

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

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

   $      $     —       $ (21,181   $ (21,181

Loss arising from ineffective portion of commodity contracts

                    (238     (238
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on revenue

                    (21,419     (21,419

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

     (502                    (502
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (502   $       $ (21,419   $ (21,921
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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

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

   $      $       $ (7,328   $ (7,328

Loss arising from ineffective portion of commodity contracts

                    (233     (233
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on revenue

                    (7,561     (7,561

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

     (669                    (669

Gain on unwinding of Treasury lock reclassified from AOCI into miscellaneous income

     21,803       6,000               27,803  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ 21,134     $ 6,000      $ (7,561   $ 19,573  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

15


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

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

   $      $     —       $ (32,823   $ (32,823

Loss arising from ineffective portion of commodity contracts

                    (668     (668
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on revenue

                    (33,491     (33,491

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

     (1,004                    (1,004
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

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

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six Months Ended March 31, 2011  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
     Nonregulated     Consolidated  
     (In thousands)  

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

   $      $       $ (21,581   $ (21,581

Loss arising from ineffective portion of commodity contracts

                    (677     (677
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on revenue

                    (22,258     (22,258

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

     (1,339                    (1,339

Gain on unwinding of Treasury lock reclassified from AOCI into miscellaneous income

     21,803       6,000               27,803  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ 20,464     $ 6,000      $ (22,258   $ 4,206  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

16


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and six months ended March 31, 2012 and 2011. 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
 
     2012     2011     2012     2011  
     (In thousands)  

Increase (decrease) in fair value:

        

Treasury lock agreements

   $ 15,079     $ 6,667     $ 13,676     $ 38,092  

Forward commodity contracts

     (18,234     (446     (41,912     1,211  

Recognition of (gains) losses in earnings due to settlements:

        

Treasury lock agreements

     317       (17,094     633       (16,672

Forward commodity contracts

     12,919       4,471       20,022       13,164  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 10,081     $ (6,402   $ (7,581   $ 35,795  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

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

Deferred gains (losses) recorded in accumulated other comprehensive income (AOCI) associated with our treasury lock agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of March 31, 2012. However, the table below does not include the expected recognition in earnings of our outstanding Treasury lock agreements as these instruments have not yet settled.

 

     Treasury
Lock
Agreements
    Commodity
Contracts
    Total  
     (In thousands)  

Next twelve months

   $ (1,266   $ (32,130   $ (33,396

Thereafter

     10,284       (6,621     3,663  
  

 

 

   

 

 

   

 

 

 

Total(1)

   $ 9,018     $ (38,751   $ (29,733
  

 

 

   

 

 

   

 

 

 

 

 

  (1) 

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

Financial Instruments Not Designated as Hedges

The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three months ended March 31, 2012 and 2011 was an increase (decrease) in revenue of $(12.8) million and $4.0 million. For the six months ended March 31, 2012 and 2011 revenue increased (decreased) $(15.0) million and $8.2 million. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

 

17


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact on our natural gas distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.

4.    Fair Value Measurements

We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the three and six months ended March 31, 2012, there were no changes in these methods.

Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 9 to the financial statements in our Annual Report on Form 10-K for the fiscal year ending September 30, 2011.

 

18


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Quantitative Disclosures

Financial Instruments

The classification of our fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following 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, 2012 and September 30, 2011. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

      Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)(1)
    Significant
Other
Unobservable
Inputs
(Level 3)
     Netting and
Cash
Collateral(2)
    March 31,
2012
 
     (In thousands)  

Assets:

            

Financial instruments

            

Natural gas distribution segment

   $       $ 502      $       —       $      $ 502  

Nonregulated segment

     52,013        249,313                (287,608     13,718  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total financial instruments

     52,013        249,815                (287,608     14,220  
            

Hedged portion of gas stored underground

     73,043                              73,043  

Available-for-sale securities
Money market funds

             3,358                       3,358  

Registered investment companies

     38,424                              38,424  

Bonds

             23,637                       23,637  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     38,424        26,995                       65,419  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 163,480      $ 276,810      $       $ (287,608   $ 152,682  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Financial instruments

            

Natural gas distribution segment

   $       $ 48,034      $       $      $ 48,034  

Nonregulated segment

     76,476        227,424                (293,304     10,596  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 76,476      $ 275,458      $       $ (293,304   $ 58,630  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

19


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

      Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)(1)
    Significant
Other
Unobservable
Inputs

