Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 29, 2016.
Class
  
Shares Outstanding
No Par Value
  
103,847,858



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
 
 
June 30,
2016
 
September 30,
2015
 
(Unaudited)
 
 
 
(In thousands, except
share data)
ASSETS
 
 
 
Property, plant and equipment
$
9,972,415

 
$
9,240,100

Less accumulated depreciation and amortization
1,918,868

 
1,809,520

Net property, plant and equipment
8,053,547

 
7,430,580

Current assets
 
 
 
Cash and cash equivalents
66,206

 
28,653

Accounts receivable, net
277,362

 
295,160

Gas stored underground
244,841

 
236,603

Other current assets
60,504

 
65,890

Total current assets
648,913

 
626,306

Goodwill
742,702

 
742,702

Deferred charges and other assets
282,206

 
293,357

 
$
9,727,368

 
$
9,092,945

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, 2016 — 103,827,358 shares; September 30, 2015 — 101,478,818 shares
$
519

 
$
507

Additional paid-in capital
2,371,381

 
2,230,591

Accumulated other comprehensive loss
(178,233
)
 
(109,330
)
Retained earnings
1,273,057

 
1,073,029

Shareholders’ equity
3,466,724

 
3,194,797

Long-term debt
2,205,645

 
2,455,388

Total capitalization
5,672,369

 
5,650,185

Current liabilities
 
 
 
Accounts payable and accrued liabilities
198,882

 
238,942

Other current liabilities
410,452

 
457,954

Short-term debt
670,466

 
457,927

Current maturities of long-term debt
250,000

 
—

Total current liabilities
1,529,800

 
1,154,823

Deferred income taxes
1,585,500

 
1,411,315

Regulatory cost of removal obligation
427,332

 
427,553

Pension and postretirement liabilities
283,579

 
287,373

Deferred credits and other liabilities
228,788

 
161,696

 
$
9,727,368

 
$
9,092,945

See accompanying notes to condensed consolidated financial statements.

3


ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended 
 June 30
 
2016
 
2015
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Regulated distribution segment
$
414,226

 
$
416,794

Regulated pipeline segment
109,249

 
97,008

Nonregulated segment
214,555

 
278,769

Intersegment eliminations
(105,114
)
 
(106,170
)
 
632,916

 
686,401

Purchased gas cost
 
 
 
Regulated distribution segment
138,845

 
149,775

Regulated pipeline segment
—

 
—

Nonregulated segment
191,741

 
260,990

Intersegment eliminations
(104,981
)
 
(106,037
)
 
225,605

 
304,728

Gross profit
407,311

 
381,673

Operating expenses
 
 
 
Operation and maintenance
137,444

 
132,447

Depreciation and amortization
73,459

 
68,444

Taxes, other than income
59,244

 
63,175

Total operating expenses
270,147

 
264,066

Operating income
137,164

 
117,607

Miscellaneous income
833

 
634

Interest charges
27,698

 
27,955

Income before income taxes
110,299

 
90,286

Income tax expense
39,106

 
34,005

Net income
$
71,193

 
$
56,281

Basic and diluted net income per share
$
0.69

 
$
0.55

Cash dividends per share
$
0.42

 
$
0.39

Basic and diluted weighted average shares outstanding
103,750

 
102,000

See accompanying notes to condensed consolidated financial statements.







 










4


ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
Nine Months Ended 
 June 30
 
2016
 
2015
 
(Unaudited)
(In thousands, except per
share data)
Operating revenues
 
 
 
Regulated distribution segment
$
1,902,513

 
$
2,394,179

Regulated pipeline segment
299,629

 
272,305

Nonregulated segment
774,474

 
1,179,379

Intersegment eliminations
(305,186
)
 
(360,629
)
 
2,671,430

 
3,485,234

Purchased gas cost
 
 
 
Regulated distribution segment
884,529

 
1,397,113

Regulated pipeline segment
—

 
—

Nonregulated segment
722,803

 
1,122,655

Intersegment eliminations
(304,787
)
 
(360,230
)
 
1,302,545

 
2,159,538

Gross profit
1,368,885

 
1,325,696

Operating expenses
 
 
 
Operation and maintenance
395,958

 
384,489

Depreciation and amortization
216,670

 
204,059

Taxes, other than income
172,872

 
181,606

Total operating expenses
785,500

 
770,154

Operating income
583,385

 
555,542

Miscellaneous expense
(1,061
)
 
(2,634
)
Interest charges
85,741

 
85,166

Income before income taxes
496,583

 
467,742

Income tax expense
180,719

 
176,182

Net income
$
315,864

 
$
291,560

Basic and diluted net income per share
$
3.06

 
$
2.86

Cash dividends per share
$
1.26

 
$
1.17

Basic and diluted weighted average shares outstanding
103,137

 
101,776

See accompanying notes to condensed consolidated financial statements.


