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EX-32 - EXHIBIT 32 - ATMOS ENERGY CORPato20161231ex-32.htm
EX-31 - EXHIBIT 31 - ATMOS ENERGY CORPato20161231ex-31.htm
EX-15 - EXHIBIT 15 - ATMOS ENERGY CORPato20161231ex-15.htm
EX-12 - EXHIBIT 12 - ATMOS ENERGY CORPato20161231ex-12.htm


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 December 31, 2016
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 February 3, 2017.
Class
  
Shares Outstanding
No Par Value
  
105,175,480




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

2



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS 
 
December 31,
2016
 
September 30,
2016
 
(Unaudited)
 
 
 
(In thousands, except
share data)
ASSETS
 
 
 
Property, plant and equipment
$
10,492,625

 
$
10,142,506

Less accumulated depreciation and amortization
1,939,663

 
1,873,900

Net property, plant and equipment
8,552,962

 
8,268,606

Current assets
 
 
 
Cash and cash equivalents
44,624

 
47,534

Accounts receivable, net
458,813

 
215,880

Gas stored underground
163,763

 
179,070

Current assets of disposal group classified as held for sale
235,482

 
151,117

Other current assets
76,750

 
88,085

Total current assets
979,432

 
681,686

Goodwill
729,673

 
726,962

Noncurrent assets of disposal group classified as held for sale

 
28,616

Deferred charges and other assets
317,088

 
305,019

 
$
10,579,155

 
$
10,010,889

CAPITALIZATION AND LIABILITIES
 
 
 
Shareholders’ equity
 
 
 
Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: December 31, 2016 — 105,109,905 shares; September 30, 2016 — 103,930,560 shares
$
526

 
$
520

Additional paid-in capital
2,451,277

 
2,388,027

Accumulated other comprehensive loss
(92,654
)
 
(188,022
)
Retained earnings
1,339,826

 
1,262,534

Shareholders’ equity
3,698,975

 
3,463,059

Long-term debt
2,314,199

 
2,188,779

Total capitalization
6,013,174

 
5,651,838

Current liabilities
 
 
 
Accounts payable and accrued liabilities
268,647

 
196,485

Current liabilities of disposal group classified as held for sale
109,298

 
72,900

Other current liabilities
381,123

 
439,085

Short-term debt
940,747

 
829,811

Current maturities of long-term debt
250,000

 
250,000

Total current liabilities
1,949,815

 
1,788,281

Deferred income taxes
1,725,433

 
1,603,056

Regulatory cost of removal obligation
430,407

 
424,281

Pension and postretirement liabilities
301,715

 
297,743

Noncurrent liabilities of disposal group held for sale

 
316

Deferred credits and other liabilities
158,611

 
245,374

 
$
10,579,155

 
$
10,010,889

See accompanying notes to condensed consolidated financial statements.

3



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Distribution segment
$
754,656

 
$
649,443

Pipeline and storage segment
109,952

 
98,416

Intersegment eliminations
(84,440
)
 
(73,106
)
 
780,168

 
674,753

Purchased gas cost
 
 
 
Distribution segment
395,346

 
313,991

Pipeline and storage segment
355

 
(559
)
Intersegment eliminations
(84,396
)
 
(73,106
)
 
311,305

 
240,326

Gross profit
468,863

 
434,427

Operating expenses
 
 
 
Operation and maintenance
124,938

 
119,828

Depreciation and amortization
76,958

 
70,656

Taxes, other than income
57,049

 
51,214

Total operating expenses
258,945

 
241,698

Operating income
209,918

 
192,729

Miscellaneous expense, net
(994
)
 
(879
)
Interest charges
31,030

 
29,537

Income from continuing operations before income taxes
177,894

 
162,313

Income tax expense
63,856

 
60,767

Income from continuing operations
114,038

 
101,546

Income from discontinued operations, net of tax ($6,841 and $885)
10,994

 
1,315

Net Income
$
125,032

 
$
102,861

Basic and diluted net income per share
 
 
 
Income per share from continuing operations
$
1.08

 
$
0.99

Income per share from discontinued operations
0.11

 
0.01

Net income per share - basic and diluted
$
1.19

 
$
1.00

Cash dividends per share
$
0.45

 
$
0.42

Basic and diluted weighted average shares outstanding
105,284

 
102,713

See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
 
 
 



4




ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended 
 December 31
 
 
2016
 
2015
 
 
(Unaudited)
(In thousands)
Net income
$
125,032

 
$
102,861

 
Other comprehensive income (loss), net of tax
 
 
 
 
Net unrealized holding losses on available-for-sale securities, net of tax of $476 and $442
(828
)
 
(768
)
 
Cash flow hedges:
 
 
 
 
Amortization and unrealized gain on interest rate agreements, net of tax of $52,429 and $2,749
91,214

 
4,783

 
Net unrealized gains on commodity cash flow hedges, net of tax of $3,183 and $1,505
4,982

 
2,353

 
Total other comprehensive income
95,368

 
6,368

 
Total comprehensive income
$
220,400

 
$
109,229

 

See accompanying notes to condensed consolidated financial statements.

