NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and its subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. Through our distribution business, we deliver natural gas through sales and transportation arrangements to over
three million
residential, commercial, public-authority and industrial customers through our
six
regulated distribution divisions in the service areas described below:
|
|
|
|
Division
|
|
Service Area
|
Atmos Energy Colorado-Kansas Division
|
|
Colorado, Kansas
|
Atmos Energy Kentucky/Mid-States Division
|
|
Kentucky, Tennessee, Virginia
(1)
|
Atmos Energy Louisiana Division
|
|
Louisiana
|
Atmos Energy Mid-Tex Division
|
|
Texas, including the Dallas/Fort Worth metropolitan area
|
Atmos Energy Mississippi Division
|
|
Mississippi
|
Atmos Energy West Texas Division
|
|
West Texas
|
|
|
(1)
|
Denotes location where we have more limited service areas.
|
In addition, we transport natural gas for others through our distribution system. Our distribution business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which our distribution divisions operate. Our corporate headquarters and shared-services function are located in Dallas, Texas, and our customer support centers are located in Amarillo and Waco, Texas.
Our pipeline and storage business, which is also subject to federal and state regulation, consists of the the pipeline and storage operations of our Atmos Pipeline–Texas (APT) Division and our natural gas transmission business in Louisiana. The APT division provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. As part of its pipeline operations, APT manages five underground storage facilites in Texas. We also provide ancillary services customary to the pipeline industry including parking arrangements, lending and sales of inventory on hand. Our natural gas transmission operations in Louisiana are comprised of a proprietary 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and on a more limited basis, to third parties.
2
. Summary of Significant Accounting Policies
Principles of consolidation
— The accompanying consolidated financial statements include the accounts of Atmos Energy Corporation and its wholly-owned subsidiaries. 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.
Use of estimates
— The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates include the allowance for doubtful accounts, unbilled revenues, contingency accruals, pension and postretirement obligations, deferred income taxes, impairment of long-lived assets, risk management and trading activities, fair value measurements and the valuation of goodwill and other long-lived assets. Actual results could differ from those estimates.
Regulation
— Our distribution and pipeline and storage operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. Our accounting policies recognize the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions. 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. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations. Further, regulation may impact the period in which revenues or expenses are recognized.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and a portion of our regulatory liabilities are recorded as a component of other current liabilities and deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and our regulatory excess deferred taxes and regulatory cost of removal obligation are reported separately. Significant regulatory assets and liabilities as of
September 30, 2018
and
2017
included the following:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Regulatory assets:
|
|
|
|
Pension and postretirement benefit costs
(1)
|
$
|
6,496
|
|
|
$
|
26,826
|
|
Infrastructure mechanisms
(2)
|
96,739
|
|
|
46,437
|
|
Deferred gas costs
|
1,927
|
|
|
65,714
|
|
Recoverable loss on reacquired debt
|
8,702
|
|
|
11,208
|
|
Deferred pipeline record collection costs
|
20,467
|
|
|
11,692
|
|
APT annual adjustment mechanism
|
—
|
|
|
2,160
|
|
Rate case costs
|
2,741
|
|
|
2,629
|
|
Other
|
6,739
|
|
|
10,132
|
|
|
$
|
143,811
|
|
|
$
|
176,798
|
|
Regulatory liabilities:
|
|
|
|
Regulatory excess deferred taxes
(3)
|
$
|
744,895
|
|
|
$
|
—
|
|
Regulatory cost of service reserve
(4)
|
22,508
|
|
|
—
|
|
Regulatory cost of removal obligation
|
522,175
|
|
|
521,330
|
|
Deferred gas costs
|
94,705
|
|
|
15,559
|
|
Asset retirement obligation
|
12,887
|
|
|
12,827
|
|
APT annual adjustment mechanism
|
35,228
|
|
|
—
|
|
Pension and postretirement benefit costs
|
69,113
|
|
|
—
|
|
Other
|
9,486
|
|
|
5,941
|
|
|
$
|
1,510,997
|
|
|
$
|
555,657
|
|
|
|
(1)
|
Includes
$6.5 million
and
$9.4 million
of pension and postretirement expense deferred pursuant to regulatory authorization.
|
|
|
(2)
|
Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on the deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recovered through base rates.
|
|
|
(3)
|
The TCJA resulted in the remeasurement of the net deferred tax liability included in our rate base. Of this amount, $
5.2 million
is recorded in other current liabilities. The period and timing of the return of the excess deferred taxes is being determined by regulators in each of our jurisdictions. See Note 12 for further information.
|
|
|
(4)
|
Effective January 1, 2018, regulators in each of our service areas required us to establish a regulatory liability for the difference in recoverable federal taxes included in revenues based on the former 35% federal statutory rate and the new 21% federal statutory rate for service provided on or after January 1, 2018. The period and timing of the return of this liability to utility customers is being determined by regulators in each of our jurisdictions. See Note 12 for further information.
|
Revenue recognition
— Sales of natural gas to our distribution customers are billed on a monthly basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for distribution segment revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.
On occasion, we are permitted to implement new rates that have not been formally approved by our state regulatory commissions, which are subject to refund. As permitted by accounting principles generally accepted in the United States, we recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented.
Rates established by regulatory authorities are adjusted for increases and decreases in our purchased gas costs through purchased gas cost adjustment mechanisms. Purchased gas cost adjustment mechanisms provide gas distribution companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case to address all of their non-gas costs.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
There is no margin generated through purchased gas cost adjustments, but they provide a dollar-for-dollar offset to increases or decreases in our distribution segment’s gas costs. The effects of these purchased gas cost adjustment mechanisms are recorded as deferred gas costs on our balance sheet.
Operating revenues for our pipeline and storage segment are recognized in the period in which volumes are transported.
Discontinued operations
— Accounting policies specific to our discontinued natural gas marketing business are described in more detail in Note 15.
Cash and cash equivalents
— We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable and allowance for doubtful accounts
— Accounts receivable arise from natural gas sales to residential, commercial, industrial, municipal and other customers. We establish an allowance for doubtful accounts to reduce the net receivable balance to the amount we reasonably expect to collect based on our collection experience or where we are aware of a specific customer’s inability or reluctance to pay. However, if circumstances change, our estimate of the recoverability of accounts receivable could be affected. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible.
Gas stored underground
— Our gas stored underground is comprised of natural gas injected into storage to support the winter season withdrawals for our distribution operations. The average cost method is used for all of our distribution operations. Gas in storage that is retained as cushion gas to maintain reservoir pressure is classified as property, plant and equipment and is valued at cost.
Property, plant and equipment
— Regulated property, plant and equipment is stated at original cost, net of contributions in aid of construction. The cost of additions includes direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), administrative and general costs and an allowance for funds used during construction. The allowance for funds used during construction represents the estimated cost of funds used to finance the construction of major projects and are capitalized in the rate base for ratemaking purposes when the completed projects are placed in service. Interest expense of
$6.8 million
,
$2.5 million
and
$2.8 million
was capitalized in
2018
,
2017
and
2016
.
Major renewals, including replacement pipe, and betterments that are recoverable under our regulatory rate base are capitalized while the costs of maintenance and repairs that are not capitalizable are charged to expense as incurred. The costs of large projects are accumulated in construction in progress until the project is completed. When the project is completed, tested and placed in service, the balance is transferred to the regulated plant in service account included in the rate base and depreciation begins.
Regulated property, plant and equipment is depreciated at various rates on a straight-line basis. These rates are approved by our regulatory commissions and are comprised of two components: one based on average service life and one based on cost of removal. Accordingly, we recognize our cost of removal expense as a component of depreciation expense. The related cost of removal accrual is reflected as a regulatory liability on the consolidated balance sheet. At the time property, plant and equipment is retired, removal expenses less salvage, are charged to the regulatory cost of removal accrual. The composite depreciation rate was
3.2 percent
,
3.1 percent
and
3.2 percent
for the fiscal years ended
September 30, 2018
,
2017
and
2016
.
Other property, plant and equipment is stated at cost. Depreciation is generally computed on the straight-line method for financial reporting purposes based upon estimated useful lives.
Asset retirement obligations
— We record a liability at fair value for an asset retirement obligation when the legal obligation to retire the asset has been incurred with an offsetting increase to the carrying value of the related asset. Accretion of the asset retirement obligation due to the passage of time is recorded as an operating expense.
As of
September 30, 2018
and
2017
, we had asset retirement obligations of
$12.9 million
and
$12.8 million
. Additionally, we had
$7.5 million
and
$7.8 million
of asset retirement costs recorded as a component of property, plant and equipment that will be depreciated over the remaining life of the underlying associated assets.
We believe we have a legal obligation to retire our natural gas storage facilities. However, we have not recognized an asset retirement obligation associated with our storage facilities because we are not able to determine the settlement date of this obligation as we do not anticipate taking our storage facilities out of service permanently. Therefore, we cannot reasonably estimate the fair value of this obligation.
Impairment of long-lived assets
— We periodically evaluate whether events or circumstances have occurred that indicate that other long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
Goodwill
— We annually evaluate our goodwill balances for impairment during our second fiscal quarter or more frequently as impairment indicators arise. During the second quarter of fiscal 2018, we completed our annual goodwill impairment assessment using a qualitative assessment, as permitted under U.S. GAAP. We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit. Based on the assessment performed, we determined that our goodwill was not impaired. Although not applicable for the fiscal 2018 analysis, if the qualitative assessment resulted in impairment indicators, we would then use a present value technique based on discounted cash flows to estimate the fair value of our reporting units. These calculations are dependent on several subjective factors including the timing of future cash flows, future growth rates and the discount rate. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.
Marketable securities
— As of
September 30, 2018
and
2017
, all of our marketable securities were classified as available for sale. In accordance with the current authoritative accounting standards, these securities, including both debt and equity securities, are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on an individual investment by investment basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related investment is written down to its estimated fair value. Beginning on October 1, 2018, changes in fair value of our equity available for sale securities will be recorded in net income as discussed further below in the
Recent accounting pronouncements
section.
Financial instruments and hedging activities
— We use financial instruments to mitigate commodity price risk in our
distribution
and
pipeline and storage
segments and to mitigate interest rate risk. The objectives and strategies for using financial instruments have been tailored to our continuing business and are discussed in Note
13
.
We record all of our financial instruments on the balance sheet at fair value
,
with changes in fair value ultimately recorded in the income statement. These financial instruments are reported as risk management assets and liabilities and are classified as current or noncurrent other assets or liabilities based upon the anticipated settlement date of the underlying financial instrument. We record the cash flow impact of our financial instruments in operating cash flows based upon their balance sheet classification.
The timing of when changes in fair value of our financial instruments are recorded in the income statement depends on whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment. Changes in fair value for financial instruments that do not meet one of these criteria are recognized in the income statement as they occur.
Financial Instruments Associated with Commodity Price Risk
In our
distribution
segment, the costs associated with and the realized gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas cost adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with accounting principles generally accepted in the United States. Accordingly, there is no earnings impact on our
distribution
segment as a result of the use of financial instruments.
Financial Instruments Associated with Interest Rate Risk
We manage interest rate risk, primarily when we plan to issue long-term debt. We currently manage this risk through the use of forward starting interest rate swaps to fix the Treasury yield component of the interest cost associated with anticipated financings. We designate these financial instruments as cash flow hedges at the time the agreements are executed. Unrealized gains and losses associated with the instruments are recorded as a component of accumulated other comprehensive income (loss). When the instruments settle, the realized gain or loss is recorded as a component of accumulated other comprehensive income (loss) and recognized as a component of interest expense over the life of the related financing arrangement. Hedge ineffectiveness to the extent incurred is reported as a component of interest expense. As of
September 30, 2018
and
September 30, 2017
,
no
cash was required to be held in margin accounts.
Fair Value Measurements
— We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measurement date (exit price). We primarily use quoted market prices and other observable market pricing information in valuing our financial assets and liabilities and minimize the use of unobservable pricing inputs in our measurements.
Fair-value estimates also consider our own creditworthiness and the creditworthiness of the counterparties involved. Our counterparties consist primarily of financial institutions and major energy companies. This concentration of counterparties may materially impact our exposure to credit risk resulting from market, economic or regulatory conditions. We seek to minimize counterparty credit risk through an evaluation of their financial condition and credit ratings and the use of collateral requirements under certain circumstances.
Amounts reported at fair value are subject to potentially significant volatility based upon changes in market prices, including, but not limited to, the valuation of the portfolio of our contracts, maturity and settlement of these contracts and newly originated transactions and interest rates, each of which directly affect the estimated fair value of our financial instruments. We believe the market prices and models used to value these financial instruments represent the best information available with respect to closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. Values are adjusted to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then current market conditions.
Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority given to unobservable inputs (Level 3). The levels of the hierarchy are described below:
Level 1
— Represents unadjusted quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is defined as a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Prices actively quoted on national exchanges are used to determine the fair value of most of our assets and liabilities recorded on our balance sheet at fair value.
Our Level 1 measurements consist primarily of our available-for-sale securities. The Level 1 measurements for investments in the Atmos Energy Corporation Master Retirement Trust (the Master Trust), Supplemental Executive Benefit Plan and postretirement benefit plan consist primarily of exchange-traded financial instruments.
Level 2
— Represents pricing inputs other than quoted prices included in Level 1 that are either directly or indirectly observable for the asset or liability as of the reporting date. These inputs are derived principally from, or corroborated by, observable market data. Our Level 2 measurements primarily consist of non-exchange-traded financial instruments, such as over-the-counter options and swaps and municipal and corporate bonds where market data for pricing is observable. The Level 2 measurements for investments in our Master Trust, Supplemental Executive Benefit Plan and postretirement benefit plan consist primarily of non-exchange traded financial instruments such as corporate bonds and government securities.
Level 3
— Represents generally unobservable pricing inputs which are developed based on the best information available, including our own internal data, in situations where there is little if any market activity for the asset or liability at the measurement date. The pricing inputs utilized reflect what a market participant would use to determine fair value. We currently do not have any Level 3 investments.
Pension and other postretirement plans
— Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. Our measurement date is September 30. The assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.
The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligation and net pension and postretirement cost. When establishing our discount rate, we consider high quality corporate bond rates based on bonds available in the marketplace that are suitable for settling the obligations, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with currently available high quality corporate bonds.
The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of the annual pension and postretirement plan cost. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors when making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension or postretirement plan cost is not affected. Rather, this gain or loss is amortized over the expected future working lifetime of the plan participants.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The expected return on plan assets is then calculated by applying the expected long-term rate of return on plan assets to the market-related value of the plan assets. The market-related value of our plan assets represents the fair market value of the plan assets, adjusted to smooth out short-term market fluctuations over a five-year period. The use of this calculation will delay the impact of current market fluctuations on the pension expense for the period.