5



ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended 
 June 30
 
Nine Months Ended 
 June 30
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
(In thousands)
Net income
$
71,193

 
$
56,281

 
$
315,864

 
$
291,560

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $110, $(41), $(837) and $(170)
151

 
(191
)
 
(1,496
)
 
(296
)
Cash flow hedges:
 
 
 
 
 
 
 
Amortization and unrealized gain (loss) on interest rate agreements, net of tax of $(22,561), $31,314, $(50,631) and $(17,232)
(39,250
)
 
54,475

 
(88,085
)
 
(29,981
)
Net unrealized gains (losses) on commodity cash flow hedges, net of tax of $11,575, $7,393, $13,220 and $(12,698)
18,105

 
11,563

 
20,678

 
(19,571
)
Total other comprehensive income (loss)
(20,994
)
 
65,847

 
(68,903
)
 
(49,848
)
Total comprehensive income
$
50,199

 
$
122,128

 
$
246,961

 
$
241,712


See accompanying notes to condensed consolidated financial statements.

6


ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended 
 June 30
 
2016
 
2015
 
(Unaudited)
(In thousands)
Cash Flows From Operating Activities
 
 
 
Net income
$
315,864

 
$
291,560

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization:
 
 
 
Charged to depreciation and amortization
216,670

 
204,059

Charged to other accounts
983

 
853

Deferred income taxes
171,042

 
164,627

Other
19,767

 
18,146

Net assets / liabilities from risk management activities
(8,357
)
 
(13,136
)
Net change in operating assets and liabilities
(91,371
)
 
51,473

Net cash provided by operating activities
624,598

 
717,582

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(796,008
)
 
(667,483
)
Other, net
1,627

 
(1,119
)
Net cash used in investing activities
(794,381
)
 
(668,602
)
Cash Flows From Financing Activities
 
 
 
Net increase in short-term debt
212,539

 
48,830

Net proceeds from equity offering
98,660

 
—

Issuance of common stock through stock purchase and employee retirement plans
26,500

 
20,813

Net proceeds from issuance of long-term debt
—

 
493,538

Settlement of interest rate agreements
—

 
13,364

Repayment of long-term debt
—

 
(500,000
)
Cash dividends paid
(130,363
)
 
(116,645
)
Repurchase of equity awards
—

 
(7,985
)
Net cash provided by (used in) financing activities
207,336

 
(48,085
)
Net increase in cash and cash equivalents
37,553

 
895

Cash and cash equivalents at beginning of period
28,653

 
42,258

Cash and cash equivalents at end of period
$
66,206

 
$
43,153


See accompanying notes to condensed consolidated financial statements.

7


ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2016
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 pipeline businesses as well as other nonregulated natural gas businesses. Historically, our regulated businesses have generated over 90 percent of our consolidated net income.
Through our regulated distribution business, we deliver natural gas through sales and transportation arrangements to approximately three million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which at June 30, 2016, covered service areas located in eight states. In addition, we transport natural gas for others through our distribution system. Our regulated businesses also include our regulated pipeline and storage operations, which include the transportation of natural gas to our North Texas 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 regulated distribution divisions operate.
Our nonregulated businesses operate primarily in the Midwest and Southeast through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc. (AEH). AEH is wholly owned by the Company and based in Houston, Texas. Through AEH, we provide natural gas management and transportation services to municipalities, natural gas distribution companies, including certain divisions of Atmos Energy, and third parties.

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, 2015. 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, 2015. Because of seasonal and other factors, the results of operations for the nine-month period ended June 30, 2016 are not indicative of our results of operations for the full 2016 fiscal year, which ends September 30, 2016.
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, 2015.
Certain prior-year amounts have been reclassified to conform with the current year presentation.
During the second quarter of fiscal 2016, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, a company 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 will need to use more judgment and make more estimates than under current guidance. The new standard is currently scheduled to become effective for us beginning on 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 June 30, 2016, we were actively evaluating all of our sources of revenue to determine the potential effect on our financial position, results of operations and cash flows and the transition approach we will utilize. We are also actively monitoring the deliberations of the FASB's Transition Resource Group as decisions made by this group will impact the final conclusions of this evaluation.
In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying

8


amount of that debt liability, consistent with debt discounts. The new standard will be effective for us beginning on October 1, 2016, and will be applied retrospectively.
In November 2015, the FASB issued guidance that requires all deferred income tax liabilities and assets to be presented as noncurrent in a classified balance sheet. Currently, entities are required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. As permitted under the new guidance, we elected early adoption as of March 31, 2016. The adoption of this guidance had no impact on our results of operations or cash flows. Because we adopted this new guidance prospectively, prior periods have not been adjusted.
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 March 2016, the FASB issued guidance to simplify the accounting and reporting of share-based payment arrangements. Key modifications required under the new guidance include:
•
Recognition of all excess tax benefits and tax deficiencies associated with stock-based compensation as income tax expense or benefit in the income statement in the period the awards vest. The guidance also requires these income tax inflows and outflows to be classified as an operating activity.
•
Simplification of the accounting for forfeitures.
•
Clarification that cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.