(Level 3)
     Netting and
Cash
Collateral(3)
    September 30,
2011
 
     (In thousands)  

Assets:

            

Financial instruments

            

Natural gas distribution segment

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

Nonregulated segment

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total financial instruments

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

Hedged portion of gas stored underground

     47,940                              47,940  

Available-for-sale securities

            

Money market funds

             1,823                       1,823  

Registered investment companies

     36,444                              36,444  

Bonds

             14,366                       14,366  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     36,444        16,189                       52,633  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

            

Financial instruments

            

Natural gas distribution segment

   $       $ 81,118      $       $      $ 81,118  

Nonregulated segment

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

  (1) 

Our Level 2 measurements primarily consist of non-exchange-traded financial instruments, such as over-the-counter options and swaps where market data for pricing is observable. The fair values for these assets and liabilities are determined using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences. This level also includes municipal and corporate bonds where market data for pricing is observable.

 

  (2) 

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of March 31, 2012, we had $5.7 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $2.8 million was used to offset current risk management liabilities under master netting arrangements and the remaining $2.9 million is classified as current risk management assets.

 

  (3) 

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of September 30, 2011 we had $28.8 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $12.4 million was used to offset current risk management liabilities under master netting arrangements and the remaining $16.4 million is classified as current risk management assets.

 

20


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

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

As of March 31, 2012:

          

Domestic equity mutual funds

   $ 24,471      $ 7,821      $      $ 32,292  

Foreign equity mutual funds

     5,327        805               6,132  

Bonds

     23,525        127        (15     23,637  

Money market funds

     3,358                       3,358  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 56,681      $ 8,753      $ (15   $ 65,419  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2011:

          

Domestic equity mutual funds

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

Foreign equity mutual funds

     4,597        267        (242     4,622  

Bonds

     14,390        10        (34     14,366  

Money market funds

     1,823                       1,823  
  

 

 

    

 

 

    

 

 

   

 

 

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

 

 

    

 

 

    

 

 

   

 

 

 

At March 31, 2012 and September 30, 2011, our available-for-sale securities included $41.8 million and $38.3 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At March 31, 2012 we maintained investments in bonds that have contractual maturity dates ranging from April 2012 through July 2016.

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

We maintained several bonds with a cumulative fair value of $4.4 million in an unrealized loss position of less than $0.1 million as of March 31, 2012. These bonds have been in an unrealized loss position for less than twelve months. Based upon our intent and ability to hold these investments, our ability to direct the source of payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that these bonds are investment grade, we do not consider this impairment to be other than temporary as of March 31, 2012.

Other Fair Value Measures

Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations. The following table presents the carrying value and fair value of our debt as of March 31, 2012:

 

     March 31, 2012  
     (In thousands)  

Carrying Amount

   $ 2,210,196  

Fair Value

   $ 2,583,071  

 

21


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

5.    Discontinued Operations

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

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

The tables below set forth selected financial and operational information related to net assets and operating results related to discontinued operations. Additionally, assets and liabilities related to our Missouri, Illinois and Iowa operations are classified as “held for sale” in other current assets and liabilities in our condensed consolidated balance sheets at March 31, 2012 and September 30, 2011. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported net income.

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

 

     Three Months Ended
March 31
    Six Months Ended
March 31
 
     2012     2011     2012     2011  
     (In thousands)  

Operating revenues

   $ 26,374     $ 35,790     $ 49,825     $ 59,523  

Purchased gas cost

     17,026       24,636       31,977       39,533  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,348       11,154       17,848       19,990  

Operating expenses

     4,275       4,431       8,449       8,447  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,073       6,723       9,399       11,543  

Other nonoperating expense

     (38     (32     (86     (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations before income taxes

     5,035       6,691       9,313       11,478  

Income tax expense

     1,834       2,642       3,393       4,532  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,201     $ 4,049     $ 5,920     $ 6,946  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

     March 31,
2012
     September 30,
2011
 
     (In thousands)  

Net plant, property & equipment

   $ 126,587      $ 127,577  

Gas stored underground

     6,517        11,931  

Other current assets

     515        786  

Deferred charges and other assets

     49        277  
  

 

 

    

 

 

 

Assets held for sale

   $ 133,668      $ 140,571  
  

 

 

    

 

 

 

Accounts payable and accrued liabilities

   $ 5,404      $ 1,917  

Other current liabilities

     6,857        4,877  

Regulatory cost of removal

     7,687        10,498  

Deferred credits and other liabilities

     872        1,153  
  

 

 

    

 

 

 

Liabilities held for sale

   $ 20,820      $ 18,445  
  

 

 

    

 

 

 

6.    Debt

The nature and terms of our debt instruments are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes in the terms of our debt instruments during the six months ended March 31, 2012.