We use a corridor approach to amortize actuarial gains and losses. Under this approach, net gains or losses in excess of ten percent of the larger of the pension benefit obligation or the market-related value of the assets are amortized on a straight-line basis. The period of amortization is the average remaining service of active participants who are expected to receive benefits under the plan.
We estimate the assumed health care cost trend rate used in determining our annual postretirement net cost based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon the annual review of our participant census information as of the measurement date.
Income taxes
— Income taxes are determined based on the liability method, which results in income tax assets and liabilities arising from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on accumulated deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of interest expense. We recognize penalties related to unrecognized tax benefits as a component of miscellaneous income (expense) in accordance with regulatory requirements.
Tax collections
— We are allowed to recover from customers revenue-related taxes that are imposed upon us. We record such taxes as operating expenses and record the corresponding customer charges as operating revenues. However, we do collect and remit various other taxes on behalf of various governmental authorities, and we record these amounts in our consolidated balance sheets on a net basis. We do not collect income taxes from our customers on behalf of governmental authorities.
Contingencies
— In the normal course of business, we are confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims made by third parties or the action of various regulatory agencies. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts and our estimates of the ultimate outcome or resolution of the liability in the future. Actual results may differ from estimates, depending on actual outcomes or changes in the facts or expectations surrounding each potential exposure.
Subsequent events
— Except as noted in Note 5 and 6 regarding the public offering of senior notes, no events occurred subsequent to the balance sheet date that would require recognition or disclosure in the financial statements.
Recent accounting pronouncements
Accounting pronouncements adopted in fiscal 2018
In February 2018, the Financial Accounting Standards Board (FASB) issued new guidance as a result of the Tax Cuts and Jobs Act of 2017 (the "TCJA"), related to the treatment of certain tax effects from accumulated other comprehensive income. The new guidance allows entities to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the adoption of the TCJA. The new guidance will be effective for us in the fiscal year beginning on October 1, 2019 and for interim periods within that year. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We have early adopted the new standard effective as of
September 30, 2018
, and reclassified the stranded tax effects of
$22.9 million
, resulting from the TCJA from accumulated other comprehensive income to retained earnings. This change is reflected on our consolidated statement of shareholders' equity.
In January 2017, the FASB issued new guidance that simplified 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. We early adopted the new standard, effective for our goodwill impairment test performed in our second
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fiscal quarter of 2018. The new standard did not have a material impact on our results of operations, consolidated balance sheets or cash flows.
Accounting pronouncements that will be effective in fiscal 2019
In May 2014, the FASB issued a comprehensive new revenue recognition standard that superseded virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, an entity recognizes 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.
We have completed the evaluation of our sources of revenue and the impact that the new guidance will have on our financial position, results of operations, cash flows and business processes. Based on this evaluation, we do not believe the implementation of the new guidance will have a material effect on our financial position, results of operations, cash flows or business processes. We intend to apply the new guidance using the modified retrospective method on the date of adoption. The most impactful change from the adoption of this standard will be the disclosure requirements. In the first quarter of fiscal 2019, we will add a new revenue footnote which will contain a disaggregation of revenues from contracts with customers by customer type.
In March 2017, the FASB issued new guidance related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The new guidance requires entities to disaggregate the current service cost component of the net benefit cost from the other components and present it with other current compensation costs for related employees in the statement of income. The other components of net benefit cost will be presented outside of income from operations on the statement of income. In addition, only the service cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The Federal Energy Regulatory Commission (“FERC”), which regulates interstate transmission pipelines and also establishes, through its Uniform System of Accounts, accounting practices for rate-regulated entities, has issued guidance that states it will permit an election to either continue to capitalize non-service benefit costs or to cease capitalizing such costs for regulatory purposes. Accounting guidelines by the FERC are typically also followed by state commissions. As such, we plan to continue to capitalize into property, plant and equipment all components of net periodic benefit cost for ratemaking purposes and will defer the non-service cost components as a regulatory asset for U.S. GAAP reporting purposes. The new guidance will be effective for us in the fiscal year beginning on October 1, 2018 and for interim periods within that year. The standard requires retrospective application for presentation of non-service cost components outside of income from operations in the statement of income and prospective application of the change in eligible costs for capitalization. We do not anticipate the new standard will have a material impact on our financial position, results of operations and cash flows.
In 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. The standard will require that changes in fair value of our available-for-sale equity securities be recorded in net income. However, the accounting for our available-for-sale debt securities remains unchanged as a result of this guidance. The new guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of fiscal year 2019. We expect to record a cumulative-effect adjustment of approximately
$8 million
from accumulated other comprehensive income to retained earnings. We do not anticipate the new standard will have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued new guidance aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance is effective for us in the fiscal year beginning October 1, 2020 and for interim periods within that year. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We intend to early adopt the guidance prospectively as of the fiscal year beginning October 1, 2018. We do not anticipate the new standard will have a material impact on our financial position, results of operations or cash flows.
Recently issued accounting pronouncements that will be effective after fiscal 2019
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2016, the FASB issued a comprehensive new leasing standard that will require lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The new standard will be effective for us beginning on October 1, 2019; early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. Additionally, in January 2018, the FASB issued amendments to the standard that provides a practical expedient for entities to not evaluate existing or expired land easements that were not previously accounted for as leases under the current guidance. In July 2018, the FASB issued an amendment to the standard that provides an additional and optional transition method to adopt the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the effect of this standard and amendments on our financial position, results of operations, cash flows and business processes.
In June 2016, the FASB issued new guidance which will require credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. In contrast, current U.S. GAAP is based on an incurred loss model that delays recognition of credit losses until it is probable the loss has been incurred. The new guidance also introduces a new impairment recognition model for available-for-sale securities that will require credit losses for available-for-sale debt securities to be recorded through an allowance account. The new standard will be effective for us beginning on October 1, 2021; early adoption is permitted beginning on October 1, 2019. We are currently evaluating the potential impact of this new guidance on our financial position, results of operations and cash flows.
In August 2018, the FASB issued new guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance removes the disclosure requirements for the amounts of gain/loss and prior service cost/credit amortization expected in the following year and the disclosure of the effect of a one-percentage-point change in the health care cost trend rate, among other changes. The guidance adds certain disclosures including the weighted average interest crediting rate for cash balance plans and a narrative description for the significant change in gains and losses as well as any other significant change in the plan obligations or assets. The new guidance is effective for us in the fiscal year beginning October 1, 2020 and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The adoption of this new guidance impacts only our disclosures; however we are still evaluating the timing of our adoption.
3. Segment Information
As of September 30, 2018, we 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.
|
|
|
•
|
The
pipeline and storage
segment
is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana.
|
|
|
•
|
The
natural gas marketing
segment
is comprised of our discontinued natural gas marketing business.
|
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our distribution segment operations are geographically dispersed, they are aggregated and reported as a single segment as each natural gas distribution division has similar economic characteristics. In addition, because the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana have similar economic characteristics, they have been aggregated and reported as a single segment.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on net income or loss of the respective operating units. We allocate interest and pension expense to the pipeline and storage segment; however, there is no debt or pension liability recorded on the pipeline and storage segment balance sheet. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process. Income taxes are allocated to each segment as if each segment’s taxes were calculated on a separate return basis.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income statements and capital expenditures by segment are shown in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2018
|
|
Distribution
|
|
Pipeline and Storage
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating revenues from external parties
|
$
|
3,000,404
|
|
|
$
|
115,142
|
|
|
$
|
—
|
|
|
$
|
3,115,546
|
|
Intersegment revenues
|
2,643
|
|
|
392,571
|
|
|
(395,214
|
)
|
|
—
|
|
Total operating revenues
|
3,003,047
|
|
|
507,713
|
|
|
(395,214
|
)
|
|
3,115,546
|
|
Purchased gas cost
|
1,559,836
|
|
|
1,978
|
|
|
(393,966
|
)
|
|
1,167,848
|
|
Operation and maintenance expense
|
465,848
|
|
|
134,995
|
|
|
(1,248
|
)
|
|
599,595
|
|
Depreciation and amortization expense
|
264,930
|
|
|
96,153
|
|
|
—
|
|
|
361,083
|
|
Taxes, other than income
|
231,566
|
|
|
32,320
|
|
|
—
|
|
|
263,886
|
|
Operating income
|
480,867
|
|
|
242,267
|
|
|
—
|
|
|
723,134
|
|
Miscellaneous expense
|
(1,849
|
)
|
|
(3,495
|
)
|
|
—
|
|
|
(5,344
|
)
|
Interest charges
|
65,850
|
|
|
40,796
|
|
|
—
|
|
|
106,646
|
|
Income before income taxes
|
413,168
|
|
|
197,976
|
|
|
—
|
|
|
611,144
|
|
Income tax (benefit) expense
|
(29,798
|
)
|
|
37,878
|
|
|
—
|
|
|
8,080
|
|
Net income
|
$
|
442,966
|
|
|
$
|
160,098
|
|
|
$
|
—
|
|
|
$
|
603,064
|
|
Capital expenditures
|
$
|
1,025,800
|
|
|
$
|
441,791
|
|
|
$
|
—
|
|
|
$
|
1,467,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2017
|
|
Distribution
|
|
Pipeline and Storage
|
|
Natural Gas Marketing
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating revenues from external parties
|
$
|
2,647,813
|
|
|
$
|
111,922
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,759,735
|
|
Intersegment revenues
|
1,362
|
|
|
345,108
|
|
|
—
|
|
|
(346,470
|
)
|
|
—
|
|
Total operating revenues
|
2,649,175
|
|
|
457,030
|
|
|
—
|
|
|
(346,470
|
)
|
|
2,759,735
|
|
Purchased gas cost
|
1,269,456
|
|
|
2,506
|
|
|
—
|
|
|
(346,426
|
)
|
|
925,536
|
|
Operation and maintenance expense
|
413,077
|
|
|
133,765
|
|
|
—
|
|
|
(44
|
)
|
|
546,798
|
|
Depreciation and amortization expense
|
249,071
|
|
|
70,377
|
|
|
—
|
|
|
—
|
|
|
319,448
|
|
Taxes, other than income
|
211,929
|
|
|
28,478
|
|
|
—
|
|
|
—
|
|
|
240,407
|
|
Operating income
|
505,642
|
|
|
221,904
|
|
|
—
|
|
|
—
|
|
|
727,546
|
|
Miscellaneous expense
|
(1,695
|
)
|
|
(1,575
|
)
|
|
—
|
|
|
—
|
|
|
(3,270
|
)
|
Interest charges
|
79,789
|
|
|
40,393
|
|
|
—
|
|
|
—
|
|
|
120,182
|
|
Income from continuing operations before income taxes
|
424,158
|
|
|
179,936
|
|
|
—
|
|
|
—
|
|
|
604,094
|
|
Income tax expense
|
155,789
|
|
|
65,594
|
|
|
—
|
|
|
—
|
|
|
221,383
|
|
Income from continuing operations
|
268,369
|
|
|
114,342
|
|
|
—
|
|
|
—
|
|
|
382,711
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
10,994
|
|
|
—
|
|
|
10,994
|
|
Gain on sale of discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
2,716
|
|
|
—
|
|
|
2,716
|
|
Net income
|
$
|
268,369
|
|
|
$
|
114,342
|
|
|
$
|
13,710
|
|
|
$
|
—
|
|
|
$
|
396,421
|
|
Capital expenditures
|
$
|
849,950
|
|
|
$
|
287,139
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,137,089
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2016
|
|
Distribution
|
|
Pipeline and Storage
|
|
Natural Gas Marketing
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating revenues from external parties
|
$
|
2,338,404
|
|
|
$
|
116,244
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,454,648
|
|
Intersegment revenues
|
1,374
|
|
|
310,952
|
|
|
—
|
|
|
(312,326
|
)
|
|
—
|
|
Total operating revenues
|
2,339,778
|
|
|
427,196
|
|
|
—
|
|
|
(312,326
|
)
|
|
2,454,648
|
|
Purchased gas cost
|
1,058,576
|
|
|
(58
|
)
|
|
—
|
|
|
(312,326
|
)
|
|
746,192
|
|
Operation and maintenance expense
|
407,982
|
|
|
130,610
|
|
|
—
|
|
|
—
|
|
|
538,592
|
|
Depreciation and amortization expense
|
234,109
|
|
|
56,682
|
|
|
—
|
|
|
—
|
|
|
290,791
|
|
Taxes, other than income
|
197,227
|
|
|
24,616
|
|
|
—
|
|
|
—
|
|
|
221,843
|
|
Operating income
|
441,884
|
|
|
215,346
|
|
|
—
|
|
|
—
|
|
|
657,230
|
|
Miscellaneous income (expense)
|
1,171
|
|
|
(1,405
|
)
|
|
—
|
|
|
—
|
|
|
(234
|
)
|
Interest charges
|
78,238
|
|
|
36,574
|
|
|
—
|
|
|
—
|
|
|
114,812
|
|
Income from continuing operations before income taxes
|
364,817
|
|
|
177,367
|
|
|
—
|
|
|
—
|
|
|
542,184
|
|
Income tax expense
|
130,987
|
|
|
65,655
|
|
|
—
|
|
|
—
|
|
|
196,642
|
|
Income from continuing operations
|
233,830
|
|
|
111,712
|
|
|
—
|
|
|
—
|
|
|
345,542
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
4,562
|
|
|
—
|
|
|
4,562
|
|
Net income
|
$
|
233,830
|
|
|
$
|
111,712
|
|
|
$
|
4,562
|
|
|
$
|
—
|
|
|
$
|
350,104
|
|
Capital expenditures
|
$
|
740,246
|
|
|
$
|
346,383
|
|
|
$
|
321
|
|
|
$
|
—
|
|
|
$
|
1,086,950
|
|
The following table summarizes our revenues from external parties by products and services for the fiscal year ended September 30.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Distribution revenues:
|
|
|
|
|
|
Gas sales revenues:
|
|
|
|
|
|
Residential
|
$
|
1,916,101
|
|
|
$
|
1,642,918
|
|
|
$
|
1,477,049
|
|
Commercial
|
797,073
|
|
|
708,167
|
|
|
619,979
|
|
Industrial
|
131,267
|
|
|
133,372
|
|
|
98,439
|
|
Public authority and other
|
47,714
|
|
|
45,820
|
|
|
41,307
|
|
Total gas sales revenues
|
2,892,155
|
|
|
2,530,277
|
|
|
2,236,774
|
|
Transportation revenues
|
99,250
|
|
|
86,332
|
|
|
76,690
|
|
Other gas revenues
|
8,999
|
|
|
31,204
|
|
|
24,940
|
|
Total distribution revenues
|
3,000,404
|
|
|
2,647,813
|
|
|
2,338,404
|
|
Pipeline and storage revenues
|
115,142
|
|
|
111,922
|
|
|
116,244
|
|
Total operating revenues
|
$
|
3,115,546
|
|
|
$
|
2,759,735
|
|
|
$
|
2,454,648
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Balance sheet information at
September 30, 2018
and
2017
by segment is presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Distribution
|
|
Pipeline and Storage
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Property, plant and equipment, net
|
$
|
7,644,693
|
|
|
$
|
2,726,454
|
|
|
$
|
—
|
|
|
$
|
10,371,147
|
|
Total assets
|
$
|
11,109,128
|
|
|
$
|
2,963,480
|
|
|
$
|
(2,198,171
|
)
|
|
$
|
11,874,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Distribution
|
|
Pipeline and Storage
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Property, plant and equipment, net
|
$
|
6,849,517
|
|
|
$
|
2,409,665
|
|
|
$
|
—
|
|
|
$
|
9,259,182
|
|
Total assets
|
$
|
10,050,164
|
|
|
$
|
2,621,601
|
|
|
$
|
(1,922,169
|
)
|
|
$
|
10,749,596
|
|
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 fiscal years ended September 30 are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands, except per share data)
|
Basic and Diluted Earnings Per Share from continuing operations
|
|
|
|
|
|
Income from continuing operations
|
$
|
603,064
|
|
|
$
|
382,711
|
|
|
$
|
345,542
|
|
Less: Income from continuing operations allocated to participating securities
|
580
|
|
|
475
|
|
|
538
|
|
Income from continuing operations available to common shareholders
|
$
|
602,484
|
|
|
$
|
382,236
|
|
|
$
|
345,004
|
|
Basic and diluted weighted average shares outstanding
|
111,012
|
|
|
106,100
|
|
|
103,524
|
|
Income from continuing operations per share — Basic and Diluted
|
$
|
5.43
|
|
|
$
|
3.60
|
|
|
$
|
3.33
|
|
|
|
|
|
|
|
Basic and Diluted Earnings Per Share from discontinued operations
|
|
|
|
|
|
Income from discontinued operations
|
$
|
—
|
|
|
$
|
13,710
|
|
|
$
|
4,562
|
|
Less: Income from discontinued operations allocated to participating securities
|
—
|
|
|
12
|
|
|
8
|
|
Income from discontinued operations available to common shareholders
|
$
|
—
|
|
|
$
|
13,698
|
|
|
$
|
4,554
|
|
Basic and diluted weighted average shares outstanding
|
111,012
|
|
|
106,100
|
|
|
103,524
|
|
Income from discontinued operations per share - Basic and Diluted
|
$
|
—
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
Net Income per share — Basic and Diluted
|
$
|
5.43
|
|
|
$
|
3.73
|
|
|
$
|
3.38
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5
. Debt
Long-term debt
Long-term debt at
September 30, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(In thousands)
|
Unsecured 8.50% Senior Notes, due March 2019
|
$
|
450,000
|
|
|
$
|
450,000
|
|
Unsecured 3.00% Senior Notes, due 2027
|
500,000
|
|
|
500,000
|
|
Unsecured 5.95% Senior Notes, due 2034
|
200,000
|
|
|
200,000
|
|
Unsecured 5.50% Senior Notes, due 2041
|
400,000
|
|
|
400,000
|
|
Unsecured 4.15% Senior Notes, due 2043
|
500,000
|
|
|
500,000
|
|
Unsecured 4.125% Senior Notes, due 2044
|
750,000
|
|
|
750,000
|
|
Medium term Series A notes, 1995-1, 6.67%, due 2025
|
10,000
|
|
|
10,000
|
|
Unsecured 6.75% Debentures, due 2028
|
150,000
|
|
|
150,000
|
|
Floating-rate term loan, due September 2019
(1)
|
125,000
|
|
|
125,000
|
|
Total long-term debt
|
3,085,000
|
|
|
3,085,000
|
|
Less:
|
|
|
|
Original issue (premium) / discount on unsecured senior notes and debentures
|
(4,439
|
)
|
|
(4,384
|
)
|
Debt issuance cost
|
20,774
|
|
|
22,339
|
|
Current maturities
|
575,000
|
|
|
—
|
|
|
$
|
2,493,665
|
|
|
$
|
3,067,045
|
|
|
|
(1)
|
Up to
$200 million
can be drawn under this term loan.
