XNYS:ATO Atmos Energy Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 3, 2012.

 

Class

  

Shares Outstanding

No Par Value

   90,173,217


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

 

     June 30,
2012
    September 30,
2011
 
     (Unaudited)        
    

(In thousands, except

share data)

 
ASSETS     

Property, plant and equipment

   $ 7,128,484      $ 6,816,794   

Less accumulated depreciation and amortization

     1,686,598        1,668,876   
  

 

 

   

 

 

 

Net property, plant and equipment

     5,441,886        5,147,918   

Current assets

    

Cash and cash equivalents

     27,706        131,419   

Accounts receivable, net

     216,753        273,303   

Gas stored underground

     239,329        289,760   

Other current assets

     291,870        316,471   
  

 

 

   

 

 

 

Total current assets

     775,658        1,010,953   

Goodwill and intangible assets

     740,174        740,207   

Deferred charges and other assets

     392,117        383,793   
  

 

 

   

 

 

 
   $ 7,349,835      $ 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: June 30, 2012 — 90,172,665 shares; September 30, 2011 — 90,296,482 shares

   $ 451      $ 451   

Additional paid-in capital

     1,737,047        1,732,935   

Retained earnings

     684,907        570,495   

Accumulated other comprehensive loss

     (67,480     (48,460
  

 

 

   

 

 

 

Shareholders’ equity

     2,354,925        2,255,421   

Long-term debt

     1,956,289        2,206,117   
  

 

 

   

 

 

 

Total capitalization

     4,311,214        4,461,538   

Current liabilities

    

Accounts payable and accrued liabilities

     178,198        291,205   

Other current liabilities

     468,409        367,563   

Short-term debt

     213,491        206,396   

Current maturities of long-term debt

     250,131        2,434   
  

 

 

   

 

 

 

Total current liabilities

     1,110,229        867,598   

Deferred income taxes

     1,085,654        960,093   

Regulatory cost of removal obligation

     381,797        428,947   

Deferred credits and other liabilities

     460,941        564,695   
  

 

 

   

 

 

 
   $ 7,349,835      $ 7,282,871   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
June 30
 
     2012     2011  
     (Unaudited)  
     (In thousands, except
per share data)
 

Operating revenues

    

Natural gas distribution segment

   $ 325,051      $ 407,031   

Regulated transmission and storage segment

     67,073        53,570   

Nonregulated segment

     256,250        491,285   

Intersegment eliminations

     (62,543     (108,271
  

 

 

   

 

 

 
     585,831        843,615   

Purchased gas cost

    

Natural gas distribution segment

     124,373        206,839   

Regulated transmission and storage segment

              

Nonregulated segment

     224,829        477,880   

Intersegment eliminations

     (62,161     (107,909
  

 

 

   

 

 

 
     287,041        576,810   
  

 

 

   

 

 

 

Gross profit

     298,790        266,805   

Operating expenses

    

Operation and maintenance

     107,295        112,665   

Depreciation and amortization

     59,819        56,932   

Taxes, other than income

     46,887        52,142   

Asset impairments

            10,988   
  

 

 

   

 

 

 

Total operating expenses

     214,001        232,727   
  

 

 

   

 

 

 

Operating income

     84,789        34,078   

Miscellaneous expense

     (1,948     (1,430

Interest charges

     34,923        35,845   
  

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     47,918        (3,197

Income tax expense (benefit)

     17,774        (1,723
  

 

 

   

 

 

 

Income (loss) from continuing operations

     30,144        (1,474

Income from discontinued operations, net of tax ($566 and $590)

     988        908   
  

 

 

   

 

 

 

Net income (loss)

   $ 31,132      $ (566
  

 

 

   

 

 

 

Basic earnings per share

    

Income (loss) per share from continuing operations

   $ 0.33      $ (0.02

Income per share from discontinued operations

     0.01        0.01   
  

 

 

   

 

 

 

Net income (loss) per share — basic

   $ 0.34      $ (0.01
  

 

 

   

 

 

 

Diluted earnings per share

    

Income (loss) per share from continuing operations

   $ 0.33      $ (0.02

Income per share from discontinued operations

     0.01        0.01   
  

 

 

   

 

 

 

Net income (loss) per share — diluted

   $ 0.34      $ (0.01
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.345      $ 0.340   
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,118        90,127   
  

 

 

   

 

 

 

Diluted

     90,993        90,127   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

     Nine Months Ended
June 30
 
     2012     2011  
     (Unaudited)  
    

(In thousands, except

per share data)

 

Operating revenues

    

Natural gas distribution segment

   $ 1,907,351      $ 2,187,907   

Regulated transmission and storage segment

     181,869        157,553   

Nonregulated segment

     1,071,189        1,550,456   

Intersegment eliminations

     (229,955     (337,542
  

 

 

   

 

 

 
     2,930,454        3,558,374   

Purchased gas cost

    

Natural gas distribution segment

     1,034,786        1,317,775   

Regulated transmission and storage segment

              

Nonregulated segment

     1,028,592        1,491,815   

Intersegment eliminations

     (228,857     (336,413
  

 

 

   

 

 