5



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
125,032

 
$
102,861

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
77,143

 
71,239

Deferred income taxes
67,241

 
59,299

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

Other
4,842

 
3,471

Net assets / liabilities from risk management activities
3,969

 
(7,495
)
Net change in operating assets and liabilities
(150,685
)
 
(159,234
)
Net cash provided by operating activities
116,963

 
70,141

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(297,962
)
 
(290,412
)
Acquisition
(85,714
)
 

Available-for-sale securities activities, net
(10,263
)
 
(2,263
)
Other, net
1,802

 
2,382

Net cash used in investing activities
(392,137
)
 
(290,293
)
Cash Flows From Financing Activities
 
 
 
Net increase in short-term debt
110,936

 
305,309

Net proceeds from equity offering
49,400

 

Issuance of common stock through stock purchase and employee retirement plans
8,998

 
8,729

Proceeds from issuance of long-term debt
125,000

 

Interest rate agreements cash collateral
25,670

 

Cash dividends paid
(47,740
)
 
(43,636
)
Net cash provided by financing activities
272,264

 
270,402

Net increase (decrease) in cash and cash equivalents
(2,910
)
 
50,250

Cash and cash equivalents at beginning of period
47,534

 
28,653

Cash and cash equivalents at end of period
$
44,624

 
$
78,903


See accompanying notes to condensed consolidated financial statements.

6



ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2016
1.    Nature of Business
Atmos Energy Corporation (“Atmos Energy” or the “Company”) is engaged primarily in the regulated natural gas distribution and pipeline business. Our regulated businesses are subject to federal and state regulation and/or regulation by local authorities in each of the states our regulated divisions and subsidiaries operate.
Our distribution business delivers natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers through our six natural gas distribution divisions, which at December 31, 2016, covered service areas located in eight states. In addition, we transport natural gas for others through our distribution system.
Our pipeline and storage business includes the transportation of natural gas to our North Texas and Louisiana distribution systems and the management of our underground storage facilities used to support our North Texas distribution business.
Through December 31, 2016, Atmos Energy was also engaged in certain nonregulated businesses. As more fully described in Note 6, effective January 1, 2017, we sold all of the equity interests of Atmos Energy Marketing, LLC (AEM) to CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy Inc. As a result of the sale, Atmos Energy has fully exited the nonregulated gas marketing business. Additionally, as further described in Note 3, we modified our reporting segments as a result of the sale.

2.    Unaudited Financial Information
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2016 are not indicative of our results of operations for the full 2017 fiscal year, which ends September 30, 2017.
Except for the completion of the sale of AEM on January 3, 2017, as discussed in Note 6, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.

Significant accounting policies
Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
As discussed in Note 3, due to the realignment of our reportable segments, prior periods' segment information has been recast in accordance with applicable accounting guidance. Additionally, as discussed in Note 6, due to the sale of AEM, prior period amounts have been presented as discontinued operations. The segment realignment and the presentation of discontinued operations do not impact our reported net income, financial position and cash flows. 
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under current guidance. The new guidance will become effective for us October 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.
As of December 31, 2016, we substantially completed the evaluation of our sources of revenue and are currently assessing the effect that the new guidance will have on our financial position, results of operations and cash flows. The conclusion of our assessment is contingent, in part, upon the completion of deliberations currently in progress by our industry, notably in connection with efforts to produce an accounting guide intended to be developed by the American Institute of Certified Public Accountants (AICPA).

7



In association with this undertaking, the AICPA formed a number of industry task forces, including a Power & Utilities (P&U) Task Force. Industry representatives and organizations, the largest auditing firms, the AICPA’s Revenue Recognition Working Group and its Financial Reporting Executive Committee have undertaken, and continue to undertake, consideration of several items relevant to our industry as further discussed below. Where applicable or necessary, the FASB’s Transition Resource Group (TRG) is also participating.
Currently, the industry is working to address several items including 1) the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers; 2) the accounting for funds received from third parties to partially or fully reimburse the cost of construction of an asset and 3) the accounting for alternative revenue programs, such as performance-based ratemaking. Existing alternative revenue program guidance, though excluded by the FASB in updating specific guidance associated with revenue from contracts with customers, was relocated without substantial modification to accounting guidance for rate-regulated entities. It will require separate presentation of such revenues (subject to the above-noted deliberations) in the statement of income, effective at the same time as updated guidance associated with revenue from contracts with customers becomes effective.
Currently, a timeline for the resolution of these deliberations has not been established. Additionally, we are actively working with our peers in the rate-regulated natural gas industry to conclude on the accounting treatment for several other issues that are not expected to be addressed by the P&U Task Force. Given the uncertainty with respect to the conclusions that might arise from these deliberations, we are currently unable to determine the effect the new guidance will have on our financial position, results of operations, cash flows, business processes or the transition method we will utilize to adopt the new guidance.
In May 2015, the FASB issued guidance removing the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance was effective for us on October 1, 2016 to be applied retrospectively. We measure certain pension plan assets using the net asset value per share practical expedient which are disclosed on an annual basis in our Form 10-K. The adoption of the new standard will have no impact on our results of operations, consolidated balance sheets or cash flows. 
In January 2016, the FASB issued guidance related to the classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning October 1, 2018; limited early adoption is permitted. We are currently evaluating the potential impact of this new guidance.
In February 2016, the FASB issued a comprehensive new leasing standard that will require lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The new standard will be effective for us beginning on October 1, 2019; early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We are currently evaluating the effect on our financial position, results of operations and cash flows.
In June 2016, the FASB issued new guidance which will require credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. In contrast, current U.S. GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable the loss has been incurred. The new guidance also introduces a new impairment recognition model for available-for-sale securities that will require credit losses for available-for-sale debt securities to be recorded through an allowance account. The new standard will be effective for us beginning on October 1, 2021; early adoption is permitted beginning on October 1, 2019. We are currently evaluating the potential impact of this new guidance.
In January 2017, the FASB issued new guidance that simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Under the new guidance, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The new standard will be effective for our fiscal 2021 goodwill impairment test; however, early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new standard will have no impact on our results of operations, consolidated balance sheets or cash flows. 
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.