|
Maturities of long-term debt at
September 30, 2018
were as follows (in thousands):
|
|
|
|
|
2019
|
$
|
575,000
|
|
2020
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
—
|
|
Thereafter
|
2,510,000
|
|
|
$
|
3,085,000
|
|
On October 4, 2018, we completed a public offering of
$600 million
of
4.30%
senior notes due 2048. We received net proceeds from the offering, after the underwriting discount and estimated offering expenses, of approximately
$591 million
, that were used to repay working capital borrowings pursuant to our commercial paper program. The effective interest rate of these notes is
4.37%
after giving effect to the offering costs.
On June 8, 2017, we completed a public offering of
$500 million
of
3.00%
senior notes due 2027 and
$250 million
of
4.125%
senior notes due 2044. The effective rate of these notes is
3.12%
and
4.40%
, after giving effect to the offering costs and the settlement of the associated forward starting interest rate swaps. The net proceeds, excluding the loss on the settlement of the interest rate swaps of
$37 million
, of approximately
$753 million
were used to repay our
$250 million
6.35%
senior unsecured notes at maturity on
June 15, 2017
and for general corporate purposes, including the repayment of working capital borrowings pursuant to our commercial paper program.
We utilize short-term debt to provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company’s desired capital structure with an equity-to-capitalization ratio between
50%
and
60%
, inclusive of long-term and short-term debt. Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Currently, our short-term borrowing requirements are satisfied through a combination of a
$1.5 billion
commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately
$1.5 billion
of total working capital funding. The primary source of our funding is our commercial paper program, which is supported by a
five
-year unsecured
$1.5 billion
credit facility. On March 26, 2018, we executed one of our two
one
-year extension options which extended the maturity date from September 25, 2021 to
September 25, 2022
. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from
zero percent
to
1.25 percent
, based on the Company’s credit ratings. Additionally, the facility contains a
$250 million
accordion feature, which provides the opportunity to increase the total committed loan to
$1.75 billion
. At
September 30, 2018
and
2017
, there was
$575.8 million
and
$447.7 million
outstanding under our commercial paper program with weighted average interest rates of
2.15%
and
1.25%
, with weighted average maturities of less than one month.
Additionally, we have a
$25 million
364-day unsecured facility, which was renewed on April 1, 2018 and expires March 31, 2019, and a
$10 million
364-day unsecured revolving credit facility, which is used primarily to issue letters of credit and which was renewed on September 30, 2018. At
September 30, 2018
, there were
no
borrowings outstanding under either of these facilities; however, outstanding letters of credit reduced the total amount available to us under our
$10 million
unsecured revolving facility to
$4.4 million
.
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than
70 percent
. At
September 30, 2018
, our total-debt-to-total-capitalization ratio, as defined, was
44 percent
. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.
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
September 30, 2018
. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.
6. Shareholders' Equity
Shelf Registration, At-the-Market Equity Sales Program and Equity Issuance
On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to
$2.5 billion
in common stock and/or debt securities, which expires March 28, 2019. At
September 30, 2018
, approximately
$650.0 million
of securities remained available for issuance under the shelf registration statement. The issuance of our
$600 million
senior unsecured notes in October 2018, as discussed in Note 5, effectively exhausted this shelf registration statement.
On November 14, 2017, we filed a prospectus supplement under the registration statement relating to an at-the-market (ATM) equity sales program under which we may issue and sell shares of our common stock up to an aggregate offering price of
$500 million
, which expires March 28, 2019. During the year ended
September 30, 2018
,
no
shares of common stock were sold under our ATM equity sales program.
On November 30, 2017, we filed a prospectus supplement under the registration statement relating to an underwriting agreement to sell
4,558,404
shares of our common stock for
$400 million
. After expenses, net proceeds from the offering were
$395.1 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 available personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire our common stock.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Income (Loss)
We record deferred gains (losses) in accumulated other comprehensive income (AOCI) related to available-for-sale securities, which include equity and debt 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 a component of interest expense, 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). Additionally, as discussed further in Note 2, we have early adopted a new accounting standard effective as of
September 30, 2018
. The adoption resulted in a reclassification of the stranded tax effects resulting from the TCJA, from accumulated other comprehensive income to retained earnings, as seen in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-
for-Sale
Securities
|
|
Interest
Rate
Agreement
Cash Flow
Hedges
|
|
Total
|
|
(In thousands)
|
September 30, 2017
|
$
|
7,048
|
|
|
$
|
(112,302
|
)
|
|
$
|
(105,254
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,426
|
|
|
43,184
|
|
|
44,610
|
|
Amounts reclassified from accumulated other comprehensive income
|
(1,821
|
)
|
|
1,752
|
|
|
(69
|
)
|
Net current-period other comprehensive income (loss)
|
(395
|
)
|
|
44,936
|
|
|
44,541
|
|
Cumulative effect of accounting change
|
1,471
|
|
|
(24,405
|
)
|
|
(22,934
|
)
|
September 30, 2018
|
$
|
8,124
|
|
|
$
|
(91,771
|
)
|
|
$
|
(83,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
2,502
|
|
|
74,560
|
|
|
9,847
|
|
|
86,909
|
|
Amounts reclassified from accumulated other comprehensive income
|
62
|
|
|
662
|
|
|
(4,865
|
)
|
|
(4,141
|
)
|
Net current-period other comprehensive income
|
2,564
|
|
|
75,222
|
|
|
4,982
|
|
|
82,768
|
|
September 30, 2017
|
$
|
7,048
|
|
|
$
|
(112,302
|
)
|
|
$
|
—
|
|
|
$
|
(105,254
|
)
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables detail reclassifications out of AOCI for the fiscal years ended
September 30, 2018
and
2017
. Amounts in parentheses below indicate decreases to net income in the statement of income.
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2018
|
Accumulated Other Comprehensive Income Components
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the
Statement of Income
|
|
(In thousands)
|
|
|
Available-for-sale securities
(2)
|
$
|
2,360
|
|
|
Operation and maintenance expense
|
|
2,360
|
|
|
Total before tax
|
|
(539
|
)
|
|
Tax expense
|
|
$
|
1,821
|
|
|
Net of tax
|
Cash flow hedges
|
|
|
|
Interest rate agreements
|
$
|
(2,375
|
)
|
|
Interest charges
|
|
(2,375
|
)
|
|
Total before tax
|
|
623
|
|
|
Tax benefit
|
|
$
|
(1,752
|
)
|
|
Net of tax
|
Total reclassifications
|
$
|
69
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2017
|
Accumulated Other Comprehensive Income Components
|
Amount Reclassified from
Accumulated Other
Comprehensive Income
|
|
Affected Line Item in the
Statement of Income
|
|
(In thousands)
|
|
|
Available-for-sale securities
(2)
|
$
|
(97
|
)
|
|
Operation and maintenance expense
|
|
(97
|
)
|
|
Total before tax
|
|
35
|
|
|
Tax benefit
|
|
$
|
(62
|
)
|
|
Net of tax
|
Cash flow hedges
|
|
|
|
Interest rate agreements
|
$
|
(1,043
|
)
|
|
Interest charges
|
Commodity contracts
|
7,967
|
|
|
Purchased gas cost
(1)
|
|
6,924
|
|
|
Total before tax
|
|
(2,721
|
)
|
|
Tax expense
|
|
$
|
4,203
|
|
|
Net of tax
|
Total reclassifications
|
$
|
4,141
|
|
|
Net of tax
|
|
|
(1)
|
Amounts are presented as part of income from discontinued operations on the consolidated statements of income.
|
|
|
(2)
|
Our available-for-sale securities include both debt and equity securities.
|
7
. Retirement and Post-Retirement Employee Benefit Plans
We have both funded and unfunded noncontributory defined benefit plans that together cover most of our employees. We also maintain post-retirement plans that provide health care benefits to retired employees. Finally, we sponsor a defined contribution plan that covers substantially all employees. These plans are discussed in further detail below.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a rate regulated entity, we generally recover our pension costs in our rates over a period of up to
15
years. The amounts that have not yet been recognized in net periodic pension cost that have been recorded as regulatory assets or liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan
|
|
Supplemental
Executive
Retirement Plans
|
|
Postretirement
Plans
|
|
Total
|
|
(In thousands)
|
September 30, 2018
|
|
|
|
|
|
|
|
Unrecognized prior service (credit) cost
|
$
|
(1,047
|
)
|
|
$
|
—
|
|
|
$
|
1,298
|
|
|
$
|
251
|
|
Unrecognized actuarial (gain) loss
|
(2,310
|
)
|
|
33,912
|
|
|
(100,966
|
)
|
|
(69,364
|
)
|
|
$
|
(3,357
|
)
|
|
$
|
33,912
|
|
|
$
|
(99,668
|
)
|
|
$
|
(69,113
|
)
|
September 30, 2017
|
|
|
|
|
|
|
|
Unrecognized prior service (credit) cost
|
$
|
(1,278
|
)
|
|
$
|
—
|
|
|
$
|
1,309
|
|
|
$
|
31
|
|
Unrecognized actuarial (gain) loss
|
62,388
|
|
|
42,170
|
|
|
(87,196
|
)
|
|
17,362
|
|
|
$
|
61,110
|
|
|
$
|
42,170
|
|
|
$
|
(85,887
|
)
|
|
$
|
17,393
|
|
Defined Benefit Plans
Employee Pension Plan
As of
September 30, 2018
, we maintained one defined benefit plan, the Atmos Energy Corporation Pension Account Plan (the Plan). The assets of the Plan are held within the Atmos Energy Corporation Master Retirement Trust (the Master Trust). The Plan is a cash balance pension plan that was established effective January 1999 and covers most of the employees of Atmos Energy that were hired on or before September 30, 2010. The plan was closed to new participants effective October 1, 2010.
Opening account balances were established for participants as of January 1999 equal to the present value of their respective accrued benefits under the pension plans which were previously in effect as of December 31, 1998. The Plan credits an allocation to each participant’s account at the end of each year according to a formula based on the participant’s age, service and total pay (excluding incentive pay). In addition, at the end of each year, a participant’s account is credited with interest on the employee’s prior year account balance. Participants are fully vested in their account balances after
three
years of service and may choose to receive their account balances as a lump sum or an annuity.
Generally, our funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974, including the funding requirements under the Pension Protection Act of 2006 (PPA). However, additional voluntary contributions are made from time to time as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
During fiscal
2018
and
2017
we contributed
$7.0 million
and
$5.0 million
in cash to the Plan to achieve a desired level of funding while maximizing the tax deductibility of this payment. Based upon market conditions at
September 30, 2018
, the current funded position of the Plan and the funding requirements under the PPA, we do not anticipate a minimum required contribution for fiscal
2019
. However, we may consider whether a voluntary contribution is prudent to maintain certain funding levels.
We make investment decisions and evaluate performance of the assets in the Master Trust on a medium-term horizon of at least
three
to
five
years. We also consider our current financial status when making recommendations and decisions regarding the Master Trust’s assets. Finally, we strive to ensure the Master Trust’s assets are appropriately invested to maintain an acceptable level of risk and meet the Master Trust’s long-term asset investment policy adopted by the Board of Directors.
To achieve these objectives, we invest the Master Trust’s assets in equity securities, fixed income securities, interests in commingled pension trust funds, other investment assets and cash and cash equivalents. Investments in equity securities are diversified among the market’s various subsectors in an effort to diversify risk and maximize returns. Fixed income securities are invested in investment grade securities. Cash equivalents are invested in securities that either are short term (less than 180 days) or readily convertible to cash with modest risk.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents asset allocation information for the Master Trust as of
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
Targeted
Allocation Range
|
|
Actual
Allocation
September 30
|
Security Class
|
2018
|
|
2017
|
Domestic equities
|
35%-55%
|
|
44.3%
|
|
43.9%
|
International equities
|
10%-20%
|
|
15.4%
|
|
17.2%
|
Fixed income
|
5%-30%
|
|
16.9%
|
|
10.6%
|
Company stock
|
0%-15%
|
|
12.7%
|
|
11.8%
|
Other assets
|
0%-20%
|
|
10.7%
|
|
16.5%
|
At
September 30, 2018
and
2017
, the Plan held
716,700
shares of our common stock which represented
12.7 percent
and
11.8 percent
of total Plan assets. These shares generated dividend income for the Plan of approximately
$1.4 million
and
$1.7 million
during fiscal
2018
and
2017
.
Our employee pension plan expenses and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets and assumed discount rates and demographic data. We review the estimates and assumptions underlying our employee pension plans annually based upon a September 30 measurement date. The development of our assumptions is fully described in our significant accounting policies in Note
2
. The actuarial assumptions used to determine the pension liability for the Plan was determined as of
September 30, 2018
and
2017
and the actuarial assumptions used to determine the net periodic pension cost for the Plan was determined as of
September 30, 2017
,
2016
and
2015
. On
October 23, 2018
, the Society of Actuaries released its annually-updated mortality improvement scale for pension plans incorporating new assumptions surrounding life expectancies in the United States. As of
September 30, 2018
, we updated our assumed mortality rates to incorporate the updated mortality table.
Additional assumptions are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
|
|
Pension Cost
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
4.38
|
%
|
|
3.89
|
%
|
|
3.89
|
%
|
|
3.73
|
%
|
|
4.55
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
Expected return on plan assets
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the Plan’s accumulated benefit obligation, projected benefit obligation and funded status as of
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(In thousands)
|
Accumulated benefit obligation
|
$
|
478,750
|
|
|
$
|
505,355
|
|
Change in projected benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
533,455
|
|
|
$
|
545,480
|
|
Service cost
|
17,264
|
|
|
18,109
|
|
Interest cost
|
20,803
|
|
|
20,443
|
|
Actuarial (gain) loss
|
(29,087
|
)
|
|
(16,347
|
)
|
Benefits paid
|
(37,716
|
)
|
|
(34,230
|
)
|
Benefit obligation at end of year
|
504,719
|
|
|
533,455
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
508,244
|
|
|
473,950
|
|
Actual return on plan assets
|
54,163
|
|
|
63,524
|
|
Employer contributions
|
7,000
|
|
|
5,000
|
|
Benefits paid
|
(37,716
|
)
|
|
(34,230
|
)
|
Fair value of plan assets at end of year
|
531,691
|
|
|
508,244
|
|
Reconciliation:
|
|
|
|
Funded status
|
26,972
|
|
|
(25,211
|
)
|
Unrecognized prior service cost
|
—
|
|
|
—
|
|
Unrecognized net loss
|
—
|
|
|
—
|
|
Net amount recognized
|
$
|
26,972
|
|
|
$
|
(25,211
|
)
|
Net periodic pension cost for the Plan for fiscal
2018
,
2017
and
2016
is recorded as operating expense and included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic pension cost:
|
|
|
|
|
|
Service cost
|
$
|
17,264
|
|
|
$
|
18,109
|
|
|
$
|
16,419
|
|
Interest cost
|
20,803
|
|
|
20,443
|
|
|
23,193
|
|
Expected return on assets
|
(27,666
|
)
|
|
(27,975
|
)
|
|
(27,522
|
)
|
Amortization of prior service credit
|
(231
|
)
|
|
(231
|
)
|
|
(226
|
)
|
Recognized actuarial loss
|
9,114
|
|
|
12,744
|
|
|
10,693
|
|
Net periodic pension cost
|
$
|
19,284
|
|
|
$
|
23,090
|
|
|
$
|
22,557
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of
September 30, 2018
and
2017
. As required by authoritative accounting literature, assets are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The methods used to determine fair value for the assets held by the Plan are fully described in Note
2
. Investments in our common/collective trusts and limited partnerships that are measured at net asset value per share equivalent are not classified in the fair value hierarchy. The net asset value amounts presented are intended to reconcile the fair value hierarchy to the total investments. In addition to the assets shown below, the Plan had net accounts receivable of
$2.0 million
and
$0.6 million
at
September 30, 2018
and
2017
, which materially approximates fair value due to the short-term nature of these assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of September 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Investments:
|
|
|
|
|
|
|
|
Common stocks
|
$
|
197,577
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
197,577
|
|
Money market funds
|
—
|
|
|
19,153
|
|
|
—
|
|
|
19,153
|
|
Registered investment companies
|
50,895
|
|
|
—
|
|
|
—
|
|
|
50,895
|
|
Government securities:
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
—
|
|
|
18,821
|
|
|
—
|
|
|
18,821
|
|
U.S. treasuries
|
23,071
|
|
|
868
|
|
|
—
|
|
|
23,939
|
|
Corporate bonds
|
—
|
|
|
46,498
|
|
|
—
|
|
|
46,498
|
|
Total investments at fair value
|
$
|
271,543
|
|
|
$
|
85,340
|
|
|
$
|
—
|
|
|
356,883
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
Common/collective trusts
(1)
|
|
|
|
|
|
|
108,391
|
|
Limited partnerships
(1)
|
|
|
|
|
|
|
64,399
|
|
Total investments at fair value
|
|
|
|
|
|
|
$
|
529,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of September 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Investments:
|
|
|
|
|
|
|
|
Common stocks
|
$
|
164,910
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164,910
|
|
Money market funds
|
—
|
|
|
9,588
|
|
|
—
|
|
|
9,588
|
|
Registered investment companies
|
64,102
|
|
|
—
|
|
|
—
|
|
|
64,102
|
|
Government securities:
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
—
|
|
|
15,664
|
|
|
—
|
|
|
15,664
|
|
U.S. treasuries
|
5,129
|
|
|
822
|
|
|
—
|
|
|
5,951
|
|
Corporate bonds
|
—
|
|
|
32,314
|
|
|
—
|
|
|
32,314
|
|
Total assets in the fair value hierarchy
|
$
|
234,141
|
|
|
$
|
58,388
|
|
|
$
|
—
|
|
|
292,529
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
Common/collective trusts
(1)
|
|
|
|
|
|
|
150,976
|
|
Limited partnerships
(1)
|
|
|
|
|
|
|
64,135
|
|
Total investments at fair value
|
|
|
|
|
|
|
$
|
507,640
|
|
|
|
(1)
|
The fair value of our common/collective trusts and limited partnerships are measured using the net asset value per share practical expedient. There are no redemption restrictions, redemption notice periods or unfunded commitments for these investments. The redemption frequency is daily.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental Executive Retirement Plans
We have three nonqualified supplemental plans which provide additional pension, disability and death benefits to our officers, division presidents and certain other employees of the Company.
The first plan is referred to as the Supplemental Executive Benefits Plan (SEBP) and covers our officers, division presidents and certain other employees of the Company who were employed on or before August 12, 1998. The SEBP is a defined benefit arrangement which provides a benefit equal to
75
percent of covered compensation under which benefits paid from the underlying qualified defined benefit plan are an offset to the benefits under the SEBP.
In August 1998, we adopted the Supplemental Executive Retirement Plan (SERP) (formerly known as the Performance-Based Supplemental Executive Benefits Plan), which covers all officers or division presidents selected to participate in the plan between August 12, 1998 and August 5, 2009 and any corporate officer who was appointed to the Management Committee through December 31, 2016. The SERP is a defined benefit arrangement which provides a benefit equal to
60
percent of covered compensation under which benefits paid from the underlying qualified defined benefit plan are an offset to the benefits under the SERP.
Effective August 5, 2009, we adopted a new defined benefit Supplemental Executive Retirement Plan (the 2009 SERP), for corporate officers, division presidents or any other employees selected at the discretion of the Board. Under the 2009 SERP, a nominal account has been established for each participant, to which the Company contributes at the end of each calendar year an amount equal to
ten
percent (
25
percent for members of the Management Committee appointed on or after January 1, 2017) of the total of each participant’s base salary and cash incentive compensation earned during each prior calendar year, beginning December 31, 2009. The benefits vest after
three years
of service and attainment of age
55
and earn interest credits at the same annual rate as the Company’s Pension Account Plan (currently
4.69%
).
Due to the retirement of certain executives, during fiscal 2018 we recognized a one-time settlement charge of
$4.2 million
associated with our S
ERP and paid
$13.9 million
in lump sums in relation to the retirements.
Similar to our employee pension plans, we review the estimates and assumptions underlying our supplemental plans annually based upon a September 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for the supplemental plans were determined as of
September 30, 2018
and
2017
and the actuarial assumptions used to determine the net periodic pension cost for the supplemental plans were determined as of
September 30, 2017
,
2016
and
2015
. These assumptions are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
|
|
Pension Cost
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
(1)
|
4.38
|
%
|
|
3.89
|
%
|
|
4.08
|
%
|
|
3.73
|
%
|
|
4.55
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
|
(
1
)
|
Reflects a weighted average discount rate for pension cost for fiscal 2018 due to settlements during the year.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the supplemental plans’ accumulated benefit obligation, projected benefit obligation and funded status as of
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(In thousands)
|
Accumulated benefit obligation
|
$
|
116,943
|
|
|
$
|
130,070
|
|
Change in projected benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
134,480
|
|
|
$
|
142,574
|
|
Service cost
|
1,332
|
|
|
2,756
|
|
Interest cost
|
4,988
|
|
|
4,744
|
|
Actuarial (gain) loss
|
(1,020
|
)
|
|
(2,452
|
)
|
Benefits paid
|
(4,523
|
)
|
|
(4,588
|
)
|
Settlements
|
(13,887
|
)
|
|
(8,554
|
)
|
Benefit obligation at end of year
|
121,370
|
|
|
134,480
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
—
|
|
|
—
|
|
Employer contribution
|
18,410
|
|
|
13,142
|
|
Benefits paid
|
(4,523
|
)
|
|
(4,588
|
)
|
Settlements
|
(13,887
|
)
|
|
(8,554
|
)
|
Fair value of plan assets at end of year
|
—
|
|
|
—
|
|
Reconciliation:
|
|
|
|
Funded status
|
(121,370
|
)
|
|
(134,480
|
)
|
Unrecognized prior service cost
|
—
|
|
|
—
|
|
Unrecognized net loss
|
—
|
|
|
—
|
|
Accrued pension cost
|
$
|
(121,370
|
)
|
|
$
|
(134,480
|
)
|
Assets for the supplemental plans are held in separate rabbi trusts. At
September 30, 2018
and
2017
, assets held in the rabbi trusts consisted of available-for-sale securities of
$46.5 million
and
$42.9 million
, which are included in our fair value disclosures in Note
14
.
Net periodic pension cost for the supplemental plans for fiscal
2018
,
2017
and
2016
is recorded as operating expense and included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic pension cost:
|
|
|
|
|
|
Service cost
|
$
|
1,332
|
|
|
$
|
2,756
|
|
|
$
|
2,371
|
|
Interest cost
|
4,988
|
|
|
4,744
|
|
|
5,185
|
|
Recognized actuarial loss
|
3,079
|
|
|
4,251
|
|
|
2,586
|
|
Settlements
|
4,159
|
|
|
2,685
|
|
|
—
|
|
Net periodic pension cost
|
$
|
13,558
|
|
|
$
|
14,436
|
|
|
$
|
10,142
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated Future Benefit Payments
The following benefit payments for our defined benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the following fiscal years:
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
Supplemental
Plans
|
|
(In thousands)
|
2019
|
$
|
32,603
|
|
|
$
|
10,475
|
|
2020
|
33,509
|
|
|
24,778
|
|
2021
|
35,838
|
|
|
4,597
|
|
2022
|
37,176
|
|
|
20,882
|
|
2023
|
38,684
|
|
|
12,735
|
|
2024-2028
|
206,563
|
|
|
43,070
|
|
Postretirement Benefits
We sponsor the Retiree Medical Plan for Retirees and Disabled Employees of Atmos Energy Corporation (the Atmos Retiree Medical Plan). This plan provides medical and prescription drug protection to all qualified participants based on their date of retirement. The Atmos Retiree Medical Plan provides different levels of benefits depending on the level of coverage chosen by the participants and the terms of predecessor plans; however, we generally pay
80
percent of the projected net claims and administrative costs and participants pay the remaining
20
percent. Effective January 1, 2015, for employees who had not met the participation requirements by September 30, 2009, the contribution rates for the Company are limited to a
three
percent cost increase in claims and administrative costs each year, with the participant responsible for the additional costs.
Generally, our funding policy is to contribute annually an amount in accordance with the requirements of ERISA. However, additional voluntary contributions are made annually as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. We expect to contribute between
$10 million
and
$20 million
to our postretirement benefits plan during fiscal
2019
.
We maintain a formal investment policy with respect to the assets in our postretirement benefits plan to ensure the assets funding the postretirement benefit plan are appropriately invested to maintain an acceptable level of risk. We also consider our current financial status when making recommendations and decisions regarding the postretirement benefits plan.
We currently invest the assets funding our postretirement benefit plan in diversified investment funds which consist of common stocks, preferred stocks and fixed income securities. The diversified investment funds may invest up to
75
percent of assets in common stocks and convertible securities. The following table presents asset allocation information for the postretirement benefit plan assets as of
September 30, 2018
and
2017
.
|
|
|
|
|
|
Actual
Allocation
September 30
|
Security Class
|
2018
|
|
2017
|
Diversified investment funds
|
97.5%
|
|
97.5%
|
Cash and cash equivalents
|
2.5%
|
|
2.5%
|
Similar to our employee pension and supplemental plans, we review the estimates and assumptions underlying our postretirement benefit plan annually based upon a September 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for our postretirement plan were determined as of
September 30, 2018
and
2017
and the actuarial assumptions used to determine the net periodic pension cost for the postretirement plan were determined as of
September 30, 2017
,
2016
and
2015
. The assumptions are presented in the following table:
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Liability
|
|
Postretirement Cost
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
|
4.38
|
%
|
|
3.89
|
%
|
|
3.89
|
%
|
|
3.73
|
%
|
|
4.55
|
%
|
Expected return on plan assets
|
5.33
|
%
|
|
4.29
|
%
|
|
4.29
|
%
|
|
4.45
|
%
|
|
4.45
|
%
|
Initial trend rate
|
6.50
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
Ultimate trend rate
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
Ultimate trend reached in
|
2022
|
|
|
2022
|
|
|
2022
|
|
|
2022
|
|
|
2021
|
|
The following table presents the postretirement plan’s benefit obligation and funded status as of
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(In thousands)
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
274,098
|
|
|
$
|
279,222
|
|
Service cost
|
12,078
|
|
|
12,436
|
|
Interest cost
|
10,907
|
|
|
10,679
|
|
Plan participants’ contributions
|
4,720
|
|
|
4,936
|
|
Actuarial gain
|
(17,252
|
)
|
|
(21,750
|
)
|
Benefits paid
|
(18,565
|
)
|
|
(13,970
|
)
|
Plan amendments
|
—
|
|
|
2,545
|
|
Benefit obligation at end of year
|
265,986
|
|
|
274,098
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
184,790
|
|
|
158,977
|
|
Actual return on plan assets
|
10,997
|
|
|
21,160
|
|
Employer contributions
|
17,419
|
|
|
13,687
|
|
Plan participants’ contributions
|
4,720
|
|
|
4,936
|
|
Benefits paid
|
(18,565
|
)
|
|
(13,970
|
)
|
Fair value of plan assets at end of year
|
199,361
|
|
|
184,790
|
|
Reconciliation:
|
|
|
|
Funded status
|
(66,625
|
)
|
|
(89,308
|
)
|
Unrecognized transition obligation
|
—
|
|
|
—
|
|
Unrecognized prior service cost
|
—
|
|
|
—
|
|
Unrecognized net loss
|
—
|
|
|
—
|
|
Accrued postretirement cost
|
$
|
(66,625
|
)
|
|
$
|
(89,308
|
)
|
Net periodic postretirement cost for fiscal
2018
,
2017
and
2016
is recorded as operating expense and included the components presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic postretirement cost:
|
|
|
|
|
|
Service cost
|
$
|
12,078
|
|
|
$
|
12,436
|
|
|
$
|
10,823
|
|
Interest cost
|
10,907
|
|
|
10,679
|
|
|
12,424
|
|
Expected return on assets
|
(8,006
|
)
|
|
(7,185
|
)
|
|
(6,264
|
)
|
Amortization of transition obligation
|
—
|
|
|
—
|
|
|
82
|
|
Amortization of prior service cost (credit)
|
11
|
|
|
(1,644
|
)
|
|
(1,644
|
)
|
Recognized actuarial gain
|
(6,473
|
)
|
|
(2,827
|
)
|
|
(2,167
|
)
|
Net periodic postretirement cost
|
$
|
8,517
|
|
|
$
|
11,459
|
|
|
$
|
13,254
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumed health care cost trend rates have a significant effect on the amounts reported for the plan. A one-percentage point change in assumed health care cost trend rates would have the following effects on the latest actuarial calculations:
|
|
|
|
|
|
|
|
|
|
One-Percentage
Point Increase
|
|
One-Percentage
Point Decrease
|
|
(In thousands)
|
Effect on total service and interest cost components
|
$
|
4,228
|
|
|
$
|
(3,377
|
)
|
Effect on postretirement benefit obligation
|
$
|
38,633
|
|
|
$
|
(31,872
|
)
|
We are currently recovering other postretirement benefits costs through our regulated rates in substantially all of our service areas under accrual accounting as prescribed by accounting principles generally accepted in the United States. Other postretirement benefits costs have been specifically addressed in rate orders in each jurisdiction served by our Kentucky/Mid-States, West Texas, Mid-Tex and Mississippi Divisions as well as our Kansas jurisdiction and Atmos Pipeline – Texas or have been included in a rate case and not disallowed. Management believes that this accounting method is appropriate and will continue to seek rate recovery of accrual-based expenses in its ratemaking jurisdictions that have not yet approved the recovery of these expenses.
The following tables set forth by level, within the fair value hierarchy, the Retiree Medical Plan’s assets at fair value as of
September 30, 2018
and
2017
. The methods used to determine fair value for the assets held by the Retiree Medical Plan are fully described in Note
2
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of September 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Investments:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
—
|
|
|
$
|
5,003
|
|
|
$
|
—
|
|
|
$
|
5,003
|
|
Registered investment companies
|
194,358
|
|
|
—
|
|
|
—
|
|
|
194,358
|
|
Total investments at fair value
|
$
|
194,358
|
|
|
$
|
5,003
|
|
|
$
|
—
|
|
|
$
|
199,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of September 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Investments:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
—
|
|
|
$
|
4,534
|
|
|
$
|
—
|
|
|
$
|
4,534
|
|
Registered investment companies
|
180,256
|
|
|
—
|
|
|
—
|
|
|
180,256
|
|
Total investments at fair value
|
$
|
180,256
|
|
|
$
|
4,534
|
|
|
$
|
—
|
|
|
$
|
184,790
|
|
Estimated Future Benefit Payments
The following benefit payments paid by us, retirees and prescription drug subsidy payments for our postretirement benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the following fiscal years. Company payments for fiscal
2018
include contributions to our postretirement plan trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
Payments
|
|
Retiree
Payments
|
|
Subsidy
Payments
|
|
Total
Postretirement
Benefits
|
|
(In thousands)
|
2019
|
$
|
14,407
|
|
|
$
|
3,532
|
|
|
$
|
—
|
|
|
$
|
17,939
|
|
2020
|
13,363
|
|
|
3,742
|
|
|
—
|
|
|
17,105
|
|
2021
|
13,572
|
|
|
3,975
|
|
|
—
|
|
|
17,547
|
|
2022
|
14,503
|
|
|
4,412
|
|
|
—
|
|
|
18,915
|
|
2023
|
15,405
|
|
|
4,832
|
|
|
—
|
|
|
20,237
|
|
2024-2028
|
88,120
|
|
|
29,514
|
|
|
—
|
|
|
117,634
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Defined Contribution Plan
The Atmos Energy Corporation Retirement Savings Plan and Trust (the Retirement Savings Plan) covers substantially all employees and is subject to the provisions of Section 401(k) of the Internal Revenue Code. Effective January 1, 2007, employees automatically become participants of the Retirement Savings Plan on the date of employment. Participants may elect a salary reduction up to a maximum of
65
percent of eligible compensation, as defined by the Plan, not to exceed the maximum allowed by the Internal Revenue Service. New participants are automatically enrolled in the Plan at a contribution rate of
four
percent of eligible compensation, from which they may opt out. We match
100
percent of a participant’s contributions, limited to
four
percent of the participant’s salary. Participants are eligible to receive matching contributions after completing
one
year of service, in which they are immediately vested. Participants are also permitted to take out a loan against their accounts subject to certain restrictions. Employees hired on or after October 1, 2010 participate in the enhanced plan in which participants receive a fixed annual contribution of
four
percent of eligible earnings to their Retirement Savings Plan account. Participants will continue to be eligible for company matching contributions of up to
four
percent of their eligible earnings and will be fully vested in the fixed annual contribution after
three
years of service.
Matching and fixed annual contributions to the Retirement Savings Plan are expensed as incurred and amounted to
$16.2 million
,
$15.4 million
and
$15.8 million
for fiscal years
2018
,
2017
and
2016
. At
September 30, 2018
and
2017
, the Retirement Savings Plan held
3.2 percent
and
3.7 percent
of our outstanding common stock.
8. Stock and Other Compensation Plans
Stock-Based Compensation Plans
Total stock-based compensation cost was
$23.9 million
,
$23.1 million
and
$24.6 million
for the fiscal years ended
September 30, 2018
,
2017
and
2016
. Of this amount,
$11.1 million
,
$9.0 million
and
$9.8 million
was capitalized. Tax benefits related to stock-based compensation were
$2.3 million
,
$4.4 million
and
$5.0 million
for the fiscal years ended
September 30, 2018
,
2017
and
2016
.
1998 Long-Term Incentive Plan
We have a Long-Term Incentive Plan (LTIP), which provides a 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 available personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire common stock.
As of
September 30, 2018
, we were authorized to grant awards for up to a maximum cumulative amount of
11.2 million
shares of common stock under this plan subject to certain adjustment provisions. As of
September 30, 2018
, non-qualified stock options, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted stock units and stock units had been issued under this plan, and
1.8 million
shares are available for future issuance through September 30, 2021.
Restricted Stock Units Award Grants
As noted above, the LTIP provides for discretionary awards of restricted stock units to help attract, retain and reward employees of Atmos Energy and its subsidiaries. Certain of these awards vest based upon the passage of time and other awards vest based upon the passage of time and the achievement of specified performance targets. The fair value of the awards granted is based on the market price of our stock at the date of grant. We estimate forfeitures using our historical forfeiture rate. The associated expense is recognized ratably over the vesting period. We use authorized and unissued shares to meet share requirements for the vesting of restricted stock units.
Employees who are granted time-lapse restricted stock units under our LTIP have a nonforfeitable right to dividend equivalents that are paid at the same rate and at the same time at which they are paid on shares of stock without restrictions. Time-lapse restricted stock units contain only a service condition that the employee recipients render continuous services to the Company for a period of
three
years from the date of grant, except for accelerated vesting in the event of death, disability, change of control of the Company or termination without cause (with certain exceptions). There are no performance conditions required to be met for employees to be vested in time-lapse restricted stock units.
Employees who are granted performance-based restricted stock units under our LTIP have a forfeitable right to dividend equivalents that accrue at the same rate at which they are paid on shares of stock without restrictions. Dividend equivalents on the performance-based restricted stock units are paid either in cash or in the form of shares upon the vesting of the award.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance-based restricted stock units contain a service condition that the employee recipients render continuous services to the Company for a period of
three
years from the beginning of the applicable
three
-year performance period, except for accelerated vesting in the event of death, disability, change of control of the Company or termination without cause (with certain exceptions) and a performance condition based on a cumulative earnings per share target amount.
The following summarizes information regarding the restricted stock units granted under the plan during the fiscal years ended
September 30, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Number of
Restricted
Units
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Number of
Restricted
Units
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Number of
Restricted
Units
|
|
Weighted
Average
Grant-Date
Fair
Value
|
Nonvested at beginning of year
|
570,814
|
|
|
$
|
69.45
|
|
|
782,431
|
|
|
$
|
57.66
|
|
|
878,104
|
|
|
$
|
48.24
|
|
Granted
|
248,710
|
|
|
85.62
|
|
|
273,497
|
|
|
74.15
|
|
|
357,323
|
|
|
65.98
|
|
Vested
|
(274,392
|
)
|
|
64.43
|
|
|
(448,326
|
)
|
|
52.23
|
|
|
(448,136
|
)
|
|
45.88
|
|
Forfeited
|
(6,540
|
)
|
|
74.87
|
|
|
(36,788
|
)
|
|
63.48
|
|
|
(4,860
|
)
|
|
53.52
|
|
Nonvested at end of year
|
538,592
|
|
|
$
|
80.91
|
|
|
570,814
|
|
|
$
|
69.45
|
|
|
782,431
|
|
|
$
|
57.66
|
|
As of
September 30, 2018
, there was
$11.5 million
of total unrecognized compensation cost related to nonvested restricted stock units granted under the LTIP. That cost is expected to be recognized over a weighted average period of
1.6 years
. The fair value of restricted stock vested during the fiscal years ended
September 30, 2018
,
2017
and
2016
was
$17.2 million
,
$23.4 million
and
$20.6 million
.
Other Plans
Direct Stock Purchase Plan
We maintain a Direct Stock Purchase Plan, open to all investors, which allows participants to have all or part of their cash dividends paid quarterly in additional shares of our common stock. The minimum initial investment required to join the plan is
$1,250
. Direct Stock Purchase Plan participants may purchase additional shares of our common stock as often as weekly with voluntary cash payments of at least
$25
, up to an annual maximum of
$100,000
.
Equity Incentive and Deferred Compensation Plan for Non-Employee Directors
We have an Equity Incentive and Deferred Compensation Plan for Non–Employee Directors, which provides non-employee directors of Atmos Energy with the opportunity to defer receipt, until retirement, of compensation for services rendered to the Company and invest deferred compensation into either a cash account or a stock account.
Other Discretionary Compensation Plans
We have an annual incentive program covering substantially all employees to give each employee an opportunity to share in our financial success based on the achievement of key performance measures considered critical to achieving business objectives for a given year with minimum and maximum thresholds. The Company must meet the minimum threshold for the plan to be funded and distributed to employees. These performance measures may include earnings growth objectives, improved cash flow objectives or crucial customer satisfaction and safety results. We monitor progress towards the achievement of the performance measures throughout the year and record accruals based upon the expected payout using the best estimates available at the time the accrual is recorded. During the last several fiscal years, we have used earnings per share as our sole performance measure.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Details of Selected Consolidated Balance Sheet Captions
The following tables provide additional information regarding the composition of certain of our balance sheet captions.
Accounts receivable
Accounts receivable was comprised of the following at
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Billed accounts receivable
|
$
|
138,794
|
|
|
$
|
135,091
|
|
Unbilled revenue
|
81,005
|
|
|
73,143
|
|
Other accounts receivable
|
48,291
|
|
|
24,894
|
|
Total accounts receivable
|
268,090
|
|
|
233,128
|
|
Less: allowance for doubtful accounts
|
(14,795
|
)
|
|
(10,865
|
)
|
Net accounts receivable
|
$
|
253,295
|
|
|
$
|
222,263
|
|
Other current assets
Other current assets as of
September 30, 2018
and
2017
were comprised of the following accounts.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Deferred gas costs
|
$
|
1,927
|
|
|
$
|
65,714
|
|
Prepaid expenses
|
33,233
|
|
|
32,163
|
|
Materials and supplies
|
8,106
|
|
|
4,472
|
|
Assets from risk management activities
|
1,369
|
|
|
2,436
|
|
Other
|
1,420
|
|
|
1,536
|
|
Total
|
$
|
46,055
|
|
|
$
|
106,321
|
|
Property, plant and equipment
Property, plant and equipment was comprised of the following as of
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Storage plant
|
$
|
414,857
|
|
|
$
|
369,510
|
|
Transmission plant
|
2,851,423
|
|
|
2,521,671
|
|
Distribution plant
|
8,141,733
|
|
|
7,306,021
|
|
General plant
|
771,355
|
|
|
765,728
|
|
Intangible plant
|
38,280
|
|
|
38,980
|
|
|
12,217,648
|
|
|
11,001,910
|
|
Construction in progress
|
349,725
|
|
|
299,394
|
|
|
12,567,373
|
|
|
11,301,304
|
|
Less: accumulated depreciation and amortization
|
(2,196,226
|
)
|
|
(2,042,122
|
)
|
Net property, plant and equipment
(1)
|
$
|
10,371,147
|
|
|
$
|
9,259,182
|
|
|
|
(1)
|
Net property, plant and equipment includes plant acquisition adjustments of
$(55.5)
million and
$(64.1)
million at
September 30, 2018
and
2017
.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill
The following presents our goodwill balance allocated by segment and changes in the balance for the fiscal year ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Pipeline and Storage
|
|
Total
|
|
(In thousands)
|
Balance as of September 30, 2017
|
$
|
587,080
|
|
|
$
|
143,052
|
|
|
$
|
730,132
|
|
Deferred tax adjustments on prior acquisitions
(1)
|
262
|
|
|
25
|
|
|
287
|
|
Balance as of September 30, 2018
|
$
|
587,342
|
|
|
$
|
143,077
|
|
|
$
|
730,419
|
|
|
|
(1)
|
We annually adjust certain deferred taxes recorded in connection with acquisitions completed in fiscal 2001 and fiscal 2005, which resulted in an increase to goodwill and net deferred tax liabilities of
$0.3 million
for fiscal
2018
.
|
Deferred charges and other assets
Deferred charges and other assets as of
September 30, 2018
and
2017
were comprised of the following accounts.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Marketable securities
|
$
|
99,385
|
|
|
$
|
88,409
|
|
Regulatory assets
|
141,778
|
|
|
110,977
|
|
Assets from risk management activities
|
250
|
|
|
803
|
|
Pension asset
|
26,972
|
|
|
—
|
|
Tax receivable
|
10,099
|
|
|
—
|
|
Other
|
15,534
|
|
|
20,447
|
|
Total
|
$
|
294,018
|
|
|
$
|
220,636
|
|
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities as of
September 30, 2018
and
2017
were comprised of the following accounts.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Trade accounts payable
|
$
|
135,159
|
|
|
$
|
143,422
|
|
Accrued gas payable
|
48,721
|
|
|
50,253
|
|
Accrued liabilities
|
33,403
|
|
|
39,375
|
|
Total
|
$
|
217,283
|
|
|
$
|
233,050
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other current liabilities
Other current liabilities as of
September 30, 2018
and
2017
were comprised of the following accounts.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Customer credit balances and deposits
|
$
|
52,648
|
|
|
$
|
54,627
|
|
Accrued employee costs
|
52,101
|
|
|
46,653
|
|
Deferred gas costs
|
94,705
|
|
|
15,559
|
|
Accrued interest
|
39,486
|
|
|
39,624
|
|
Liabilities from risk management activities
|
56,734
|
|
|
322
|
|
Taxes payable
|
123,457
|
|
|
116,291
|
|
Pension and postretirement obligations
|
10,475
|
|
|
18,411
|
|
Regulatory cost of service reserve
|
22,508
|
|
|
—
|
|
Regulatory cost of removal obligation
|
55,770
|
|
|
35,910
|
|
APT annual adjustment mechanism
|
19,918
|
|
|
—
|
|
Regulatory excess deferred taxes (See Note 12)
|
5,225
|
|
|
—
|
|
Other
|
14,041
|
|
|
5,251
|
|
Total
|
$
|
547,068
|
|
|
$
|
332,648
|
|
Deferred credits and other liabilities
Deferred credits and other liabilities as of
September 30, 2018
and
2017
were comprised of the following accounts.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Customer advances for construction
|
$
|
11,010
|
|
|
$
|
9,309
|
|
Other regulatory liabilities
|
78,599
|
|
|
5,257
|
|
Asset retirement obligation
|
12,887
|
|
|
12,827
|
|
Liabilities from risk management activities
|
103
|
|
|
112,076
|
|
APT annual adjustment mechanism
|
15,310
|
|
|
—
|
|
Other
|
40,119
|
|
|
36,266
|
|
Total
|
$
|
158,028
|
|
|
$
|
175,735
|
|
10
. Leases
We have entered into operating leases for towers, office and warehouse space, vehicles and heavy equipment used in our operations. The remaining lease terms range from
one
to
13
years and generally provide for the payment of taxes, insurance and maintenance by the lessee. Renewal options exist for certain of these leases.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The related future minimum lease payments at
September 30, 2018
were as follows:
|
|
|
|
|
|
Operating
Leases
(1)
|
|
(In thousands)
|
2019
|
$
|
17,655
|
|
2020
|
16,483
|
|
2021
|
16,202
|
|
2022
|
16,004
|
|
2023
|
15,621
|
|
Thereafter
|
22,226
|
|
Total minimum lease payments
|
$
|
104,191
|
|
|
|
(1)
|
Future minimum lease payments do not include amounts for fleet leases and other de minimis items that can be renewed beyond the initial lease term. The Company anticipates renewing the leases beyond the initial term, but the anticipated payments associated with the renewals do not meet the definition of expected minimum lease payments and therefore are not included above. Expected payments are
$17.7 million
in 2019,
$14.7 million
in 2020,
$11.3 million
in 2021,
$8.0 million
in 2022,
$4.6 million
in 2023 and
$2.3 million
thereafter.
|
Consolidated lease and rental expense amounted to
$33.8 million
,
$32.7 million
and
$32.6 million
for fiscal
2018
,
2017
and
2016
.
11
. Commitments and Contingencies
Litigation
In the normal course of business, we are subject to various legal and regulatory proceedings. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts, our historical experience, and our estimates of the ultimate outcome or resolution of the liability in the future. While the outcome of these proceedings is uncertain and a loss in excess of the amount we have accrued is possible though not reasonably estimable, it is the opinion of management that any amounts exceeding the accruals will not have a material adverse impact on our financial position, results of operations or cash flows.
We maintain liability insurance for various risks associated with the operation of our natural gas pipelines and facilities, including for property damage and bodily injury. These liability insurance policies generally require us to be responsible for the first
$1.0 million
(self-insured retention) of each incident.
The National Transportation Safety Board (NTSB) is investigating an incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. Together with the Railroad Commission of Texas and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with the NTSB to help determine the cause of this incident.
On
March 29, 2018
, a civil action was filed in Dallas, Texas against Atmos Energy in response to the February 23rd incident. The plaintiffs seek over
$1.0 million
in damages for, among with others, wrongful death and personal injury.
We are a party to various other litigation or claims that have arisen in the ordinary course of our business. While the results of such litigation or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
Environmental Matters
We are a party to environmental matters and claims that have arisen in the ordinary course of our business. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such response actions will not have a material adverse effect on our financial condition, results of operations or cash flows because we believe that the expenditures related to such response actions will either be recovered through rates, shared with other parties or are adequately covered by insurance.
Purchase Commitments
Our distribution and pipeline and storage segments 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.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our Mid-Tex Division 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 trading hubs. At
September 30, 2018
, we were committed to purchase
54.1
Bcf within
one
year and
37.2
Bcf within
two
to
three
years under indexed contracts. Purchases under these contracts totaled
$57.2 million
,
$49.7 million
and
$85.3 million
for
2018
,
2017
and
2016
.
Regulatory Matters
The SEC and the Commodities Futures Trading Commission, pursuant to the Dodd–Frank Act, established numerous regulations relating to U.S. financial markets. We enacted procedures and modified existing business practices and contractual arrangements to comply with such regulations. There are, however, some rulemaking proceedings that have not yet been finalized, including those relating to capital and margin rules for (non–cleared) swaps. We do not expect these rules to directly impact our business practices or collateral requirements. However, depending on the substance of these final rules, in addition to certain international regulatory requirements still under development that are similar to Dodd–Frank, our swap counterparties could be subject to additional and potentially significant capitalization requirements. These regulations could motivate counterparties to increase our collateral requirements or cash postings.
As of
September 30, 2018
, formula rate mechanisms were pending regulatory approval in our Mississippi and Tennessee service areas, infrastructure mechanisms were pending regulatory approval in our Mississippi service area and rate cases were pending regulatory approval in our Kentucky, Mid-Tex, Virginia and West Texas service areas. These regulatory proceedings are discussed in further detail above in the
Business — Ratemaking Activity
section. Additionally, as discussed in further detail in Note 12, all jurisdictions are addressing impacts of the TCJA.
12. Income Taxes
Impact of the Tax Cuts and Jobs Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was signed into law. The TCJA introduced several significant changes to corporate income tax laws in the United States. The most significant change that affects Atmos Energy is the reduction of the federal statutory income tax rate from 35% to 21%. As a rate-regulated entity, the accelerated capital expensing and the limitation on interest deductibility provisions included in the TCJA are not applicable to us.
Under generally accepted accounting principles, we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
At September 30, 2017, we measured our net deferred tax liability using the enacted federal statutory tax rate of 35%. The enactment of the TCJA on December 22, 2017 required us to remeasure our deferred tax assets and liabilities, including our U.S. federal income tax net operating loss carryforwards, at the newly enacted federal statutory income tax rate of 21%. As the Company’s fiscal year end is September 30, 2018, the Internal Revenue Code requires the Company to use a blended statutory federal corporate income tax rate of
24.5%
for fiscal 2018.
The decrease in the federal statutory income tax rate reduced our net deferred tax liability by
$905.3 million
. Of this amount,
$746.5 million
relates to regulated operations and has been recorded as a regulatory liability, a portion of which is currently being returned to utility customers in accordance with issued regulatory orders and the Internal Revenue Code. The remaining
$158.8 million
has been reflected as a one-time income tax benefit in our consolidated statement of income for the year ended
September 30, 2018
, because these taxes are not related to our cost of service ratemaking.
The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118), which allows us to record provisional amounts during a one-year measurement period, similar to the measurement period in accounting for business combinations. The Company has determined a reasonable estimate for the measurement and accounting for certain effects of the TCJA, including the remeasurement of our net deferred tax liabilities and the establishment of a regulatory liability, which have been reflected as provisional amounts in the
September 30, 2018
consolidated financial statements. The amounts represent our best estimates based upon records, information and current guidance. We are still analyzing certain aspects of the TCJA, refining our calculations and expecting additional guidance relating to the TCJA from the U.S. Department of the Treasury and the Internal Revenue Service. Any additional guidance issued or future actions of our regulators could potentially affect the final determination of the accounting effects arising from the implementation of the TCJA.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have and continue to work with our regulators in each jurisdiction to determine the amortization of the excess deferred taxes regulatory liability of
$746.5 million
of which the balance is
$744.9 million
as of
September 30, 2018
. In addition, we have recorded a cost of service regulatory liability of
$22.5 million
as of
September 30, 2018
. Accounting orders were issued for all our service areas that required us to establish, effective January 1, 2018, a separate regulatory liability for the difference in taxes included in our rates that have been calculated based on a 35% statutory income tax rate and the new 21% statutory income tax rate. The establishment of this regulatory liability relating to our cost of service rates resulted in a reduction to our revenues beginning in the second quarter of fiscal 2018.
We have received approval from regulators to update our cost of service rates to reflect the decrease in the statutory income tax rate in our Colorado, Kansas, Kentucky, Louisiana and Texas service areas. We are still working with regulators in Mississippi, Tennessee and Virginia to reflect the effects of the lower statutory income tax rate in our cost of service in rates. As of
September 30, 2018
, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for differences in our cost of service rates due to change in the federal statutory income tax rate in Colorado and Kansas.
As of
September 30, 2018
, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for the excess deferred taxes created upon implementation of the TCJA in Colorado, Kentucky and Louisiana in accordance with regulatory proceedings on a provisional basis over periods ranging from
18
to
40
years. In our remaining jurisdictions, the treatment of the effects of the TCJA in rates is being addressed in ongoing or will be addressed in future regulatory proceedings.
Income Tax Expense
The components of income tax expense from continuing operations for
2018
,
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Current
|
|
|
|
|
|
Federal
|
$
|
(10,099
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
11,075
|
|
|
9,022
|
|
|
5,667
|
|
Deferred
|
|
|
|
|
|
Federal
|
150,556
|
|
|
197,013
|
|
|
178,630
|
|
State
|
15,330
|
|
|
15,348
|
|
|
12,350
|
|
TCJA Impact
|
(158,782
|
)
|
|
—
|
|
|
—
|
|
Investment tax credits
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
$
|
8,080
|
|
|
$
|
221,383
|
|
|
$
|
196,642
|
|
Reconciliations of the provision for income taxes computed at the statutory rate to the reported provisions for income taxes from continuing operations for
2018
,
2017
and
2016
are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Tax at statutory rate
(1)
|
$
|
149,730
|
|
|
$
|
211,433
|
|
|
$
|
189,764
|
|
Common stock dividends deductible for tax reporting
|
(1,745
|
)
|
|
(2,584
|
)
|
|
(2,570
|
)
|
State taxes (net of federal benefit)
|
19,826
|
|
|
16,100
|
|
|
11,133
|
|
Change in valuation allowance
|
—
|
|
|
—
|
|
|
1,324
|
|
Amortization of excess deferred taxes
|
(1,219
|
)
|
|
—
|
|
|
—
|
|
Remeasurement due to TCJA
|
(158,782
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
270
|
|
|
(3,566
|
)
|
|
(3,009
|
)
|
Income tax expense
|
$
|
8,080
|
|
|
$
|
221,383
|
|
|
$
|
196,642
|
|
|
|
(1)
|
Tax expense is calculated at the statutory federal income tax rate of
24.5%
for the year ended September 30, 2018 and
35%
for the years ended September 30, 2017 and 2016.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that gave rise to significant components of the deferred tax liabilities and deferred tax assets at
September 30, 2018
and
2017
are presented below:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
Employee benefit plans
|
$
|
72,745
|
|
|
$
|
121,288
|
|
Interest rate agreements
|
27,135
|
|
|
65,171
|
|
Net operating loss carryforwards
|
461,481
|
|
|
555,043
|
|
Charitable and other credit carryforwards
|
6,818
|
|
|
18,873
|
|
Regulatory excess deferred tax
|
169,947
|
|
|
—
|
|
Other
|
13,804
|
|
|
10,218
|
|
Total deferred tax assets
|
751,930
|
|
|
770,593
|
|
Valuation allowance
|
(1,465
|
)
|
|
(5,403
|
)
|
Net deferred tax assets
|
750,465
|
|
|
765,190
|
|
Deferred tax liabilities:
|
|
|
|
Difference in net book value and net tax value of assets
|
(1,859,787
|
)
|
|
(2,528,485
|
)
|
Pension funding
|
(6,986
|
)
|
|
(13,101
|
)
|
Gas cost adjustments
|
1,005
|
|
|
(60,376
|
)
|
Other
|
(38,764
|
)
|
|
(41,927
|
)
|
Total deferred tax liabilities
|
(1,904,532
|
)
|
|
(2,643,889
|
)
|
Net deferred tax liabilities
|
$
|
(1,154,067
|
)
|
|
$
|
(1,878,699
|
)
|
Deferred credits for rate regulated entities
|
$
|
762
|
|
|
$
|
985
|
|
At
September 30, 2018
, we had
$430.0 million
of federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset taxable income and will begin to expire in
2029
. The Company also has
$10.1 million
of federal alternative minimum tax credit carryforwards, which do not expire and are expected to be fully refunded to us between 2019 and 2022 as a result of changes introduced by the TCJA. These credit carryforwards are now reflected as taxes receivable within the deferred charges and other assets line item on our consolidated balance sheet. In addition, the Company has
$5.3 million
in remeasured charitable contribution carryforwards to offset future taxable income. The Company’s charitable contribution carryforwards expiration period begins in
2019
.
The Company also has
$31.4 million
of state net operating loss carryforwards (net of
$8.4 million
of remeasured federal effects) and
$1.5 million
of state tax credits carryforwards (net of
$0.4 million
of remeasured federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards expiration period begins in
2019
.
Due to the changes introduced by the TCJA, we now believe it is more likely than not that the benefit from certain charitable contribution carryforwards for which a valuation allowance was previously established will be realized. As a result, we reduced our valuation allowance by
$4.2 million
during the first quarter of fiscal 2018. This amount is included in the
$158.8 million
one-time income tax benefit.
We believe it is more likely than not that the benefit from certain state net operating loss carryforwards and state credit carryforwards will not be realized. Due to the uncertainty of realizing a benefit from the deferred tax asset recorded for the carryforwards, a re-measured valuation allowance of
$1.5 million
continues to be established for the year ended
September 30, 2018
.
No
additional valuation allowance was recorded for the year ended
September 30, 2018
.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At
September 30, 2018
, we had recorded liabilities associated with unrecognized tax benefits totaling
$26.2 million
. The following table reconciles the beginning and ending balance of our unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(In thousands)
|
Unrecognized tax benefits - beginning balance
|
$
|
23,719
|
|
|
$
|
20,298
|
|
|
$
|
17,069
|
|
Increase (decrease) resulting from prior period tax positions
|
22
|
|
|
(366
|
)
|
|
(290
|
)
|
Increase resulting from current period tax positions
|
2,462
|
|
|
3,787
|
|
|
3,519
|
|
Unrecognized tax benefits - ending balance
|
26,203
|
|
|
23,719
|
|
|
20,298
|
|
Less: deferred federal and state income tax benefits
|
(5,503
|
)
|
|
(8,302
|
)
|
|
(7,104
|
)
|
Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year
|
$
|
20,700
|
|
|
$
|
15,417
|
|
|
$
|
13,194
|
|
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties included within interest charges in our consolidated statement of income. During the years ended
September 30, 2018
,
2017
and
2016
, the Company recognized approximately
$1.6 million
,
$1.1 million
and
$2.5 million
in interest and penalties. The Company had approximately
$6.1 million
,
$4.5 million
and
$3.3 million
for the payment of interest and penalties accrued at
September 30, 2018
,
2017
and
2016
.
We file income tax returns in the U.S. federal jurisdiction as well as in various states where we have operations. We have concluded substantially all U.S. federal income tax matters through fiscal year 2009 and concluded substantially all Texas income tax matters through fiscal year 2010.
13
. Financial Instruments
We use financial instruments to mitigate commodity price risk and interest rate risk. Our financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when our financial instruments are in net liability positions.
As discussed in Note
2
and Note 15, we report our financial instruments as risk management assets and liabilities, each of which is classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. The following table shows the fair values of our risk management assets and liabilities at
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Assets from risk management activities, current
|
$
|
1,369
|
|
|
$
|
2,436
|
|
Assets from risk management activities, noncurrent
|
250
|
|
|
803
|
|
Liabilities from risk management activities, current
|
(56,734
|
)
|
|
(322
|
)
|
Liabilities from risk management activities, noncurrent
|
(103
|
)
|
|
(112,076
|
)
|
Net assets (liabilities)
|
$
|
(55,218
|
)
|
|
$
|
(109,159
|
)
|
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.
Our
distribution
gas supply department is responsible for executing this segment’s commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between
25
and
50 percent
of anticipated heating season gas purchases using financial instruments. For the
2017
-
2018
heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately
26 percent
, or approximately
15.0
Bcf of the winter flowing gas requirements at a weighted average cost of approximately
$3.20
per Mcf. We have not designated these financial instruments as hedges for accounting purposes.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Rate Risk Management Activities
We currently manage interest rate risk through the use of forward starting interest rate swaps to fix the Treasury yield component of the interest cost associated with anticipated financings.
In October 2012, we entered into forward starting interest rate swaps to fix the Treasury yield component associated with
$210 million
of the then anticipated issuance of
$250 million
unsecured senior notes in fiscal 2017. These notes were issued as planned in June 2017 and we settled swaps with the payment of
$37.0 million
. Because the swaps were effective, the realized loss was recorded as a component of accumulated other comprehensive income (loss) and is being recognized as a component of interest expense over the
27
-year life of the senior notes.
Additionally, in fiscal 2014 and 2015, we entered into forward starting interest rate swaps to effectively fix the Treasury yield component associated with
$450 million
of the anticipated issuance of
$450 million
unsecured senior notes in fiscal 2019. We designated all of these swaps as cash flow hedges at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the forward starting interest rate swaps will be recorded as a component of accumulated other comprehensive income (loss). When the forward starting interest rate swaps settle, the realized gain or loss will be recorded as a component of accumulated other comprehensive income (loss) and recognized as a component of interest expense over the life of the related financing arrangement. Hedge ineffectiveness to the extent incurred, will be reported as a component of interest expense.
Prior to fiscal 2012, we entered into several interest rate agreements to fix the Treasury yield component of the interest cost of financing for various issuances of long-term debt and senior notes. The gains and losses realized upon settlement of these interest rate agreements were recorded as a component of accumulated other comprehensive income (loss) when they were settled and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for the settled interest rate agreements extend through fiscal 2045.
Quantitative Disclosures Related to Financial Instruments
The following tables present detailed information concerning the impact of financial instruments on our consolidated balance sheet and income statements.
As of
September 30, 2018
, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of
September 30, 2018
, we had
22,874
MMcf of net long commodity contracts outstanding. These contracts have not been designated as hedges.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments on the Balance Sheet
The following tables present the fair value and balance sheet classification of our financial instruments as of
September 30, 2018
and
2017
. The gross amounts of recognized assets and liabilities are netted within our Consolidated Balance Sheets to the extent that we have netting arrangements with the counterparties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
|
|
(In thousands)
|
September 30, 2018
|
|
|
|
|
|
Designated As Hedges:
|
|
|
|
|
|
Interest rate swap agreements
|
Other current assets /
Other current liabilities
|
|
$
|
—
|
|
|
$
|
(56,499
|
)
|
Total
|
|
|
—
|
|
|
(56,499
|
)
|
Not Designated As Hedges:
|
|
|
|
|
|
Commodity contracts
|
Other current assets /
Other current liabilities
|
|
1,369
|
|
|
(235
|
)
|
Commodity contracts
|
Deferred charges and other assets /
Deferred credits and other liabilities
|
|
250
|
|
|
(103
|
)
|
Total
|
|
|
1,619
|
|
|
(338
|
)
|
Gross Financial Instruments
|
|
|
1,619
|
|
|
(56,837
|
)
|
Gross Amounts Offset on Consolidated Balance Sheet:
|
|
|
|
|
|
Contract netting
|
|
|
—
|
|
|
—
|
|
Net Financial Instruments
|
|
|
1,619
|
|
|
(56,837
|
)
|
Cash collateral
|
|
|
—
|
|
|
—
|
|
Net Assets/Liabilities from Risk Management Activities
|
|
|
$
|
1,619
|
|
|
$
|
(56,837
|
)
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
|
|
(In thousands)
|
September 30, 2017
|
|
|
|
|
|
Designated As Hedges:
|
|
|
|
|
|
Interest rate swap agreements
|
Deferred charges and other assets /
Deferred credits and other liabilities
|
|
$
|
—
|
|
|
$
|
(112,076
|
)
|
Total
|
|
|
—
|
|
|
(112,076
|
)
|
Not Designated As Hedges:
|
|
|
|
|
|
Commodity contracts
|
Other current assets /
Other current liabilities
|
|
2,436
|
|
|
(322
|
)
|
Commodity contracts
|
Deferred charges and other assets /
Deferred credits and other liabilities
|
|
803
|
|
|
—
|
|
Total
|
|
|
3,239
|
|
|
(322
|
)
|
Gross Financial Instruments
|
|
|
3,239
|
|
|
(112,398
|
)
|
Gross Amounts Offset on Consolidated Balance Sheet:
|
|
|
|
|
|
Contract netting
|
|
|
—
|
|
|
—
|
|
Net Financial Instruments
|
|
|
3,239
|
|
|
(112,398
|
)
|
Cash collateral
|
|
|
—
|
|
|
—
|
|
Net Assets/Liabilities from Risk Management Activities
|
|
|
$
|
3,239
|
|
|
$
|
(112,398
|
)
|
Impact of Financial Instruments on the Income Statement
Cash Flow Hedges
As discussed above, our distribution segment has interest rate swap agreements, which we designated as a cash flow hedge at the time the swaps were executed. The net loss on settled interest rate agreements reclassified from AOCI into interest charges on our consolidated income statements for the years ended
September 30, 2018
,
2017
and
2016
was
$(2.4) million
,
$(1.0) million
and
$(0.5) million
.
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the years ended
September 30, 2018
and
2017
. The amounts included in the table below exclude gains and losses arising from ineffectiveness because these amounts are immediately recognized in the income statement as incurred.
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 30
|
|
2018
|
|
2017
|
|
(In thousands)
|
Increase in fair value:
|
|
|
|
Interest rate agreements
|
$
|
43,184
|
|
|
$
|
74,560
|
|
Forward commodity contracts
(1)
|
—
|
|
|
9,847
|
|
Recognition of (gains) losses in earnings due to settlements:
|
|
|
|
Interest rate agreements
|
1,752
|
|
|
662
|
|
Forward commodity contracts
(1)
|
—
|
|
|
(4,865
|
)
|
Total other comprehensive income from hedging, net of tax
(2)
|
$
|
44,936
|
|
|
$
|
80,204
|
|
|
|
(1)
|
Due to the sale of AEM, these amounts are included in income from discontinued operations
|
|
|
(2)
|
Utilizing an income tax rate of approximately
23 percent
for fiscal 2018 and an income tax rate ranging from approximately
37 percent
to
39 percent
for fiscal 2017 based on the effective rates in each taxing jurisdiction.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of
September 30, 2018
. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those financial instruments have not yet settled.
|
|
|
|
|
|
Interest Rate
Agreements
|
|
(In thousands)
|
2019
|
$
|
(1,863
|
)
|
2020
|
(1,893
|
)
|
2021
|
(1,893
|
)
|
2022
|
(1,893
|
)
|
2023
|
(1,893
|
)
|
Thereafter
|
(38,729
|
)
|
Total
(1)
|
$
|
(48,164
|
)
|
|
|
(1)
|
Utilizing an income tax rate of approximately
23 percent
.
|
Financial Instruments Not Designated as Hedges
As discussed above, financial instruments used in our distribution segment are not designated as hedges. However, there is no earnings impact on our distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
14
. Fair Value Measurements
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note
2
.
Fair value measurements also apply to the valuation of our pension and post-retirement plan assets. The fair value of these assets is presented in Note
7
.
Quantitative Disclosures
Financial Instruments
The classification of our fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of
September 30, 2018
and
2017
. As required under authoritative accounting literature, assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
(1)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Netting and
Cash
Collateral
|
|
September 30, 2018
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
Financial instruments
|
$
|
—
|
|
|
$
|
1,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,619
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
42,644
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,644
|
|
Bond mutual funds
|
21,507
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,507
|
|
Bonds
|
—
|
|
|
31,400
|
|
|
—
|
|
|
—
|
|
|
31,400
|
|
Money market funds
|
—
|
|
|
3,834
|
|
|
—
|
|
|
—
|
|
|
3,834
|
|
Total available-for-sale securities
|
64,151
|
|
|
35,234
|
|
|
—
|
|
|
—
|
|
|
99,385
|
|
Total assets
|
$
|
64,151
|
|
|
$
|
36,853
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,004
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Financial instruments
|
$
|
—
|
|
|
$
|
56,837
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
(1)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Netting and
Cash
Collateral
|
|
September 30, 2017
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
Financial instruments
|
$
|
—
|
|
|
$
|
3,239
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,239
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
41,097
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,097
|
|
Bond mutual funds
|
16,371
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,371
|
|
Bonds
|
—
|
|
|
29,104
|
|
|
—
|
|
|
—
|
|
|
29,104
|
|
Money market funds
|
—
|
|
|
1,837
|
|
|
—
|
|
|
—
|
|
|
1,837
|
|
Total available-for-sale securities
|
57,468
|
|
|
30,941
|
|
|
—
|
|
|
—
|
|
|
88,409
|
|
Total assets
|
$
|
57,468
|
|
|
$
|
34,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,648
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Financial instruments
|
$
|
—
|
|
|
$
|
112,398
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112,398
|
|
|
|
(1)
|
Our Level 2 measurements consist of over-the-counter options and swaps, which are valued using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds, which are valued based on the most recent available quoted market prices and money market funds which are valued at cost.
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-for-sale securities, which include debt and equity securities, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
(In thousands)
|
As of September 30, 2018
|
|
|
|
|
|
|
|
Domestic equity mutual funds
|
$
|
26,950
|
|
|
$
|
9,363
|
|
|
$
|
(353
|
)
|
|
$
|
35,960
|
|
Foreign equity mutual funds
|
4,656
|
|
|
2,028
|
|
|
—
|
|
|
6,684
|
|
Bond mutual funds
|
21,810
|
|
|
—
|
|
|
(303
|
)
|
|
21,507
|
|
Bonds
|
31,511
|
|
|
13
|
|
|
(124
|
)
|
|
31,400
|
|
Money market funds
|
3,834
|
|
|
—
|
|
|
—
|
|
|
3,834
|
|
|
$
|
88,761
|
|
|
$
|
11,404
|
|
|
$
|
(780
|
)
|
|
$
|
99,385
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
Domestic equity mutual funds
|
$
|
25,361
|
|
|
$
|
8,920
|
|
|
$
|
—
|
|
|
$
|
34,281
|
|
Foreign equity mutual funds
|
4,581
|
|
|
2,235
|
|
|
—
|
|
|
6,816
|
|
Bond mutual funds
|
16,391
|
|
|
2
|
|
|
(22
|
)
|
|
16,371
|
|
Bonds
|
29,074
|
|
|
46
|
|
|
(16
|
)
|
|
29,104
|
|
Money market funds
|
1,837
|
|
|
—
|
|
|
—
|
|
|
1,837
|
|
|
$
|
77,244
|
|
|
$
|
11,203
|
|
|
$
|
(38
|
)
|
|
$
|
88,409
|
|
At
September 30, 2018
and
2017
, our available-for-sale securities included
$46.5 million
and
$42.9 million
related to assets held in separate rabbi trusts for our supplemental executive retirement plans as discussed in Note
7
. At
September 30, 2018
we maintained investments in bonds that have contractual maturity dates ranging from October 2018 through September 2021.
Other Fair Value Measures
In addition to the financial instruments above, we have several financial and nonfinancial assets and liabilities subject to fair value measures. These financial assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable and debt. The nonfinancial assets and liabilities include asset retirement obligations and pension and post-retirement plan assets. We record cash and cash equivalents, accounts receivable, accounts payable and debt at carrying value. For cash and cash equivalents, accounts receivable and accounts payable, we consider carrying value to materially approximate fair value due to the short-term nature of these assets and liabilities.
Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations, which are considered Level 1 fair value measurements for debt instruments with a recent, observable trade or Level 2 fair value measurements for debt instruments where fair value is determined using the most recent available quoted market price. The following table presents the carrying value and fair value of our debt as of
September 30, 2018
:
|
|
|
|
|
|
September 30, 2018
|
|
(In thousands)
|
Carrying Amount
|
$
|
3,085,000
|
|
Fair Value
|
$
|
3,161,679
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Discontinued Operations
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 working capital of
$109.0 million
for total cash consideration of
$147.3 million
. Of this amount,
$7.0 million
was placed into escrow, to be paid to the Company within 24 months, net of any indemnification claims agreed upon between the two companies. In January 2018,
$3.0 million
of this escrowed amount was released and received by the Company. We recognized a net gain of
$0.03
per diluted share on the sale in the second quarter of fiscal 2017 and completed the working capital true–up during the third quarter of fiscal 2017.
The operating results of our
natural gas marketing
reportable segment have been reported on the consolidated statements of income as income from discontinued operations, net of income tax for the years ended September 30, 2017 and 2016. 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 resulted in the company becoming a fully regulated entity; 2) the fact that an entire reportable segment was 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 information related to discontinued operations. Operating expenses include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income. At September 30, 2018 and 2017 we did not have any assets or liabilities held for sale.
The following table presents statement of income data related to discontinued operations.
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
2017
|
|
2016
|
|
(In thousands)
|
Operating revenues
|
$
|
303,474
|
|
|
$
|
1,005,090
|
|
Purchased gas cost
|
277,554
|
|
|
968,118
|
|
Operating expenses
|
7,874
|
|
|
26,184
|
|
Operating income
|
18,046
|
|
|
10,788
|
|
Other nonoperating expense
|
(211
|
)
|
|
(2,495
|
)
|
Income from discontinued operations before income taxes
|
17,835
|
|
|
8,293
|
|
Income tax expense
|
6,841
|
|
|
3,731
|
|
Income from discontinued operations
|
10,994
|
|
|
4,562
|
|
Gain on sale from discontinued operations, net of tax ($10,215 and $0)
|
2,716
|
|
|
—
|
|
Net income from discontinued operations
|
$
|
13,710
|
|
|
$
|
4,562
|
|
The following table presents statement of cash flow data related to discontinued operations.
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
2017
|
|
2016
|
|
(In thousands)
|
Depreciation and amortization
|
$
|
185
|
|
|
$
|
2,304
|
|
Capital expenditures
|
$
|
—
|
|
|
$
|
321
|
|
Non-cash loss in commodity contract cash flow hedges
|
$
|
(8,165
|
)
|
|
$
|
(33,533
|
)
|
Significant Accounting Policies Related to Discontinued Operations
Except as noted below, AEM adhered to the same Significant Accounting Policies as described in Note 2.
Revenue recognition
— Operating revenues for our natural gas marketing segment were recognized in the period in which actual volumes were transported and storage services were provided. Operating revenues for our natural gas marketing segment and the associated carrying value of natural gas inventory (inclusive of storage costs) were recognized when we sold
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the gas and physically delivered it to our customers. Operating revenues include realized gains and losses arising from the settlement of financial instruments used in our natural gas marketing activities.
Gas stored underground
— Gas stored underground was comprised of natural gas injected into storage to conduct the operations of the natural gas marketing segment. Our natural gas marketing segment utilized the average cost method; however, most of this inventory was hedged and was therefore reported at fair value at the end of each month.
Property, plant and equipment
— Natural gas marketing property, plant and equipment was stated at cost. Depreciation was generally computed on the straight-line method for financial reporting purposes based upon estimated useful lives ranging from
3
to
30
years.
Financial instruments and hedging activities
— In our
natural gas marketing
segment, we previously designated most of the natural gas inventory held by this operating segment as the hedged item in a fair-value hedge. This inventory was marked to market at the end of each month based on the Gas Daily index, with changes in fair value recognized as unrealized gains or losses in purchased gas cost, which is reflected in income from discontinued operations in the period of change. The financial instruments associated with this natural gas inventory were designated as fair-value hedges and were marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains or losses in purchased gas cost in the period of change. We elected to exclude this spot/forward differential for purposes of assessing the effectiveness of these fair-value hedges.
Additionally, we previously elected to treat fixed-price forward contracts used in our
natural gas marketing
segment to deliver natural gas as normal purchases and normal sales. As such, these deliveries were recorded on an accrual basis in accordance with our revenue recognition policy. Financial instruments used to mitigate the commodity price risk associated with these contracts were designated as cash flow hedges of anticipated purchases and sales at indexed prices. Accordingly, unrealized gains and losses on these open financial instruments were recorded as a component of accumulated other comprehensive income, and were recognized in earnings as a component of purchased gas cost which is reflected in income from discontinued operations when the hedged volumes were sold.
Gains and losses from hedge ineffectiveness were recognized in the income statement. Fair value and cash flow hedge ineffectiveness arising from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the financial instruments is referred to as basis ineffectiveness. Ineffectiveness arising from changes in the fair value of the fair value hedges 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 is referred to as timing ineffectiveness. Hedge ineffectiveness, to the extent incurred, is reported as a component of purchased gas cost reflected in income from discontinued operations for the years ended
September 30, 2017
and
2016
.
Our
natural gas marketing
segment also utilized master netting agreements with significant counterparties that allow us to offset gains and losses arising from financial instruments that would be settled in cash with gains and losses arising from financial instruments that could be settled with the physical commodity. Assets and liabilities from risk management activities, as well as accounts receivable and payable, reflect the master netting agreements in place. Additionally, the accounting guidance for master netting arrangements requires us to include the fair value of cash collateral or the obligation to return cash in the amounts that have been netted under master netting agreements used to offset gains and losses arising from financial instruments.
Fair Value Measurements
— Our discontinued operations used the same fair value measurement policies as described in Note 2 for our continuing operations. Level 1 measurements included primarily exchange-traded financial instruments and gas stored underground that was been designated as the hedged item in a fair value hedge. Within our
natural gas marketing
operations, we utilized a mid-market pricing convention (the mid-point between the bid and ask prices), as permitted under current accounting standards. Values derived from these sources reflected the market in which transactions involving these financial instruments are executed. Level 2 measurements primarily consisted of non-exchange-traded financial instruments, such as over-the-counter options and swaps.
Short-term Debt Related to Discontinued Operations
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, both facilities were terminated on January 3, 2017.
Commodity Risk Management Activities
Our discontinued
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
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Effective January 1, 2017, as a result of the sale of AEM, these activities were discontinued.
Due to the 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 cost and recognized a pre-tax gain of
$10.6 million
, which is included in income from discontinued operations on the consolidated statement of income for the year ended September 30, 2017.
The Company's other risk management activities are discussed in Note 13.
Impact of Financial Instruments on the Income Statement
Hedge ineffectiveness for our
natural gas marketing
segment was recorded as a component of purchased gas cost, which is included in discontinued operations on the consolidated statements of income, and primarily results from differences in the location and timing of the derivative instrument and the hedged item. For the years ended
September 30, 2017
and
2016
, we recognized a gain arising from fair value and cash flow hedge ineffectiveness of
$3.4 million
and
$21.6 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 the results of discontinued operations on our consolidated income statement for the years ended
September 30, 2017
and
2016
is presented below.
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
2017
|
|
2016
|
|
(In thousands)
|
Commodity contracts
|
$
|
(9,567
|
)
|
|
$
|
3,516
|
|
Fair value adjustment for natural gas inventory designated as the hedged item
|
12,858
|
|
|
18,079
|
|
Total decrease in purchased gas cost reflected in income from discontinued operations
|
$
|
3,291
|
|
|
$
|
21,595
|
|
The decrease in purchased gas cost reflected in income from discontinued operations is comprised of the following:
|
|
|
|
Basis ineffectiveness
|
$
|
(597
|
)
|
|
$
|
(1,390
|
)
|
Timing ineffectiveness
|
3,888
|
|
|
22,985
|
|
|
$
|
3,291
|
|
|
$
|
21,595
|
|
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.
Cash Flow Hedges
The impact of our natural gas marketing segment cash flow hedges on our consolidated income statements for the years ended
September 30, 2017
and
2016
is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transactions. Therefore, this presentation is not indicative of the economic margin we realized when the underlying physical and financial transactions were settled.
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Year Ended September 30
|
|
2017
|
|
2016
|
|
(In thousands)
|
Loss reclassified from AOCI for effective portion of natural gas marketing commodity contracts
|
$
|
(2,612
|
)
|
|
$
|
(52,651
|
)
|
Gain (loss) arising from ineffective portion of natural gas marketing commodity contracts
|
111
|
|
|
(19
|
)
|
Gain on discontinuance of cash flow hedging of natural gas marketing commodity contracts reclassified from AOCI
|
10,579
|
|
|
—
|
|
Total impact on purchased gas cost reflected in income from discontinued operations
|
$
|
8,078
|
|
|
$
|
(52,670
|
)
|
Financial Instruments Not Designated as Hedges
The impact of financial instruments that have not been designated as hedges on our consolidated income statements for the years ended
September 30, 2017
and
2016
was an increase (decrease) in purchased gas cost reflected in income from discontinued operations of
$(6.8) million
and
$15.5 million
, which is included in discontinued operations on the consolidated statements of income. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic margin we realized when the underlying physical and financial transactions were settled.
16
. Concentration of Credit Risk
Credit risk is the risk of financial loss to us if a customer fails to perform its contractual obligations. We engage in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers. These transactions principally occur in the southern and midwestern regions of the United States. We believe that this geographic concentration does not contribute significantly to our overall exposure to credit risk. Credit risk associated with trade accounts receivable for the distribution segment is mitigated by the large number of individual customers and the diversity in our customer base. The credit risk for our other segment is not significant.
17. Selected Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data is presented below. The sum of net income per share by quarter may not equal the net income per share for the fiscal year due to variations in the weighted average shares outstanding used in computing such amounts. Our businesses are seasonal due to weather conditions in our service areas. For further information on its effects on quarterly results, see the “Results of Operations” discussion included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
(In thousands, except per share data)
|
Fiscal year 2018:
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
Distribution
|
$
|
860,792
|
|
|
$
|
1,199,291
|
|
|
$
|
535,488
|
|
|
$
|
407,476
|
|
Pipeline and storage
|
126,463
|
|
|
120,955
|
|
|
127,633
|
|
|
132,662
|
|
Intersegment eliminations
|
(98,063
|
)
|
|
(100,837
|
)
|
|
(100,876
|
)
|
|
(95,438
|
)
|
Total operating revenues
|
889,192
|
|
|
1,219,409
|
|
|
562,245
|
|
|
444,700
|
|
|
|
|
|
|
|
|
|
Purchased gas cost
|
366,917
|
|
|
626,960
|
|
|
130,886
|
|
|
43,085
|
|
Operating income
|
241,561
|
|
|
268,988
|
|
|
122,993
|
|
|
89,592
|
|
Net Income
|
314,132
|
|
|
178,992
|
|
|
71,193
|
|
|
38,747
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
Net income per share — basic and diluted
|
$
|
2.89
|
|
|
$
|
1.60
|
|
|
$
|
0.64
|
|
|
$
|
0.35
|
|
ATMOS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
(In thousands, except per share data)
|
Fiscal year 2017:
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
Distribution
|
$
|
754,656
|
|
|
$
|
962,541
|
|
|
$
|
494,060
|
|
|
$
|
437,918
|
|
Pipeline and storage
|
109,952
|
|
|
111,972
|
|
|
117,283
|
|
|
117,823
|
|
Intersegment eliminations
|
(84,440
|
)
|
|
(86,327
|
)
|
|
(84,842
|
)
|
|
(90,861
|
)
|
Total operating revenues
|
780,168
|
|
|
988,186
|
|
|
526,501
|
|
|
464,880
|
|
|
|
|
|
|
|
|
|
Purchased gas cost
|
311,305
|
|
|
427,494
|
|
|
114,176
|
|
|
72,561
|
|
Operating income
|
209,918
|
|
|
285,172
|
|
|
140,664
|
|
|
91,792
|
|
Income from continuing operations
|
114,038
|
|
|
162,012
|
|
|
70,808
|
|
|
35,853
|
|
Income from discontinued operations
|
10,994
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain on sale of discontinued operations
|
—
|
|
|
2,716
|
|
|
—
|
|
|
—
|
|
Net Income
|
125,032
|
|
|
164,728
|
|
|
70,808
|
|
|
35,853
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
Income per share from continuing operations
|
$
|
1.08
|
|
|
$
|
1.52
|
|
|
$
|
0.67
|
|
|
$
|
0.34
|
|
Income per share from discontinued operations
|
0.11
|
|
|
0.03
|
|
|
—
|
|
|
—
|
|
Net income per share — basic and diluted
|
$
|
1.19
|
|
|
$
|
1.55
|
|
|
$
|
0.67
|
|
|
$
|
0.34
|
|