Long-term debt

Long-term debt at March 31, 2012 and September 30, 2011 consisted of the following:

 

    March 31,
2012
    September 30,
2011
 
    (In thousands)  

Unsecured 10% Notes, redeemed December 2011

  $      $ 2,303  

Unsecured 5.125% Senior Notes, due January 2013

    250,000       250,000  

Unsecured 4.95% Senior Notes, due 2014

    500,000       500,000  

Unsecured 6.35% Senior Notes, due 2017

    250,000       250,000  

Unsecured 8.50% Senior Notes, due 2019

    450,000       450,000  

Unsecured 5.95% Senior Notes, due 2034

    200,000       200,000  

Unsecured 5.50% Senior Notes, due 2041

    400,000       400,000  

Medium term notes

   

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

    10,000       10,000  

Unsecured 6.75% Debentures, due 2028

    150,000       150,000  

Rental property term note due in installments through 2013

    196       262  
 

 

 

   

 

 

 

Total long-term debt

    2,210,196       2,212,565  

Less:

   

Original issue discount on unsecured senior notes and debentures

    (3,852     (4,014

Current maturities

    (250,131     (2,434
 

 

 

   

 

 

 
  $ 1,956,213     $ 2,206,117  
 

 

 

   

 

 

 

 

23


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our unsecured 10% notes were paid on their maturity date on December 31, 2011 and were not replaced. As noted above, our Unsecured 5.125% Senior Notes will mature in January 2013; accordingly, these have been classified within the current maturities of long-term debt.

Short-term debt

Our short-term borrowing requirements are affected by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.

We finance our short-term borrowing requirements through a combination of a $750 million commercial paper program and four committed revolving credit facilities with third-party lenders. As a result, we have approximately $985 million of working capital funding. Additionally, our $750 million unsecured credit facility has an accordion feature which, if utilized, would increase borrowing capacity to $1.0 billion. At March 31, 2012 and September 30, 2011, there was $174.0 million and $206.4 million outstanding under our commercial paper program. We also use intercompany credit facilities to supplement the funding provided by these third-party committed credit facilities.

Regulated Operations

We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $785 million of working capital funding, including a five-year $750 million unsecured facility, a $25 million unsecured facility and a $10 million revolving credit facility, which is used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $4.2 million at March 31, 2012. Our $25 million unsecured facility was renewed effective April 1, 2012. This facility bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin.

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

Nonregulated Operations

Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH, has a three-year $200 million committed revolving credit facility, expiring in December 2013, with a syndicate of third-party lenders with an accordion feature that could increase AEM’s borrowing capacity to $500 million. The credit facility is primarily used to issue letters of credit and, on a less frequent basis, to borrow funds for gas purchases and other working capital needs. This facility is collateralized by substantially all of the assets of AEM and is guaranteed by AEH. Due to outstanding letters of credit and various covenants, including covenants based on working capital, the amount available to AEM under this credit facility was $82.0 million at March 31, 2012.

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

 

24


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Shelf Registration

We have an effective shelf registration statement with the Securities and Exchange Commission (SEC) that permits us to issue a total of $1.3 billion in common stock and/or debt securities. The shelf registration statement has been approved by all requisite state regulatory commissions. At March 31, 2012, $900 million remains available for issuance. Of this amount, $550 million is available for the issuance of debt securities and $350 million remains available for the issuance of equity securities under the shelf until March 2013.

Debt Covenants

The availability of funds under our regulated credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At March 31, 2012, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 52 percent. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.

AEM is required by the financial covenants in its facility to maintain a ratio of total liabilities to tangible net worth that does not exceed a maximum of 5 to 1. At March 31, 2012, AEM’s ratio of total liabilities to tangible net worth, as defined, was 0.97 to 1. Additionally, AEM must maintain minimum levels of net working capital and net worth ranging from $20 million to $40 million. As defined in the financial covenants, at March 31, 2012, AEM’s net working capital was $105.9 million and its tangible net worth was $142.5 million.