As permitted under the new guidance, we elected early adoption as of March 31, 2016. In accordance with the transition requirements, we recorded a $3.3 million income tax benefit during the first six months of fiscal 2016. Additionally, we recorded a $14.5 million cumulative-effect increase to retained earnings with an offsetting increase to the Company’s net operating loss (NOL) deferred tax asset to recognize the effect of excess tax benefits earned prior to September 30, 2015. For the nine months ended June 30, 2016, we have recognized a total income tax benefit of $4.9 million. Since we have adopted this new guidance prospectively, prior periods have not been adjusted.
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.
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.

9



 
Significant regulatory assets and liabilities as of June 30, 2016 and September 30, 2015 included the following:
 
June 30,
2016
 
September 30,
2015
 
(In thousands)
Regulatory assets:
 
 
 
Pension and postretirement benefit costs(1)
$
110,425

 
$
121,183

Infrastructure mechanisms(2)
31,090

 
32,813

Deferred gas costs
3,390

 
9,715

Recoverable loss on reacquired debt
14,401

 
16,319

APT annual adjustment mechanism
2,976

 
1,002

Rate case costs
1,640

 
1,533

Other
20,906

 
9,774

 
$
184,828

 
$
192,339

Regulatory liabilities:
 
 
 
Regulatory cost of removal obligations
$
486,290

 
$
483,676

Deferred gas costs
34,362

 
28,100

Asset retirement obligations
9,063

 
9,063

Other
5,483

 
3,693

 
$
535,198

 
$
524,532

 
(1) 
Includes $12.9 million and $16.6 million of pension and postretirement expense deferred pursuant to regulatory authorization.
(2) 
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all expenses associated with capital expenditures incurred pursuant to these rules, which primarily consist of interest, depreciation and other taxes, 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
We operate the Company through the following three segments:
•
The regulated distribution segment, which includes our regulated natural gas distribution and related sales operations,
•
The regulated pipeline 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 regulated distribution segment operations are geographically dispersed, they are reported as a single segment as each regulated 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, 2015. We evaluate performance based on net income or loss of the respective operating units.

10



Income statements for the three and nine months ended June 30, 2016 and 2015 by segment are presented in the following tables:
 
Three Months Ended June 30, 2016
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
411,982

 
$
28,518

 
$
192,416

 
$
—

 
$
632,916

Intersegment revenues
2,244

 
80,731

 
22,139

 
(105,114
)
 
—

 
414,226

 
109,249

 
214,555

 
(105,114
)
 
632,916

Purchased gas cost
138,845

 
—

 
191,741

 
(104,981
)
 
225,605

Gross profit
275,381

 
109,249

 
22,814

 
(133
)
 
407,311

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
100,859

 
29,083

 
7,635

 
(133
)
 
137,444

Depreciation and amortization
58,916

 
13,409

 
1,134

 
—

 
73,459

Taxes, other than income
52,377

 
6,220

 
647

 
—

 
59,244

Total operating expenses
212,152

 
48,712

 
9,416

 
(133
)
 
270,147

Operating income
63,229

 
60,537

 
13,398

 
—

 
137,164

Miscellaneous income (expense)
1,111

 
(359
)
 
574

 
(493
)
 
833

Interest charges
18,968

 
9,002

 
221

 
(493
)
 
27,698

Income before income taxes
45,372

 
51,176

 
13,751

 
—

 
110,299

Income tax expense
15,516

 
18,046

 
5,544

 
—

 
39,106

Net income
$
29,856

 
$
33,130

 
$
8,207

 
$
—

 
$
71,193

Capital expenditures
$
191,202

 
$
66,639

 
$
(66
)
 
$
—

 
$
257,775

 
Three Months Ended June 30, 2015
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
415,160

 
$
25,859

 
$
245,382

 
$
—

 
$
686,401

Intersegment revenues
1,634

 
71,149

 
33,387

 
(106,170
)
 
—

 
416,794

 
97,008

 
278,769

 
(106,170
)
 
686,401

Purchased gas cost
149,775

 
—

 
260,990

 
(106,037
)
 