8



Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is reported separately.

Significant regulatory assets and liabilities as of December 31, 2016 and September 30, 2016 included the following:
 
December 31,
2016
 
September 30,
2016
 
(In thousands)
Regulatory assets:
 
 
 
Pension and postretirement benefit costs(1)
$
128,947

 
$
132,348

Infrastructure mechanisms(2)
49,098

 
42,719

Deferred gas costs
18,345

 
45,184

Recoverable loss on reacquired debt
13,122

 
13,761

Deferred pipeline record collection costs
8,125

 
7,336

APT annual adjustment mechanism
5,194

 
7,171

Rate case costs
1,460

 
1,539

Other
13,030

 
13,565

 
$
237,321

 
$
263,623

Regulatory liabilities:
 
 
 
Regulatory cost of removal obligations
$
479,667

 
$
476,891

Deferred gas costs
17,416

 
20,180

Asset retirement obligations
13,404

 
13,404

Other
6,920

 
4,250

 
$
517,407

 
$
514,725

 
(1) 
Includes $12.1 million and $12.4 million of pension and postretirement expense deferred pursuant to regulatory authorization.
(2) 
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates.

3.    Segment Information

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

 As a result of the announced sale of Atmos Energy Marketing, we revised the information used by the chief operating decision maker to manage the Company, effective December 1, 2016. Accordingly, we will manage and review our consolidated operations through the following three reportable segments:
The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states and storage assets located in Kentucky and Tennessee, which are used to support our natural gas distribution operations in those states. These storage assets were formerly included in our nonregulated segment.
The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana which were formerly included in our nonregulated segment.
The natural gas marketing segment is comprised of our discontinued natural gas marketing business.

Our determination of reportable segments considers how our chief operating decision maker allocates resources between our strategic operating units under which we manage sales of various products and services through our distribution, pipeline and storage and natural gas marketing businesses. Although our distribution segment operations are geographically dispersed,

9



they are aggregated and reported as a single segment as each natural gas distribution division has similar economic characteristics. In addition, the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana have similar economic characteristics and have been aggregated and reported as a single segment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. We evaluate performance based on net income or loss of the respective operating segments. We allocate interest and pension expense to the pipeline and storage segment; however, there is no debt or pension liability recorded on the pipeline and storage segment balance sheet. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process.
    
Prior periods' segment information has been recast as required by applicable accounting guidance. The segment realignment does not impact our reported consolidated revenues or net income. 
Income statements for the three months ended December 31, 2016 and 2015 by segment are presented in the following tables:
 
Three Months Ended December 31, 2016
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
754,266

 
$
25,902

 
$

 
$

 
$
780,168

Intersegment revenues
390

 
84,050

 

 
(84,440
)
 

 
754,656

 
109,952

 

 
(84,440
)
 
780,168

Purchased gas cost
395,346

 
355

 

 
(84,396
)
 
311,305

Gross profit
359,310

 
109,597

 

 
(44
)
 
468,863

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
92,714

 
32,268

 

 
(44
)
 
124,938

Depreciation and amortization
61,157

 
15,801

 

 

 
76,958

Taxes, other than income
50,546

 
6,503

 

 

 
57,049

Total operating expenses
204,417

 
54,572

 

 
(44
)
 
258,945

Operating income
154,893

 
55,025

 

 

 
209,918

Miscellaneous expense
(633
)
 
(361
)
 

 

 
(994
)
Interest charges
21,118

 
9,912

 

 

 
31,030

Income from continuing operations before income taxes
133,142

 
44,752

 

 

 
177,894

Income tax expense
47,778

 
16,078

 

 

 
63,856

Income from continuing operations
85,364

 
28,674

 

 

 
114,038

Income from discontinued operations, net of tax

 

 
10,994

 

 
10,994

Net income
$
85,364

 
$
28,674

 
$
10,994

 
$

 
$
125,032

Capital expenditures
$
222,484

 
$
75,478

 
$

 
$

 
$
297,962


10



 
Three Months Ended December 31, 2015
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
649,113

 
$
25,640

 
$

 
$

 
$
674,753

Intersegment revenues
330

 
72,776

 

 
(73,106
)
 

 
649,443

 
98,416

 

 
(73,106
)
 
674,753

Purchased gas cost
313,991

 
(559
)
 

 
(73,106
)
 
240,326

Gross profit
335,452

 
98,975

 

 

 
434,427

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
92,189

 
27,639

 

 

 
119,828

Depreciation and amortization
57,614

 
13,042

 

 

 
70,656

Taxes, other than income
45,558

 
5,656

 

 

 
51,214

Total operating expenses
195,361

 
46,337

 

 

 
241,698

Operating income
140,091

 
52,638

 

 

 
192,729

Miscellaneous expense
(477
)
 
(402
)
 

 

 
(879
)
Interest charges
20,390

 
9,147

 

 