In addition to these financial covenants, our credit facilities and public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers.

Additionally, our public debt indentures relating to our senior notes and debentures, as well as our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity.

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

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

We were in compliance with all of our debt covenants as of March 31, 2012. 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.

7.    Earnings Per Share

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

 

25


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

ing securities. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three and six months ended March 31, 2012 and 2011 are calculated as follows:

 

     Three Months Ended
March 31
     Six Months Ended
March 31
 
     2012      2011      2012      2011  
     (In thousands, except per share amounts)  

Basic Earnings Per Share from continuing operations

           

Income from continuing operations

   $ 105,910      $ 128,160      $ 171,698      $ 199,260  

Less: Income from continuing operations allocated to participating securities

     1,109        1,342        1,794        2,089  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 104,801      $ 126,818      $ 169,904      $ 197,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,020        90,246        90,137        90,157  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share — Basic

   $ 1.16      $ 1.41      $ 1.89      $ 2.18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share from discontinued operations

           

Income from discontinued operations

   $ 3,201      $ 4,049      $ 5,920      $ 6,946  

Less: Income from discontinued operations allocated to participating securities

     34        42        62        73  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 3,167      $ 4,007      $ 5,858      $ 6,873  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,020        90,246        90,137        90,157  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations per share — Basic

   $ 0.04      $ 0.04      $ 0.06      $ 0.08  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — Basic

   $ 1.20      $ 1.45      $ 1.95      $ 2.26  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
March 31
     Six Months Ended
March 31
 
     2012      2011      2012      2011  
     (In thousands, except per share amounts)  

Diluted Earnings Per Share from continuing operations

           

Income from continuing operations available to common shareholders

   $ 104,801      $ 126,818      $ 169,904      $ 197,171  

Effect of dilutive stock options and other shares

     3        3        4        5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 104,804      $ 126,821      $ 169,908      $ 197,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,020        90,246        90,137        90,157  

Additional dilutive stock options and other shares

     302        287        303        298  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,322        90,533        90,440        90,455  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations per share — Diluted

   $ 1.16      $ 1.41      $ 1.88      $ 2.18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share from discontinued operations

           

Income from discontinued operations available to common shareholders

   $ 3,167      $ 4,007      $ 5,858      $ 6,873  

Effect of dilutive stock options and other shares

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 3,167      $ 4,007      $ 5,858      $ 6,873  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,020        90,246        90,137        90,157  

Additional dilutive stock options and other shares

     302        287        303        298  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,322        90,533        90,440        90,455  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations per share — Diluted

   $ 0.04      $ 0.04      $ 0.06      $ 0.08  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share — Diluted

   $ 1.20      $ 1.45      $ 1.94      $ 2.26  
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2012 and 2011 as their exercise price was less than the average market price of the common stock during that period.

Share Repurchase Program

On September 28, 2011, the Board of Directors approved a new program authorizing the repurchase of up to five million shares of common stock over a five-year period. However, it may be terminated or limited at any time. Shares may be repurchased in the open market or in privately negotiated transactions in amounts the company deems appropriate. The program is primarily intended to minimize the dilutive effect of equity grants under various benefit related incentive compensation plans of the company. As of March 31, 2012, 387,991 shares had been repurchased for an aggregate value of $12.5 million.

 

27


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, 2012 and 2011 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.

 

     Three Months Ended March 31  
     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 4,298     $ 4,257     $ 4,088     $ 3,601  

Interest cost

     6,678       7,055       3,466       3,203  

Expected return on assets

     (5,369     (6,285     (652     (682

Amortization of transition asset

                   378       378  

Amortization of prior service cost

     (36     (105     (363     (363

Amortization of actuarial loss

     4,143       2,748       662       86  

Curtailment gain

            (40              
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 9,714     $ 7,630     $ 7,579     $ 6,223  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended March 31  
     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 8,596     $ 8,637     $ 8,176     $ 7,202  

Interest cost

     13,355       13,979       6,931       6,406  

Expected return on assets

     (10,737     (12,248     (1,304     (1,364

Amortization of transition asset

                   756       756  

Amortization of prior service cost

     (71     (217     (725     (725

Amortization of actuarial loss

     8,285       6,242       1,324       173  

Curtailment gain

            (40              
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 19,428     $ 16,353     $ 15,158     $ 12,448  
  

 

 

   

 

 

   

 

 

   

 

 

 

The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2012 and 2011 are as follows:

 

     Pension
Account Plan
    Other
Pension  Benefits
    Other Benefits  
     2012     2011     2012     2011     2012     2011  

Discount rate

     5.05     5.68     5.05     5.39     5.05     5.39

Rate of compensation increase

     3.50     4.00     3.50     4.00     N/A        N/A   

Expected return on plan assets

     7.75     8.25     7.75     8.25     4.70     5.00

The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid.