304,728

Gross profit
267,019

 
97,008

 
17,779

 
(133
)
 
381,673

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
98,552

 
26,572

 
7,456

 
(133
)
 
132,447

Depreciation and amortization
55,491

 
11,816

 
1,137

 
—

 
68,444

Taxes, other than income
56,176

 
6,193

 
806

 
—

 
63,175

Total operating expenses
210,219

 
44,581

 
9,399

 
(133
)
 
264,066

Operating income
56,800

 
52,427

 
8,380

 
—

 
117,607

Miscellaneous income (expense)
1,045

 
(211
)
 
345

 
(545
)
 
634

Interest charges
19,961

 
8,299

 
240

 
(545
)
 
27,955

Income before income taxes
37,884

 
43,917

 
8,485

 
—

 
90,286

Income tax expense
15,420

 
15,349

 
3,236

 
—

 
34,005

Net income
$
22,464

 
$
28,568

 
$
5,249

 
$
—

 
$
56,281

Capital expenditures
$
170,134

 
$
55,914

 
$
(209
)
 
$
—

 
$
225,839



11


 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2016
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
1,896,636

 
$
75,344

 
$
699,450

 
$
—

 
$
2,671,430

Intersegment revenues
5,877

 
224,285

 
75,024

 
(305,186
)
 
—

 
1,902,513

 
299,629

 
774,474

 
(305,186
)
 
2,671,430

Purchased gas cost
884,529

 
—

 
722,803

 
(304,787
)
 
1,302,545

Gross profit
1,017,984

 
299,629

 
51,671

 
(399
)
 
1,368,885

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
291,388

 
83,302

 
21,667

 
(399
)
 
395,958

Depreciation and amortization
173,913

 
39,358

 
3,399

 
—

 
216,670

Taxes, other than income
152,324

 
18,529

 
2,019

 
—

 
172,872

Total operating expenses
617,625

 
141,189

 
27,085

 
(399
)
 
785,500

Operating income
400,359

 
158,440

 
24,586

 
—

 
583,385

Miscellaneous income (expense)
209

 
(1,164
)
 
1,245

 
(1,351
)
 
(1,061
)
Interest charges
58,390

 
27,294

 
1,408

 
(1,351
)
 
85,741

Income before income taxes
342,178

 
129,982

 
24,423

 
—

 
496,583

Income tax expense
124,755

 
46,081

 
9,883

 
—

 
180,719

Net income
$
217,423

 
$
83,901

 
$
14,540

 
$
—

 
$
315,864

Capital expenditures
$
533,826

 
$
262,058

 
$
124

 
$
—

 
$
796,008

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30, 2015
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
Operating revenues from external parties
$
2,389,037

 
$
70,887

 
$
1,025,310

 
$
—

 
$
3,485,234

Intersegment revenues
5,142

 
201,418

 
154,069

 
(360,629
)
 
—

 
2,394,179

 
272,305

 
1,179,379

 
(360,629
)
 
3,485,234

Purchased gas cost
1,397,113

 
—

 
1,122,655

 
(360,230
)
 
2,159,538

Gross profit
997,066

 
272,305

 
56,724

 
(399
)
 
1,325,696

Operating expenses
 
 
 
 
 
 
 
 
 
Operation and maintenance
288,962

 
74,029

 
21,897

 
(399
)
 
384,489

Depreciation and amortization
165,730

 
34,945

 
3,384

 
—

 
204,059

Taxes, other than income
162,759

 
16,296

 
2,551

 
—

 
181,606

Total operating expenses
617,451

 
125,270

 
27,832

 
(399
)
 
770,154

Operating income
379,615

 
147,035

 
28,892

 
—

 
555,542

Miscellaneous income (expense)
(1,221
)
 
(842
)
 
897

 
(1,468
)
 
(2,634
)
Interest charges
60,914

 
25,014

 
706

 
(1,468
)
 
85,166

Income before income taxes
317,480

 
121,179

 
29,083

 
—

 
467,742

Income tax expense
121,776

 
42,894

 
11,512

 
—

 
176,182

Net income
$
195,704

 
$
78,285

 
$
17,571

 
$
—

 
$
291,560

Capital expenditures
$
482,371

 
$
185,028

 
$
84

 
$
—

 
$
667,483

 

12


Balance sheet information at June 30, 2016 and September 30, 2015 by segment is presented in the following tables:

 
June 30, 2016
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
6,067,548

 
$
1,935,087

 
$
50,912

 
$
—

 
$
8,053,547

Investment in subsidiaries
1,007,787

 
—

 
—

 
(1,007,787
)
 