 
29,537

Income from continuing operations before income taxes
119,224

 
43,089

 

 

 
162,313

Income tax expense
45,288

 
15,479

 

 

 
60,767

Income from continuing operations
73,936

 
27,610

 

 

 
101,546

Income from discontinued operations, net of tax

 

 
1,315

 

 
1,315

Net income
$
73,936

 
$
27,610

 
$
1,315

 
$

 
$
102,861

Capital expenditures
$
165,407

 
$
124,981

 
$
24

 
$

 
$
290,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11



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

 
December 31, 2016
 
Distribution
 
Pipeline and Storage
 
Natural Gas Marketing
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
6,362,710

 
$
2,190,252

 
$

 
$

 
$
8,552,962

Investment in subsidiaries
834,469

 

 

 
(834,469
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
43,733

 

 
891

 

 
44,624

Assets from risk management activities
8,057

 

 

 

 
8,057

Current assets of disposal group classified as held for sale

 

 
253,950

 
(18,468
)
 
235,482

Other current assets
666,474

 
46,009

 
(6,824
)
 
(14,390
)
 
691,269

Intercompany receivables
1,052,199

 

 

 
(1,052,199
)
 

Total current assets
1,770,463

 
46,009

 
248,017

 
(1,085,057
)
 
979,432

Goodwill
586,661

 
143,012

 

 

 
729,673

Noncurrent assets from risk management activities
1,282

 

 

 

 
1,282

Deferred charges and other assets
289,224

 
26,582

 

 

 
315,806

 
$
9,844,809

 
$
2,405,855

 
$
248,017

 
$
(1,919,526
)
 
$
10,579,155

CAPITALIZATION AND LIABILITIES
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
3,698,975

 
$
731,631

 
$
102,838

 
$
(834,469
)
 
$
3,698,975

Long-term debt
2,314,199

 

 

 

 
2,314,199

Total capitalization
6,013,174

 
731,631

 
102,838

 
(834,469
)
 
6,013,174

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

 

 

 

 
250,000

Short-term debt
940,747

 

 

 

 
940,747

Liabilities from risk management activities
25,060

 

 

 

 
25,060

Current liabilities of disposal group classified as held for sale

 

 
120,566

 
(11,268
)
 
109,298

Other current liabilities
602,247

 
43,028

 
1,025

 
(21,590
)
 
624,710

Intercompany payables

 
1,048,091

 
4,108

 
(1,052,199
)
 

Total current liabilities
1,818,054

 
1,091,119

 
125,699

 
(1,085,057
)
 
1,949,815

Deferred income taxes
1,156,716

 
560,401

 
8,316

 

 
1,725,433

Noncurrent liabilities from risk management activities
97,921

 

 

 

 
97,921

Regulatory cost of removal obligation
407,767

 
22,640

 

 

 
430,407

Pension and postretirement liabilities
301,715

 

 

 

 
301,715

Deferred credits and other liabilities
49,462

 
64

 
11,164

 

 
60,690

 
$
9,844,809

 
$
2,405,855

 
$
248,017

 
$
(1,919,526
)
 
$
10,579,155


12





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

 
$
2,060,141

 
$

 
$

 
$
8,268,606

Investment in subsidiaries
768,415

 

 

 
(768,415
)
 

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
22,117

 

 
25,417

 

 
47,534

Assets from risk management activities
3,029

 

 

 

 
3,029

Current assets of disposal group classified as held for sale

 

 
162,508

 
(11,391
)
 
151,117

Other current assets
486,934

 
39,078

 
5

 
(46,011
)
 
480,006

Intercompany receivables
971,665

 

 

 
(971,665
)
 

Total current assets
1,483,745

 
39,078

 
187,930

 
(1,029,067
)
 
681,686

Goodwill
583,950

 
143,012

 

 

 
726,962

Noncurrent assets from risk management activities
1,822

 

 

 

 
1,822

Noncurrent assets of disposal group classified as held for sale

 

 
28,785

 
(169
)
 
28,616

Deferred charges and other assets
275,418

 
27,779

 

 

 
303,197

 
$
9,321,815

 
$
2,270,010

 
$
216,715

 
$
(1,797,651
)
 
$
10,010,889

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

 
$
701,818

 
$
66,597

 
$
(768,415
)
 
$
3,463,059

Long-term debt
2,188,779

 

 

 

 
2,188,779

Total capitalization
5,651,838

 
701,818

 
66,597

 
(768,415
)
 
5,651,838

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

 

 

 

 
250,000

Short-term debt
829,811

 

 
35,000

 
(35,000
)
 
829,811

Liabilities from risk management activities
56,771

 
1,967

 

 
(1,967
)
 
56,771

Current liabilities of the disposal group classified as held for sale

 

 
81,908

 
(9,008
)
 
72,900

Other current liabilities
549,019

 
37,944

 
3,263

 
(11,427
)
 
578,799

Intercompany payables

 
957,526

 
14,139

 
(971,665
)
 

Total current liabilities
1,685,601

 
997,437

 
134,310

 
(1,029,067
)
 
1,788,281

Deferred income taxes
1,055,348

 
543,390

 
4,318

 

 
1,603,056

Noncurrent liabilities from risk management activities
184,048

 
169

 

 
(169
)
 
184,048

Regulatory cost of removal obligation
397,162

 
27,119

 

 

 
424,281

Pension and postretirement liabilities
297,743

 

 

 

