Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

Index to financial statements and financial statement schedule:



	Page
Report of independent registered public accounting firm	45
Financial statements and supplementary data:
Consolidated balance sheets at September 30, 2016 and 2015	46
Consolidated statements of income for the years ended September 30, 2016, 2015 and 2014	47
Consolidated statements of comprehensive income for the years ended September 30, 2016, 2015 and 2014	48
Consolidated statements of shareholders' equity for the years ended September 30, 2016, 2015 and 2014	49
Consolidated statements of cash flow for the years ended September 30, 2016, 2015 and 2014	50
Notes to consolidated financial statements	51
Selected Quarterly Financial Data (Unaudited)	97
Financial statement schedule for the years ended September 30, 2016, 2015 and 2014
Schedule II. Valuation and Qualifying Accounts	105

All other financial statement schedules are omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and accompanying notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Atmos Energy Corporation

We have audited the accompanying consolidated balance sheets of Atmos Energy Corporation as of September 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2016. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atmos Energy Corporation at September 30, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects the financial information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Atmos Energy Corporation’s internal control over financial reporting as of September 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 14, 2016 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Dallas, Texas

November 14, 2016

ATMOS ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS



	September 30
	2016			2015
	(In thousands, except share data)
ASSETS
Property, plant and equipment	$	9,987,078		$	8,959,702
Construction in progress	184,062			280,398
	10,171,140			9,240,100
Less accumulated depreciation and amortization	1,890,629			1,809,520
Net property, plant and equipment	8,280,511			7,430,580
Current assets
Cash and cash equivalents	47,534			28,653
Accounts receivable, less allowance for doubtful accounts of $13,367 in 2016 and $15,283 in 2015	300,007			295,160
Gas stored underground	233,316			236,603
Other current assets	100,829			65,890
Total current assets	681,686			626,306
Goodwill	743,407			742,702
Deferred charges and other assets	305,285			275,484
	$	10,010,889		$	9,075,072
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: 2016 — 103,930,560 shares, 2015 — 101,478,818 shares	$	520		$	507
Additional paid-in capital	2,388,027			2,230,591
Accumulated other comprehensive loss	(188,022		)	(109,330		)
Retained earnings	1,262,534			1,073,029
Shareholders’ equity	3,463,059			3,194,797
Long-term debt	2,188,779			2,437,515
Total capitalization	5,651,838			5,632,312
Commitments and contingencies
Current liabilities
Accounts payable and accrued liabilities	259,434			238,942
Other current liabilities	449,036			457,954
Short-term debt	829,811			457,927
Current maturities of long-term debt	250,000			—
Total current liabilities	1,788,281			1,154,823
Deferred income taxes	1,603,056			1,411,315
Regulatory cost of removal obligation	424,281			427,553
Pension and postretirement liabilities	297,743			287,373
Deferred credits and other liabilities	245,690			161,696
	$	10,010,889		$	9,075,072

See accompanying notes to consolidated financial statements.

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME



	Year Ended September 30
	2016			2015			2014
	(In thousands, except per share data)
Operating revenues
Regulated distribution segment	$	2,291,866		$	2,763,835		$	3,061,546
Regulated pipeline segment	408,833			370,112			318,459
Nonregulated segment	1,066,363			1,472,209			2,067,292
Intersegment eliminations	(417,113		)	(464,020		)	(506,381		)
	3,349,949			4,142,136			4,940,916
Purchased gas cost
Regulated distribution segment	1,019,061			1,526,258			1,885,031
Regulated pipeline segment	—			—			—
Nonregulated segment	1,002,573			1,399,349			1,979,337
Intersegment eliminations	(416,581		)	(463,488		)	(505,878		)
	1,605,053			2,462,119			3,358,490
Gross profit	1,744,896			1,680,017			1,582,426
Operating expenses
Operation and maintenance	560,766			541,868			505,154
Depreciation and amortization	293,096			274,796			253,987
Taxes, other than income	223,016			231,958			211,936
Total operating expenses	1,076,878			1,048,622			971,077
Operating income	668,018			631,395			611,349
Miscellaneous expense, net	(1,593		)	(4,389		)	(5,235		)
Interest charges	115,948			116,241			129,295
Income before income taxes	550,477			510,765			476,819
Income tax expense	200,373			195,690			187,002
Net income	$	350,104		$	315,075		$	289,817
Basic net income per share	$	3.38		$	3.09		$	2.96
Diluted net income per share	$	3.38		$	3.09		$	2.96
Weighted average shares outstanding:
Basic	103,524			101,892			97,606
Diluted	103,524			101,892			97,608

See accompanying notes to consolidated financial statements.

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year Ended September 30
	2016			2015			2014
	(In thousands)
Net income	$	350,104		$	315,075		$	289,817
Other comprehensive income (loss), net of tax
Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $(245), $(1,559) and $1,199	(465		)	(2,713		)	2,214
Cash flow hedges:
Amortization and unrealized loss on interest rate agreements, net of tax of $(56,723), $(40,501) and $(32,353)	(98,682		)	(70,461		)	(56,287		)
Net unrealized gains (losses) on commodity cash flow hedges, net of tax of $13,078, $(15,193) and $1,791	20,455			(23,763		)	2,802
Total other comprehensive loss	(78,692		)	(96,937		)	(51,271		)
Total comprehensive income	$	271,412		$	218,138		$	238,546

See accompanying notes to consolidated financial statements.

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY



	Common stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
	Number of Shares		Stated Value
	(In thousands, except share and per share data)
Balance, September 30, 2013	90,640,211		$	453		$	1,765,811		$	38,878		$	775,267		$	2,580,409
Net income	—		—			—			—			289,817			289,817
Other comprehensive loss	—		—			—			(51,271		)	—			(51,271		)
Repurchase of equity awards	(190,134	)	(1		)	(8,716		)	—			—			(8,717		)
Cash dividends ($1.48 per share)	—		—			—			—			(146,248		)	(146,248		)
Common stock issued:
Public offering	9,200,000		46			390,159			—			—			390,205
Direct stock purchase plan	83,150		1			4,066			—			—			4,067
1998 Long-term incentive plan	653,130		3			5,214			—			(864		)	4,353
Employee stock-based compensation	—		—			23,536			—			—			23,536
Outside directors stock-for-fee plan	1,735		—			81			—			—			81
Balance, September 30, 2014	100,388,092		502			2,180,151			(12,393		)	917,972			3,086,232
Net income	—		—			—			—			315,075			315,075
Other comprehensive loss	—		—			—			(96,937		)	—			(96,937		)
Repurchase of equity awards	(148,464	)	(1		)	(7,984		)	—			—			(7,985		)
Cash dividends ($1.56 per share)	—		—			—			—			(160,018		)	(160,018		)
Common stock issued:
Direct stock purchase plan	176,391		1			10,625			—			—			10,626
Retirement savings plan	398,047		2			20,324			—			—			20,326
1998 Long-term incentive plan	664,752		3			2,263			—			—			2,266
Employee stock-based compensation	—		—			25,212			—			—			25,212
Balance, September 30, 2015	101,478,818		507			2,230,591			(109,330		)	1,073,029			3,194,797
Net income	—		—			—			—			350,104			350,104
Other comprehensive loss	—		—			—			(78,692		)	—			(78,692		)
Cash dividends ($1.68 per share)	—		—			—			—			(175,126		)	(175,126		)
Cumulative effect of accounting change	—		—			—			—			14,527			14,527
Common stock issued:
Public offering	1,360,756		7			98,567			—			—			98,574
Direct stock purchase plan	133,133		1			9,228			—			—			9,229
Retirement savings plan	359,414		2			25,047			—			—			25,049
1998 Long-term incentive plan	598,439		3			3,175			—			—			3,178
Employee stock-based compensation	—		—			21,419			—			—			21,419
Balance, September 30, 2016	103,930,560		$	520		$	2,388,027		$	(188,022	)	$	1,262,534		$	3,463,059

See accompanying notes to consolidated financial statements.

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended September 30
	2016			2015			2014
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	350,104		$	315,075		$	289,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	293,096			274,796			253,987
Deferred income taxes	193,556			192,886			189,952
Stock-based compensation	14,760			15,980			14,721
Debt financing costs	5,667			5,922			9,409
Other	1,019			359			541
Changes in assets and liabilities:
(Increase) decrease in accounts receivable	(4,847		)	48,240			(41,408		)
(Increase) decrease in gas stored underground	20,577			33,234			(31,996		)
Increase in other current assets	(18,739		)	(11,951		)	(24,411		)
(Increase) decrease in deferred charges and other assets	(24,860		)	51,614			28,875
Increase (decrease) in accounts payable and accrued liabilities	(5,195		)	(59,112		)	60,465
Increase (decrease) in other current liabilities	(44,482		)	896			2,413
Increase (decrease) in deferred credits and other liabilities	14,334			(56,025		)	(19,552		)
Net cash provided by operating activities	794,990			811,914			732,813
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures	(1,086,950		)	(963,621		)	(824,441		)
Purchases of available-for-sale securities	(32,551		)	(29,527		)	(32,734		)
Proceeds from sale of available-for-sale securities	27,019			24,889			24,872
Maturities of available-for-sale securities	6,290			6,235			5,215
Other, net	6,460			5,422			2,109
Net cash used in investing activities	(1,079,732		)	(956,602		)	(824,979		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term debt	371,884			261,232			(171,289		)
Proceeds from issuance of long-term debt, net of discount	—			499,060			—
Net proceeds from equity offering	98,574			—			390,205
Issuance of common stock through stock purchase and employee retirement plans	34,278			30,952			4,274
Settlement of interest rate agreements	—			13,364			—
Interest rate agreements cash collateral	(25,670		)	—			—
Repayment of long-term debt	—			(500,000		)	—
Cash dividends paid	(175,126		)	(160,018		)	(146,248		)
Repurchase of equity awards	—			(7,985		)	(8,717		)
Other	(317		)	(5,522		)	—
Net cash provided by financing activities	303,623			131,083			68,225
Net increase (decrease) in cash and cash equivalents	18,881			(13,605		)	(23,941		)
Cash and cash equivalents at beginning of year	28,653			42,258			66,199
Cash and cash equivalents at end of year	$	47,534		$	28,653		$	42,258
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest	$	154,748		$	151,334		$	156,606
Income taxes	$	7,794		$	1,802		$	(610	)

See accompanying notes to consolidated financial statements.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Business

Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and pipeline businesses as well as certain other nonregulated businesses. Through our regulated 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 regulated 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 regulated pipeline business, which is also subject to federal and state regulation, consists of the regulated operations of our Atmos Pipeline–Texas Division, a division of the Company. This division transports natural gas to our Mid-Tex Division, transports natural gas for third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary to the pipeline industry including parking arrangements, lending and sales of inventory on hand.

Our nonregulated businesses operate primarily in the Midwest and Southeast through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc., (AEH). AEH is a wholly-owned subsidiary of the Company and based in Houston, Texas. Through AEH, we provide natural gas management and transportation services to municipalities, regulated distribution companies, including certain divisions of Atmos Energy and third parties.

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.

Basis of comparison — As described under Recent Accounting Pronouncements below, we reclassified debt issuance costs from deferred charges and other assets to long-term debt. Additionally, we recorded immaterial corrections to the presentation of certain activities on our Consolidated Statement of Cash Flows for the years ended September 30, 2015 and 2014.

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 regulated distribution and regulated pipeline 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 that would normally be expensed under accounting principles generally accepted in the United States are permitted to be capitalized or deferred on the balance sheet because it is probable they can be

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recovered through rates. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations.

We record regulatory assets as a component of other current assets and deferred charges and other assets for costs that have been deferred for which future recovery through customer rates is considered probable. Regulatory liabilities are recorded either on the face of the balance sheet or as a component of current liabilities, deferred income taxes or deferred credits and other liabilities when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Significant regulatory assets and liabilities as of September 30, 2016 and 2015 included the following:



	September 30
	2016		2015
	(In thousands)
Regulatory assets:
Pension and postretirement benefit costs(1)	$	132,348	$	121,183
Infrastructure Mechanisms(2)	42,719		32,813
Deferred gas costs	45,184		9,715
Recoverable loss on reacquired debt	13,761		16,319
Deferred pipeline record collection costs	7,336		3,118
APT annual adjustment mechanism	7,171		1,002
Rate case costs	1,539		1,533
Other	13,565		6,656
	$	263,623	$	192,339
Regulatory liabilities:
Regulatory cost of removal obligation	$	476,891	$	483,676
Deferred gas costs	20,180		28,100
Asset retirement obligation	13,404		9,063
Other	4,250		3,693
	$	514,725	$	524,532


(1)	Includes $12.4 million and $16.6 million of pension and postretirement expense deferred pursuant to regulatory authorization.


(2)	Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all 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.

Revenue recognition — Sales of natural gas to our regulated 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 regulated 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. There is no gross profit generated through purchased gas cost adjustments, but they provide a dollar-for-dollar offset to increases or decreases in our regulated 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 regulated pipeline and nonregulated segments are recognized in the period in which actual volumes are transported and storage services are provided.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating revenues for our nonregulated segment and the associated carrying value of natural gas inventory (inclusive of storage costs) are recognized when we sell the gas and physically deliver it to our customers. Operating revenues include realized gains and losses arising from the settlement of financial instruments used in our nonregulated activities.

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 regulated distribution operations and natural gas held by our nonregulated segment to conduct their operations. The average cost method is used for substantially all of our regulated operations. Our nonregulated segment utilizes the average cost method; however, most of this inventory is hedged and is therefore reported at fair value at the end of each month. 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.

Regulated 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 $2.8 million, $2.3 million and $1.5 million was capitalized in 2016, 2015 and 2014.

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 recoverable through rates 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 for the fiscal year ended September 30, 2016, and 3.3 percent for each of the fiscal years ended September 30, 2015 and 2014.

Nonregulated property, plant and equipment — Nonregulated 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 ranging from three to 43 years.

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, 2016 and 2015, we had asset retirement obligations of $13.4 million and $11.1 million. Additionally, we had $8.1 million and $4.8 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. We 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, 2016 and 2015, all of our marketable securities were classified as available for sale. In accordance with the authoritative accounting standards, these securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on 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.

Financial instruments and hedging activities — We use financial instruments to mitigate commodity price risk in our regulated distribution and nonregulated segments and interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses 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 regulated distribution segment, the costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas cost adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with accounting principles generally accepted in the United States. Accordingly, there is no earnings impact on our regulated distribution segment as a result of the use of financial instruments.

In our nonregulated segment, we have designated most of the natural gas inventory held by this operating segment as the hedged item in a fair-value hedge. This inventory is 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 in the period of change. The financial instruments associated with this natural gas inventory have been designated as fair-value hedges and are 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 have elected to exclude this spot/forward differential for purposes of assessing the effectiveness of these fair-value hedges. For the fiscal years ended September 30, 2016, 2015 and 2014, we included unrealized gains (losses) on open contracts of $1.3 million, $(2.4) million and $9.6 million as a component of nonregulated purchased gas cost.

Additionally, we have elected to treat fixed-price forward contracts used in our nonregulated segment to deliver natural gas as normal purchases and normal sales. As such, these deliveries are 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 have been designated as cash flow hedges of anticipated purchases and sales at indexed prices. Accordingly, unrealized gains and losses on these open financial instruments are recorded as a component of accumulated other comprehensive income, and are recognized in earnings as a component of purchased gas cost when the hedged volumes are sold.

Gains and losses from hedge ineffectiveness are 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

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Our nonregulated segment also utilizes master netting agreements with significant counterparties that allow us to offset gains and losses arising from financial instruments that may be settled in cash with gains and losses arising from financial instruments that may 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. As of September 30, 2016 and 2015, the Company netted $24.7 million and $43.5 million of cash held in margin accounts into its current and noncurrent risk management assets and liabilities.

Financial Instruments Associated with Interest Rate Risk

We manage interest rate risk, primarily when we plan to issue new long-term debt or to refinance existing 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, 2016, the Company netted $25.7 million of cash held in margin accounts into its current and noncurrent risk management liabilities. As of September 30, 2015 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 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. Within our nonregulated operations, we utilize 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 reflect the market in which transactions involving these financial instruments are executed.

Our Level 1 measurements consist primarily of exchange-traded financial instruments, gas stored underground that has been designated as the hedged item in a fair value hedge and 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.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 common collective trusts, corporate bonds and investments in limited partnerships.

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.

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.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 reasonably 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 regarding the renewal of our revolving credit facility and the AEM uncommitted 364-day bilateral credit facility and Note 15 regarding the proposed sale of AEM, no events occurred subsequent to the balance sheet date that would require recognition or disclosure in the financial statements.

Recent accounting pronouncements — In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. The new standard is currently scheduled to become effective for us beginning on October 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. As of September 30, 2016, we were actively evaluating all of our sources of revenue to determine the potential effect of the new standard on our financial position, results of operations and cash flows and the transition approach we will utilize. We are also actively monitoring the deliberations of the FASB's Transition Resource Group as decisions made by this group will impact the final conclusions of this evaluation.

In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new guidance aligns the presentation of debt issuance costs with debt discounts and premiums. While the guidance would have been effective for us beginning October 1, 2016, we elected early adoption effective September 30, 2016 and have applied the provisions of the new guidance to each prior period presented. As a result, we reclassified $17.0 million and $17.9 million of unamortized debt issuance costs from deferred charges and other assets to long-term debt on the September 30, 2016 and 2015 consolidated balance sheets.

In April 2015, the FASB issued guidance to simplify the accounting for fees paid in connection with arrangements with cloud-based software providers. Under the new guidance, unless a software arrangement includes specific elements enabling customers to possess and operate software on platforms other than that offered by the cloud-based provider, the cost of such arrangements is to be accounted for as an operating expense in the period incurred. The new guidance is effective for us beginning October 1, 2016 and may be applied either prospectively or retrospectively with early adoption permitted. The adoption of this standard will not impact on our financial position, results of operations and cash flows.

In May 2015, the FASB issued guidance removing the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance is effective for us on October 1, 2016 to be applied retrospectively. The adoption of this standard will have no impact on our results of operations, consolidated balance sheets or cash flows.

In November 2015, the FASB issued guidance that requires all deferred income tax liabilities and assets to be presented as noncurrent in a classified balance sheet. Previously, entities were required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified balance sheet. As permitted under the new guidance, we elected early adoption as of March 31, 2016. The adoption of this guidance had no impact on our results of operations or cash flows. Because we adopted this new guidance prospectively, prior periods have not been adjusted.

In January 2016, the FASB issued guidance related to the classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning October 1, 2018; limited early adoption is permitted. We are currently evaluating the potential impact of this new guidance.

In February 2016, the FASB issued a comprehensive new leasing standard that will require lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The new standard will be effective for us beginning on October 1, 2019; early adoption is permitted. The new leasing

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We are currently evaluating the effect on our financial position, results of operations and cash flows.

In March 2016, the FASB issued guidance to simplify the accounting and reporting of share-based payment arrangements. Key modifications required under the new guidance include:


•	Recognition of all excess tax benefits and tax deficiencies associated with stock-based compensation as income tax expense or benefit in the income statement in the period the awards vest. The guidance also requires these income tax inflows and outflows to be classified as an operating activity.


•	Simplification of the accounting for forfeitures.


•	Clarification that cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.

As permitted under the new guidance, we elected early adoption as of March 31, 2016. In accordance with the transition requirements, we recorded a $14.5 million cumulative-effect increase to retained earnings as of October 1, 2015, with an offsetting increase to the Company’s net operating loss (NOL) deferred tax asset to recognize the effect of excess tax benefits earned prior to September 30, 2015. For the year ended September 30, 2016, we have recognized a total income tax benefit of $5.0 million. The new guidance provides for certain provisions to be accounted for prospectively and others retrospectively.

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.

Segment Information

Atmos Energy Corporation and its subsidiaries are engaged primarily in the regulated natural gas distribution and pipeline business as well as other nonregulated businesses. We distribute natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers through our six regulated distribution divisions, which cover service areas located in eight states. In addition, we transport natural gas for others through our distribution system.

Through our nonregulated business, we provide natural gas management and transportation services to municipalities, regulated distribution companies, including certain divisions of Atmos Energy and third parties.

We operate the Company through the following three segments:


•	The regulated distribution segment, includes our regulated distribution and related sales operations.


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


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

Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our regulated distribution segment operations are geographically dispersed, they are aggregated and reported as a single segment as each regulated distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on net income or loss of the respective operating units. Interest expense is allocated pro rata to each segment based upon our net investment in each segment. Income taxes are allocated to each segment as if each segment’s taxes were calculated on a separate return basis.

Summarized income statements and capital expenditures by segment are shown in the following tables.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Year Ended September 30, 2016
	Regulated Distribution		Regulated Pipeline			Nonregulated		Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	2,284,185	$	104,007		$	961,757	$	—		$	3,349,949
Intersegment revenues	7,681		304,826			104,606		(417,113		)	—
	2,291,866		408,833			1,066,363		(417,113		)	3,349,949
Purchased gas cost	1,019,061		—			1,002,573		(416,581		)	1,605,053
Gross profit	1,272,805		408,833			63,790		(532		)	1,744,896
Operating expenses
Operation and maintenance	404,115		129,525			27,658		(532		)	560,766
Depreciation and amortization	233,036		55,576			4,484		—			293,096
Taxes, other than income	196,070		24,298			2,648		—			223,016
Total operating expenses	833,221		209,399			34,790		(532		)	1,076,878
Operating income	439,584		199,434			29,000		—			668,018
Miscellaneous income (expense)	455		(1,683		)	1,443		(1,808		)	(1,593		)
Interest charges	79,404		36,574			1,778		(1,808		)	115,948
Income before income taxes	360,635		161,177			28,665		—			550,477
Income tax expense	128,265		59,488			12,620		—			200,373
Net income	$	232,370	$	101,689		$	16,045	$	—		$	350,104
Capital expenditures	$	740,039	$	346,400		$	511	$	—		$	1,086,950

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Year Ended September 30, 2015
	Regulated Distribution			Regulated Pipeline			Nonregulated			Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	2,757,585		$	97,662		$	1,286,889		$	—		$	4,142,136
Intersegment revenues	6,250			272,450			185,320			(464,020		)	—
	2,763,835			370,112			1,472,209			(464,020		)	4,142,136
Purchased gas cost	1,526,258			—			1,399,349			(463,488		)	2,462,119
Gross profit	1,237,577			370,112			72,860			(532		)	1,680,017
Operating expenses
Operation and maintenance	388,486			118,866			35,048			(532		)	541,868
Depreciation and amortization	223,048			47,236			4,512			—			274,796
Taxes, other than income	205,894			22,743			3,321			—			231,958
Total operating expenses	817,428			188,845			42,881			(532		)	1,048,622
Operating income	420,149			181,267			29,979			—			631,395
Miscellaneous expense	(377		)	(1,243		)	(760		)	(2,009		)	(4,389		)
Interest charges	84,132			33,151			967			(2,009		)	116,241
Income before income taxes	335,640			146,873			28,252			—			510,765
Income tax expense	130,827			52,211			12,652			—			195,690
Net income	$	204,813		$	94,662		$	15,600		$	—		$	315,075
Capital expenditures	$	670,575		$	291,603		$	1,443		$	—		$	963,621

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Year Ended September 30, 2014
	Regulated Distribution			Regulated Pipeline			Nonregulated		Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	3,056,212		$	92,166		$	1,792,538	$	—		$	4,940,916
Intersegment revenues	5,334			226,293			274,754		(506,381		)	—
	3,061,546			318,459			2,067,292		(506,381		)	4,940,916
Purchased gas cost	1,885,031			—			1,979,337		(505,878		)	3,358,490
Gross profit	1,176,515			318,459			87,955		(503		)	1,582,426
Operating expenses
Operation and maintenance	387,228			91,466			26,963		(503		)	505,154
Depreciation and amortization	208,376			41,031			4,580		—			253,987
Taxes, other than income	196,343			13,143			2,450		—			211,936
Total operating expenses	791,947			145,640			33,993		(503		)	971,077
Operating income	384,568			172,819			53,962		—			611,349
Miscellaneous income (expense)	(381		)	(3,181		)	2,216		(3,889		)	(5,235		)
Interest charges	94,918			36,280			1,986		(3,889		)	129,295
Income before income taxes	289,269			133,358			54,192		—			476,819
Income tax expense	117,684			47,167			22,151		—			187,002
Net income	$	171,585		$	86,191		$	32,041	$	—		$	289,817
Capital expenditures	$	574,372		$	248,230		$	1,839	$	—		$	824,441

The following table summarizes our revenues from external parties by products and services for the fiscal year ended September 30.



	2016		2015		2014
	(In thousands)
Regulated distribution revenues:
Gas sales revenues:
Residential	$	1,477,049	$	1,761,689	$	1,933,099
Commercial	619,979		772,187		876,042
Industrial	51,999		74,981		90,536
Public authority and other	41,307		53,401		64,779
Total gas sales revenues	2,190,334		2,662,258		2,964,456
Transportation revenues	70,383		67,475		64,049
Other gas revenues	23,468		27,852		27,707
Total regulated distribution revenues	2,284,185		2,757,585		3,056,212
Regulated pipeline revenues	104,007		97,662		92,166
Nonregulated revenues	961,757		1,286,889		1,792,538
Total operating revenues	$	3,349,949	$	4,142,136	$	4,940,916

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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



	September 30, 2016
	Regulated Distribution		Regulated Pipeline		Nonregulated		Eliminations			Consolidated
	(In thousands)
ASSETS
Property, plant and equipment, net	$	6,220,425	$	2,008,997	$	51,089	$	—		$	8,280,511
Investment in subsidiaries	1,026,859		—		—		(1,026,859		)	—
Current assets
Cash and cash equivalents	21,072		—		26,462		—			47,534
Assets from risk management activities	3,029		—		6,775		—			9,804
Other current assets	446,868		19,204		367,220		(208,944		)	624,348
Intercompany receivables	978,093		—		—		(978,093		)	—
Total current assets	1,449,062		19,204		400,457		(1,187,037		)	681,686
Goodwill	576,114		132,582		34,711		—			743,407
Noncurrent assets from risk management activities	1,822		—		—		—			1,822
Deferred charges and other assets	275,496		27,631		336		—			303,463
	$	9,549,778	$	2,188,414	$	486,593	$	(2,213,896	)	$	10,010,889
CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	3,463,059	$	678,964	$	347,895	$	(1,026,859	)	$	3,463,059
Long-term debt	2,188,779		—		—		—			2,188,779
Total capitalization	5,651,838		678,964		347,895		(1,026,859		)	5,651,838
Current liabilities
Current maturities of long-term debt	250,000		—		—		—			250,000
Short-term debt	1,026,811		—		—		(197,000		)	829,811
Liabilities from risk management activities	56,771		—		—		—			56,771
Other current liabilities	549,328		22,427		91,888		(11,944		)	651,699
Intercompany payables	—		950,215		27,878		(978,093		)	—
Total current liabilities	1,882,910		972,642		119,766		(1,187,037		)	1,788,281
Deferred income taxes	1,058,895		536,732		7,429		—			1,603,056
Noncurrent liabilities from risk management activities	184,048		—		—		—			184,048
Regulatory cost of removal obligation	424,281		—		—		—			424,281
Pension and postretirement liabilities	297,743		—		—		—			297,743
Deferred credits and other liabilities	50,063		76		11,503		—			61,642
	$	9,549,778	$	2,188,414	$	486,593	$	(2,213,896	)	$	10,010,889

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	September 30, 2015
	Regulated Distribution		Regulated Pipeline		Nonregulated			Eliminations			Consolidated
	(In thousands)
ASSETS
Property, plant and equipment, net	$	5,670,306	$	1,706,449	$	53,825		$	—		$	7,430,580
Investment in subsidiaries	1,038,670		—		(2,096		)	(1,036,574		)	—
Current assets
Cash and cash equivalents	23,863		—		4,790			—			28,653
Assets from risk management activities	378		—		8,854			—			9,232
Other current assets	421,591		24,628		480,503			(338,301		)	588,421
Intercompany receivables	887,713		—		—			(887,713		)	—
Total current assets	1,333,545		24,628		494,147			(1,226,014		)	626,306
Goodwill	575,449		132,542		34,711			—			742,702
Noncurrent assets from risk management activities	368		—		—			—			368
Deferred charges and other assets	252,499		17,288		5,329			—			275,116
	$	8,870,837	$	1,880,907	$	585,916		$	(2,262,588	)	$	9,075,072
CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	3,194,797	$	577,275	$	461,395		$	(1,038,670	)	$	3,194,797
Long-term debt	2,437,515		—		—			—			2,437,515
Total capitalization	5,632,312		577,275		461,395			(1,038,670		)	5,632,312
Current liabilities
Short-term debt	782,927		—		—			(325,000		)	457,927
Liabilities from risk management activities	9,568		—		—			—			9,568
Other current liabilities	569,273		29,780		99,480			(11,205		)	687,328
Intercompany payables	—		867,409		20,304			(887,713		)	—
Total current liabilities	1,361,768		897,189		119,784			(1,223,918		)	1,154,823
Deferred income taxes	1,008,091		406,254		(3,030		)	—			1,411,315
Noncurrent liabilities from risk management activities	110,539		—		—			—			110,539
Regulatory cost of removal obligation	427,553		—		—			—			427,553
Pension and postretirement liabilities	287,373		—		—			—			287,373
Deferred credits and other liabilities	43,201		189		7,767			—			51,157
	$	8,870,837	$	1,880,907	$	585,916		$	(2,262,588	)	$	9,075,072

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Earnings Per Share

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

Basic and diluted earnings per share for the fiscal years ended September 30 are calculated as follows:



	2016		2015		2014
	(In thousands, except per share data)
Basic Earnings Per Share
Net Income	$	350,104	$	315,075	$	289,817
Less: Income allocated to participating securities	546		626		711
Net Income available to common shareholders	$	349,558	$	314,449	$	289,106
Basic weighted average shares outstanding	103,524		101,892		97,606
Net Income per share — Basic	$	3.38	$	3.09	$	2.96
Diluted Earnings Per Share
Net Income available to common shareholders	$	349,558	$	314,449	$	289,106
Effect of dilutive stock options and other shares	—		—		—
Net Income available to common shareholders	$	349,558	$	314,449	$	289,106
Basic weighted average shares outstanding	103,524		101,892		97,606
Additional dilutive stock options and other shares	—		—		2
Diluted weighted average shares outstanding	103,524		101,892		97,608
Net Income per share — Diluted	$	3.38	$	3.09	$	2.96

Debt

Long-term debt

Long-term debt at September 30, 2016 and 2015 consisted of the following:



	2016		2015
	(In thousands)
Unsecured 6.35% Senior Notes, due June 2017	250,000		250,000
Unsecured 8.50% Senior Notes, due 2019	450,000		450,000
Unsecured 5.95% Senior Notes, due 2034	200,000		200,000
Unsecured 5.50% Senior Notes, due 2041	400,000		400,000
Unsecured 4.15% Senior Notes, due 2043	500,000		500,000
Unsecured 4.125% Senior Notes, due 2044	500,000		500,000
Medium term Series A notes, 1995-1, 6.67%, due 2025	10,000		10,000
Unsecured 6.75% Debentures, due 2028	150,000		150,000
Total long-term debt	2,460,000		2,460,000
Less:
Original issue discount on unsecured senior notes and debentures	4,270		4,612
Debt issuance cost	16,951		17,873
Current maturities	250,000		—
	$	2,188,779	$	2,437,515

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On September 22, 2016, we entered into a three year, $200 million multi-draw term loan agreement with a syndicate of three lenders. Borrowings under the term loan may be made in increments of $1.0 million or higher, may be repaid at any time during the loan period and will bear interest at a rate dependent upon our credit ratings at the time of such borrowing and based, at our election, on a base rate or LIBOR for the applicable interest period. The term loan will be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. At September 30, 2016, there were no borrowings under the term loan.

On October 15, 2014, we issued $500 million of 4.125% 30-year unsecured senior notes, which replaced, on a long-term basis, our $500 million unsecured 4.95% senior notes. The effective rate of these notes is 4.086%, after giving effect to the offering costs and the settlement of the associated forward starting interest rate swaps discussed in Note 13. The net proceeds of approximately $494 million were used to repay our $500 million 4.95% senior unsecured notes at maturity on October 15, 2014.

Short-term debt

Our short-term debt is utilized to fund ongoing working capital needs, such as our seasonal requirements for gas supply and general corporate liquidity. Our short-term borrowings typically reach their highest levels in the winter months.

As of September 30, 2016, we financed our short-term borrowing requirements through a combination of a $1.25 billion commercial paper program, four committed revolving credit facilities and one uncommitted revolving credit facility, with a total availability from third-party lenders of approximately $1.3 billion of working capital funding. On October 5, 2016, we amended our existing $1.25 billion unsecured credit facility (the five-year unsecured credit facility) which increased the committed loan to $1.5 billion and extended the facility through September 25, 2021. The amended facility also retains the $250 million accordion feature, which provides the opportunity to increase the total committed loan amount to $1.75 billion. After giving effect to the amended facility, we have total availability from third-party lenders of approximately $1.6 billion of working capital funding. At September 30, 2016 and 2015, there was $829.8 million and $457.9 million outstanding under our commercial paper program with weighted average interest rates of 0.81% and 0.42%, with average maturities of less than one month. We also use intercompany credit facilities to supplement the funding provided by these third-party committed credit facilities. These facilities are described in greater detail below.

Regulated Operations

We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders. The first facility is the five-year unsecured credit facility described above, which 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. This credit facility serves primarily as a backup liquidity facility for our commercial paper program. At September 30, 2016, there were no borrowings under this facility, but we had $829.8 million of commercial paper outstanding leaving $420.2 million available.

The second facility is a $25 million unsecured facility that bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin. This facility was renewed on April 1, 2016. At September 30, 2016, there were no borrowings outstanding under this facility.

The third facility, which was renewed on September 30, 2016, is a $10 million committed revolving credit facility, used primarily to issue letters of credit and bears interest at a LIBOR-based rate plus 1.5 percent. At September 30, 2016, there were no borrowings outstanding under this credit facility; however, letters of credit totaling $5.9 million had been issued under the facility at September 30, 2016, which reduced the amount available by a corresponding amount.

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 our five-year unsecured facility 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, 2016, our total-debt-to-total-capitalization ratio, as defined, was 50 percent. In addition, both the interest margin over the Eurodollar rate and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.

In addition to these third-party facilities, our regulated operations have a $500 million intercompany revolving credit facility with AEH. This facility bears interest at the lower of (i) the Eurodollar rate under the five-year revolving credit facility or (ii) the lowest rate outstanding under the commercial paper program. Applicable state regulatory commissions have approved our use of this facility through December 31, 2016. We intend to seek renewal of this facility during the first quarter of fiscal 2017. There was $197.0 million outstanding under this facility at September 30, 2016.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Nonregulated Operations

Atmos Energy Marketing, LLC (AEM), which is wholly owned by AEH, has one uncommitted $25 million 364-day bilateral credit facility that expires in December 2016 and one committed $15 million 364-day bilateral credit facility that was renewed on September 30, 2016. On October 25, 2016, the uncommitted $25 million 364-day bilateral credit facility was renewed through July 31, 2017. These facilities are used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under these bilateral credit facilities was $32.8 million at September 30, 2016.

AEH has a $500 million intercompany demand credit facility with AEC. This facility bears interest at a rate equal to the one-month LIBOR rate plus 3.00 percent. Applicable state regulatory commissions have approved our use of this facility through December 31, 2016. We intend to seek renewal of this facility during the first quarter of fiscal 2017. There were no borrowings outstanding under this facility at September 30, 2016.

Debt Covenants

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

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

We were in compliance with all of our debt covenants as of September 30, 2016. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.

Maturities of long-term debt at September 30, 2016 were as follows (in thousands):



2017	$	250,000
2018	—
2019	450,000
2020	—
2021	—
Thereafter	1,760,000
	$	2,460,000

Shareholders' Equity

Shelf Registration

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

At-the-Market Equity Sales Program

On March 28, 2016, we entered into an at-the-market (ATM) equity distribution agreement (the Agreement) with Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC in their capacity as agents and/or as principals (Agents). Under the terms of the Agreement, we may issue and sell, through any of the Agents, shares of our common stock, up to an aggregate offering price of $200 million, through the period ended March 28, 2019. We may also sell shares from time to time to an Agent for its own account at a price to be agreed upon at the time of sale. We will pay each Agent a commission of 1.0% of the gross offering proceeds of the shares sold through it as a sales agent. We have no obligation to offer or sell any shares under the Agreement, and may at any time suspend offers and sales under the Agreement. The shares will be issued pursuant to our shelf registration statement filed with the SEC on March 28, 2016. During fiscal 2016, we sold 1,360,756 shares of common stock under the ATM program for $100.0 million and received net proceeds of $98.6 million.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1998 Long-Term Incentive Plan

In August 1998, the Board of Directors approved and adopted the 1998 Long-Term Incentive Plan (LTIP), which became effective in October 1998 after approval by our shareholders. The LTIP is a comprehensive, long-term incentive compensation plan providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted stock units and stock units to certain employees and non-employee directors of the Company and our subsidiaries. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire our common stock.

As of September 30, 2015, we were authorized to grant awards for up to a maximum of 8.7 million shares of common stock under this plan subject to certain adjustment provisions. In February 2016, our shareholders voted to increase the number of authorized LTIP shares by 2.5 million shares and to extend the term of the plan for an additional five years, through September 2021. On March 29, 2016, we filed with the SEC a registration statement on Form S-8 to register an additional 2.5 million shares; we also listed such shares with the New York Stock Exchange. As of September 30, 2016, we were authorized to grant awards for up to a maximum of 11.2 million shares of common stock under this plan subject to certain adjustment provisions.

2014 Equity Offering

On February 18, 2014, we completed the public offering of 9,200,000 shares of our common stock including the underwriters’ exercise of their overallotment option of 1,200,000 shares under our existing shelf registration statement. The offering was priced at $44.00 per share and generated net proceeds of $390.2 million, which were used to repay short-term debt outstanding under our commercial paper program, to fund infrastructure spending primarily to enhance the safety and reliability of our system and for general corporate purposes.

Share Repurchase Program

On September 28, 2011, the Board of Directors approved a program authorizing the repurchase of up to five million shares of common stock over a five-year period. The program expired on September 30, 2016 and will not be renewed. We did not repurchase any shares during fiscal 2016, 2015, or 2014 under the program.

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, interest rate agreement cash flow hedges and commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings as they are amortized. The following tables provide the components of our accumulated other comprehensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income.



	Available- for-Sale Securities			Interest Rate Agreement Cash Flow Hedges			Commodity Contracts Cash Flow Hedges			Total
	(In thousands)
September 30, 2015	$	4,949		$	(88,842	)	$	(25,437	)	$	(109,330	)
Other comprehensive income (loss) before reclassifications	(263		)	(99,029		)	(11,662		)	(110,954		)
Amounts reclassified from accumulated other comprehensive income	(202		)	347			32,117			32,262
Net current-period other comprehensive income (loss)	(465		)	(98,682		)	20,455			(78,692		)
September 30, 2016	$	4,484		$	(187,524	)	$	(4,982	)	$	(188,022	)



	Available- for-Sale Securities			Interest Rate Agreement Cash Flow Hedges			Commodity Contracts Cash Flow Hedges			Total
	(In thousands)
September 30, 2014	$	7,662		$	(18,381	)	$	(1,674	)	$	(12,393	)
Other comprehensive income (loss) before reclassifications	(2,173		)	(71,003		)	(49,211		)	(122,387		)
Amounts reclassified from accumulated other comprehensive income	(540		)	542			25,448			25,450
Net current-period other comprehensive income (loss)	(2,713		)	(70,461		)	(23,763		)	(96,937		)
September 30, 2015	$	4,949		$	(88,842	)	$	(25,437	)	$	(109,330	)

The following tables detail reclassifications out of AOCI for the fiscal years ended September 30, 2016 and 2015. Amounts in parentheses below indicate decreases to net income in the statement of income.



	Fiscal Year Ended September 30, 2016
Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement of Income
	(In thousands)
Available-for-sale securities	$	318		Operation and maintenance expense
	318			Total before tax
	(116		)	Tax expense
	$	202		Net of tax
Cash flow hedges
Interest rate agreements	$	(546	)	Interest charges
Commodity contracts	(52,651		)	Purchased gas cost
	(53,197		)	Total before tax
	20,733			Tax benefit
	$	(32,464	)	Net of tax
Total reclassifications	$	(32,262	)	Net of tax

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Fiscal Year Ended September 30, 2015
Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement of Income
	(In thousands)
Available-for-sale securities	$	850		Operation and maintenance expense
	850			Total before tax
	(310		)	Tax expense
	$	540		Net of tax
Cash flow hedges
Interest rate agreements	$	(853	)	Interest charges
Commodity contracts	(41,716		)	Purchased gas cost
	(42,569		)	Total before tax
	16,579			Tax benefit
	$	(25,990	)	Net of tax
Total reclassifications	$	(25,450	)	Net of tax

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 cover substantially all employees. These plans are discussed in further detail below.

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 are as follows:



	Defined Benefits Plan			Supplemental Executive Retirement Plans		Postretirement Plans			Total
	(In thousands)
September 30, 2016
Unrecognized prior service credit	$	(1,509	)	$	—	$	(2,880	)	$	(4,389	)
Unrecognized actuarial (gain) loss	127,028			51,558		(54,298		)	124,288
	$	125,519		$	51,558	$	(57,178	)	$	119,899
September 30, 2015
Unrecognized transition obligation	$	—		$	—	$	82		$	82
Unrecognized prior service credit	(1,735		)	—		(4,524		)	(6,259		)
Unrecognized actuarial (gain) loss	120,948			36,915		(47,149		)	110,714
	$	119,213		$	36,915	$	(51,591	)	$	104,537

Defined Benefit Plans

Employee Pension Plan

Prior to December 31, 2014, we maintained two defined benefit plans: the Atmos Energy Corporation Pension Account Plan (the Plan) and the Atmos Energy Corporation Retirement Plan for Mississippi Valley Gas Union Employees (the Union Plan) (collectively referred to as the Plans). The assets of the Plans were held within the Atmos Energy Corporation Master Retirement Trust (the Master Trust). In June 2014, active collectively bargained employees of Atmos Energy’s Mississippi Division voted to decertify the union. As a result of this vote, effective January 1, 2015, active participants of the Union Plan became participants in the Plan. Opening account balances were established at the time of transfer equal to the present value of their respective accrued benefits under the Union Plan at December 31, 2014. Additionally, effective January 1, 2015, current retirees in the Union Plan as well as those participants who terminated and were vested in the Union Plan were transferred to the Plan with the same provisions that were in place at the time of their retirement or termination.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Plan is a cash balance pension plan that was established effective January 1999 and covers most of the employees of Atmos Energy’s regulated operations that were hired 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 2016 and 2015 we contributed $15.0 million and $38.0 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, 2016, the current funded position of the Plan and the funding requirements under the PPA, we do not anticipate a minimum required contribution for fiscal 2017. 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.

The following table presents asset allocation information for the Master Trust as of September 30, 2016 and 2015.



	Targeted Allocation Range	Actual Allocation September 30
Security Class	2016		2015
Domestic equities	35%-55%	40.5	%	41.3	%
International equities	10%-20%	15.5	%	14.9	%
Fixed income	5%-30%	11.2	%	11.0	%
Company stock	0%-15%	15.1	%	15.2	%
Other assets	0%-20%	17.7	%	17.6	%

At September 30, 2016 and 2015, the Plan held 956,700 and 1,169,700 shares of our common stock which represented 15.1 percent and 15.2 percent of total Plan assets. These shares generated dividend income for the Plan of approximately $1.8 million during fiscal 2016 and 2015.

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, 2016 and 2015 and the actuarial assumptions used to determine the net periodic pension cost for the Plan was determined as of September 30, 2015, 2014 and 2013. On October 20, 2016, 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, 2016, we updated our assumed mortality rates to incorporate the updated mortality table.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additional assumptions are presented in the following table:



	Pension Liability				Pension Cost
	2016		2015		2016		2015		2014
Discount rate	3.73	%	4.55	%	4.55	%	4.43	%	4.95	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%
Expected return on plan assets	7.00	%	7.00	%	7.00	%	7.25	%	7.25	%

The following table presents the Plan’s accumulated benefit obligation, projected benefit obligation and funded status as of September 30, 2016 and 2015:



	2016			2015
	(In thousands)
Accumulated benefit obligation	$	516,924		$	485,921
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	508,599		$	493,594
Service cost	16,419			16,231
Interest cost	23,193			21,850
Actuarial loss	41,847			7,420
Benefits paid(1)	(44,578		)	(30,496		)
Benefit obligation at end of year	545,480			508,599
Change in plan assets:
Fair value of plan assets at beginning of year	450,932			434,767
Actual return on plan assets	52,596			8,661
Employer contributions	15,000			38,000
Benefits paid(1)	(44,578		)	(30,496		)
Fair value of plan assets at end of year	473,950			450,932
Reconciliation:
Funded status	(71,530		)	(57,667		)
Unrecognized prior service cost	—			—
Unrecognized net loss	—			—
Accrued pension cost	$	(71,530	)	$	(57,667	)


(1)	Includes $12.8 million of one-time payments to eligible deferred vested participants who elected to receive a lump-sum payout of their pension benefits during fiscal 2016.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net periodic pension cost for the Plan for fiscal 2016, 2015 and 2014 is recorded as operating expense and included the following components:



	Fiscal Year Ended September 30
	2016			2015			2014
	(In thousands)
Components of net periodic pension cost:
Service cost	$	16,419		$	16,231		$	15,345
Interest cost	23,193			21,850			22,330
Expected return on assets	(27,522		)	(25,744		)	(23,601		)
Amortization of prior service credit	(226		)	(192		)	(136		)
Recognized actuarial loss	10,693			13,322			13,777
Net periodic pension cost	$	22,557		$	25,467		$	27,715

The following table sets forth by level, within the fair value hierarchy, the Plan's assets at fair value as of September 30, 2016 and 2015. 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. In addition to the assets shown below, the Plan had net accounts receivable of $2.6 million and $2.4 million at September 30, 2016 and 2015 which materially approximates fair value due to the short-term nature of these assets.



	Assets at Fair Value as of September 30, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Investments:
Common stocks	$	157,111	$	—	$	—	$	157,111
Money market funds	—		11,522		—		11,522
Registered investment companies	87,396		—		—		87,396
Common/collective trusts	—		105,124		—		105,124
Government securities:
Mortgage-backed securities	—		15,223		—		15,223
U.S. treasuries	4,704		863		—		5,567
Corporate bonds	—		31,929		—		31,929
Limited partnerships	—		57,438		—		57,438
Total investments at fair value	$	249,211	$	222,099	$	—	$	471,310

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Assets at Fair Value as of September 30, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Investments:
Common stocks	$	159,304	$	—	$	—	$	159,304
Money market funds	—		11,787		—		11,787
Registered investment companies	81,960		—		—		81,960
Common/collective trusts	—		93,081		—		93,081
Government securities:
Mortgage-backed securities	—		14,359		—		14,359
U.S. treasuries	5,279		805		—		6,084
Corporate bonds	—		28,973		—		28,973
Limited partnerships	—		52,996		—		52,996
Total investments at fair value	$	246,543	$	202,001	$	—	$	448,544

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, any corporate officer who may be appointed to the Management Committee after August 5, 2009 and any other employees selected by our Board of Directors at its discretion. 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 (other than such officer who is appointed as a member of the Company’s Management Committee), 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 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%).

On October 2, 2013, due to the retirement of one of our executives, we recognized a settlement loss of $4.5 million associated with our SEBP and made a $16.8 million benefit payment.

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, 2016 and 2015 and the actuarial assumptions used to determine the net periodic pension cost for the supplemental plans were determined as of September 30, 2015, 2014 and 2013. These assumptions are presented in the following table:



	Pension Liability				Pension Cost
	2016		2015		2016		2015		2014
Discount rate	3.73	%	4.55	%	4.55	%	4.43	%	4.95	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%	3.50	%	3.50	%

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, 2016 and 2015:



	2016			2015
	(In thousands)
Accumulated benefit obligation	$	137,616		$	118,835
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	122,393		$	113,219
Service cost	2,371			3,971
Interest cost	5,185			4,943
Actuarial loss	17,229			4,811
Benefits paid	(4,604		)	(4,551		)
Benefit obligation at end of year	142,574			122,393
Change in plan assets:
Fair value of plan assets at beginning of year	—			—
Employer contribution	4,604			4,551
Benefits paid	(4,604		)	(4,551		)
Fair value of plan assets at end of year	—			—
Reconciliation:
Funded status	(142,574		)	(122,393		)
Unrecognized prior service cost	—			—
Unrecognized net loss	—			—
Accrued pension cost	$	(142,574	)	$	(122,393	)

Assets for the supplemental plans are held in separate rabbi trusts. At September 30, 2016 and 2015, assets held in the rabbi trusts consisted of available-for-sale securities of $41.3 million and $41.7 million, which are included in our fair value disclosures in Note 14.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net periodic pension cost for the supplemental plans for fiscal 2016, 2015 and 2014 is recorded as operating expense and included the following components:



	Fiscal Year Ended September 30
	2016		2015		2014
	(In thousands)
Components of net periodic pension cost:
Service cost	$	2,371	$	3,971	$	3,607
Interest cost	5,185		4,943		4,966
Amortization of transition asset	—		—		—
Amortization of prior service cost	—		—		—
Recognized actuarial loss	2,586		2,343		1,948
Settlements	—		—		4,539
Net periodic pension cost	$	10,142	$	11,257	$	15,060

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)
2017	$	31,306	$	36,604
2018	32,047		14,289
2019	33,674		7,181
2020	35,232		4,395
2021	37,279		4,306
2022-2026	202,442		60,658

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 of this cost. Effective January 1, 2015 for employees who had not met the participation requirements by September 30, 2009, the contribution rates for the Company will be 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 2017.

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.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2016 and 2015.



	Actual Allocation September 30
Security Class	2016		2015
Diversified investment funds	97.2	%	97.5	%
Cash and cash equivalents	2.8	%	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, 2016 and 2015 and the actuarial assumptions used to determine the net periodic pension cost for the postretirement plan were determined as of September 30, 2015, 2014 and 2013. The assumptions are presented in the following table:



	Postretirement Liability				Postretirement Cost
	2016		2015		2016		2015		2014
Discount rate	3.73	%	4.55	%	4.55	%	4.43	%	4.95	%
Expected return on plan assets	4.45	%	4.45	%	4.45	%	4.60	%	4.60	%
Initial trend rate	7.50	%	7.50	%	7.50	%	7.50	%	8.00	%
Ultimate trend rate	5.00	%	5.00	%	5.00	%	5.00	%	5.00	%
Ultimate trend reached in	2022		2021		2021		2020		2020

The following table presents the postretirement plan’s benefit obligation and funded status as of September 30, 2016 and 2015:



	2016			2015
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	267,179		$	315,118
Service cost	10,823			15,583
Interest cost	12,424			14,385
Plan participants’ contributions	4,289			4,563
Actuarial gain	(1,052		)	(69,962		)
Benefits paid	(14,441		)	(12,508		)
Benefit obligation at end of year	279,222			267,179
Change in plan assets:
Fair value of plan assets at beginning of year	138,009			134,821
Actual return on plan assets	14,528			(8,851		)
Employer contributions	16,592			19,984
Plan participants’ contributions	4,289			4,563
Benefits paid	(14,441		)	(12,508		)
Fair value of plan assets at end of year	158,977			138,009
Reconciliation:
Funded status	(120,245		)	(129,170		)
Unrecognized transition obligation	—			—
Unrecognized prior service cost	—			—
Unrecognized net loss	—			—
Accrued postretirement cost	$	(120,245	)	$	(129,170	)

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net periodic postretirement cost for fiscal 2016, 2015 and 2014 is recorded as operating expense and included the components presented below.



	Fiscal Year Ended September 30
	2016			2015			2014
	(In thousands)
Components of net periodic postretirement cost:
Service cost	$	10,823		$	15,583		$	16,784
Interest cost	12,424			14,385			15,951
Expected return on assets	(6,264		)	(6,431		)	(5,167		)
Amortization of transition obligation	82			272			274
Amortization of prior service credit	(1,644		)	(1,644		)	(1,450		)
Recognized actuarial (gain) loss	(2,167		)	—			631
Net periodic postretirement cost	$	13,254		$	22,165		$	27,023

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	$	4,539	$	(3,596	)
Effect on postretirement benefit obligation	$	42,079	$	(34,531	)

We are currently recovering other postretirement benefits costs through our regulated rates under accrual accounting as prescribed by accounting principles generally accepted in the United States in substantially all of our service areas. 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, 2016 and 2015. 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, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Investments:
Money market funds	$	—	$	4,470	$	—	$	4,470
Registered investment companies	154,507		—		—		154,507
Total investments at fair value	$	154,507	$	4,470	$	—	$	158,977



	Assets at Fair Value as of September 30, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Investments:
Money market funds	$	—	$	3,486	$	—	$	3,486
Registered investment companies	134,523		—		—		134,523
Total investments at fair value	$	134,523	$	3,486	$	—	$	138,009

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 2016 include contributions to our postretirement plan trusts.



	Company Payments		Retiree Payments		Subsidy Payments		Total Postretirement Benefits
	(In thousands)
2017	$	15,806	$	3,679	$	—	$	19,485
2018	11,602		3,992		—		15,594
2019	12,165		4,036		—		16,201
2020	13,246		4,756		—		18,002
2021	14,210		5,420		—		19,630
2022-2026	84,642		36,837		—		121,479

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 salary reduction amount 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, in our common stock. However, participants have the option to immediately transfer this matching contribution into other funds held within the plan. Participants are eligible to receive matching contributions after completing one year of service. Participants are also permitted to take out loans 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.

Prior to December 31, 2015, we also maintained the Atmos Energy Holdings, LLC 401(k) Profit-Sharing Plan (the AEH 401(k) Profit-Sharing Plan), which covered substantially all AEH employees. On November 4, 2015, the Atmos Energy Corporation Board of Directors voted to approve the merger of the assets and liabilities of the AEH 401(k) Profit-Sharing Plan with the Retirement Savings Plan, effective January 1, 2016. On December 31, 2015, the AEH 401(k) Profit Sharing Plan was merged into the Retirement Savings Plan and all assets and loans of active and inactive participants were transferred to the Retirement Savings Plan.

Prior to December 31, 2014, we maintained the Atmos Energy Corporation Savings Plan for MVG Union Employees (the Union 401(k) Plan). In June 2014, active collectively bargained employees of Atmos Energy’s Mississippi Division voted to decertify the Union. As a result, effective July 19, 2014, active participants of the Union 401(k) Plan were eligible to participate in the Retirement Savings Plan. Effective January 1, 2015, all remaining participants became participants in the Retirement Savings Plan and the Union 401(k) Plan was terminated.

Matching contributions to the Retirement Savings Plan (and prior to December 31, 2014, the Union 401(k) Plan) are expensed as incurred and amounted to $12.6 million, $11.5 million and $10.9 million for fiscal years 2016, 2015 and 2014. The Board of Directors may also approve discretionary contributions, subject to the provisions of the Internal Revenue Code and applicable Treasury regulations. No discretionary contributions were made for fiscal years 2016, 2015 or 2014. At September 30, 2016 and 2015, the Retirement Savings Plan held 4.2 percent and 4.3 percent of our outstanding common stock. Discretionary contributions to the AEH 401(k) Profit-Sharing Plan were expensed as incurred and amounted to $0.3 million, $1.1 million and $1.4 million for fiscal years 2016, 2015 and 2014.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock and Other Compensation Plans

Stock-Based Compensation Plans

Total stock-based compensation cost was $24.6 million, $27.5 million and $25.5 million for the fiscal years ended September 30, 2016, 2015 and 2014. Of this amount, $9.8 million, $11.5 million and $10.8 million was capitalized. Tax benefits related to stock-based compensation were $5.0 million, $4.7 million and $3.1 million for the fiscal years ended September 30, 2016, 2015 and 2014.

1998 Long-Term Incentive Plan

As of September 30, 2016, we were authorized to grant awards for up to a maximum of 11.2 million shares of common stock under this plan subject to certain adjustment provisions. As of September 30, 2016, 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 2.4 million shares were available for future issuance.

Restricted Stock Unit 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. 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, 2016, 2015 and 2014:



	2016				2015				2014
	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	878,104		$	48.24	988,637		$	42.22	1,052,844		$	36.20
Granted	357,323		65.98		444,543		50.50		464,438		45.05
Vested	(448,136	)	45.88		(551,688	)	39.28		(524,532	)	32.67
Forfeited	(4,860	)	53.52		(3,388	)	48.55		(4,113	)	39.00
Nonvested at end of year	782,431		$	57.66	878,104		$	48.24	988,637		$	42.22

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2016, there was $11.4 million of total unrecognized compensation cost related to nonvested time-lapse 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, 2016, 2015 and 2014 was $20.6 million, $21.7 million and $17.1 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.

Outside Directors Stock-For-Fee Plan

In November 1994, the Board of Directors adopted the Outside Directors Stock-for-Fee Plan, which was approved by our shareholders in February 1995. The plan permits non-employee directors to receive all or part of their annual retainer and meeting fees in stock rather than in cash. This plan was terminated by the Board of Directors, effective September 1, 2014, when the LTIP was amended to incorporate substantially all of its provisions.

Equity Incentive and Deferred Compensation Plan for Non-Employee Directors

In November 1998, the Board of Directors adopted the Equity Incentive and Deferred Compensation Plan for Non-Employee Directors, which was approved by our shareholders in February 1999. This plan amended the Atmos Energy Corporation Deferred Compensation Plan for Outside Directors adopted by the Company in May 1990 and replaced the pension payable under our Retirement Plan for Non-Employee Directors. The plan 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.

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, 2016 and 2015:



	September 30
	2016			2015
	(In thousands)
Billed accounts receivable	$	206,248		$	204,585
Unbilled revenue	67,396			65,008
Other accounts receivable	39,730			40,850
Total accounts receivable	313,374			310,443
Less: allowance for doubtful accounts	(13,367		)	(15,283		)
Net accounts receivable	$	300,007		$	295,160

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other current assets

Other current assets as of September 30, 2016 and 2015 were comprised of the following accounts.



	September 30
	2016		2015
	(In thousands)
Assets from risk management activities	$	9,804	$	9,232
Deferred gas costs	45,184		9,715
Taxes receivable	5,456		4,479
Prepaid expenses	23,053		23,055
Materials and supplies	5,825		12,587
Other	11,507		6,822
Total	$	100,829	$	65,890

Property, plant and equipment

Property, plant and equipment was comprised of the following as of September 30, 2016 and 2015:



	September 30
	2016			2015
	(In thousands)
Production plant	$	66		$	131
Storage plant	353,523			286,011
Transmission plant	2,232,927			1,844,117
Distribution plant	6,598,990			6,019,001
General plant	761,057			769,311
Intangible plant	40,515			41,131
	9,987,078			8,959,702
Construction in progress	184,062			280,398
	10,171,140			9,240,100
Less: accumulated depreciation and amortization	(1,890,629		)	(1,809,520		)
Net property, plant and equipment(1)	$	8,280,511		$	7,430,580


(1)	Net property, plant and equipment includes plant acquisition adjustments of $(59.8) million and $(68.1) million at September 30, 2016 and 2015.

Goodwill

The following presents our goodwill balance allocated by segment and changes in the balance for the fiscal year ended September 30, 2016:



	Regulated Distribution		Regulated Pipeline		Nonregulated		Total
	(In thousands)
Balance as of September 30, 2015	$	575,449	$	132,542	$	34,711	$	742,702
Deferred tax adjustments on prior acquisitions(1)	665		40		—		705
Balance as of September 30, 2016	$	576,114	$	132,582	$	34,711	$	743,407


(1)	We annually adjust certain deferred taxes recorded in connection with acquisitions completed in fiscal 2001 and fiscal 2004, which resulted in an increase to goodwill and net deferred tax liabilities of $0.7 million for fiscal 2016.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred charges and other assets

Deferred charges and other assets as of September 30, 2016 and 2015 were comprised of the following accounts.



	September 30
	2016		2015
	(In thousands)
Marketable securities	$	72,701	$	74,200
Regulatory assets	214,890		182,573
Assets from risk management activities	1,822		368
Other	15,872		18,343
Total	$	305,285	$	275,484

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities as of September 30, 2016 and 2015 were comprised of the following accounts.



	September 30
	2016		2015
	(In thousands)
Trade accounts payable	$	114,533	$	78,534
Accrued gas payable	108,526		119,825
Accrued liabilities	36,375		40,583
Total	$	259,434	$	238,942

Other current liabilities

Other current liabilities as of September 30, 2016 and 2015 were comprised of the following accounts.



	September 30
	2016		2015
	(In thousands)
Customer credit balances and deposits	$	81,890	$	100,232
Accrued employee costs	47,058		47,602
Deferred gas costs	20,180		28,100
Accrued interest	34,863		34,914
Liabilities from risk management activities	56,771		9,568
Taxes payable	104,457		93,674
Pension and postretirement obligations	36,606		21,857
Current deferred tax liability	—		55,918
Regulatory cost of removal accrual	52,610		56,123
Other	14,601		9,966
Total	$	449,036	$	457,954

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred credits and other liabilities

Deferred credits and other liabilities as of September 30, 2016 and 2015 were comprised of the following accounts.



	September 30
	2016		2015
	(In thousands)
Customer advances for construction	$	9,850	$	9,316
Regulatory liabilities	4,152		3,693
Asset retirement obligation	13,404		9,063
Liabilities from risk management activities	184,048		110,539
Other	34,236		29,085
Total	$	245,690	$	161,696

Leases

We have entered into operating leases for office and warehouse space, vehicles and heavy equipment used in our operations. The remaining lease terms range from one to 18 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. Renewal options exist for certain of these leases.

The related future minimum lease payments at September 30, 2016 were as follows:



	Operating Leases
	(In thousands)
2017	$	17,073
2018	16,824
2019	15,450
2020	14,479
2021	14,335
Thereafter	47,714
Total minimum lease payments	$	125,875

Consolidated lease and rental expense amounted to $32.6 million, $32.5 million and $31.7 million for fiscal 2016, 2015 and 2014.

Commitments and Contingencies

Litigation

We are a party to various litigation that has arisen in the ordinary course of our business. While the results of such litigation cannot be predicted with certainty, we believe the final outcome of such litigation 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 regulated distribution divisions maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.

Our Mid-Tex Division also maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at prices indexed to natural gas trading hubs. At September 30, 2016, we were committed to purchase 28.5 Bcf within one year, 4.2 Bcf within two to three years and 0.6 Bcf

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

beyond three years under indexed contracts. Purchases under these contracts totaled $85.3 million, $113.3 million and $140.9 million for 2016, 2015, 2014.

Our nonregulated segment has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At September 30, 2016, we were committed to purchase 93.5 Bcf within one year, 9.1 Bcf within two to three years and 0.2 Bcf after three years under indexed contracts. We are committed to purchase 11.9 Bcf within one year and 1.3 Bcf within one to three years under fixed price contracts with prices ranging from $0.25 to $3.16 per Mcf. Purchases under these contracts totaled $763.2 million , $1,141.3 million and $1,687.5 million for 2016, 2015 and 2014.

In addition, our nonregulated segment maintains long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts as of September 30, 2016 are as follows (in thousands):



2017	$	9,065
2018	2,336
2019	424
2020	400
2021	327
Thereafter	678
	$	13,230

Income Taxes

The components of income tax expense from continuing operations for 2016, 2015 and 2014 were as follows:



	2016			2015			2014
	(In thousands)
Current
Federal	$	—		$	—		$	—
State	6,822			7,251			5,527
Deferred
Federal	181,790			175,897			169,106
State	11,766			12,548			12,375
Investment tax credits	(5		)	(6		)	(6		)
	$	200,373		$	195,690		$	187,002

Reconciliations of the provision for income taxes computed at the statutory rate to the reported provisions for income taxes from continuing operations for 2016, 2015 and 2014 are set forth below:



	2016			2015			2014
	(In thousands)
Tax at statutory rate of 35%	$	192,667		$	178,768		$	166,887
Common stock dividends deductible for tax reporting	(2,570		)	(2,413		)	(2,307		)
State taxes (net of federal benefit)	11,504			12,869			11,636
Change in valuation allowance	1,324			4,998			6,969
Other, net	(2,552		)	1,468			3,817
Income tax expense	$	200,373		$	195,690		$	187,002

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, 2016 and 2015 are presented below:



	2016			2015
	(In thousands)
Deferred tax assets:
Employee benefit plans	$	122,682		$	121,619
Interest rate agreements	107,782			51,067
Net operating loss carryforwards	514,391			313,224
Charitable and other credit carryforwards	22,273			22,281
Other	23,648			36,695
Total deferred tax assets	790,776			544,886
Valuation allowance	(10,481		)	(10,872		)
Net deferred tax assets	780,295			534,014
Deferred tax liabilities:
Difference in net book value and net tax value of assets	(2,259,278		)	(1,890,886		)
Pension funding	(30,652		)	(35,247		)
Gas cost adjustments	(54,725		)	(43,634		)
Other	(38,696		)	(31,480		)
Total deferred tax liabilities	(2,383,351		)	(2,001,247		)
Net deferred tax liabilities	$	(1,603,056	)	$	(1,467,233	)
Deferred credits for rate regulated entities	$	861		$	412

At September 30, 2016, we had $494.0 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. In addition, the Company has $11.0 million in charitable contribution carryforwards to offset taxable income. The Company’s charitable contribution carryforwards expire in 2017 - 2021.

For state taxable income, the Company has $20.4 million of state net operating loss carryforwards (net of $11.0 million of federal effects) and $1.1 million of state tax credits carryforwards (net of federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards will begin to expire between 2017 and 2031.

We believe it is more likely than not that the benefit from certain charitable contribution carryforwards, 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 valuation allowance of $1.1 million and $5.0 million was established for the years ended September 30, 2016 and 2015. In addition, $1.4 million of deferred tax assets expired for which a valuation allowance had previously been recorded and $0.2 million of deferred tax assets expired for which a valuation allowance had not been previously recorded during the year ended September 30, 2016.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At September 30, 2016, we had recorded liabilities associated with unrecognized tax benefits totaling $20.3 million. The following table reconciles the beginning and ending balance of our unrecognized tax benefits:



	2016			2015
	(In thousands)
Unrecognized tax benefits - beginning balance	$	17,069		$	12,629
Increase (decrease) resulting from prior period tax positions	(290		)	1,009
Increase resulting from current period tax positions	3,519			3,431
Unrecognized tax benefits - ending balance	20,298			17,069
Less: deferred federal and state income tax benefits	(7,104		)	(5,974		)
Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year	$	13,194		$	11,095

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expense. During the years ended September 30, 2016 and 2015, the Company recognized approximately $2.5 million and $0.5 million in interest and penalties. The Company had approximately $3.3 million and $0.8 million for the payment of interest and penalties accrued at September 30, 2016 and 2015.

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 2007 and concluded substantially all Texas income tax matters through fiscal year 2010.

Financial Instruments

We use financial instruments to mitigate commodity price risk and interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. Currently, we utilize financial instruments in our regulated distribution and nonregulated segments. We currently do not manage commodity price risk with financial instruments in our regulated pipeline segment.

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, 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 by segment at September 30, 2016 and 2015:



	Regulated Distribution			Nonregulated		Total
	(In thousands)
September 30, 2016
Assets from risk management activities, current(1)	$	3,029		$	6,775	$	9,804
Assets from risk management activities, noncurrent	1,822			—		1,822
Liabilities from risk management activities, current(1)	(56,771		)	—		(56,771		)
Liabilities from risk management activities, noncurrent(1)	(184,048		)	—		(184,048		)
Net assets (liabilities)	$	(235,968	)	$	6,775	$	(229,193	)
September 30, 2015
Assets from risk management activities, current(2)	$	378		$	8,854	$	9,232
Assets from risk management activities, noncurrent	368			—		368
Liabilities from risk management activities, current(2)	(9,568		)	—		(9,568		)
Liabilities from risk management activities, noncurrent(2)	(110,539		)	—		(110,539		)
Net assets (liabilities)	$	(119,361	)	$	8,854	$	(110,507	)


(1)	Includes $25.7 million of cash held on deposit to collateralize certain regulated distribution financial instruments, which were used to offset current and noncurrent risk management liabilities. Also includes $24.7 million of cash held on

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

deposit to collateralize certain nonregulated financial instruments. Of this amount, $17.9 million was used to offset current and noncurent risk management liabilities under master netting arrangements and the remaining $6.8 million is classified as current risk management assets.


(2)	Includes $43.5 million of cash held on deposit to collateralize certain nonregulated financial instruments. Of this amount, $34.6 million was used to offset current and noncurrent risk management liabilities under master netting arrangements and the remaining $8.9 million is classified as current risk management assets.

Regulated Commodity Risk Management Activities

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

Our regulated 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 2015-2016 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 33 percent, or approximately 23.0 Bcf of the winter flowing gas requirements at a weighted average cost of approximately $3.14 per Mcf. We have not designated these financial instruments as hedges.

Nonregulated Commodity Risk Management Activities

In our nonregulated operations, we buy, sell and deliver natural gas at competitive prices by aggregating and purchasing gas supply, arranging transportation and storage logistics and effectively managing commodity price risk.

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

Gas delivery and related services - We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk associated with deliveries under fixed-priced forward contracts to either deliver gas to customers or purchase gas from suppliers. These financial instruments have maturity dates ranging from one to 63 months.
Transportation and storage services - Our nonregulated operations use storage and basis swaps, futures and various over-the-counter and exchange-traded options to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges for accounting purposes.
Aggregating and purchasing gas supply - Certain financial instruments, designated as fair value hedges, are used to hedge our natural gas inventory used in asset optimization activities.

Our nonregulated risk management activities are controlled through various risk management policies and procedures. Our Audit Committee has oversight responsibility for our nonregulated risk management limits and policies. A risk committee, comprised of corporate and business unit officers, is responsible for establishing and enforcing our nonregulated risk management policies and procedures.

Under our risk management policies, we seek to match our financial instrument positions to our physical storage positions as well as our expected current and future sales and purchase obligations in order to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Our operations can also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on September 30, 2016, our nonregulated segment had net open positions (including existing storage and related financial contracts) of 0.1 Bcf.

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 the then anticipated issuance of $500 million senior notes in October 2014. These notes were issued as planned in October 2014 and we settled swaps with the receipt of $13.4 million. Because the swaps were effective, the realized gain was recorded as a component of accumulated other comprehensive income and is being recognized as a component of interest expense over the 30-year life of the senior notes. In October 2012, we entered into forward starting interest rate swaps to fix the Treasury yield component associated with $210 million of the anticipated issuance of $250 million unsecured senior notes in fiscal 2017. 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, 2016, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of September 30, 2016, we had net long/(short) commodity contracts outstanding in the following quantities:



Contract Type	Hedge Designation	Regulated Distribution	Nonregulated
		Quantity (MMcf)
Commodity contracts	Fair Value	—	(19,395	)
	Cash Flow	—	39,278
	Not designated	18,595	71,147
		18,595	91,030

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 by operating segment as of September 30, 2016 and 2015. 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.



		Regulated Distribution					Nonregulated
	Balance Sheet Location	Assets		Liabilities			Assets			Liabilities
		(In thousands)
September 30, 2016
Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities	$	—	$	—		$	6,612		$	(21,903	)
Interest rate contracts	Other current assets / Other current liabilities	—		(68,481		)	—			—
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities	—		—			2,178			(3,779		)
Interest rate contracts	Deferred charges and other assets / Deferred credits and other liabilities	—		(198,008		)	—			—
Total		—		(266,489		)	8,790			(25,682		)
Not Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities	3,029		—			18,157			(18,812		)
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities	1,822		—			12,343			(12,701		)
Total		4,851		—			30,500			(31,513		)
Gross Financial Instruments		4,851		(266,489		)	39,290			(57,195		)
Gross Amounts Offset on Consolidated Balance Sheet:
Contract netting		—		—			(39,290		)	39,290
Net Financial Instruments		4,851		(266,489		)	—			(17,905		)
Cash collateral		—		25,670			6,775			17,905
Net Assets/Liabilities from Risk Management Activities		$	4,851	$	(240,819	)	$	6,775		$	—

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



		Regulated Distribution					Nonregulated
	Balance Sheet Location	Assets		Liabilities			Assets			Liabilities
		(In thousands)
September 30, 2015
Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities	$	—	$	—		$	11,680		$	(36,067	)
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities	—		—			126			(9,918		)
Interest rate contracts	Deferred charges and other assets / Deferred credits and other liabilities	—		(110,539		)	—			—
Total		—		(110,539		)	11,806			(45,985		)
Not Designated As Hedges:
Commodity contracts	Other current assets / Other current liabilities	378		(9,568		)	65,239			(65,780		)
Commodity contracts	Deferred charges and other assets / Deferred credits and other liabilities	368		—			14,318			(14,218		)
Total		746		(9,568		)	79,557			(79,998		)
Gross Financial Instruments		746		(120,107		)	91,363			(125,983		)
Gross Amounts Offset on Consolidated Balance Sheet:
Contract netting		—		—			(91,363		)	91,363
Net Financial Instruments		746		(120,107		)	—			(34,620		)
Cash collateral		—		—			8,854			34,620
Net Assets/Liabilities from Risk Management Activities		$	746	$	(120,107	)	$	8,854		$	—

Impact of Financial Instruments on the Income Statement

Hedge ineffectiveness for our nonregulated segment is recorded as a component of purchased gas cost and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the years ended September 30, 2016, 2015 and 2014, we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $21.6 million, $0.2 million and $1.9 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

Fair Value Hedges

The impact of our nonregulated commodity contracts designated as fair value hedges and the related hedged item on our consolidated income statement for the years ended September 30, 2016, 2015 and 2014 is presented below.



	Fiscal Year Ended September 30
	2016			2015			2014
	(In thousands)
Commodity contracts	$	3,516		$	10,311		$	(792	)
Fair value adjustment for natural gas inventory designated as the hedged item	18,079			(9,768		)	2,486
Total decrease in purchased gas cost	$	21,595		$	543		$	1,694
The decrease in purchased gas cost is comprised of the following:
Basis ineffectiveness	$	(1,390	)	$	811		$	(919	)
Timing ineffectiveness	22,985			(268		)	2,613
	$	21,595		$	543		$	1,694

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

To the extent that the Company’s natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market.

Cash Flow Hedges

The impact of cash flow hedges on our consolidated income statements for the years ended September 30, 2016, 2015 and 2014 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.



	Fiscal Year Ended September 30, 2016
	Regulated Distribution			Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts	$	—		$	(52,651	)	$	(52,651	)
Loss arising from ineffective portion of commodity contracts	—			(19		)	(19		)
Total impact on purchased gas cost	—			(52,670		)	(52,670		)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense	(546		)	—			(546		)
Total impact from cash flow hedges	$	(546	)	$	(52,670	)	$	(53,216	)



	Fiscal Year Ended September 30, 2015
	Regulated Distribution			Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI for effective portion of commodity contracts	$	—		$	(41,716	)	$	(41,716	)
Loss arising from ineffective portion of commodity contracts	—			(325		)	(325		)
Total impact on purchased gas cost	—			(42,041		)	(42,041		)
Net loss on settled interest rate agreements reclassified from AOCI into interest expense	(853		)	—			(853		)
Total impact from cash flow hedges	$	(853	)	$	(42,041	)	$	(42,894	)



	Fiscal Year Ended September 30, 2014
	Regulated Distribution			Nonregulated		Consolidated
	(In thousands)
Gain reclassified from AOCI for effective portion of commodity contracts	$	—		$	8,365	$	8,365
Gain arising from ineffective portion of commodity contracts	—			198		198
Total impact on purchased gas cost	—			8,563		8,563
Net loss on settled interest rate agreements reclassified from AOCI into interest expense	(4,230		)	—		(4,230		)
Total impact from cash flow hedges	$	(4,230	)	$	8,563	$	4,333

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the years ended September 30, 2016 and 2015. 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
	2016			2015
	(In thousands)
Decrease in fair value:
Interest rate agreements	$	(99,029	)	$	(71,003	)
Forward commodity contracts	(11,662		)	(49,211		)
Recognition of losses in earnings due to settlements:
Interest rate agreements	347			542
Forward commodity contracts	32,117			25,448
Total other comprehensive income (loss) from hedging, net of tax(1)	$	(78,227	)	$	(94,224	)


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

Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of September 30, 2016. 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			Commodity Contracts			Total
	(In thousands)
2017	$	(447	)	$	(3,983	)	$	(4,430	)
2018	(649		)	(561		)	(1,210		)
2019	(673		)	(414		)	(1,087		)
2020	(698		)	(26		)	(724		)
2021	(698		)	2			(696		)
Thereafter	(15,139		)	—			(15,139		)
Total(1)	$	(18,304	)	$	(4,982	)	$	(23,286	)


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

Financial Instruments Not Designated as Hedges

The impact of financial instruments that have not been designated as hedges on our consolidated income statements for the years ended September 30, 2016, 2015 and 2014 was an increase (decrease) in purchased gas cost of $(15.5) million, $15.5 million and $(5.0) million. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.

As discussed above, financial instruments used in our regulated distribution segment are not designated as hedges. However, there is no earnings impact on our regulated 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.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2016 and 2015. 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.



	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)(1)		Significant Other Unobservable Inputs (Level 3)		Netting and Cash Collateral(2)			September 30, 2016
	(In thousands)
Assets:
Financial instruments
Regulated distribution segment	$	—	$	4,851	$	—	$	—		$	4,851
Nonregulated segment	—		39,290		—		(32,515		)	6,775
Total financial instruments	—		44,141		—		(32,515		)	11,626
Hedged portion of gas stored underground	52,578		—		—		—			52,578
Available-for-sale securities
Money market funds	—		2,630		—		—			2,630
Registered investment companies	38,677		—		—		—			38,677
Bonds	—		31,394		—		—			31,394
Total available-for-sale securities	38,677		34,024		—		—			72,701
Total assets	$	91,255	$	78,165	$	—	$	(32,515	)	$	136,905
Liabilities:
Financial instruments
Regulated distribution segment	$	—	$	266,489	$	—	$	(25,670	)	$	240,819
Nonregulated segment	—		57,195		—		(57,195		)	—
Total liabilities	$	—	$	323,684	$	—	$	(82,865	)	$	240,819

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(3)			September 30, 2015
	(In thousands)
Assets:
Financial instruments
Regulated distribution segment	$	—	$	746	$	—	$	—		$	746
Nonregulated segment	—		91,363		—		(82,509		)	8,854
Total financial instruments	—		92,109		—		(82,509		)	9,600
Hedged portion of gas stored underground	43,901		—		—		—			43,901
Available-for-sale securities
Money market funds	—		1,072		—		—			1,072
Registered investment companies	40,619		—		—		—			40,619
Bonds	—		32,509		—		—			32,509
Total available-for-sale securities	40,619		33,581		—		—			74,200
Total assets	$	84,520	$	125,690	$	—	$	(82,509	)	$	127,701
Liabilities:
Financial instruments
Regulated distribution segment	$	—	$	120,107	$	—	$	—		$	120,107
Nonregulated segment	—		125,983		—		(125,983		)	—
Total liabilities	$	—	$	246,090	$	—	$	(125,983	)	$	120,107

(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.

(2)

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of September 30, 2016, we had $25.7 million of cash held in margin accounts to collateralize certain regulated distribution financial instruments, which were used to offset current and noncurrent risk management liabilities. As of September 30, 2016 we also had $24.7 million of cash held in margin accounts to collateralize certain nonregulated financial instruments. Of this amount, $17.9 million was used to offset current and noncurrent risk management liabilities under master netting agreements and the remaining $6.8 million is classified as current risk management assets.

(3)

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of September 30, 2015 we had $43.5 million of cash held in margin accounts to collateralize certain nonregulated financial instruments. Of this amount, $34.6 million was used to offset current and noncurrent risk management liabilities under master netting agreements and the remaining $8.9 million is classified as current risk management assets.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)
As of September 30, 2016
Domestic equity mutual funds	$	26,692	$	6,419	$	(590	)	$	32,521
Foreign equity mutual funds	4,954		1,202		—			6,156
Bonds	31,296		108		(10		)	31,394
Money market funds	2,630		—		—			2,630
	$	65,572	$	7,729	$	(600	)	$	72,701
As of September 30, 2015
Domestic equity mutual funds	$	27,643	$	7,332	$	(456	)	$	34,519
Foreign equity mutual funds	5,261		905		(66		)	6,100
Bonds	32,423		106		(20		)	32,509
Money market funds	1,072		—		—			1,072
	$	66,399	$	8,343	$	(542	)	$	74,200

At September 30, 2016 and 2015, our available-for-sale securities included $41.3 million and $41.7 million related to assets held in separate rabbi trusts for our supplemental executive retirement plans as discussed in Note 7. At September 30, 2016 we maintained investments in bonds that have contractual maturity dates ranging from October 2016 through May 2020.

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, 2016:



	September 30, 2016
	(In thousands)
Carrying Amount	$	2,460,000
Fair Value	$	2,844,990

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Subsequent Event

On October 29, 2016, AEH entered into a Membership Interest Purchase Agreement (the Agreement) with CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. to sell all of the equity interests of AEM for $40.0 million plus working capital at the date of closing. No material gain or loss is currently anticipated in connection with the closing of this transaction. We expect this transaction to close during the second quarter of fiscal 2017.

The following table summarizes the approximate value of the assets and liabilities that are part of the disposal group as of September 30, 2016:



	September 30, 2016
	(In thousands)
Assets:
Net property, plant and equipment	$	13,000
Accounts receivable	94,000
Gas stored underground	56,000
Other current assets	13,000
Goodwill	15,000
Deferred charges and other assets	300
Total assets included in disposal group	$	191,300

Liabilities:
Accounts payable and accrued liabilities	$	71,000
Other current liabilities	8,000
Deferred credits and other	200
Total liabilities included in disposal group	$	79,200

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 regulated distribution segment is mitigated by the large number of individual customers and diversity in our customer base. The credit risk for our other segments is not significant.

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 2016:
Operating revenues
Regulated distribution	$	638,602		$	849,685		$	414,226		$	389,353
Regulated pipeline	94,677			95,703			109,249			109,204
Nonregulated	272,524			287,395			214,555			291,889
Intersegment eliminations	(99,582		)	(100,490		)	(105,114		)	(111,927		)
	906,221			1,132,293			632,916			678,519
Gross profit	443,763			517,811			407,311			376,011
Operating income	196,205			250,016			137,164			84,633
Net income	102,861			141,810			71,193			34,240
Net income per share — basic	$	1.00		$	1.38		$	0.69		$	0.33
Net income per share — diluted	$	1.00		$	1.38		$	0.69		$	0.33



	Quarter Ended
	December 31			March 31			June 30			September 30
	(In thousands, except per share data)
Fiscal year 2015:
Operating revenues
Regulated distribution	$	846,772		$	1,130,613		$	416,794		$	369,656
Regulated pipeline	83,567			91,730			97,008			97,807
Nonregulated	462,288			438,322			278,769			292,830
Intersegment eliminations	(133,862		)	(120,597		)	(106,170		)	(103,391		)
	1,258,765			1,540,068			686,401			656,902
Gross profit	423,285			520,738			381,673			354,321
Operating income	187,725			250,210			117,607			75,853
Net income	97,595			137,684			56,281			23,515
Net income per share — basic	$	0.96		$	1.35		$	0.55		$	0.23
Net income per share — diluted	$	0.96		$	1.35		$	0.55		$	0.23

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