—

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
61,441

 
—

 
4,765

 
—

 
66,206

Assets from risk management activities
3,651

 
—

 
4,047

 
—

 
7,698

Other current assets
370,444

 
22,269

 
391,265

 
(208,969
)
 
575,009

Intercompany receivables
981,651

 
—

 
—

 
(981,651
)
 
—

Total current assets
1,417,187

 
22,269

 
400,077

 
(1,190,620
)
 
648,913

Goodwill
575,449

 
132,542

 
34,711

 
—

 
742,702

Noncurrent assets from risk management activities
750

 
—

 
908

 
—

 
1,658

Deferred charges and other assets
258,370

 
21,976

 
202

 
—

 
280,548

 
$
9,327,091

 
$
2,111,874

 
$
486,810

 
$
(2,198,407
)
 
$
9,727,368

CAPITALIZATION AND LIABILITIES
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
3,466,724

 
$
661,175

 
$
346,612

 
$
(1,007,787
)
 
$
3,466,724

Long-term debt
2,205,645

 
—

 
—

 
—

 
2,205,645

Total capitalization
5,672,369

 
661,175

 
346,612

 
(1,007,787
)
 
5,672,369

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

 
—

 
—

 
—

 
250,000

Short-term debt
870,466

 
—

 
—

 
(200,000
)
 
670,466

Liabilities from risk management activities
56,883

 
—

 
—

 
—

 
56,883

Other current liabilities
453,831

 
16,590

 
90,999

 
(8,969
)
 
552,451

Intercompany payables
—

 
953,683

 
27,968

 
(981,651
)
 
—

Total current liabilities
1,631,180

 
970,273

 
118,967

 
(1,190,620
)
 
1,529,800

Deferred income taxes
1,093,755

 
480,336

 
11,409

 
—

 
1,585,500

Noncurrent liabilities from risk management activities
176,491

 
—

 
—

 
—

 
176,491

Regulatory cost of removal obligation
427,332

 
—

 
—

 
—

 
427,332

Pension and postretirement liabilities
283,579

 
—

 
—

 
—

 
283,579

Deferred credits and other liabilities
42,385

 
90

 
9,822

 
—

 
52,297

 
$
9,327,091

 
$
2,111,874

 
$
486,810

 
$
(2,198,407
)
 
$
9,727,368


13




 
September 30, 2015
 
Regulated
Distribution
 
Regulated
Pipeline
 
Nonregulated
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
5,670,306

 
$
1,706,449

 
$
53,825

 
$
—

 
$
7,430,580

Investment in subsidiaries
1,038,670

 
—

 
(2,096
)
 
(1,036,574
)
 
—

Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
23,863

 
—

 
4,790

 
—

 
28,653

Assets from risk management activities
378

 
—

 
8,854

 
—

 
9,232

Other current assets
421,591

 
24,628

 
480,503

 
(338,301
)
 
588,421

Intercompany receivables
887,713

 
—

 
—

 
(887,713
)
 
—

Total current assets
1,333,545

 
24,628

 
494,147

 
(1,226,014
)
 
626,306

Goodwill
575,449

 
132,542

 
34,711

 
—

 
742,702

Noncurrent assets from risk management activities
368

 
—

 
—

 
—

 
368

Deferred charges and other assets
270,372

 
17,288

 
5,329

 
—

 
292,989

 
$
8,888,710

 
$
1,880,907

 
$
585,916

 
$
(2,262,588
)
 
$
9,092,945

CAPITALIZATION AND LIABILITIES
 
 
 
 
 
 
 
 
 
Shareholders’ equity
$
3,194,797

 
$
577,275

 
$
461,395

 
$
(1,038,670
)
 
$
3,194,797

Long-term debt
2,455,388

 
—

 
—

 
—

 
2,455,388

Total capitalization
5,650,185

 
577,275

 
461,395

 
(1,038,670
)
 
5,650,185

Current liabilities
 
 
 
 
 
 
 
 
 
Short-term debt
782,927

 
—

 
—

 
(325,000
)
 
457,927

Liabilities from risk management activities
9,568

 
—

 
—

 
—

 
9,568

Other current liabilities
569,273

 
29,780

 
99,480

 
(11,205
)
 
687,328

Intercompany payables
—

 
867,409

 
20,304

 
(887,713
)
 
—

Total current liabilities
1,361,768

 
897,189

 
119,784

 
(1,223,918
)
 
1,154,823

Deferred income taxes
1,008,091

 
406,254

 
(3,030
)
 