 
     1,834,521        2,473,177   
  

 

 

   

 

 

 

Gross profit

     1,095,933        1,085,197   

Operating expenses

    

Operation and maintenance

     334,065        341,317   

Depreciation and amortization

     179,306        167,176   

Taxes, other than income

     145,004        145,868   

Asset impairments

            30,270   
  

 

 

   

 

 

 

Total operating expenses

     658,375        684,631   
  

 

 

   

 

 

 

Operating income

     437,558        400,566   

Miscellaneous income (expense)

     (3,207     24,046   

Interest charges

     107,025        112,615   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     327,326        311,997   

Income tax expense

     125,484        114,211   
  

 

 

   

 

 

 

Income from continuing operations

     201,842        197,786   

Income from discontinued operations, net of tax ($3,959 and $5,122)

     6,908        7,854   
  

 

 

   

 

 

 

Net income

   $ 208,750      $ 205,640   
  

 

 

   

 

 

 

Basic earnings per share

    

Income per share from continuing operations

   $ 2.23      $ 2.17   

Income per share from discontinued operations

     0.08        0.09   
  

 

 

   

 

 

 

Net income per share — basic

   $ 2.31      $ 2.26   
  

 

 

   

 

 

 

Diluted earnings per share

    

Income per share from continuing operations

   $ 2.21      $ 2.16   

Income per share from discontinued operations

     0.07        0.09   
  

 

 

   

 

 

 

Net income per share — diluted

   $ 2.28      $ 2.25   
  

 

 

   

 

 

 

Cash dividends per share

   $ 1.035      $ 1.020   
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     90,131        90,233   
  

 

 

   

 

 

 

Diluted

     91,006        90,530   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
June 30
 
     2012     2011  
     (Unaudited)
(In thousands)
 

Cash Flows From Operating Activities

    

Net income

   $ 208,750      $ 205,640   

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

    

Asset impairments

            30,270   

Depreciation and amortization:

    

Charged to depreciation and amortization

     183,884        171,726   

Charged to other accounts

     310        149   

Deferred income taxes

     120,713        115,488   

Other

     22,386        15,927   

Net assets / liabilities from risk management activities

     12,759        (15,869

Net change in operating assets and liabilities

     (29,996     (3,769
  

 

 

   

 

 

 

Net cash provided by operating activities

     518,806        519,562   

Cash Flows From Investing Activities

    

Capital expenditures

     (497,374     (390,283

Other, net

     (4,247     (3,373
  

 

 

   

 

 

 

Net cash used in investing activities

     (501,621     (393,656

Cash Flows From Financing Activities

    

Net decrease in short-term debt

     (6,688     (132,072

Net proceeds from issuance of long-term debt

            394,618   

Settlement of Treasury lock agreements

            20,079   

Unwinding of Treasury lock agreements

            27,803   

Repayment of long-term debt

     (2,369     (360,066

Cash dividends paid

     (94,338     (93,039

Repurchase of common stock

     (12,535       

Repurchase of equity awards

     (5,219     (5,300

Issuance of common stock

     251        7,548   
  

 

 

   

 

 

 

Net cash used in financing activities

     (120,898     (140,429
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (103,713     (14,523

Cash and cash equivalents at beginning of period

     131,419        131,952   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 27,706      $ 117,429   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 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 at June 30, 2012 covered service areas located in 12 states. In addition, we transport natural gas for others through our distribution system. On August 1, 2012, we completed the divestiture of our natural gas distribution operations in Missouri, Illinois and Iowa, representing approximately 84,000 customers. On August 8, 2012, we announced that we had entered into a definitive agreement to sell our natural gas distribution operations in Georgia, representing approximately 64,000 customers. 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 headquartered 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 nine-month period ended June 30, 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 June 30, 2012 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). On July 27, 2012, we issued a notice of redemption of our Unsecured 5.125% Senior Notes on August 28, 2012. The redemption is discussed further in Note 6. On August 1, 2012, we completed the sale of our Missouri, Illinois and Iowa natural gas distribution assets. The sale is discussed in Note 5. On August 8, 2012 we announced that we had entered into a definitive agreement to sell our natural gas distribution operations in Georgia, which is discussed in Note 5.

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.

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 nine months ended June 30, 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 new presentation requirements related to reclassifications of items from accumulated other comprehensive income, which were scheduled 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 nine months ended June 30, 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 June 30, 2012 and September 30, 2011 included the following:

 

     June 30,
2012
     September 30,
2011
 
     (In thousands)  

Regulatory assets:

     

Pension and postretirement benefit costs

   $ 240,312       $ 254,666   

Merger and integration costs, net

     5,876         6,242   

Deferred gas costs

     14,495         33,976   

Regulatory cost of removal asset

     10,430         8,852   

Environmental costs

     52         385   

Rate case costs

     4,454         4,862   

Deferred franchise fees

     2,129         379   

Other

     13,236         3,534   
  

 

 

    

 

 

 
   $ 290,984       $ 312,896   
  

 

 

    

 

 

 

Regulatory liabilities:

     