 
297,743

Noncurrent liabilities of disposal group classified as held for sale

 

 
316

 

 
316

Deferred credits and other liabilities
50,075

 
77

 
11,174

 

 
61,326

 
$
9,321,815

 
$
2,270,010

 
$
216,715

 
$
(1,797,651
)
 
$
10,010,889


13




4.    Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three months ended December 31, 2016 and 2015 are calculated as follows:

 
Three Months Ended December 31, 2015
 
2016
 
2015
 
(In thousands, except per share amounts)
Basic and Diluted Earnings Per Share from continuing operations
 
 
 
Income from continuing operations
$
114,038

 
$
101,546

Less: Income from continuing operations allocated to participating securities
153

 
170

Income from continuing operations available to common shareholders
$
113,885

 
$
101,376

Basic and diluted weighted average shares outstanding
105,284

 
102,713

Income from continuing operations per share — Basic and Diluted
$
1.08

 
$
0.99

 
 
 
 
Basic and Diluted Earnings Per Share from discontinued operations
 
 
 
Income from discontinued operations
$
10,994

 
$
1,315

Less: Income from discontinued operations allocated to participating securities
14

 
1

Income from discontinued operations available to common shareholders
$
10,980

 
$
1,314

Basic and diluted weighted average shares outstanding
105,284

 
102,713

Income from discontinued operations per share — Basic and Diluted
$
0.11

 
$
0.01

Net income per share — Basic and Diluted
$
1.19

 
$
1.00





14



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

 
$
250,000

Unsecured 8.50% Senior Notes, due 2019
450,000

 
450,000

Unsecured 5.95% Senior Notes, due 2034
200,000

 
200,000

Unsecured 5.50% Senior Notes, due 2041
400,000

 
400,000

Unsecured 4.15% Senior Notes, due 2043
500,000

 
500,000

Unsecured 4.125% Senior Notes, due 2044
500,000

 
500,000

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

 
10,000

Unsecured 6.75% Debentures, due 2028
150,000

 
150,000

Floating-rate term loan, due 2019
125,000

 

Total long-term debt
2,585,000

 
2,460,000

Less:
 
 
 
Original issue discount on unsecured senior notes and debentures
4,184

 
4,270

Debt issuance cost
16,617

 
16,951

Current maturities
250,000

 
250,000

 
$
2,314,199

 
$
2,188,779

 
On September 22, 2016, we entered into a three year, $200 million multi-draw floating-rate term loan agreement with a syndicate of three lenders. Borrowings under the term loan may be made in increments of $1.0 million or higher, may be repaid at any time during the loan period and will bear interest at a rate dependent upon our credit ratings at the time of such borrowing and based, at our election, on a base rate or LIBOR for the applicable interest period. The term loan will be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. At December 31, 2016, there was $125.0 million outstanding under the term loan.
We utilize short-term debt to fund ongoing working capital needs, such as our seasonal requirements for gas supply, general corporate liquidity and capital expenditures. Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.
We currently finance our short-term borrowing requirements through a combination of a $1.5 billion commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility with third-party lenders that provide approximately $1.6 billion of total working capital funding. The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility that expires September 25, 2021. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from zero percent to 1.25 percent, based on the Company’s credit ratings. Additionally, the facility contains a $250 million accordion feature, which provides the opportunity to increase the total committed loan to $1.75 billion. This facility was amended in October 2016 to increase the total availability from $1.25 billion. At December 31, 2016 and September 30, 2016 a total of $940.7 million and $829.8 million was outstanding under our commercial paper program.

Additionally, we have a $25 million unsecured facility and a $10 million unsecured revolving credit facility, which is used primarily to issue letters of credit. At December 31, 2016, there were no borrowings outstanding under either of these facilities; however, outstanding letters of credit reduced the total amount available to us under our $10 million revolving facility to $4.1 million.
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy

15



of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At December 31, 2016, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 50 percent. In addition, both the interest margin and the fee that we pay on unused amounts under certain of these facilities are subject to adjustment depending upon our credit ratings.
These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. We were in compliance with all of our debt covenants as of December 31, 2016. 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.
As of December 31, 2016, AEM had one uncommitted $25 million 364-day bilateral credit facility that was scheduled to expire on July 31, 2017 and one committed $15 million 364-day bilateral credit facility that was scheduled to expire on September 30, 2017. In connection with the sale of AEM discussed in Note 6, both facilities were terminated on January 3, 2017. There were no amounts outstanding under these facilities as of December 31, 2016.
6. Divestitures and Acquisitions
Divestiture of Atmos Energy Marketing (AEM)
On October 29, 2016, we entered into a Membership Interest Purchase Agreement (the Agreement) with CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. (CES) to sell all of the equity interests of AEM. The transaction closed on January 3, 2017, with an effective date of January 1, 2017. CES paid a cash purchase price of $38.3 million plus estimated working capital of $103.2 million for total cash consideration of $141.5 million. Of this amount, $7.0 million was placed into escrow and will be paid to the Company within 24 months, net of any indemnification claims agreed upon between the two companies. We expect to recognize a net gain of $0.03 per diluted share on the sale and complete the working capital true–up during the second quarter of fiscal 2017.
The operating results of our natural gas marketing reportable segment have been reported on the condensed consolidated statements of income as income from discontinued operations, net of income tax.  Accordingly, expenses related to allocable general corporate overhead and interest expense are not included in these results.  The decision to report this segment as a discontinued operation was predicated, in part, on the following qualitative and quantitative factors:  1) the disposal results in the company becoming a fully regulated entity; 2) the fact that an entire reportable segment will be disposed and 3) the fact the disposed segment represented in excess of 30 percent of consolidated revenues over the last five fiscal years.
The tables below set forth selected financial and operational information related to assets, liabilities and operating results related to discontinued operations. Additionally, assets and liabilities related to our natural gas marketing operations are classified as “held for sale” in other current assets and liabilities in our condensed consolidated balance sheets at December 31, 2016 and in other current assets, deferred charges and other assets, other current liabilities and deferred credits and other liabilities in our consolidated balance sheets at September 30, 2016. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported consolidated net income.

16



The following table presents statement of income data related to discontinued operations.
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(In thousands)
 
 
 
 
Operating revenues
$
303,474

 
$
259,258

Purchased gas cost
277,554

 
249,789

Gross profit
25,920

 
9,469

Operating expenses
7,874

 
5,993

Operating income
18,046

 
3,476

Other nonoperating expense
(211
)
 
(1,276
)
Income from discontinued operations before income taxes
17,835

 
2,200

Income tax expense
6,841

 
885

Net income from discontinued operations
$
10,994

 
$
1,315

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of our natural gas marketing's operations to total assets and liabilities classified as held for sale.
 
December 31, 2016
 
September 30, 2016
 
(In thousands)
Assets:
 
 
 
Net property, plant and equipment
$
11,599

 
$
11,905

Accounts receivable
139,741

 
93,551

Gas stored underground
77,559

 
54,246

Other current assets
9,447

 
14,711

Goodwill(2)
13,734

 
16,445

Deferred charges and other assets
1,870

 
435

Total assets of the disposal group classified as held for sale in the statement of financial position (1)
253,950

 
191,293

Cash
891

 
25,417

Other assets
(6,824
)
 
5

Total assets of disposal group in the statement of financial position
$
248,017

 
$
216,715

 
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
113,368

 
$
72,268

Other current liabilities
6,876

 
9,640

Deferred credits and other
322

 
316

Total liabilities of the disposal group classified as held for sale in the statement of financial position (1)
120,566

 
82,224

Intercompany note payable

 
35,000

Tax liabilities
19,469

 
15,471

Intercompany payables
4,108

 
14,139

Other liabilities
1,036

 
3,179

Total liabilities of disposal group in the statement of financial position
$
145,179

 
$
150,013


(1) 
Amounts in the comparative period are classified as current and long term in the statement of financial position.
(2) 
The period-over-period change in natural gas marketing goodwill is the result of the reallocation of goodwill between the retained portion and held-for-sale portion of the former Atmos Energy Marketing reporting unit, based on relative fair value.

17



The following table presents statement of cash flow data related to discontinued operations.
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(In thousands)
Depreciation and amortization
$
185

 
$
583

Capital expenditures
$

 
$
24

Noncash gain in commodity contract cash flow hedges
$
18,744

 
$
3,858


Acquisition of EnLink Pipeline
On December 20, 2016, we executed a purchase and sale agreement to acquire the general partnership and limited partnership interests in EnLink North Texas Pipeline, LP (EnLink Pipeline) from EnLink Energy GP, LLC and EnLink Midstream Operating, LP for an all–cash price of $85 million, plus estimated working capital. After considering estimated working capital, the total proceeds paid were $85.7 million. The final purchase is subject to adjustment after the estimated working capital is finalized during the second quarter of fiscal 2017.

EnLink Pipeline's primary asset is a 140–mile natural gas pipeline located on the north side of the Dallas–Fort Worth Metroplex. As of December 31, 2016, the $85 million purchase price was preliminarily allocated, based on fair value using observable market inputs, to the net book value of the acquired pipeline. The final purchase price allocation is subject to adjustment pending the completion of analysis of the fair value of certain contracts included in the acquisition. We expect to complete this evaluation during the second quarter of fiscal 2017.

7.    Shareholders' Equity

Shelf Registration and At-the-Market Equity Sales Program
On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to $2.5 billion in common stock and/or debt securities. We also filed a prospectus supplement under the registration statement relating to an at-the-market (ATM) equity distribution program under which we may issue and sell, shares of our common stock, up to an aggregate offering price of $200 million. During the first fiscal quarter of 2017, we sold 690,812 shares of common stock under our existing ATM program for $50.0 million and received net proceeds of $49.4 million. At December 31, 2016, approximately $2.4 billion of securities remain available for issuance under the shelf registration statement and approximately $50 million of equity remained available for issuance under the ATM program.

Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale securities, interest rate cash flow hedges and commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings as they are amortized. The following tables provide the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income (loss).
 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2016
$
4,484

 
$
(187,524
)
 
$
(4,982
)
 
$
(188,022
)
Other comprehensive income (loss) before reclassifications
(828
)
 
91,127

 
9,847

 
100,146

Amounts reclassified from accumulated other comprehensive income

 
87

 
(4,865
)
 
(4,778
)
Net current-period other comprehensive income (loss)
(828
)
 
91,214

 
4,982

 
95,368

December 31, 2016
$
3,656

 
$
(96,310
)
 
$

 
$
(92,654
)
 

18



 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2015
$
4,949

 
$
(88,842
)
 
$
(25,437
)
 
$
(109,330
)
Other comprehensive income (loss) before reclassifications
(768
)
 
4,696

 
(11,656
)
 
(7,728
)
Amounts reclassified from accumulated other comprehensive income

 
87

 
14,009

 
14,096

Net current-period other comprehensive income (loss)
(768
)
 
4,783

 
2,353

 
6,368

December 31, 2015
$
4,181

 
$
(84,059
)
 
$
(23,084
)
 
$
(102,962
)

The following tables detail reclassifications out of AOCI for the three months ended December 31, 2016 and 2015. Amounts in parentheses below indicate decreases to net income in the statement of income.
 
Three Months Ended December 31, 2016
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Cash flow hedges
 
 
 
Interest rate agreements
$
(137
)
 
Interest charges
Commodity contracts
7,976

 
Purchased gas cost(1)
 
7,839

 
Total before tax
 
(3,061
)
 
Tax expense
Total reclassifications
$
4,778

 
Net of tax
 
Three Months Ended December 31, 2015
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Cash flow hedges
 
 
 
Interest rate agreements
$
(137
)
 
Interest charges
Commodity contracts
(22,965
)
 
Purchased gas cost(1)
 
(23,102
)
 
Total before tax
 
9,006

 
Tax benefit
Total reclassifications
$
(14,096
)
 
Net of tax
(1)Amounts are presented as part of income from discontinued operations on the condensed consolidated statements of income.
 
 
 
 
 
 
 
 




19



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 months ended December 31, 2016 and 2015 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
 
Three Months Ended December 31
 
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
5,216

 
$
4,698

 
$
3,109

 
$
2,706

Interest cost
6,297

 
7,095

 
2,670

 
3,106

Expected return on assets
(6,994
)
 
(6,881
)
 
(1,796
)
 
(1,566
)
Amortization of transition obligation

 

 

 
21

Amortization of prior service credit
(58
)
 
(57
)
 
(411
)
 
(411
)
Amortization of actuarial (gain) loss
4,249

 
3,320

 
(707
)
 
(542
)
Net periodic pension cost
$
8,710

 
$
8,175

 
$
2,865

 
$
3,314

 
 
 
 
 
 
 
 
The assumptions used to develop our net periodic pension cost for the three months ended December 31, 2016 and 2015 are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
2016
 
2015
 
2016
 
2015
Discount rate
 
3.73%
 
4.55%
 
3.73%
 
4.55%
Rate of compensation increase
 
3.50%
 
3.50%
 
N/A
 
N/A
Expected return on plan assets
 
7.00%
 
7.00%
 
4.45%
 
4.45%
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plan as of January 1, 2016. Based on that determination, we were not required to make a minimum contribution to our defined benefit plan during the first quarter of fiscal 2017.
We contributed $3.0 million to our other post-retirement benefit plans during the three months ended December 31, 2016. We expect to contribute a total of between $10 million and $20 million to these plans during fiscal 2017.

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 11 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, there were no material changes in the status of such litigation and environmental-related matters or claims during the three months ended December 31, 2016.
We are a party to various litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Purchase Commitments
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

20



contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at prices indexed to natural gas distribution hubs. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. There were no material changes to the purchase commitments for the three months ended December 31, 2016.
Regulatory Matters
Various regulatory agencies, including the SEC and the Commodities Futures Trading Commission, continue to adopt regulations implementing many of the provisions of the Dodd-Frank Act of 2010. We continue to enact new procedures and modify existing business practices and contractual arrangements to comply with such regulations.  Additional rulemakings are pending which we believe will result in new reporting and disclosure obligations. The costs associated with hedging certain risks inherent in our business may be further increased when these expected additional regulations are adopted.
As of December 31, 2016, formula rate mechanisms were in progress in our Louisiana, Tennessee, Mississippi and West Texas service areas, infrastructure mechanisms were in progress in our Mississippi, Colorado and Kansas service areas and an ad valorem tax rider filing was in progress in our Kansas service area. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
10.    Financial Instruments
We currently use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments and the related accounting for these financial instruments are fully described in Notes 2 and 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016. During the three months ended December 31, 2016 there were no changes in our objectives, strategies and accounting for using financial instruments. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause payments to be accelerated when our financial instruments are in net liability positions. The following summarizes those objectives and strategies.

Regulated Commodity Risk Management Activities
Our purchased gas cost adjustment mechanisms essentially insulate our distribution segment from commodity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
We typically seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2016-2017 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we anticipate hedging approximately 27 percent, or 16.2 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.

Natural Gas Marketing Commodity Risk Management Activities
Our natural gas marketing segment was exposed to risks associated with changes in the market price of natural gas through the purchase, sale and delivery of natural gas to its customers at competitive prices. Through December 31, 2016, we managed 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. These financial instruments have maturity dates ranging from one to 60 months. Effective January 1, 2017, as a result of the sale of AEM, these activities will be discontinued.
Due to the anticipated sale of AEM, we determined that the cash flows associated with our natural gas marketing commodity cash flow hedges were no longer probable of occurring; therefore, we discontinued hedge accounting as of December 31, 2016. As a result, we reclassified the gain in accumulated other comprehensive income associated with the commodity contracts into earnings as a reduction of purchased gas costs and recognized a pre-tax gain of $10.6 million for the three months ended December 31, 2016, which is included in discontinued operations on the condensed consolidated statement of income.




21



Interest Rate Risk Management Activities
We periodically manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings.
As of December 31, 2016, we had forward starting interest rate swaps to effectively fix the Treasury yield component associated with the anticipated issuance of $250 million and $450 million unsecured senior notes in fiscal 2017 and fiscal 2019, at 3.37% and 3.78%, which we designated as cash flow hedges at the time the swaps were executed. As of December 31, 2016, we had $18.2 million of net realized losses in accumulated other comprehensive income (AOCI) associated with the settlement of financial instruments used to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes, which will be recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these settled amounts extend through fiscal 2045.
 
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.
As of December 31, 2016, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of December 31, 2016, we had net long/(short) commodity contracts outstanding in the following quantities:
Contract Type
 
Hedge Designation
 
Quantity (MMcf)
 
 
 
 
 
Commodity contracts
 
Fair Value
 
(22,403
)
 
 
Not designated
 
109,012

 
 
 
 
86,609


22



Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of December 31, 2016 and September 30, 2016. The gross amounts of recognized assets and liabilities are netted within our unaudited Condensed Consolidated Balance Sheets to the extent that we have netting arrangements with the counterparties.
 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
December 31, 2016
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current liabilities
 
$

 
$
(19,740
)
Interest rate contracts
Other current liabilities
 

 
(25,060
)
Interest rate contracts
Deferred credits and other liabilities
 

 
(97,921
)
Total
 
 

 
(142,721
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
89,309

 
(71,433
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
19,714

 
(16,591
)
Total
 
 
109,023

 
(88,024
)
Gross Financial Instruments
 
 
109,023

 
(230,745
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 
(97,841
)
 
97,841

Net Financial Instruments
 
 
11,182

 
(132,904
)
Cash collateral
 
 
3,788

 
9,909

Net Assets/Liabilities from Risk Management Activities
 
 
$
14,970

 
$
(122,995
)
 
 

23



 
 
 
 
 
Balance Sheet Location
 
Assets
 
Liabilities
 
 
 
 (In thousands)
September 30, 2016
 
 
 
 
 
Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
$
6,612

 
$
(21,903
)
Interest rate contracts
Other current assets /
Other current liabilities
 

 
(68,481
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
2,178

 
(3,779
)
Interest rate contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 

 
(198,008
)
Total
 
 
8,790

 
(292,171
)
Not Designated As Hedges:
 
 
 
 
 
Commodity contracts
Other current assets /
Other current liabilities
 
21,186

 
(18,812
)
Commodity contracts
Deferred charges and other assets /
Deferred credits and other liabilities
 
14,165

 
(12,701
)
Total
 
 
35,351

 
(31,513
)
Gross Financial Instruments
 
 
44,141

 
(323,684
)
Gross Amounts Offset on Consolidated Balance Sheet:
 
 
 
 
 
Contract netting
 
 
(39,290
)
 
39,290

Net Financial Instruments
 
 
4,851

 
(284,394
)
Cash collateral
 
 
6,775

 
43,575

Net Assets/Liabilities from Risk Management Activities
 
 
$
11,626

 
$
(240,819
)
 
Impact of Financial Instruments on the Income Statement
Hedge ineffectiveness for our natural gas marketing segment is recorded as a component of purchased gas cost, which is included in discontinued operations on the condensed consolidated statements of income, and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended December 31, 2016 and 2015, we recognized gains arising from fair value and cash flow hedge ineffectiveness of $3.4 million and $7.9 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.
 
Fair Value Hedges
The impact of our natural gas marketing segment commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three months ended December 31, 2016 and 2015 is presented below.
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(In thousands)
Commodity contracts
$
(9,567
)
 
$
5,744

Fair value adjustment for natural gas inventory designated as the hedged item
12,858

 
2,161

Total decrease in purchased gas cost
$
3,291

 
$
7,905

The decrease in purchased gas cost is comprised of the following:
 
 
 
Basis ineffectiveness
$
(597
)
 
$
1,289

Timing ineffectiveness
3,888

 
6,616

 
$
3,291

 
$
7,905


24



 
 
 
 
Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on purchased gas cost. To the extent that the Company’s natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market.

Cash Flow Hedges
The impact of our interest rate and natural gas marketing segment cash flow hedges on our condensed consolidated income statements for the three months ended December 31, 2016 and 2015 is presented below.
 
Three Months Ended 
 December 31
 
2016
 
2015
 
(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts
$
(2,612
)
 
$
(22,965
)
Gain (loss) arising from ineffective portion of commodity contracts
111

 
(43
)
Gain on discontinuance of cash flow hedging of natural gas marketing commodity contracts reclassified from AOCI
10,579

 

Total impact on purchased gas cost
8,078

 
(23,008
)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense
(137
)
 
(137
)
Total Impact from Cash Flow Hedges
$
7,941

 
$
(23,145
)
 
 
 
 
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three months ended December 31, 2016 and 2015. 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 
 December 31
 
 
2016
 
2015
 
 
(In thousands)
Increase (decrease) in fair value:
 
 
 
 
Interest rate agreements
$
91,127

 
$
4,696

 
Forward commodity contracts
9,847

 
(11,656
)
 
Recognition of (gains) losses in earnings due to settlements:
 
 
 
 
Interest rate agreements
87

 
87

 
Forward commodity contracts
(4,865
)
 
14,009

 
Total other comprehensive income from hedging, net of tax(1)
$
96,196

 
$
7,136