—

 
1,411,315

Noncurrent liabilities from risk management activities
110,539

 
—

 
—

 
—

 
110,539

Regulatory cost of removal obligation
427,553

 
—

 
—

 
—

 
427,553

Pension and postretirement liabilities
287,373

 
—

 
—

 
—

 
287,373

Deferred credits and other liabilities
43,201

 
189

 
7,767

 
—

 
51,157

 
$
8,888,710

 
$
1,880,907

 
$
585,916

 
$
(2,262,588
)
 
$
9,092,945


14



4.    Earnings Per Share
We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vesting is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the three and nine months ended June 30, 2016 and 2015 are calculated as follows:
 
Three Months Ended 
 June 30
 
Nine Months Ended 
 June 30
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share amounts)
Basic and Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
71,193

 
$
56,281

 
$
315,864

 
$
291,560

Less: Income allocated to participating securities
108

 
111

 
496

 
596

Income available to common shareholders
$
71,085

 
$
56,170

 
$
315,368

 
$
290,964

Basic and diluted weighted average shares outstanding
103,750

 
102,000

 
103,137

 
101,776

Net income per share - Basic and Diluted
$
0.69

 
$
0.55

 
$
3.06

 
$
2.86


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, 2015. Except as noted below, there were no material changes in the terms of our debt instruments during the nine months ended June 30, 2016.
Long-term debt
Long-term debt at June 30, 2016 and September 30, 2015 consisted of the following:
 
 
June 30, 2016
 
September 30, 2015
 
(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

Total long-term debt
2,460,000

 
2,460,000

Less:
 
 
 
Original issue discount on unsecured senior notes and debentures
4,355

 
4,612

Current maturities
250,000

 
—

 
$
2,205,645

 
$
2,455,388

 
On October 15, 2014, we issued $500 million of 4.125% 30-year unsecured senior notes, which replaced, on a long-term basis, our $500 million unsecured 4.95% senior notes. The effective rate of these notes is 4.086%, after giving effect to the offering costs and the settlement of the associated forward starting interest rate swaps. The net proceeds of approximately $494 million were used to repay our $500 million 4.95% senior unsecured notes at maturity on October 15, 2014.

15


Short-term debt
Our short-term debt is utilized 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 $1.25 billion commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility with third-party lenders. These facilities provide approximately $1.3 billion of working capital funding. At June 30, 2016 and September 30, 2015 a total of $670.5 million and $457.9 million was outstanding under our commercial paper program.
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 $1.3 billion of working capital funding, including a five-year $1.25 billion unsecured facility with an accordion feature, which, if utilized would increase the borrowing capacity to $1.5 billion, a $25 million unsecured facility, which was renewed on April 1, 2016, and a $10 million unsecured revolving credit facility, which is used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $4.1 million at June 30, 2016.
In addition to these third-party facilities, our regulated operations have a $500 million intercompany revolving credit facility with AEH, which 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, 2016.
Nonregulated Operations
Atmos Energy Marketing, LLC (AEM), which is wholly owned by AEH, has one uncommitted $25 million bilateral credit facility that was renewed and extended in March 2016 and one committed $15 million bilateral credit facility that was renewed and extended in December 2015. The uncommitted $25 million bilateral credit facility currently expires in December 2016 and the $15 million bilateral credit facility expires in September 2016. These facilities are used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under these bilateral credit facilities was $33.0 million at June 30, 2016.
AEH has a $500 million intercompany demand credit facility with AEC. This facility bears interest at a rate equal to the one-month LIBOR rate plus 3.00 percent. Applicable state regulatory commissions have approved our use of this facility through December 31, 2016.
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, 2016, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 49 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.
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 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 June 30, 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.


16


6.    Shareholders' Equity

Shelf Registration
On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to $2.5 billion in common stock and/or debt securities, which replaced our registration statement that expired on March 28, 2016. At June 30, 2016, $2.4 billion of securities remain available for issuance under the shelf registration statement.

At-the-Market Equity Sales Program

On March 28, 2016, we entered into an at-the-market (ATM) equity distribution agreement (the Agreement) with Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC in their capacity as agents and/or as principals (Agents). Under the terms of the Agreement, we may issue and sell, through any of the Agents, shares of our common stock, up to an aggregate offering price of $200 million, through the period ended March 28, 2019. We may also sell shares from time to time to an Agent for its own account at a price to be agreed upon at the time of sale. We will pay each Agent a commission of 1.0% of the gross offering proceeds of the shares sold through it as a sales agent. We have no obligation to offer or sell any shares under the Agreement, and may at any time suspend offers and sales under the Agreement. The shares will be issued pursuant to our shelf registration statement filed with the SEC on March 28, 2016. During the third fiscal quarter of 2016, we sold 1,360,756 shares of common stock under the ATM program for $100.0 million and received net proceeds of $98.7 million.