Deferred gas costs

   $ 34,044       $ 8,130   

Regulatory cost of removal obligation

     449,778         464,025   

Other

     6,465         14,025   
  

 

 

    

 

 

 
   $ 490,287       $ 486,180   
  

 

 

    

 

 

 

The amounts above do not include regulatory assets and liabilities related to our divested Missouri, Illinois and Iowa service areas, which are classified as assets held for sale as of June 30, 2012 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 June 30, 2012, we had deferred $2.1 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. We elected to utilize this provision of GURA, effective January 1, 2012, and established a regulatory asset totaling $5.1 million, which is recorded in “Other” in the regulatory assets table above. Of this amount, $2.9 million represented a reduction to operation and maintenance expense during the second and third quarters 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 nine-month periods ended June 30, 2012 and 2011:

 

     Three Months Ended
June 30
    Nine Months Ended
June 30
 
     2012     2011     2012     2011  
     (In thousands)  

Net income (loss)

   $ 31,132      $ (566   $ 208,750      $ 205,640   

Unrealized holding gains (losses) on investments, net of tax expense (benefit) of $(523) and $(56) for the three months ended June 30, 2012 and 2011 and of $1,194 and $876 for the nine months ended June 30, 2012 and 2011

     (888     (94     2,059        1,492   

Amortization, unrealized gain (loss) and unwinding of treasury lock agreements, net of tax expense (benefit) of $(18,399) and $(4,629) for the three months ended June 30, 2012 and 2011 and $(9,995) and $7,950 for the nine months ended June 30, 2012 and 2011

     (31,328     (7,884     (17,019     13,536   

Net unrealized gains (losses) on cash flow hedging transactions, net of tax expense (benefit) of $11,401 and $(182) for the three months ended June 30, 2012 and 2011 and $(2,595) and $9,008 for the nine months ended June 30, 2012 and 2011

     17,830        (285     (4,060     14,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 16,746      $ (8,829   $ 189,730      $ 234,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

      June 30,
2012
    September 30,
2011
 
     (In thousands)  

Accumulated other comprehensive income (loss):

    

Unrealized holding gains on investments

   $ 4,617      $ 2,558   

Treasury lock agreements

     (51,176     (34,157

Cash flow hedges

     (20,921     (16,861
  

 

 

   

 

 

 
   $ (67,480   $ (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 nine months ended June 30, 2012 there were no

 

9


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

changes in our objectives, strategies and accounting for these financial instruments. Currently, we utilize financial instruments in our natural gas distribution and nonregulated segments. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.

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 53 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 June 30, 2012, we had three Treasury lock agreements outstanding to fix the Treasury yield component of 30-year unsecured notes, which we plan to issue 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 June 30, 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 June 30, 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

            (33,110
  

Cash Flow

            42,625   
  

Not designated

     15,940        38,773   
     

 

 

   

 

 

 
        15,940        48,288   
     

 

 

   

 

 

 

 

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 June 30, 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 June 30, 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)        

June 30, 2012

       

Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets   $      $ 41,920      $ 41,920   

Noncurrent commodity contracts

  Deferred charges and other assets                     

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities     (96,047     (33,707     (129,754

Noncurrent commodity contracts

  Deferred credits and other liabilities            (7,638     (7,638
   

 

 

   

 

 

   

 

 

 

Total

      (96,047     575        (95,472

Not Designated As Hedges:

       

Asset Financial Instruments

       

Current commodity contracts

  Other current assets     3,486        87,961        91,447   

Noncurrent commodity contracts

  Deferred charges and other assets     1,207        73,841        75,048   

Liability Financial Instruments

       

Current commodity contracts

  Other current liabilities(1)     (1,505     (102,577     (104,082

Noncurrent commodity contracts

  Deferred credits and other liabilities            (64,360     (64,360
   

 

 

   

 

 

   

 

 

 

Total

      3,188        (5,135     (1,947
   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

    $ (92,859)      $ (4,560   $ (97,419
   

 

 

   

 

 

   

 

 

 

 

  (1) 

Other current liabilities not designated as hedges in our natural gas distribution segment include $0.7 million related to risk management liabilities that were classified as assets held for sale at June 30, 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 June 30, 2012 and 2011 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $19.0 million and $5.8 million. For the nine months ended June 30, 2012 and 2011 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $21.2 million and $23.3 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 nine months ended June 30, 2012 and 2011 is presented below.

 

     Three Months Ended
June 30
 
         2012             2011      
     (In thousands)  

Commodity contracts

   $ (14,942   $ 7,837   

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

     34,296        (1,781
  

 

 

   

 

 

 

Total impact on revenue

   $ 19,354      $ 6,056   
  

 

 

   

 

 

 

The impact on revenue is comprised of the following:

    

Basis ineffectiveness

   $ 2,077      $ 853   

Timing ineffectiveness

     17,277        5,203   
  

 

 

   

 

 

 
   $ 19,354      $ 6,056   
  

 

 

   

 

 

 

 

     Nine Months Ended
June 30
 
         2012             2011      
     (In thousands)  

Commodity contracts

   $ 38,211      $ 4,834   

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

     (16,039     19,430   
  

 

 

   

 

 

 

Total impact on revenue

   $ 22,172      $ 24,264   
  

 

 

   

 

 

 

The impact on revenue is comprised of the following:

    

Basis ineffectiveness

   $ 2,179      $ 1,265   

Timing ineffectiveness

     19,993        22,999   
  

 

 

   

 

 

 
   $ 22,172      $ 24,264   
  

 

 

   

 

 

 

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 nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 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 June 30, 2012  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
     Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $      $     —       $ (19,534   $ (19,534

Loss arising from ineffective portion of commodity contracts

                    (328     (328
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on gross profit

                    (19,862     (19,862

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

     (502                    (502
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (502   $       $ (19,862   $ (20,364
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Three Months Ended June 30, 2011  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
     Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $      $     —       $ (3,907   $ (3,907

Loss arising from ineffective portion of commodity contracts

                    (281     (281
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on gross profit

                    (4,188     (4,188

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

     (614                    (614
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (614   $       $ (4,188   $ (4,802
  

 

 

   

 

 

    

 

 

   

 

 

 

 

15


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Nine Months Ended June 30, 2012  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
     Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $      $       —       $ (52,358   $ (52,358

Loss arising from ineffective portion of commodity contracts

                    (996     (996
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on gross profit

                    (53,354     (53,354

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

     (1,506                    (1,506
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ (1,506   $       $ (53,354   $ (54,860
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended June 30, 2011  
     Natural
Gas
Distribution
    Regulated
Transmission
and Storage
     Nonregulated     Consolidated  
     (In thousands)  

Loss reclassified from AOCI for effective portion of commodity contracts

   $      $       $ (25,488   $ (25,488

Loss arising from ineffective portion of commodity contracts

                    (958     (958
  

 

 

   

 

 

    

 

 

   

 

 

 

Total impact on gross profit

                    (26,446     (26,446

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

     (1,953                    (1,953

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

     21,803        6,000                27,803   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Impact from Cash Flow Hedges

   $ 19,850      $ 6,000       $ (26,446   $ (596
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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 nine months ended June 30, 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
June 30
    Nine Months Ended
June 30
 
     2012      2011     2012     2011  
     (In thousands)  

Increase (decrease) in fair value:

         

Treasury lock agreements

   $ (31,644)       $ (8,270   $ (17,968   $ 29,822   

Forward commodity contracts

     5,914         (2,668     (35,998     (1,457

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

         

Treasury lock agreements

     316         386        949        (16,286

Forward commodity contracts

     11,916         2,383        31,938        15,547   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ (13,498)       $ (8,169   $ (21,079   $ 27,626   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

  (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 June 30, 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   $ (16,543   $ (17,809

Thereafter

     10,600        (4,378     6,222   
  

 

 

   

 

 

   

 

 

 

Total(1)

   $ 9,334      $ (20,921   $ (11,587
  

 

 

   

 

 

   

 

 

 

 

  (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 June 30, 2012 and 2011 was an increase (decrease) in gross profit of $11.2 million and $(4.3) million. For the nine months ended June 30, 2012 and 2011 gross profit increased (decreased) $(3.8) million and $3.9 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 nine months ended June 30, 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 June 30, 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)(2)
     Significant
Other
Unobservable
Inputs
(Level 3)
     Netting and
Cash
Collateral(3)
    June 30,
2012
 
     (In thousands)  

Assets:

             

Financial instruments

             

Natural gas distribution segment

   $       $ 4,693       $       —       $      $ 4,693   

Nonregulated segment(1)

     1,957         201,766                 (193,759     9,964   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total financial instruments

     1,957         206,459                 (193,759     14,657   

Hedged portion of gas stored underground

     89,257                                89,257   

Available-for-sale securities

             

Money market funds

             2,629                        2,629   

Registered investment companies

     36,839                                36,839   

Bonds

             23,421                        23,421   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     36,839         26,050                        62,889   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 128,053       $ 232,509       $       $ (193,759   $ 166,803   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Financial instruments

             

Natural gas distribution segment

   $       $ 97,552       $       $      $ 97,552   

Nonregulated segment(1)

     7,441         200,842                 (199,443     8,840   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 7,441       $ 298,394       $       $ (199,443   $ 106,392   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

19


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

      Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)(2)
     Significant
Other
Unobservable
Inputs
(Level 3)
     Netting and
Cash
Collateral(4)
    September 30,
2011
 
     (In thousands)  

Assets:

             

Financial instruments

             

Natural gas distribution segment

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

Nonregulated segment(1)

     8,502         104,156                 (95,156     17,502   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total financial instruments

     8,502         105,997                 (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

   $ 92,886       $ 122,186       $       $ (95,156   $ 119,916   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Financial instruments

             

Natural gas distribution segment

   $       $ 81,118       $       $      $ 81,118   

Nonregulated segment(1)

     9,324         128,384                 (123,943     13,765   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 9,324       $ 209,502       $       $ (123,943   $ 94,883   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

  (1) 

Certain of the nonregulated segment’s financial instruments were reclassified from Level 1 to Level 2 upon further evaluation.

 

  (2) 

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

 

  (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 June 30, 2012, we had $5.7 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $1.8 million was used to offset current risk management liabilities under master netting arrangements and the remaining $3.9 million is classified as current risk management assets.

 

  (4) 

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 June 30, 2012:

          

Domestic equity mutual funds

   $ 24,322       $ 6,887       $      $ 31,209   

Foreign equity mutual funds

     5,328         342         (40     5,630   

Bonds

     23,282         145         (6     23,421   

Money market funds

     2,629                        2,629   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 55,561       $ 7,374       $ (46   $ 62,889   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 2012 and September 30, 2011, our available-for-sale securities included $39.5 million and $38.3 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At June 30, 2012 we maintained investments in bonds that have contractual maturity dates ranging from July 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 an investment in one foreign equity mutual fund with a fair value of $2.7 million in an unrealized loss position of less than $0.1 million as of June 30, 2012. This fund has been in an unrealized loss position for less than twelve months. Because this fund is only used to fund the supplemental plans, we evaluate investment performance over a long-term horizon. Based upon our intent and ability to hold this investment, our ability to direct the source of the payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that this fund continues to receive good ratings from mutual fund rating companies, we do not consider this impairment to be other-than-temporary as of June 30, 2012.

We also maintained several bonds with a cumulative fair value of $3.8 million in an unrealized loss position of less than $0.1 million as of June 30, 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 June 30, 2012.

 

21


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 June 30, 2012:

 

     June 30, 2012  
     (In thousands)  

Carrying Amount

   $ 2,210,196   

Fair Value

   $ 2,633,904   

5.    Discontinued Operations

On August 1, 2012, we completed the sale of substantially all of our natural gas distribution assets located in Missouri, Illinois and Iowa to Liberty Energy (Midstates) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $129 million. The sale was previously announced on May 12, 2011. In connection with the sale, we expect to recognize a net of tax gain of approximately $6 million, subject to post-closing adjustments.

As required under generally accepted accounting principles, the operating results of our 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 June 30, 2012 and September 30, 2011.

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

 

     Three Months Ended
June 30
    Nine Months Ended
June 30
 
     2012     2011     2012     2011  
     (In thousands)  

Operating revenues

   $ 8,745      $ 11,524      $ 58,570      $ 71,047   

Purchased gas cost

     3,005        5,460        34,982        44,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,740        6,064        23,588        26,054   

Operating expenses

     4,146        4,472        12,595        12,919   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,594        1,592        10,993        13,135   

Other nonoperating expense

     (40     (94     (126     (159
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations before income taxes

     1,554        1,498        10,867        12,976   

Income tax expense

     566        590        3,959        5,122   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 988     $ 908     $ 6,908     $ 7,854  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

     June 30,
2012
     September 30,
2011
 
     (In thousands)  

Net plant, property & equipment

   $ 126,685       $ 127,577   

Gas stored underground

     5,746         11,931   

Other current assets

     2,998         786   

Deferred charges and other assets

     100         277   
  

 

 

    

 

 

 

Assets held for sale

   $ 135,529       $ 140,571   
  

 

 

    

 

 

 

Accounts payable and accrued liabilities

   $ 1,526       $ 1,917   

Other current liabilities

     8,722         4,877   

Regulatory cost of removal

     6,927         10,498   

Deferred credits and other liabilities

     869         1,153   
  

 

 

    

 

 

 

Liabilities held for sale

   $ 18,044       $ 18,445   
  

 

 

    

 

 

 

On August 8, 2012, we entered into a definitive agreement to sell all of our natural gas distribution assets located in Georgia to Liberty Energy (Georgia) Corp., an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $141 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 in fiscal 2013.

The following table presents the assets and liabilities associated with our Georgia operations as of June 30, 2012. As required under generally accepted accounting principles, the operating results and the assets and liabilities of our Georgia operations are classified as continuing operations at June 30, 2012.

 

     June 30, 2012  
     (In thousands)  

Net plant, property & equipment

   $ 133,336   

Gas stored underground

     2,389   

Other current assets

     6,885   

Deferred charges and other assets

     112   
  

 

 

 

Total assets

   $ 142,722   
  

 

 

 

Accounts payable and accrued liabilities

   $ 1,570   

Other current liabilities

     3,275   

Regulatory cost of removal

     4,010   

Deferred credits and other liabilities

     296   
  

 

 

 

Total liabilities

   $ 9,151   
  

 

 

 

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 nine months ended June 30, 2012.

 

23


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Long-term debt

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

 

     June 30,
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

     (3,776     (4,014

Current maturities

     (250,131     (2,434
  

 

 

   

 

 

 
   $ 1,956,289      $ 2,206,117   
  

 

 

   

 

 

 

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 were scheduled to mature in January 2013. On July 27, 2012 we issued a notice of early redemption of these notes on August 28, 2012. We intend to initially fund the redemption through the issuance of commercial paper. Shortly thereafter, we intend to enter into a short-term financing facility to repay the commercial paper borrowings utilized to redeem the notes. The short-term facility is expected to be repaid with the proceeds received from the issuance of new unsecured notes anticipated to occur in January 2013. In connection with the redemption, we will pay a make-whole premium in accordance with the terms of the indenture and the Senior Notes and accrued interest at the time of redemption. In accordance with regulatory requirements, the premium will be deferred and will be recognized over the life of the new unsecured notes expected to be issued in January 2013.

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 collateralized by our $750 million unsecured credit facility 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 June 30, 2012 and September 30, 2011, there was $213.5 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.

 

24


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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. On July 25, 2012, we increased the borrowing capacity of our $10 million revolving credit facility to $14 million. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $2.5 million at June 30, 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 $94.6 million at June 30, 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.

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 June 30, 2012, $900 million remains available for issuance. With the closing of the sale of our Missouri, Illinois and Iowa operations on August 1, 2012, there are no longer any restrictions on our ability to issue either debt or equity under the shelf until it expires in 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 June 30, 2012, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 53 percent. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.

 

25


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 June 30, 2012, AEM’s ratio of total liabilities to tangible net worth, as defined, was 0.77 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 June 30, 2012, AEM’s net working capital was $122.0 million and its tangible net worth was $152.3 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 June 30, 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.

 

26


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 restricted stock units, for which vesting is predicated solely on the passage of time granted under our 1998 Long-Term Incentive Plan, are considered to be participating securities. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three and nine months ended June 30, 2012 and 2011 are calculated as follows:

 

     Three Months Ended
June 30
    Nine Months Ended
June 30
 
     2012      2011     2012      2011  
     (In thousands, except per share amounts)  

Basic Earnings Per Share from continuing operations

          

Income (loss) from continuing operations

   $ 30,144       $ (1,474   $ 201,842       $ 197,786   

Less: Income (loss) from continuing operations allocated to participating securities

     125         (32     847         2,076   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations available to common shareholders

   $ 30,019       $ (1,442   $ 200,995       $ 195,710   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,118         90,127        90,131         90,233   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations per share — Basic

   $ 0.33       $ (0.02   $ 2.23       $ 2.17   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic Earnings Per Share from discontinued operations

          

Income from discontinued operations

   $ 988       $ 908      $ 6,908       $ 7,854   

Less: Income from discontinued operations allocated to participating securities

     4         20        29         82   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 984       $ 888      $ 6,879       $ 7,772   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,118         90,127        90,131         90,233   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations per share — Basic

   $ 0.01       $ 0.01      $ 0.08       $ 0.09   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per share — Basic

   $ 0.34       $ (0.01   $ 2.31       $ 2.26   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

27


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
June 30
    Nine Months Ended
June 30
 
     2012      2011     2012      2011  
     (In thousands, except per share amounts)  

Diluted Earnings Per Share from continuing operations

          

Income (loss) from continuing operations available to common shareholders

   $ 30,019       $ (1,442   $ 200,995       $ 195,710   

Effect of dilutive stock options and other shares

                    5         4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations available to common shareholders

   $ 30,019       $ (1,442   $ 201,000       $ 195,714   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,118         90,127        90,131         90,233   

Additional dilutive stock options and other shares

     875                875         297   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,993         90,127        91,006         90,530   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) from continuing operations per share — Diluted

   $ 0.33       $ (0.02   $ 2.21       $ 2.16   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted Earnings Per Share from discontinued operations

          

Income from discontinued operations available to common shareholders

   $ 984       $ 888      $ 6,879       $ 7,772   

Effect of dilutive stock options and other shares

             2                  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations available to common shareholders

   $ 984       $ 890      $ 6,879       $ 7,772   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic weighted average shares outstanding

     90,118         90,127        90,131         90,233   

Additional dilutive stock options and other shares

     875                875         297   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted weighted average shares outstanding

     90,993         90,127        91,006         90,530   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations per share — Diluted

   $ 0.01       $ 0.01      $ 0.07       $ 0.09   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per share — Diluted

   $ 0.34       $ (0.01   $ 2.28       $ 2.25   
  

 

 

    

 

 

   

 

 

    

 

 

 

There were approximately 288,000 stock options and other shares excluded from the computation of diluted earnings per share for the three months ended June 30, 2011 as their inclusion in the computation would be anti-dilutive.

There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and nine months ended June 30, 2012 and 2011 as their exercise price was less than the average market price of the common stock during those periods.

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 June 30, 2012, a total of 387,991 shares had been repurchased for an aggregate value of $12.5 million.

 

28


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 nine months ended June 30, 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 June 30  
     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 4,297      $ 4,257      $ 4,089      $ 3,601   

Interest cost

     6,677        7,055        3,465        3,204   

Expected return on assets

     (5,368     (6,285     (651     (681

Amortization of transition asset

                   377        377   

Amortization of prior service cost

     (35     (106     (362     (362

Amortization of actuarial loss

     4,142        2,748        662        87   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 9,713      $ 7,669      $ 7,580      $ 6,226   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended June 30  
     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Components of net periodic pension cost:

        

Service cost

   $ 12,893      $ 12,894      $ 12,265      $ 10,803   

Interest cost

     20,032        21,034        10,396        9,610   

Expected return on assets

     (16,105     (18,533     (1,955     (2,045

Amortization of transition asset

                   1,133        1,133   

Amortization of prior service cost

     (106     (323     (1,087     (1,087

Amortization of actuarial loss

     12,427        8,990        1,986        260   

Curtailment gain

            (40              
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 29,141      $ 24,022      $ 22,738      $ 18,674   
  

 

 

   

 

 

   

 

 

   

 

 

 

The assumptions used to develop our net periodic pension cost for the three and nine months ended June 30, 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. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the

 

29


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 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 nine months of fiscal 2012, we contributed $40.3 million to our defined benefit plans and we anticipate contributing approximately $6 million during the remainder of the fiscal year.

We contributed $15.4 million to our other post-retirement benefit plans during the nine months ended June 30, 2012. We expect to contribute a total of approximately $5 million to $10 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 nine months ended June 30, 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. Oral arguments are scheduled in the case in late August 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 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

 

30


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 June 30, 2012, AEH was committed to purchase 79.2 Bcf within one year, 17.7 Bcf within one to three years and 0.1 Bcf after three years under indexed contracts. AEH is committed to purchase 2.7 Bcf within one year and 0.4 Bcf within one to three years under fixed price contracts with prices ranging from $2.50 to $6.36 per Mcf. Purchases under these contracts totaled $176.6 million and $356.8 million for the three months ended June 30, 2012 and 2011 and $753.0 million and $1,130.0 million for the nine months ended June 30, 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 June 30, 2012 are as follows (in thousands):

 

2012

   $ 33,563   

2013

     241,797   

2014

     70,633   

2015

       

2016

       

Thereafter

       
  

 

 

 
   $ 345,993   
  

 

 

 

Our nonregulated segment maintains long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes to the estimated storage and transportation fees for the nine months ended June 30, 2012.

 

31


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

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 June 30, 2012, we had replaced 88,312 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 $100.5 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 June 30, 2012, rate cases were in progress in our Mid-Tex, West Texas, Kansas and Tennessee service areas, an annual rate filing mechanism was in progress in our Louisiana service area and one infrastructure program filing was in progress in our Georgia 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 nine months ended June 30, 2012, there were no material changes in our concentration of credit risk.

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,

 

32


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

   

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 nine month periods ended June 30, 2012 and 2011 by segment are presented in the following tables:

 

    Three Months Ended June 30, 2012  
    Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated      Eliminations     Consolidated  
    (In thousands)  

Operating revenues from external parties

  $ 324,837      $ 26,551      $ 234,443       $      $ 585,831   

Intersegment revenues

    214        40,522        21,807         (62,543       
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
    325,051        67,073        256,250         (62,543     585,831   

Purchased gas cost

    124,373               224,829         (62,161     287,041   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

    200,678        67,073        31,421         (382     298,790   

Operating expenses

          

Operation and maintenance

    83,474        16,427        7,777         (383     107,295   

Depreciation and amortization

    51,020        7,797        1,002                59,819   

Taxes, other than income

    42,274        3,839        774                46,887   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

    176,768        28,063        9,553         (383     214,001   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

    23,910        39,010        21,868         1        84,789   

Miscellaneous income (expense)

    (926     (298     136         (860     (1,948

Interest charges

    27,834        7,353        595         (859     34,923   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (4,850     31,359        21,409                47,918   

Income tax expense (benefit)

    (2,073     11,215        8,632                17,774   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations

    (2,777     20,144        12,777                30,144   

Income from discontinued operations, net of tax

    988                              988   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

  $ (1,789   $ 20,144      $ 12,777       $      $ 31,132   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures

  $ 149,531      $ 34,191      $ 2,529       $      $ 186,251   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

33


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    Three Months Ended June 30, 2011  
    Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated     Eliminations     Consolidated  
    (In thousands)  

Operating revenues from external parties

  $ 406,817      $ 19,772      $ 417,026      $      $ 843,615   

Intersegment revenues

    214        33,798        74,259        (108,271       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    407,031        53,570        491,285        (108,271     843,615   

Purchased gas cost

    206,839               477,880        (107,909     576,810   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    200,192        53,570        13,405        (362     266,805   

Operating expenses

         

Operation and maintenance

    86,804        18,786        7,437        (362     112,665   

Depreciation and amortization

    49,099        6,790        1,043               56,932   

Taxes, other than income

    47,534        3,729        879               52,142   

Asset impairments

                  10,988               10,988   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    183,437        29,305        20,347        (362     232,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    16,755        24,265        (6,942            34,078   

Miscellaneous income (expense)

    (1,153     (312     168        (133     (1,430

Interest charges

    28,042        7,653        283        (133     35,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (12,440     16,300        (7,057            (3,197

Income tax expense (benefit)

    (4,311     5,748        (3,160            (1,723
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (8,129     10,552        (3,897            (1,474

Income from discontinued operations, net of tax

    908                             908   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (7,221   $ 10,552      $ (3,897   $      $ (566
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

  $ 121,452      $ 20,239      $ 1,929      $      $ 143,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    Nine Months Ended June 30, 2012  
    Natural
Gas
Distribution
    Regulated
Transmission
and Storage
    Nonregulated      Eliminations     Consolidated  
    (In thousands)  

Operating revenues from external parties

  $ 1,906,590      $ 66,421      $ 957,443       $      $ 2,930,454   

Intersegment revenues

    761        115,448        113,746         (229,955       
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
    1,907,351        181,869        1,071,189         (229,955     2,930,454   

Purchased gas cost

    1,034,786               1,028,592         (228,857     1,834,521   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

    872,565        181,869        42,597         (1,098     1,095,933   

Operating expenses

          

Operation and maintenance

    266,331        49,239        19,597         (1,102     334,065   

Depreciation and amortization

    153,606        23,240        2,460                179,306   

Taxes, other than income

    131,066        11,538        2,400                145,004   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

    551,003        84,017        24,457         (1,102     658,375   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

    321,562        97,852        18,140         4        437,558   

Miscellaneous income (expense)

    (1,949     (634     739         (1,363     (3,207

Interest charges

    84,522        22,176        1,686         (1,359     107,025   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

    235,091        75,042        17,193                327,326   

Income tax expense

    91,662        26,864        6,958                125,484   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

    143,429        48,178        10,235                201,842   

Income from discontinued operations, net of tax

    6,908                              6,908   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

  $ 150,337      $ 48,178      $ 10,235       $      $ 208,750   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures

  $ 392,666      $ 97,182      $ 7,526       $      $ 497,374   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

35


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

    Nine Months Ended June 30, 2011  
    Natural
Gas
Distribution
     Regulated
Transmission
and Storage
     Nonregulated     Eliminations     Consolidated  
    (In thousands)  

Operating revenues from external parties

  $ 2,187,256       $ 62,602       $ 1,308,516      $      $ 3,558,374   

Intersegment revenues

    651         94,951         241,940        (337,542       
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
    2,187,907         157,553         1,550,456        (337,542     3,558,374   

Purchased gas cost

    1,317,775                 1,491,815        (336,413     2,473,177   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

    870,132         157,553         58,641        (1,129     1,085,197   

Operating expenses

           

Operation and maintenance

    268,299         49,591         24,556        (1,129     341,317   

Depreciation and amortization

    145,548         18,387         3,241               167,176   

Taxes, other than income

    132,070         11,395         2,403               145,868   

Asset impairments

                    30,270               30,270   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

    545,917         79,373         60,470        (1,129     684,631   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

    324,215         78,180         (1,829            400,566   

Miscellaneous income

    18,305         5,267         764        (290     24,046   

Interest charges

    87,344         23,802         1,759        (290     112,615   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    255,176         59,645         (2,824            311,997   

Income tax expense (benefit)

    94,323         21,252         (1,364            114,211   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    160,853         38,393         (1,460            197,786   

Income from discontinued operations, net of tax

    7,854                               7,854   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 168,707       $ 38,393       $ (1,460   $      $ 205,640   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Capital expenditures

  $ 340,713       $ 44,796       $ 4,774      $      $ 390,283   
 

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

36


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

     June 30, 2012  
     Natural
Gas
Distribution
     Regulated
Transmission
and Storage
     Nonregulated     Eliminations     Consolidated  
     (In thousands)  

ASSETS

            

Property, plant and equipment, net

   $ 4,464,707       $ 910,689       $ 66,490      $      $ 5,441,886   

Investment in subsidiaries

     725,348                 (2,096     (723,252       

Current assets

            

Cash and cash equivalents

     9,245                 18,461               27,706   

Assets from risk management activities

     3,486                 3,939               7,425   

Other current assets

     519,422         16,021         424,455        (219,371     740,527   

Intercompany receivables

     595,944                        (595,944       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     1,128,097         16,021         446,855        (815,315     775,658   

Intangible assets

                     174               174   

Goodwill

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

Noncurrent assets from risk management activities

     1,207                 6,025               7,232   

Deferred charges and other assets

     358,272         16,379         10,234               384,885   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 7,250,539       $ 1,075,470       $ 562,393      $ (1,538,567   $ 7,349,835   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

  

         

Shareholders’ equity

   $ 2,354,925       $ 313,280       $ 412,068      $ (725,348   $ 2,354,925   

Long-term debt

     1,956,224                 65               1,956,289   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total capitalization

     4,311,149         313,280         412,133        (725,348     4,311,214   

Current liabilities

            

Current maturities of long-term debt

     250,000                 131               250,131   

Short-term debt

     422,491                        (209,000     213,491   

Liabilities from risk management activities

     96,895                 4,658               101,553   

Other current liabilities

     435,743         8,440         109,146        (8,275     545,054   

Intercompany payables

             559,281         36,663        (595,944       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,205,129         567,721         150,598        (813,219     1,110,229   

Deferred income taxes

     898,176         192,981         (5,503            1,085,654   

Noncurrent liabilities from risk management activities

                     4,182               4,182   

Regulatory cost of removal obligation

     381,797                               381,797   

Deferred credits and other liabilities

     454,288         1,488         983               456,759   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
   $ 7,250,539       $ 1,075,470       $ 562,393      $ (1,538,567   $ 7,349,835   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

37


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