 

28


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 2012. Based upon this valuation, we contributed $23.0 million to our defined benefit pension plans during the second fiscal quarter to achieve a desirable PPA funding threshold. The need for this funding reflects the increased pension benefit obligation due to a decrease in the discount rate compared to the prior year as well as a decline in the fair value of plan assets. During the first six months of fiscal 2012, we contributed $34.2 million to our defined benefit plans and we anticipate contributing an additional $12.4 million during the remainder of the fiscal year.

We contributed $9.1 million to our other post-retirement benefit plans during the six months ended March 31, 2012. We expect to contribute a total of approximately $10 million to $15 million to these plans during the remainder of the fiscal year.

9.    Commitments and Contingencies

Litigation and Environmental Matters

With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 13 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, except as noted below, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2012.

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

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

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

A hearing was held on February 28, 2011 to hear a number of motions, including a motion to dismiss the jury verdict and a motion for a new trial. The motions to dismiss the jury verdict and for a new trial were denied. However, the total punitive damages award was reduced from $27.5 million to $24.7 million. On October 17, 2011, we filed our brief of appellants with the Kentucky Court of Appeals, appealing the verdict of the trial court. The appellees in this case subsequently filed their appellees’ brief with the Court of Appeals on January 16, 2012, with our reply brief being filed with the Court on March 19, 2012.

In addition, in a related development, on July 12, 2011, the Atmos Entities filed a lawsuit in the United States District Court, Western District of Kentucky, Atmos Energy Corporation et al.vs. Resource Energy Technologies, LLC and Robert Thorpe and John F. Charles, against the third party producer and its affiliates to

 

29


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

recover all costs, including attorneys’ fees, incurred by the Atmos Entities, which are associated with the defense and appeal of the case discussed above as well as for all damages awarded to the plaintiffs in such case against the Atmos Entities. The total amount of damages being claimed in the lawsuit is “open-ended” since the appellate process and related costs are ongoing. This lawsuit is based upon the indemnification provisions agreed to by the third party producer in favor of Atmos Gathering that are contained in an agreement entered into between Atmos Gathering and the third party producer in May 2009. The defendants filed a motion to dismiss the case on August 25, 2011, with Atmos Energy filing a brief in response to such motion on September 19, 2011. On March 27, 2012 the court denied the motion to dismiss.

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

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

Purchase Commitments

AEH has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At March 31, 2012, AEH was committed to purchase 96.2 Bcf within one year, 23.5 Bcf within one to three years and 0.6 Bcf after three years under indexed contracts. AEH is committed to purchase 3.5 Bcf within one year and 0.6 Bcf within one to three years under fixed price contracts with prices ranging from $1.75 to $6.36 per Mcf. Purchases under these contracts totaled $264.3 million and $438.9 million for the three months ended March 31, 2012 and 2011 and $576.4 million and $773.1 million for the six months ended March 31, 2012 and 2011.

Our natural gas distribution divisions, except for our Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.

Our Mid-Tex Division maintains long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market and fixed prices. The estimated commitments under these contracts as of March 31, 2012 are as follows (in thousands):

 

2012

   $ 33,347  

2013

     71,496  

2014

     61,594  

2015

       

2016

       

Thereafter

       
  

 

 

 
   $ 166,437  
  

 

 

 

Our nonregulated segment maintains long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts are detailed in our

 

30


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes to the estimated storage and transportation fees for the six months ended March 31, 2012.

Regulatory Matters

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

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

As discussed in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, in 2010, our Mid-Tex Division agreed to install 100,000 steel service line replacements by September 30, 2012. As of March 31, 2012, we had replaced 73,822 lines and are on schedule for completion in September 2012. Under the terms of the agreement, special rate recovery of the associated return, depreciation and taxes is approved for lines replaced between October 1, 2010 and September 30, 2012. Since October 1, 2010, we have spent $81.4 million on steel service line replacements.

In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act calls for various regulatory agencies, including the SEC and the Commodity Futures Trading Commission (CFTC) to establish rules and regulations for implementation of many of the provisions of the Dodd-Frank Act. Although the SEC and CFTC have issued a number of rules and regulations, we expect additional rules and regulations to be issued, which should provide additional clarity regarding the extent of the impact of this legislation on the Company. The costs of participating in financial markets for hedging certain risks inherent in our business may be increased as a result of the new legislation and related rules and regulations. Additional reporting and disclosure obligations have been imposed upon the Company, the full extent of which will not be known until the SEC and the CFTC have completed their ongoing rulemaking process.

As of March 31, 2012, rate cases were in progress in our Mid-Tex, West Texas and Kansas service areas and annual rate filing mechanisms were in progress in our Mid-Tex and Louisiana service areas along with one infrastructure program filing in progress in our Atmos Pipeline — Texas service area. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.

10.    Concentration of Credit Risk

Information regarding our concentration of credit risk is disclosed in Note 15 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the six months ended March 31, 2012, there were no material changes in our concentration of credit risk.

 

31


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

11.    Segment Information

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

 

   

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

 

   

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

 

   

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

Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our natural gas distribution segment operations are geographically dispersed, they are reported as a single segment as each natural gas distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. We evaluate performance based on net income or loss of the respective operating units.

Income statements for the three and six month periods ended March 31, 2012 and 2011 by segment are presented in the following tables:

 

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

Operating revenues from external parties

   $ 888,685      $ 20,430     $ 334,335     $     $ 1,243,450  

Intersegment revenues

     323        37,607       36,428       (74,358       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     889,008        58,037       370,763       (74,358     1,243,450  

Purchased gas cost

     508,206               374,992       (74,009     809,189  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     380,802        58,037       (4,229     (349     434,261  

Operating expenses

           

Operation and maintenance

     89,443        15,847       5,769       (351     110,708  

Depreciation and amortization

     51,755        7,792       725              60,272  

Taxes, other than income

     50,313        3,915       691              54,919  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     191,511        27,554       7,185       (351     225,899  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     189,291        30,483       (11,414     2       208,362  

Miscellaneous income (expense)

     733        (56     567       (628     616  

Interest charges

     28,833        7,614       839       (626     36,660  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     161,191        22,813       (11,686            172,318  

Income tax expense (benefit)

     62,890        8,193       (4,675            66,408  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     98,301        14,620       (7,011            105,910  

Income from discontinued operations, net of tax

     3,201                             3,201  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

32


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

Operating revenues from external parties

   $ 1,077,178      $ 21,597      $ 482,722     $      $ 1,581,497  

Intersegment revenues

     236        33,379        100,809       (134,424       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     1,077,414        54,976        583,531       (134,424     1,581,497  

Purchased gas cost

     698,410                563,473       (134,054     1,127,829  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     379,004        54,976        20,058       (370     453,668  

Operating expenses

            

Operation and maintenance

     92,266        15,231        7,035       (370     114,162  

Depreciation and amortization

     48,555        5,798        1,114              55,467  

Taxes, other than income

     50,088        4,113        (643            53,558  

Asset impairment

                     19,282              19,282  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     190,909        25,142        26,788       (370     242,469  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     188,095        29,834        (6,730            211,199  

Miscellaneous income

     20,156        5,861        306       (121     26,202  

Interest charges

     29,605        8,085        306       (121     37,875  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     178,646        27,610        (6,730            199,526  

Income tax expense (benefit)

     64,085        9,871        (2,590            71,366  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     114,561        17,739        (4,140            128,160  

Income from discontinued operations, net of tax

     4,049                              4,049  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 118,610      $ 17,739      $ (4,140   $      $ 132,209  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 109,762      $ 11,818      $ 1,921     $      $ 123,501  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

33


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

Operating revenues from external parties

  $ 1,581,753     $ 39,870     $ 723,000     $      $ 2,344,623  

Intersegment revenues

    547       74,926       91,939       (167,412       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,582,300       114,796       814,939       (167,412     2,344,623  

Purchased gas cost

    910,413              803,763       (166,696     1,547,480  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    671,887       114,796       11,176       (716     797,143  

Operating expenses

         

Operation and maintenance

    182,857       32,812       11,820       (719     226,770  

Depreciation and amortization

    102,586       15,443       1,458              119,487  

Taxes, other than income

    88,792       7,699       1,626              98,117  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    374,235       55,954       14,904       (719     444,374  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    297,652       58,842       (3,728     3       352,769  

Miscellaneous income (expense)

    (1,023     (336     603       (503     (1,259

Interest charges

    56,688       14,823       1,091       (500     72,102  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    239,941       43,683       (4,216            279,408  

Income tax expense (benefit)

    93,735       15,649       (1,674            107,710  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    146,206       28,034       (2,542            171,698  

Income from discontinued operations, net of tax

    5,920                            5,920  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 152,126     $ 28,034     $ (2,542   $      $ 177,618  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

  $ 243,135     $ 62,991     $ 4,997     $      $ 311,123  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

Operating revenues from external parties

  $ 1,780,439     $ 42,830     $ 891,490     $      $ 2,714,759  

Intersegment revenues

    437       61,153       167,681       (229,271       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,780,876       103,983       1,059,171       (229,271     2,714,759  

Purchased gas cost

    1,110,936              1,013,935       (228,504     1,896,367  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    669,940       103,983       45,236       (767     818,392  

Operating expenses

         

Operation and maintenance

    181,495       30,805       17,119       (767     228,652  

Depreciation and amortization

    96,449       11,597       2,198              110,244  

Taxes, other than income

    84,536       7,666       1,524              93,726  

Asset impairment

                  19,282              19,282  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    362,480       50,068       40,123       (767     451,904  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    307,460       53,915       5,113              366,488  

Miscellaneous income

    19,458       5,579       596       (157     25,476  

Interest charges

    59,302       16,149       1,476       (157     76,770  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    267,616       43,345       4,233              315,194  

Income tax expense

    98,634       15,504       1,796              115,934  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    168,982       27,841       2,437              199,260  

Income from discontinued operations, net of tax

    6,946                            6,946  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 175,928     $ 27,841     $ 2,437     $      $ 206,206  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

  $ 219,261     $ 24,557     $ 2,845     $      $ 246,663  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Balance sheet information at March 31, 2012 and September 30, 2011 by segment is presented to reflect our business structure as of March 31, 2012 in the following tables.

 

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

ASSETS

            

Property, plant and equipment, net

   $ 4,382,291      $ 886,507      $ 65,214     $      $ 5,334,012  

Investment in subsidiaries

     674,594                (2,096     (672,498       

Current assets

            

Cash and cash equivalents

     40,140                6,900              47,040  

Assets from risk management activities

     502                2,877              3,379  

Other current assets

     632,486        13,278        399,389       (201,731     843,422  

Intercompany receivables

     584,018                       (584,018       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     1,257,146        13,278        409,166       (785,749     893,841  

Intangible assets

                     185              185  

Goodwill

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

Noncurrent assets from risk management activities

                     10,841              10,841  

Deferred charges and other assets

     366,329        13,203        10,316              389,848  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 7,253,268      $ 1,045,369      $ 528,337     $ (1,458,247   $ 7,368,727  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

  

         

Shareholders’ equity

   $ 2,360,712      $ 293,135      $ 381,459     $ (674,594   $ 2,360,712  

Long-term debt

     1,956,147                66              1,956,213  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total capitalization

     4,316,859        293,135        381,525       (674,594     4,316,925  

Current liabilities

            

Current maturities of long-term debt

     250,000                131              250,131  

Short-term debt

     371,996                       (198,000     173,996  

Liabilities from risk management activities

     47,281                5,296              52,577  

Other current liabilities

     507,354        6,309        119,382       (1,635     631,410  

Intercompany payables

             551,330        32,688       (584,018       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,176,631        557,639        157,497       (783,653     1,108,114  

Deferred income taxes

     890,455        188,936        (16,903            1,062,488  

Noncurrent liabilities from risk management activities

     1                5,300              5,301  

Regulatory cost of removal obligation

     414,001                              414,001  

Deferred credits and other liabilities

     455,321        5,659        918              461,898  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 7,253,268      $ 1,045,369      $ 528,337     $ (1,458,247   $ 7,368,727  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

36


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

ASSETS

            

Property, plant and equipment, net

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

Investment in subsidiaries

     670,993                (2,096     (668,897       

Current assets

            

Cash and cash equivalents

     24,646                106,773              131,419  

Assets from risk management activities

     843                17,501              18,344  

Other current assets

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

Intercompany receivables

     569,898                       (569,898       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

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

Intangible assets

                     207              207  

Goodwill

     572,908