1998 Long-Term Incentive Plan 
In August 1998, the Board of Directors approved and adopted the 1998 Long-Term Incentive Plan (LTIP), which became effective in October 1998 after approval by our shareholders. The LTIP is a comprehensive, long-term incentive compensation plan providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted stock units and stock units to certain employees and non-employee directors of the Company and our subsidiaries. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire our common stock. 
As of September 30, 2015, we were authorized to grant awards for up to a maximum of 8.7 million shares of common stock under this plan subject to certain adjustment provisions. In February 2016, our shareholders voted to increase the number of authorized LTIP shares by 2.5 million shares and to extend the term of the plan for an additional five years, through September 2021. On March 29, 2016, we filed with the SEC a registration statement on Form S-8 to register an additional 2.5 million shares; we also listed such shares with the New York Stock Exchange.
2011 Share Repurchase Program
We did not repurchase any shares during the nine months ended June 30, 2016 and 2015 under our 2011 share repurchase program, which is scheduled to end on September 30, 2016.
Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in AOCI related to available-for-sale securities, interest rate agreement 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).

17


 
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 loss before reclassifications
(1,417
)
 
(88,345
)
 
(8,612
)
 
(98,374
)
Amounts reclassified from accumulated other comprehensive income
(79
)
 
260

 
29,290

 
29,471

Net current-period other comprehensive income (loss)
(1,496
)
 
(88,085
)
 
20,678

 
(68,903
)
June 30, 2016
$
3,453

 
$
(176,927
)
 
$
(4,759
)
 
$
(178,233
)
 
 
Available-
for-Sale
Securities
 
Interest
Rate
Agreement
Cash Flow
Hedges
 
Commodity
Contracts
Cash Flow
Hedges
 
Total
 
(In thousands)
September 30, 2014
$
7,662

 
$
(18,381
)
 
$
(1,674
)
 
$
(12,393
)
Other comprehensive income (loss) before reclassifications
30

 
(30,436
)
 
(37,397
)
 
(67,803
)
Amounts reclassified from accumulated other comprehensive income
(326
)
 
455

 
17,826

 
17,955

Net current-period other comprehensive income (loss)
(296
)
 
(29,981
)
 
(19,571
)
 
(49,848
)
June 30, 2015
$
7,366

 
$
(48,362
)
 
$
(21,245
)
 
$
(62,241
)

The following tables detail reclassifications out of AOCI for the three and nine months ended June 30, 2016 and 2015. Amounts in parentheses below indicate decreases to net income in the statement of income.
 
Three Months Ended June 30, 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
(12,347
)
 
Purchased gas cost
 
(12,484
)
 
Total before tax
 
4,865

 
Tax benefit
Total reclassifications
$
(7,619
)
 
Net of tax

18


 
Three Months Ended June 30, 2015
Accumulated Other Comprehensive Income Components
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
508

 
Operation and maintenance expense
 
508

 
Total before tax
 
(186
)
 
Tax expense
 
$
322

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(137
)
 
Interest charges
Commodity contracts
(16,488
)
 
Purchased gas cost
 
(16,625
)
 
Total before tax
 
6,480

 
Tax benefit
 
$
(10,145
)
 
Net of tax
Total reclassifications
$
(9,823
)
 
Net of tax
 
 
 
 
 
Nine Months Ended June 30, 2016
Accumulated Other Comprehensive Income Components                          
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in  the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
124

 
Operation and maintenance expense
 
124

 
Total before tax
 
(45
)
 
Tax expense
 
$
79

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(410
)
 
Interest charges
Commodity contracts
(48,015
)
 
Purchased gas cost
 
(48,425
)
 
Total before tax
 
18,875

 
Tax benefit
 
$
(29,550
)
 
Net of tax
Total reclassifications
$
(29,471
)
 
Net of tax
 
 
 
 
 
Nine Months Ended June 30, 2015
Accumulated Other Comprehensive Income Components                          
Amount Reclassified from
Accumulated Other
Comprehensive Income      
 
Affected Line Item in  the
Statement of Income
 
(In thousands)
 
 
Available-for-sale securities
$
514

 
Operation and maintenance expense
 
514

 
Total before tax
 
(188
)
 
Tax expense
 
$
326

 
Net of tax
Cash flow hedges
 
 
 
Interest rate agreements
$
(717
)
 
Interest charges
Commodity contracts
(29,222
)
 
Purchased gas cost
 
(29,939
)
 
Total before tax
 
11,658

 
Tax benefit
 
$
(18,281
)
 
Net of tax
Total reclassifications
$
(17,955
)
 
Net of tax

19



7.     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, 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 June 30
 
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
4,698

 
$
5,051

 
$
2,705

 
$
3,895

Interest cost
7,095

 
6,698

 
3,106

 
3,596

Expected return on assets
(6,881
)
 
(6,435
)
 
(1,566
)
 
(1,608
)
Amortization of transition obligation
—

 
—

 
21

 
69

Amortization of prior service credit
(57
)
 
(48
)
 
(411
)
 
(411
)
Amortization of actuarial (gain) loss
3,319

 
3,916

 
(541
)
 
—

Net periodic pension cost
$
8,174

 
$
9,182

 
$
3,314

 
$
5,541

 
 
 
 
 
 
 
 
 
Nine Months Ended June 30
 
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Components of net periodic pension cost:
 
 
 
 
 
 
 
Service cost
$
14,093

 
$
15,153

 
$
8,117

 
$
11,687

Interest cost
21,284

 
20,095

 
9,318

 
10,789

Expected return on assets
(20,642
)
 
(19,308
)
 
(4,698
)
 
(4,824
)
Amortization of transition obligation
—

 
—

 
62

 
205

Amortization of prior service credit
(170
)
 
(144
)
 
(1,233
)
 
(1,233
)
Amortization of actuarial (gain) loss
9,959

 
11,749

 
(1,625
)
 
—

Net periodic pension cost
$
24,524

 
$
27,545

 
$
9,941

 
$
16,624


The assumptions used to develop our net periodic pension cost for the three and nine months ended June 30, 2016 and 2015 are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
2016
 
2015
 
2016
 
2015
Discount rate
 
4.55%
 
4.43%
 
4.55%
 
4.43%
Rate of compensation increase
 
3.50%
 
3.50%
 
N/A
 
N/A
Expected return on plan assets
 
7.00%
 
7.25%
 
4.45%
 
4.60%
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 are not required to make a minimum contribution to our defined benefit plan; however, we made a voluntary contribution of $15.0 million during the third quarter of fiscal 2016.
We contributed $12.8 million to our other post-retirement benefit plans during the nine months ended June 30, 2016. We expect to contribute between $15 million and $25 million to these plans during fiscal 2016.


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8.    Commitments and Contingencies
Litigation and Environmental Matters
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 10 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, there were no material changes in the status of such litigation and environmental-related matters or claims during the nine months ended June 30, 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 regulated 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 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, 2015. There were no material changes to the purchase commitments for the nine months ended June 30, 2016.
AEH has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. These purchase commitment contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. Except for purchases made in the normal course of business under these contracts, there were no material changes to the purchase commitments for the nine months ended June 30, 2016.
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, 2015. There were no material changes to the estimated storage and transportation fees for the nine months ended June 30, 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 June 30, 2016, rate cases were in progress in our Kentucky and Virginia service areas, two formula rate mechanisms were in progress in our Louisiana service area and an infrastructure mechanism was in progress in our Mississippi service area. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
9.    Financial Instruments
We currently use financial instruments in our regulated distribution and nonregulated segments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments, which have been tailored to our regulated distribution and nonregulated segments, and the related accounting for these financial instruments are fully described in Notes 2 and 12 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. During the nine months ended June 30, 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 regulated 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

21


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 2015-2016 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 33 percent, or 23.0 Bcf of the winter flowing gas requirements. We have not designated these financial instruments as hedges for accounting purposes.

Nonregulated Commodity Risk Management Activities
Our nonregulated segment is 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. 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. Specifically, these operations use financial instruments in the following ways:
•
Gas delivery and related services - Certain financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, are used to mitigate the commodity price risk associated with deliveries under fixed-priced forward contracts to either deliver gas to customers or purchase gas from suppliers. These financial instruments have maturity dates ranging from one to 54 months.
•
Transportation and storage services - Our nonregulated operations 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 for accounting purposes.
•
Aggregating and purchasing gas supply - Certain financial instruments, designated as fair value hedges, are used to hedge our natural gas inventory used in asset optimization activities.

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 June 30, 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 June 30, 2016, we had $18.4 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 June 30, 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 June 30, 2016, we had net long/(short) commodity contracts outstanding in the following quantities:
Contract Type
 
Hedge Designation
 
Regulated
Distribution
 
Nonregulated
 
 
 
 
Quantity (MMcf)
Commodity contracts
 
Fair Value
 
—

 
(35,118
)
 
 
Cash Flow
 
—

 
45,325

 
 
Not designated
 
10,002

 
51,128

 
 
 
 
10,002

 
61,335


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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, 2016 and September 30, 2015. 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.
 
 
 
Regulated Distribution
 
Nonregulated
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
 
 
 (In thousands)
June 30, 2016
 
 
 
 
 
 
 
 
 
Designated As Hedges: