Atos
Annual Report 2018

Plain-text annual report

Atmos Energy Corporation 2018 Integrated Annual Report Our Vision: To Be the Nation’s Safest Natural Gas Company A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Atmos Energy at a Glance Delivering safe, clean and economical energy to more than 3 million homes and businesses Our Service Area Colorado-Kansas Division Denver, CO West Texas Division Lubbock, TX Atmos Energy Corporation Headquarters, Dallas, TX Kentucky/Mid-States Division Franklin, TN Waha Hub Mid-Tex Division Atmos Pipeline-Texas Division Dallas, TX Carthage Hub Mississippi Division Flowood, MS Katy Hub Louisiana Division Baton Rouge, LA Natural gas distribution areas Division offices Proprietary storage Major gas delivery hubs Investment Highlights > Regulated distribution assets in eight states serving more than 3 million customers. > Projected annual capital expenditures of about $9 to $10 billion through fiscal 2023; over 80% spent on safety and reliability. > Earning on about 85% of annual capital expenditures within 6 months and on 99% within 12 months. > 6% to 8% forecasted earnings per share and dividend growth through fiscal 2023. > 16 consecutive years of annual EPS growth; 34 consecutive years of annual dividend growth. ON THE COVER: Marc Scheller, Field Construction Coordinator (kneeling), and Ruben Ramos, Operation Supervisor, review maps for a project replacing 3.3 miles of 6-inch, 10-inch and 12-inch high pressure steel main lines, which serve as one of the main feeds into Greeley, Colorado. s A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T To Our Shareholders Atmos Energy is a company driven by investments: in our communities, in innovation, in our operational assets and in our employees. We see this in our daily efforts to improve the lives of others and to contribute to our communities. Our 4,600 employees are committed to serving our customers exceptionally well while ensuring customer and employee safety in the 1,400 communities we serve. For Atmos Energy, fiscal year 2018 marked another successful milepost in our long, sustainable journey to being the nation’s safest natural gas company. We invested $1.5 billion in modernizing our transmission and distribution system. Earnings per diluted share increased for the 16th consecutive year, and dividends increased for the 34th consecutive year. We were recognized as the Most Trusted Utility Brand in the South by Market Strategies International in their annual Cogent Reports Utility Trusted Brand and Customer Engagement: Residential Study. And our employees continue to execute our long-term growth strategy of investing in the modernization of our system, mitigating risk, and providing exceptional service to our customers in the communities where we live and work. Today, there is heightened concern over the age and safety of our nation’s infrastructure, which includes roads and bridges, as well as water, electrical and natural gas delivery systems. We recognized this need long ago. We have been increasing our rate of pipe replacement each year, and it is now among the highest of our peers nationwide. Over the last 10 years, we have invested $9 billion, and we plan to spend $9-$10 billion over the next five years. Our long-term strategy of investing in safety and reliability benefits our customers, employees, shareholders and the communities we serve. Twenty years ago, we established the guiding principles that define our culture, which we refer to as AtmoSpirit. These principles – Inspire Trust, Be at Your Best, Bring Out the Best in Others, Make a Difference and Focus on the Future – summarize the values, beliefs and behaviors we embrace as a company. They are the foundation upon which we will meet the needs of all of the stakeholders who are vital to the long-term sustainability of Atmos Energy. Our employees have followed these principles without seeking recognition or awards, and it is this attitude that will propel our future. Safely owning and operating more than 75,000 miles of distribution and transmission pipelines, many of which serve some of the fastest-growing communities in the country, requires a strong partnership with all of our stakeholders. That is why we are introducing our first integrated annual report. This report will highlight not only our fiscal 2018 financial performance, but also a few of the many things we do as a company every day to meet the needs of all of our stakeholders. We appreciate your interest in Atmos Energy, and we look forward to continuing on our journey to be the nation’s safest natural gas company. Kim R. Cocklin Executive Chairman of the Board Michael E. Haefner President and Chief Executive Officer November 15, 2018 ATMOS ENERGY CORPORATION | 1 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Corporate Governance Strong governance is core to accomplishing our vision. From our Board of Directors to all of our employees, we expect everyone to take responsibility for doing what is right for all our stakeholders. That means conducting business ethically, instilling accountability in our employees, and working with business partners who share our high standards and principles. Our Operating Principles Being the largest publicly traded, fully regulated natural gas-only company comes with great responsibility. Our example reflects on the entire industry. We have a bold vision: to be the safest provider of natural gas services, to be recognized for exceptional service, to be a great employer and to achieve superior financial results. To achieve this vision, we must operate our business exceptionally well, invest in our people and infrastructure, and enhance our culture. Our operating principles are essential to executing our strategy and to sustaining our operating and financial performance. Operating Principles 1 2 3 4 5 6 Execute Exceptionally Well Mitigate Risk Improve Every Day Adapt Quickly Develop Employees, Grow Leaders and Shape Culture Build Relationships and Give Back ATMOS ENERGY CORPORATION | 3 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T We evaluate new business partners not only for their quality and competence, but also for their alignment with our ethical standards and values. Leading with Integrity Our Code of Conduct sets guidelines for ethical business conduct among our directors, officers and employees. They are required to complete annual code-of-conduct training, which helps them recognize and deal with ethical issues including, but not limited to, conflicts of interest, gifts and entertainment, use of confidential information, fair dealing, protection of corporate assets, and compliance with rules and regulations. We provide an anonymous hotline for employees and the public to report any suspected violations. We also expect our business partners to operate ethically. We evaluate new business partners not only for their quality and competence, but also for their alignment with our ethical standards and values. Moreover, we use local and minority-owned businesses in many of our contracting services. We are a proud government contractor, and we partner with a full range of well-qualified, diverse local businesses, from landscapers and general contractors to auto mechanics and plumbers. Board of Directors Our Board of Directors has the responsibility for risk oversight of the Company as a whole. The Board’s leadership structure is designed so that independent directors exercise oversight of the Company’s management and key issues related to strategy and risk. Only independent directors serve on the Board’s Audit Committee, Human Resources Committee, and Nominating and Corporate Governance Committee, and all standing Board committees are chaired by independent directors. Additionally, independent directors regularly hold executive sessions of the Board outside the presence of the Executive Chairman, the President and CEO, or any other Company employee. And they generally meet in a private session with the Executive Chairman and the CEO at regularly scheduled Board Leadership Demographics 21% 36% 60% 26% Women on the Board of Directors Women and minorities on the Board of Directors Women or minority appointments to the Board in the last 5 years Women and minority officers New Hire Demographics 38% 38% 48% Women or minority new hires Women or minority senior engineers Women or minority entry-level engineers 4 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Cybersecurity Commitment We are dedicated to keeping sensitive information about our employees, customers, vendors and company secure. We are vigilant in assessing our risk of cyber threats and respond accordingly. We have a continued cycle of process improvement to help us respond to the changing cybersecurity landscape. Supporting Strong Governance In addition to our Code of Conduct, our Board has adopted several policies and guidelines to support good conduct and governance: • Our Corporate Governance Guidelines assist the Board in exercising its responsibilities to the Company and our shareholders by providing a framework under which the Board may conduct business. Our Insider Trading Prevention Program governs the purchase or sale of Company securities by our directors and employees, especially when any material, nonpublic information relating to the Company may be in the possession of any director or employee. Our Political Activities Policy provides guidelines on our Company lobbying and political spending activities, as well as engagement by our employees in the overall political process. Our Risk Compliance Committee has oversight over our safety practices and cybersecurity. Our shareholders vote on executive compensation every year at our annual shareholders’ meeting. • • • • meetings. Directors serve one-year terms upon election and are re-elected to subsequent one-year terms by a shareholder vote at the annual shareholder’s meeting. Knowing that an effective Board of Directors represents diverse viewpoints and backgrounds, we evaluate each Director’s continued service annually, considering factors such as diversity of skills, background and experience, age, professional background, financial literacy, availability, independence and other relevant leadership qualities. Our Audit Committee is responsible for overseeing risks associated with financial and accounting matters, including compliance with all legal and regulatory requirements, and internal control over financial reporting. In addition, the Audit Committee has oversight responsibility for the Company’s overall business risk management process, which includes the identification, assessment, mitigation and monitoring of key business risks, including cybersecurity, on a company-wide basis. Being a Diverse Company Part of being a responsible business is recognizing the value of diversity in our leadership and workforce. We are committed to having a workforce that reflects the diversity of each of the 1,400 unique communities we serve. We are constantly striving to enhance our talent pipeline by recruiting and hiring the best candidates. Management Committee Our Management Committee, composed of senior leaders, leads the execution of the Company’s strategy as approved by the Board of Directors. The Committee actively monitors our operations and financial performance; ensures com- pliance with our policies, procedures and ethical business practices; and develops our strategy to achieve sustainable, long-term performance. ATMOS ENERGY CORPORATION | 5 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Fiscal 2018 Highlights Earnings per diluted share increased for the 16th consecutive year, and dividends increased for the 34th consecutive year. We invested $1.5 billion in modernizing our transmission and distribution system. In addition, our consistent investment in the safety and technical training of our workforce and our successful completion of infrastructure projects helped sustain our financial stability and continued growth. 735 distribution miles 155 transmission miles 54,000 lines 127,000 hours We replaced 735 miles We replaced 155 miles We replaced more than We conducted 127,000 of aging natural gas of transmission pipe- 54,000 service lines. hours of safety and distribution pipelines to lines in fiscal 2018. make our safe system even safer and more reliable. technical training in order to continue to provide safe and reliable service. 11.1% $1.94 per share 255% return $93.91 per share Adjusted earnings per Dividends paid in fiscal Total shareholder return Our stock closed at diluted share from 2018 were $1.94 per in fiscal 2018 was $93.91 per share on continuing operations share. In November 14.5 percent. Since we September 28, 2018. increased 11.1 percent, to $4.00* for fiscal 2018, marking our 16th 2018, the Board of launched our growth Directors increased the through investment dividend for the 35th strategy in October consecutive annual consecutive year by 2011, total return to our increase. Adjusted net raising the indicated shareholders has been income for the fiscal rate for fiscal 2019 to 255.6 percent. year was $444 million, $2.10 per share, an 8.2 compared to $396 million percent increase over in fiscal 2017. fiscal 2018. *This is a Non-GAAP measure. See page 8 for a reconciliation of our adjusted earnings per share to our GAAP financial results. 6 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T System Modernization Supports Earnings Growth Constructive Regulatory Mechanisms Support Efficient Conversion of Investments in Safety and Reliability into Financial Results $9 to $10 billion in annual capital investments through 2023 Constructive rate mechanisms reducing regulatory lag 6% to 8% consolidated EPS growth ) s n o i l l i b n i ( e s a B e t a R $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 0 $14.5-$15.5 $8.0 $4.3 2013 2018 2023E Pipeline and Storage Distribution Adjusted Earnings per Share $5.40-$5.80 $4.002 $3.601 ~85% Earning on Annual Investments Within 0–6 Months Within 7–12 Months $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Greater than 12 Months 2017 2018 2023E 1 Excludes $0.13 per share associated with discontinued operations 2 Excludes $1.43 per share associated with the implementation of the 2017 Tax Cuts and Jobs Act (TCJA) 5,000-6,000 miles 250,000-300,000 service lines 10 to 15% reduction $66 per month Over the next five years, we expect to replace 5,000-6,000 miles of aging natural gas distribution and transmission pipelines to make our system even safer and more reliable. Over the next five years, we expect to replace 250,000-300,000 steel service lines. Over the next five years, our system modernization efforts are expected to reduce methane emissions from our system by 10-15 percent. Our customers will continue to enjoy safe and clean natural gas at affordable prices. By 2023, we anticipate their average monthly bill will be $66, which is just 6 percent higher than the average monthly bill in 2008. ATMOS ENERGY CORPORATION | 7 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Customer bills remain affordable, while shareholders have benefited from our investments as our share price has appreciated with earnings growth. Average Monthly Customer Bills $70 $60 $50 $40 $30 $20 $10 $0 $66 $56 08 09 10 11 12 13 14 15 16 17 18 23E Estimated bills for 2023 are based on normal weather. Shareholder Value Combining share appreciation and dividends, Atmos Energy has consistently delivered total shareholder return above its gas distribution peers and the broader market over the past three and five years. Continued Outstanding Positive Total Returns to our Shareholders* 151% 104% 92% Atmos Energy Peer Group S&P 500 index 73% 58% 64% 15% 6% 18% 1-year 3-year 5-year * Total shareholder return contains share price appreciation and dividends paid. Non-GAAP Reconciliation (in thousands, except per share data) 2018 2017 Income from continuing operations TCJA non-cash income tax benefit Adjusted income from continuing operations Consolidated diluted EPS from continuing operations Diluted EPS from TCJA non-cash income tax benefit Adjusted diluted EPS from continuing operations $ 603,064 $ 382,711 (158,782) 444,282 5.43 (1.43) $ $ 4.00 $ $ $ $ — 382,711 3.60 — 3.60 8 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Safety With a commitment to being the safest provider of natural gas, we are doing our part to replace the nation’s aging natural gas delivery network. Over the last ten years, we have invested approximately $9 billion to modernize our pipeline infrastructure, which is more than three times our profits during that time. We continued our trend of investment this year, with $1.5 billion spent to make our safe system even safer. There’s Safety in Partnerships We own and operate over 75,000 miles of natural gas pipelines, serving some of the fastest-growing communities in the country. Safely owning, operating and modernizing such a dynamic system requires strong partnerships between the communities we serve, the regulators who oversee our activities, and the investors and creditors who ensure we have the financial resources necessary to continue improving our system. In the jurisdictions where we operate, regulators understand that it takes significant investment to modernize our natural gas delivery network. Regulatory mechanisms allow us to recover our costs and provide investors with a reasonable Earnings vs. Investments ($ Millions) Income from Continuing Operations Capital Expenditures 1,600 1,400 1,200 1,000 800 600 400 200 0 09 10 11 12 13 14 15 return so that we can make these needed investments. Today, we begin to earn on 85 percent of our capital spending within the first six months and 99 percent within the first year. Furthermore, the low price of natural gas enables us to continue investing in the safety and reliability of our system while keeping customers’ bills afford- able. During fiscal 2018, we were among the first utilities in the country to begin returning the benefits of the 2017 Tax Cuts and Jobs Act to our customers. Once the TCJA is fully implemented, our customers will save over $125 million per year. Since 2008, the average customer monthly bill has remained less than $60 a month. While we plan to invest $9-$10 billion over the next five years, we project that the average monthly bill will remain a great value for our customers. 16 17 18 ATMOS ENERGY CORPORATION | 9 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T As a company, we held over 53,000 hours of safety training in fiscal 2018. Our OSHA rate of recordable injuries has decreased 23% since 2013. Safety is Our Business We operate our system safely and in full compliance with state and federal regulations. We do this by monitoring our system, repairing leaks, and operating an emergency hotline 24 hours a day, 7 days a week to respond to and investigate reports of natural gas leaks. Every working day of the year, company employees are performing regularly scheduled leak surveys of our system, the frequency of which is governed by regulations. To determine the schedule for pipeline replacements, we use a risk-based prioritization model that considers factors like the pipe’s age, location, material, leak history, environmental factors and more. Our number-one priority is the safety of our employees, the public and our natural gas distribution system. To perform their work well, Atmos Energy employees involved in pipeline inspection and improvement are highly trained. Field employees spend about one-fifth of their time in the classroom, in addition to on-the-job training and education. They also receive extensive training in safe processes and how to keep customers and communities safe. As part of our never-ending quest to be the safest provider of natural gas services, field employees start each day with a safety meeting. As a company, we conducted over 53,000 hours of safety training in fiscal 2018. Our OSHA rate of recordable injuries has decreased 23 percent in the last five years. We have robust, multi-channel safety outreach efforts through our public awareness campaigns, community involvement, and continued relationships with regulators, city leaders and first responders. We use a variety of ways to deliver safety information to our customers and the public, including bill inserts, on-hold messaging, signage, customer e-mails and social media campaigns. In fiscal 2018, our social media safety campaigns received over 11 million views. Our safety mascots, Gus the Gopher and Rosie the Skunk, engage our customers and the public in learning how to call 811 before you dig, and what to do if you smell natural gas. We also partner with fire departments and other first responders in order to provide a seamless response in the event of a natural gas emergency. Our Atmos Energy First Responder Natural Gas Workshops provide emergency response teams with detailed information and procedures on how to safely work around natural gas and carbon monoxide. Meet Gus and Rosie Gus the Gopher and Rosie the Skunk are our natural gas safety ambassadors. Gus reminds people to call 811 before digging, and Rosie teaches people to detect natural gas using their senses. Gus the Gopher wins Our video “Gus the Gopher for Call 811” won the top video in the external category of the American Gas Association Safety Awareness Video Excellence awards. 10 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Investing in Technology to Improve Safety Atmos Energy reviews advances in technology and incorporates them as appropriate for leak detec- tion and monitoring. This includes state-of-the-art technologies for leak detection, monitoring and leak repair prioritization. We use the best available monitoring methods for safety and to better serve our customers, including advanced mobile detection technology for surveying our distribution system that is 1,000 times more sensitive than traditional technologies. Examples include: > Remote Methane Leak Detection (laser-based gas detector – RMLD) > Flame Ionization Detector (FID) > Cavity Ring-Down Spectroscopy (CRDS) > Combustible Gas Detector (CGI) > Optical Methane Detector (OMD) > Forward Looking Infrared Camera (FLIR) We use FLIR cameras, RMLDs, FIDs and CGIs to monitor compressors, distribution gate stations and storage fields. RMLD, CGI, CRDS and OMD are used to conduct mobile inspections of buried natural gas distribution and trans- mission pipelines. Choosing the proper equipment to do a leak survey is dependent on several different criteria, including but not limited to safety, weather, instrument capabilities, location, application and experience. New Technologies Keep Everyone Safer At Atmos Energy, we continually leverage new tech- nologies to keep our employees, our delivery network and the public safe. We use multiple technologies to perform leak surveys, some of which include infrared- based leak detection, laser-based technologies and new technologies that have been developed for our industry. We are always working with industry and technology partners to develop and evaluate new technologies to enhance safety. For years we have partnered with the Gas Technology Institute, which develops technology-based solutions for the natural gas industry. We were among the early participants in our industry to evaluate technologies that had the potential to be adapted to our business. This part- nership has produced tools we are incorporating into our daily processes, such as mobile technology that captures critical infrastructure data during construc- tion and operations. Safety Performance by the Numbers OSHA RATE – Recordable Injuries per hours worked DART RATE – Days Away/Restricted Duty/Transfer Injuries per hours worked RMVC RATE – Reportable Motor Vehicle Collision Rate OSHA RATE DART RATE RMVC RATE 2013 3.79 1.93 4.99 2017 2.91 1.92 4.97 Reported on a calendar-year basis. ATMOS ENERGY CORPORATION | 11 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T All Atmos Energy operations employees who are new to their roles spend weeks at Gas City perfecting their skills and enhancing their knowledge. A City Built for Training We are proud of our state-of-the-art training facility in Plano, Texas, the Charles K. Vaughan Center. It’s home to Gas City, where employees received more than 73,000 hours of hands-on technical training in fiscal 2018 and over 850,000 hours since the facility opened in 2010. All Atmos Energy operations em- ployees who are new to their roles spend weeks at Gas City perfecting their skills and enhancing their knowledge. We also hold natural gas safety events for first responders, community officials and school children at the center. Class is always in session at Gas City. Training Facts 53,000 73,000 850,000 Approximate total safety training hours in FY 2018 Approximate total technical training hours in FY2018 Approximate training hours since the Charles K. Vaughan Center opened in 2010 12 | ATMOS ENERGY CORPORATION ATMOS ENERGY CORPORATION | 13 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Environment As a distributor of natural gas, we work with the cleanest fossil fuel in existence. And thanks to advances in technology, America’s supply of natural gas will likely meet our energy needs for the next 100 years. Delivering this vital energy resource safely, reliably and with minimal environmental impact is our top priority. Natural Gas, the Cleanest Fossil Fuel Natural gas is the cleanest fossil fuel. From extraction to delivery, natural gas is 92 percent energy efficient, and it keeps improving. Local gas distribution systems are estimated to account for only 0.1 percent of natural gas emissions, down 74 percent since 1990. Leaks are decreasing, too. They’re down 25 percent from mains and 16 percent from service lines. Modernizing Infrastructure to Reduce our Carbon Footprint Replacing pipelines also reduces leaks and methane emissions. We track and report greenhouse gas emissions in accordance with the Environmental Protection Agency’s (EPA) Greenhouse Gas Reporting Rule, which requires reporting of greenhouse gas data and other relevant information from large sources and suppliers in the United States. In addition, all of our operating divisions report to various state agencies that have environmental jurisdiction over our activities. We are a founding partner of the EPA’s Natural Gas STAR Methane Challenge Program, a voluntary part- nership that encourages oil and natural gas companies to improve efficiency and reduce methane emissions. Since 2012, we’ve replaced over 3,500 miles of pipe. In that time, we’ve decreased total emissions due to the use and loss of natural gas by 13.7 percent. Over the next five years, we plan to replace between 5,000 and 6,000 miles of distribution and transmission pipes. Included in this total is the replacement of all remaining cast iron main by 2021. As we continue to replace infrastructure, we estimate a 50-percent reduction in methane emissions by 2035. Distribution Miles Replacement Rate s e l i M 1,000 800 600 400 200 0 13 14 15 16 17 18 19E-23E Industry Identified Materials – Bare Steel, Cast Iron, Vintage Plastics Other Risk-Based Materials Transmission Miles Replacement Rate s e l i M 180 160 140 120 100 80 60 40 13 14 15 16 17 18 19E-23E ATMOS ENERGY CORPORATION | 15 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Our LEED-certified buildings reduce water usage by about 50 to 60% annually. Protecting People, Places and Our Planet The environment we share with our customers, shareholders and communities is as important to us as it is to all stakeholders. Our goals are to minimize the release of any environmentally damaging substance; to reduce waste and dispose of it wisely; and to lessen our environmental impact by using safe technologies and procedures. We strive to minimize methane emissions when we install, repair and remove pipe. When possible, we use compression to transport natural gas into another pipe when we are temporarily taking assets out of service, which reduces the loss of natural gas into the environment. When compression is not a viable alternative, we flare or burn the natural gas versus venting it. Burning the natural gas converts it into carbon dioxide, which has a 21 percent smaller global warming impact compared to the methane released during venting. D E E L We also practice sustainable facility design using responsible materials and efficient building operations. We are proud to have built nine LEED-certified buildings, with four more underway as of September 30, 2018. Due to the sustainable design of our buildings, we have reduced our environmental footprint by approximately 541 metric tons of carbon dioxide, 4,868 grams of sulfur dioxide and 2,372 grams of nitrous oxide per year. Additionally, we estimate that our LEED-certified buildings reduce water usage by about 50 to 60 percent annually. Reclamation of areas disturbed during construction projects is also a priority. Before beginning any project, we conduct a comprehensive environmental review in order to understand our possible impact on species habitat, water and cultural resources. And when a project is finished, 16 | ATMOS ENERGY CORPORATION we strive to leave the smallest possible footprint. We sow seeds of native grasses to help with environmental restoration, and continue to monitor the surrounding vegetation density of the project area. In addition, we purchase credits from wetland mitigation banks, if necessary, to replace any wetlands that may have been impacted in the area in which we’ve worked. Partnering with Others to Promote Environmental Responsibility According to the EPA, municipal solid waste landfills are the third-largest source of human-related methane emissions in the United States. To prevent methane from migrating into the atmosphere, landfill gas producers capture and convert the emissions from landfills into a renewable energy source. Landfill gas producers need transmission companies like Atmos Energy to transport their renewable gas to market. Since 2010, we have partnered with one of the largest landfill gas producers in Louisiana at up to 4,500 Mcf/day. During non-peak demand periods, we purchase pipeline- quality natural gas, blend it with the natural gas from the landfill gas so that it meets pipeline quality standards, and then sell this gas to a power generator and local distribution company at cost. Similarly in Texas, we partner with two landfill facilities to receive and transport pipeline quality natural gas. Atmos Energy receives up to 7,000 Mcf/day of gas from one landfill and 3,100 Mcf/day of gas from the other. The methane pro- duced naturally at these landfills is captured and processed before it’s received to ensure it meets our current pipeline gas specification. While the transportation of landfill gas is a small part of what we do, it is an important part of a solution to economically reduce methane emissions.  Reducing the consumption and transportation of paper can make a big impact on our environment. That’s why we have provided our customers with a better, more environmentally friendly choice for receiving and paying their utility bills. Over 40 percent of our customers have signed up for electronic billing, giving us one of the highest e-bill percentages in the industry. In 2018, we saved over 152,000 pounds of paper, or the equivalent of approximately 1,800 trees, which we could not have done without the participation of our customers. Pipeline Projects Abound Pipeline replacement projects are in the works throughout our eight-state service area. The D-9 Project in Texas (pictured above), which is replacing 3.3 miles of 18-inch, 1955-vintage pipe with 20-inch high-pressure steel pipe, not only makes our system safer but also adds much-needed natural gas capacity. ATMOS ENERGY CORPORATION | 17 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Natural Gas: Making America Stronger Natural gas is more than a clean, reliable energy source: it’s a great investment in America’s future. By creating jobs, saving families money and helping protect the environment, natural gas is doing good things for Americans all across the country. number one America is now the world’s number-one producer of natural gas. Low natural gas prices have saved American businesses about $76 billion in energy savings since 2009. $76 billion 2 million jobs The industry supplies nearly 2 million jobs in America. By 2035, this is expected to rise to 3.5 million. Families save about $875 a year using natural gas appliances. $875 annually 18 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Natural Gas Advantage: Enhancing Communities Affordable It’s a fact that natural gas is helping to transform communities. Along with creating good-paying jobs, natural gas is a corner- stone of industries across our states, like manufacturing and agriculture. It reduces costs and increases energy efficiency at our schools. Because it’s reliable, natural gas ensures that hospitals have dependable and efficient operations and patient comfort. 68 MILLION U.S. HOMES USE NATURAL GAS Shippers, trucking fleets, municipalities, trash companies and public transit systems are achieving lower greenhouse gas emissions through greater use of natural gas vehicles. In fact, there are over 175,000 natural gas vehicles being used by companies such as UPS, Waste Management, AT&T, Ryder, Anheuser-Busch, Fed-Ex and others. That’s not all – over 11,000 public transit buses and new bus orders use natural gas. Natural Gas Advantage: Protecting Our Environment lowest level in 25 years You can breathe a little easier thanks to natural gas. Natural gas produces lower levels of emissions than other fossil fuels, and helps to protect the environment. So while U.S. natural gas production has risen significantly, our nation’s greenhouse gas emissions have dropped to their lowest level in over 25 years. That’s a win-win for us and for our planet. ATMOS ENERGY CORPORATION | 19 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Building Relationships Beyond a doubt, we believe people are the ultimate source of energy. Our relationships with our communities, employees and customers have earned us a reputation as an organization with a deeply human spirit. We never forget that we live in the communities we serve, which is all the more reason to give them our best. Giving Where We Serve and Making a Difference Giving back to the community is part of who we are as a company. We make a difference by offering customer assistance programs to help the elderly, disabled, veterans and low-income families in our service areas. Our Share the Warmth program, supported by donations from customers, employees and share- holders, distributes funds to local nonprofit organizations to help pay natural gas bills for eligible customers. We also participate in the federally funded Low Income Home Energy Assistance Program (LIHEAP), which helps meet the energy needs of underserved families. Being Good Neighbors Living, working and raising families in the communities we serve makes this commitment personal to all of our employees. Community service is a key part of our culture. In addition to providing energy assistance, we have a long history of committing 1.5 percent of our distribution division earnings to charitable organizations that offer community services in the areas we care most about: health, education and community development. We partner with agencies such as United Way and The Salvation Army during our annual week of giving campaign. We offer employees the opportunity to make a company-matched donation that supports the organization of their choice. We host Science, Technology, Engineering and Math (STEM) camps for youth, where we share information about energy industry careers. Individually, our employees also give generously of their time. Every year, Atmos Energy employees volunteer an average of more than 35,000 hours. Employees adopt a school, read to children, deliver Meals on Wheels, support Special Olympics, serve on local boards and commissions, and volunteer through Habitat for Humanity. FY 2018 Energy Assistance Programs $2.7 million Total assistance in FY 2018 11th Share the Warmth bus donated 11,478 Number of families assisted $1.2 million Contributed by customers to Share the Warmth FY 2018 Charitable Contributions $6.1 million Donated by Atmos Energy $700,000 Donated by employees 20 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T We provided our employees more than $1 million in education assistance over the last five years. Empowering Our People Our employees are our greatest asset. They’re also our most important investment. From recruitment to training to career development, we believe in providing our employees with the best tools and the most opportunities to succeed. We recruit and hire people with a variety of skills, talents, backgrounds and experiences who want to be part of our energetic, diverse and safety-conscious workforce. They learn about and experience our corporate culture in our three-day onboarding program. Those who teach the program are chosen based on how well they embody the AtmoSpirit culture. Also, we have a Culture Council made up of employees from across the enterprise chartered to strengthen, promote and sustain our culture. Employees who go through technical training learn every aspect of their jobs, from safety to customer service, and spend most of their time in hands-on training. They’re also trained on the job with coaches who ensure each person is ready to work properly and safely. We also want our employees to take their education as far as they desire, and we help them do so through the Robert W. Best Education Assistance program. Over the last five years, we provided our employees more than $1 million in education assistance. ATMOS ENERGY CORPORATION | 21 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Whether chatting with an agent or scheduling a service technician, customers receive efficient, knowledgeable and courteous service from our customer contact centers. Customer service by the numbers 3.9m 96% 97% Calls in FY18 Customers satisfied with agents Customers satisfied with on-site technicians 22 | ATMOS ENERGY CORPORATION A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Our 24/7 online Account Center makes it easy for customers to interact with us when it is convenient for them. 18-Year ESL Volunteer Collections Specialist Sonia Vazquez is director of the 350-student English as a Second Language (ESL) program at Prestonwood Baptist Church in Plano, Texas, where she has volunteered for 18 years, overseeing 11 classes. The primary student language is Spanish, followed by Portuguese. Classes are held two nights a week from September to May. The five-level course curriculum starts with Basic English and ends with idioms. “Idioms are the most difficult for the students to grasp because they translate the phrase literally,” Vazquez says. “Some- thing like ‘I am feeling under the weather’ makes them think: standing under an umbrella when it is raining or snowing.” Going the Extra Mile for Customers Among the core values that make our company sustainable is our dedication to exceptional customer service. Because we continue to invest in technologies which enable our customers to interact with us efficiently and at times that are convenient for them, our customer satisfaction scores keep climbing. Customers certainly appreciate our relentless drive to keep them safe, but they also notice that we go out of our way to make every customer’s experience a pleasant one. We’re friendly and efficient, we respond to their needs quickly, and we’re easy to interact with. We have continued to understand our customers’ needs and to invest in an advanced customer service system that provides flexibility in how they interact with us. These efforts have resulted in bills that are easier to read and a convenient, user-friendly online account center, which has increased the number of customers managing their accounts online by 35 per- cent. When customers do use our call center, we score high marks on customer satisfaction. Sharing the Warmth When the temperature drops, Atmos Energy generosity kicks in to help the elderly, disabled and other vulnerable customers. We work with hundreds of community action agencies to help customers pay their bills and stay warm. ATMOS ENERGY CORPORATION | 23 A T M O S E N E R G Y I N T E G R A T E D A N N U A L R E P O R T Leadership Board of Directors Robert W. Best Former Chairman of the Board, Atmos Energy Corporation Dallas, Texas Board member since 1997 Kim R. Cocklin Executive Chairman of the Board, Atmos Energy Corporation Dallas, Texas Board member since 2009 Kelly H. Compton Executive Director, The Hoglund Foundation Dallas, Texas Board member since 2016 Committees: Audit, Human Resources Sean Donohue Chief Executive Officer Dallas/Fort Worth International Airport Dallas, Texas Board member since 2018 Ruben E. Esquivel Vice President for Community and Corporate Relations, UT Southwestern Medical Center Dallas, Texas Board member since 2008 Committees: Audit, Executive, Human Resources, Work Session/ Annual Meeting (Chair) Robert C. Grable Founding Partner, Kelly Hart & Hallman LLP Fort Worth, Texas Board member since 2009 Committees: Audit, Executive, Nominating and Corporate Governance (Chair), Work Session/ Annual Meeting Stephen R. Springer Retired Senior Vice President and General Manager, Midstream Division, The Williams Companies, Inc. Fort Myers Beach, Florida Board member since 2005 Committee: Work Session/ Annual Meeting Rafael G. Garza President and Founder of RGG Capital Partners, LLC, and Co-Founder and Managing Director, Bravo Equity, LP Fort Worth, Texas Board member since 2016 Committees: Audit, Nominating and Corporate Governance Richard K. Gordon General Partner of Juniper Capital LP, and Juniper Capital III; Co-founder of Juniper Capital II, Houston, Texas Board member since 2001 Lead Director since 2016 Committees: Human Resources, Nominating and Corporate Governance Michael E. Haefner President and Chief Executive Officer, Atmos Energy Corporation Dallas, Texas Board member since 2015 Diana J. Walters Founder and Managing Partner, 575 Grant, LLC New York, NY Board member since 2018 Nancy K. Quinn Independent Energy Consultant Key Biscayne, Florida Board member since 2004 Former Lead Director Committees: Audit, Executive, Human Resources (Chair) Richard A. Sampson General Partner and Founder, RS Core Capital, LLC Denver, Colorado Board member since 2012 Committees: Audit (Chair), Executive, Human Resources Richard Ware II Chairman, Amarillo National Bank Amarillo, Texas Board member since 1994 Committees: Nominating and Corporate Governance, Audit, Work Session/Annual Meeting Charles K. Vaughan Honorary Director, Retired Chairman of the Board and Retired Lead Director, Atmos Energy Corporation Dallas, Texas Board member from 1983 to 2012 Senior Management Team Michael E. Haefner President and Chief Executive Officer Christopher T. Forsythe Senior Vice President and Chief Financial Officer David J. Park Senior Vice President, Utility Operations J. Kevin Akers Executive Vice President, Safety and Enterprise Services Karen E. Hartsfield Senior Vice President, General Counsel and Corporate Secretary J. Matt Robbins Senior Vice President, Human Resources 24 | ATMOS ENERGY CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2018 ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to OR Commission file number 1-10042 Atmos Energy Corporation (Exact name of registrant as specified in its charter) Texas and Virginia (State or other jurisdiction of incorporation or organization) Three Lincoln Centre, Suite 1800 5430 LBJ Freeway, Dallas, Texas (Address of principal executive offices) 75-1743247 (IRS employer identification no.) 75240 (Zip code) Registrant’s telephone number, including area code: (972) 934-9227 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common stock, No Par Value Name of Each Exchange on Which Registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Í No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No Í Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been sub- ject to such filing requirements for the past 90 days. Yes Í No ‘ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes Í No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Í Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ The aggregate market value of the common voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s No Í most recently completed second fiscal quarter, March 31, 2018, was $9,175,655,493. As of November 8, 2018, the registrant had 111,352,649 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Definitive Proxy Statement to be filed for the Annual Meeting of Shareholders on February 6, 2019 are incorporated by reference into Part III of this report. TABLE OF CONTENTS Page Glossary of Key Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . Item 9. Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. 4 15 20 20 22 22 22 24 25 45 46 103 103 105 105 106 106 106 106 Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Part IV [THIS PAGE INTENTIONALLY LEFT BLANK] GLOSSARY OF KEY TERMS Adjusted diluted EPS from continuing operations . . . . . . . . . . . . . . . . . . . . . Non-GAAP measure defined as diluted earnings per share from continuing operations before the one-time, non-cash income tax benefit Adjusted income from continuing operations . . . . . . . . . . . . . . . . . . . . . Non-GAAP measure defined as income from continuing operations before the one-time, non-cash income tax benefit AEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Atmos Energy Corporation AEH . . . . . . . . . . . . . . . . . . . . . . . . . . . . Atmos Energy Holdings, Inc. AEM . . . . . . . . . . . . . . . . . . . . . . . . . . . Atmos Energy Marketing, LLC AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Other Comprehensive Income ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Rate Mechanism ATO . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading symbol for Atmos Energy Corporation common stock on the NYSE Bcf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Billion cubic feet Contribution Margin . . . . . . . . . . . . . . . Non-GAAP measure defined as operating revenues less purchased gas cost COSO . . . . . . . . . . . . . . . . . . . . . . . . . . Committee of Sponsoring Organizations of the Treadway Commission DARR . . . . . . . . . . . . . . . . . . . . . . . . . . Dallas Annual Rate Review ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . Employee Retirement Income Security Act of 1974 FASB . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Accounting Standards Board FERC . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Energy Regulatory Commission GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . Generally Accepted Accounting Principles GRIP . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas Reliability Infrastructure Program GSRS . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas System Reliability Surcharge LTIP . . . . . . . . . . . . . . . . . . . . . . . . . . . Mcf MDWQ . . . . . . . . . . . . . . . . . . . . . . . . . Maximum daily withdrawal quantity Mid-Tex ATM Cities . . . . . . . . . . . . . . Represents a coalition of 47 incorporated cities or approximately . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thousand cubic feet 1998 Long-Term Incentive Plan 8 percent of the Mid-Tex Division’s customers. Mid-Tex Cities . . . . . . . . . . . . . . . . . . . Represents all incorporated cities other than Dallas and Mid-Tex ATM Cities, or approximately 72 percent of the Mid-Tex Division’s customers. MMcf . . . . . . . . . . . . . . . . . . . . . . . . . . . Million cubic feet Moody’s . . . . . . . . . . . . . . . . . . . . . . . . Moody’s Investor Service, Inc. NGA . . . . . . . . . . . . . . . . . . . . . . . . . . . Natural Gas Act of 1938 NYMEX . . . . . . . . . . . . . . . . . . . . . . . . New York Mercantile Exchange, Inc. NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock Exchange PHMSA . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline and Hazardous Materials Safety Administration PPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Protection Act of 2006 PRP . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline Replacement Program RRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Railroad Commission of Texas RRM . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate Review Mechanism RSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate Stabilization Clause S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard & Poor’s Corporation SAVE . . . . . . . . . . . . . . . . . . . . . . . . . . Steps to Advance Virginia Energy SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States Securities and Exchange Commission SGR . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental Growth Rider SIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . System Integrity Rider SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stable Rate Filing SSIR . . . . . . . . . . . . . . . . . . . . . . . . . . . System Safety and Integrity Rider TCJA . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Cuts and Jobs Act of 2017 WNA . . . . . . . . . . . . . . . . . . . . . . . . . . . Weather Normalization Adjustment 3 The terms “we,” “our,” “us”, “Atmos Energy” and the “Company” refer to Atmos Energy Corporation and its subsidiaries, unless the context suggests otherwise. PART I ITEM 1. Business. Overview and Strategy Atmos Energy Corporation, headquartered in Dallas, Texas, and incorporated in Texas and Virginia, is one of the country’s largest natural-gas-only distributors based on number of customers. We deliver safe, clean, reli- able, efficient, affordable and abundant natural gas through regulated sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers in eight states located pri- marily in the South. We also operate one of the largest intrastate pipelines in Texas based on miles of pipe. Atmos Energy’s vision is to be the safest provider of natural gas services. We intend to achieve this vision by: ‰ operating our business exceptionally well ‰ investing in our people and infrastructure ‰ enhancing our culture. Since 2011, our operating strategy has focused on modernizing our distribution and transmission system to improve safety and reliability. Since that time, our capital expenditures have increased approximately 13% annu- ally. Additionally, during this period, we have added new or modified existing regulatory mechanisms to reduce regulatory lag. Our ability to increase capital spending annually to modernize our system has increased our rate base, which has resulted in rising earnings per share and shareholder value. Our core values include focusing on our employees and customers while conducting our business with honesty and integrity. We continue to strengthen our culture through ongoing communications with our employ- ees and enhanced employee training. Operating Segments As of September 30, 2018, we manage and review our consolidated operations through the following three reportable segments: ‰ The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. ‰ The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana. ‰ The natural gas marketing segment is comprised of our discontinued natural gas marketing business. These operating segments are described in greater detail below. 4 Distribution Segment Overview Our distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The following table summarizes key information about our six regulated natural gas distribution divisions, presented in order of total rate base. Division Service Areas Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas, including the Dallas/Fort Worth Metroplex Kentucky Tennessee Virginia Louisiana Amarillo, Lubbock, Midland Mississippi Colorado Kansas Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communities Served 550 Customer Meters 1,697,171 230 270 80 110 170 182,510 150,661 24,396 362,233 313,828 269,333 120,384 135,820 We operate in our service areas under terms of non-exclusive franchise agreements granted by the various cities and towns that we serve. At September 30, 2018, we held 1,013 franchises having terms generally ranging from five to 35 years. A significant number of our franchises expire each year, which require renewal prior to the end of their terms. Historically, we have successfully renewed these franchises and believe that we will continue to be able to renew our franchises as they expire. Revenues in this operating segment are established by regulatory authorities in the states in which we oper- ate. These rates are intended to be sufficient to cover the costs of conducting business, including a reasonable return on invested capital. In addition, we transport natural gas for others through our distribution systems. Rates established by regulatory authorities often include cost adjustment mechanisms for costs that (i) are subject to significant price fluctuations compared to our other costs, (ii) represent a large component of our cost of service and (iii) are generally outside our control. Purchased gas cost adjustment mechanisms represent a common form of cost adjustment mechanism. Pur- chased gas cost adjustment mechanisms provide natural gas distribution companies a method of recovering pur- chased gas costs on an ongoing basis without filing a rate case because they provide a dollar-for-dollar offset to increases or decreases in the cost natural gas. Therefore, although substantially all of our distribution operating revenues fluctuate with the cost of gas that we purchase, distribution Contribution Margin (a Non-GAAP meas- ure defined as operating revenues less purchased gas cost) is generally not affected by fluctuations in the cost of gas. Additionally, some jurisdictions have performance-based ratemaking adjustments to provide incentives to distribution companies to minimize purchased gas costs through improved storage management and use of finan- cial instruments to lock in gas costs. Under the performance-based ratemaking adjustments, purchased gas costs savings are shared between the utility and its customers. Our supply of natural gas is provided by a variety of suppliers, including independent producers, marketers and pipeline companies, withdrawals of gas from proprietary and contracted storage assets and peaking and spot purchase agreements, as needed. Supply arrangements consist of both base load and swing supply (peaking) quantities and are contracted from our suppliers on a firm basis with various terms at market prices. Base load quantities are those that flow at a constant level throughout the month and swing supply quantities provide the flexibility to change daily quanti- ties to match increases or decreases in requirements related to weather conditions. 5 Except for local production purchases, we select our natural gas suppliers through a competitive bidding process by periodically requesting proposals from suppliers that have demonstrated that they can provide reliable service. We select these suppliers based on their ability to deliver gas supply to our designated firm pipeline receipt points at the lowest reasonable cost. Major suppliers during fiscal 2018 were Castleton Commodities Merchant Trading L.P., CenterPoint Energy Services, Inc., Concord Energy LLC, ConocoPhillips Company, Devon Gas Services, L.P., DTE Energy Trading Inc., Mieco Inc., Sequent Energy Management, L.P., Targa Gas Marketing LLC and Tenaska Gas Storage & Marketing Ventures, LLC. The combination of base load, peaking and spot purchase agreements, coupled with the withdrawal of gas held in storage, allows us the flexibility to adjust to changes in weather, which minimizes our need to enter into long-term firm commitments. We estimate our peak-day availability of natural gas supply to be approximately 4.4 Bcf. The peak-day demand for our distribution operations in fiscal 2018 was on January 16, 2018, when sales to customers reached approximately 3.8 Bcf. Currently, our distribution divisions utilize 38 pipeline transportation companies, both interstate and intra- state, to transport our natural gas. The pipeline transportation agreements are firm and many of them have “pipeline no-notice” storage service, which provides for daily balancing between system requirements and nomi- nated flowing supplies. These agreements have been negotiated with the shortest term necessary while still main- taining our right of first refusal. The natural gas supply for our Mid-Tex Division is delivered primarily by our Atmos Pipeline — Texas Division (APT). To maintain our deliveries to high priority customers, we have the ability, and have exercised our right, to curtail deliveries to certain customers under the terms of interruptible contracts or applicable state regulations or statutes. Our customers’ demand on our system is not necessarily indicative of our ability to meet current or anticipated market demands or immediate delivery requirements because of factors such as the physical limi- tations of gathering, storage and transmission systems, the duration and severity of cold weather, the availability of gas reserves from our suppliers, the ability to purchase additional supplies on a short-term basis and actions by federal and state regulatory authorities. Curtailment rights provide us the flexibility to meet the human-needs requirements of our customers on a firm basis. Priority allocations imposed by federal and state regulatory agen- cies, as well as other factors beyond our control, may affect our ability to meet the demands of our customers. We do not anticipate any problems with obtaining additional gas supply as needed for our customers. Pipeline and Storage Segment Overview Our pipeline and storage segment consists of the pipeline and storage operations of APT and our natural gas transmission operations in Louisiana. APT is one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas-producing areas of central, northern and eastern Texas, extend- ing into or near the major producing areas of the Barnett Shale, the Texas Gulf Coast and the Delaware and Val Verde Basins of West Texas. Through its system, APT provides transportation and storage services to our Mid-Tex Division, other third party local distribution companies, industrial and electric generation customers, marketers and producers. As part of its pipeline operations, APT owns and operates five underground storage reservoirs in Texas. Revenues earned from transportation and storage services for APT are subject to traditional ratemaking governed by the RRC. Rates are updated through periodic filings made under Texas’ Gas Reliability Infra- structure Program (GRIP). GRIP allows us to include in our rate base annually approved capital costs incurred in the prior calendar year provided that we file a complete rate case at least once every five years; the most recent of which was completed in August 2017. APT’s existing regulatory mechanisms allow certain transportation and storage services to be provided under market-based rates. Our natural gas transmission operations in Louisiana are comprised of a proprietary 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution division for these services is subject to regulatory approval by the Louisiana Public Serv- ice Commission. We also manage two asset management plans in Louisiana that serve distribution affiliates of the Company, which have been approved by applicable state regulatory commissions. Generally, these asset 6 management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements. Natural Gas Marketing Segment Overview Through December 31, 2016, we were engaged in a nonregulated natural gas marketing business, which was conducted by Atmos Energy Marketing (AEM). AEM’s primary business was to aggregate and purchase gas supply, arrange transportation and storage logistics and ultimately deliver gas to customers at competitive prices. Additionally, AEM utilized proprietary and customer-owned transportation and storage assets to provide various services to its customers requested. As more fully described in Note 15, effective January 1, 2017, we sold all of the equity interests of AEM to CenterPoint Energy Services, Inc. (CES), a subsidiary of CenterPoint Energy Inc. As a result of the sale, Atmos Energy has fully exited the nonregulated natural gas marketing business. Accordingly, these operations have been reported as discontinued operations. Ratemaking Activity Overview The method of determining regulated rates varies among the states in which our regulated businesses oper- ate. The regulatory authorities have the responsibility of ensuring that utilities in their jurisdictions operate in the best interests of customers while providing utility companies the opportunity to earn a reasonable return on their investment. Generally, each regulatory authority reviews rate requests and establishes a rate structure intended to generate revenue sufficient to cover the costs of conducting business, including a reasonable return on invested capital. Our rate strategy focuses on reducing or eliminating regulatory lag, obtaining adequate returns and provid- ing stable, predictable margins, which benefit both our customers and the Company. As a result of our rate- making efforts in recent years, Atmos Energy has: ‰ Formula rate mechanisms in place in four states that provide for an annual rate review and adjustment to rates. ‰ Infrastructure programs in place in the majority of our states that provide for an annual adjustment to rates for qualifying capital expenditures. Through our annual formula rate mechanisms and infrastructure pro- grams, we have the ability to recover over 85 percent of our capital expenditures within six months and 99 percent within twelve months. ‰ Authorization in tariffs, statute or commission rules that allows us to defer certain elements of our cost of service such as depreciation, ad valorem taxes and pension costs, until they are included in rates. ‰ WNA mechanisms in seven states that serve to minimize the effects of weather on approximately 97 percent of our distribution Contribution Margin. ‰ The ability to recover the gas cost portion of bad debts in five states. 7 The following table provides a jurisdictional rate summary for our regulated operations as of September 30, 2018. This information is for regulatory purposes only and may not be representative of our actual financial position. Division Jurisdiction Effective Date of Last Rate/GRIP Action Rate Base (thousands)(1) Authorized Rate of Return(1) Authorized Debt/ Equity Ratio Authorized Return on Equity(1) Atmos Pipeline — Texas . . . . . . . . Texas Colorado-Kansas . . . . . . . . . . . . . . Colorado Colorado SSIR Kansas Kansas GSRS 05/22/2018 05/03/2018 01/01/2018 03/17/2016 02/27/2018 05/03/2018 06/01/2017 12/27/2016 05/01/2018 07/01/2018 06/01/2017 02/14/2018 01/01/2018 Mississippi - SIR(7) 01/01/2018 Mississippi - SGR 01/01/2018 03/15/2017 06/05/2018 Texas-GRIP LGS (3) (3) (3) 8.87% 47/53 $2,122,194 7.55% 44/56 134,726 7.82% 48/52 29,855 (3) 200,564 (3) 12,514 7.41% 47/53 427,646 7.49% 47/53 302,953 (3) 47,581 7.26% 49/51 169,120 419,080 7.55% 44/56 2,362,937(2) 8.36% 45/55 (3) 7.47% 47/53 7.60% 47/53 8.70% 47/53 (3) 8.57% 48/52 (3) 377,954 70,141 23,718 (3) 507,831 (3) (3) 11.50% 9.45% 9.60% (3) (3) 9.70% 9.80% (3) 9.80% 9.80% 10.50% (3) 9.67% 9.92% 12.00% 10.50% 10.50% Kentucky/Mid-States . . . . . . . . . . . Kentucky Tennessee(8) Virginia Louisiana . . . . . . . . . . . . . . . . . . . . Trans La Mid-Tex Cities . . . . . . . . . . . . . . . . Texas(9) Mid-Tex — Dallas . . . . . . . . . . . . . Texas Mississippi . . . . . . . . . . . . . . . . . . . Mississippi(7) West Texas(4) . . . . . . . . . . . . . . . . . Texas(10) Division Jurisdiction Bad Debt Rider(5) Formula Rate Infrastructure Mechanism Performance Based Rate Program(6) WNA Period Atmos Pipeline — Texas . . . . . Texas Colorado-Kansas . . . . . . . . . . . Colorado Kansas Kentucky/Mid-States . . . . . . . . Kentucky Tennessee Virginia Louisiana . . . . . . . . . . . . . . . . . Trans La LGS Mid-Tex Cities . . . . . . . . . . . . . Texas Mid-Tex — Dallas . . . . . . . . . . Texas Mississippi . . . . . . . . . . . . . . . . Mississippi West Texas(4) . . . . . . . . . . . . . . Texas No No Yes Yes Yes Yes No No Yes Yes No Yes Yes No No No Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes No No Yes Yes Yes Yes Yes Yes Yes N/A No No Yes Yes No No No No No Yes No N/A N/A October-May November-April October-April January-December December-March December-March November-April November-April November-April October-May (1) The rate base, authorized rate of return and authorized return on equity presented in this table are those from the most recent regulatory filing for each jurisdiction. These rate bases, rates of return and returns on equity are not necessarily indicative of current or future rate bases, rates of return or returns on equity. (2) The Mid-Tex rate base represents a “system-wide”, or 100 percent, of the Mid-Tex Division’s rate base. (3) A rate base, rate of return, return on equity or debt/equity ratio was not included in the respective state commission’s final decision. (4) The West Texas Cities includes all West Texas Division cities except Amarillo, Channing, Dalhart and Lubbock. (5) The bad debt rider allows us to recover from ratepayers the gas cost portion of uncollectible accounts. 8 (6) The performance-based rate program provides incentives to distribution companies to minimize purchased gas costs by allowing the companies and their customers to share the purchased gas costs savings. (7) The Mississippi Public Service Commission approved a settlement at its meeting on October 23, 2018, which included a rate base of $541.7 million, an authorized return of 7.81%, a debt/equity ratio of 45/55 and an authorized ROE of 10.24%. New rates were implemented November 1, 2018. (8) The Tennessee Public Utility Commission approved the Formula Rate Mechanism filing at its meeting on October 15, 2018, which included a rate base of $351.8 million, an authorized return of 7.26%, a debt/equity ratio of 49/51 and an authorized ROE of 9.8%. (9) The Mid-Tex Cities approved the Formula Rate Mechanism filing with rates effective October 1, 2018, which included a rate base of $2,587.3 million, an authorized return of 7.87%, a debt/equity ratio of 42/58 and an authorized ROE of 9.80%. (10) The West Texas Cities approved the Formula Rate Mechanism filing with rates effective October 1, 2018, which included a rate base of $505.7 million, an authorized return of 7.87%, a debt/equity ratio of 42/58 and an authorized ROE of 9.80%. Although substantial progress has been made in recent years to improve rate design and recovery of invest- ment across our service areas, we are continuing to seek improvements in rate design to address cost variations and pursue tariffs that reduce regulatory lag associated with investments. Further, potential changes in federal energy policy, federal safety regulations and changing economic conditions will necessitate continued vigilance by the Company and our regulators in meeting the challenges presented by these external factors. Recent Ratemaking Activity Net operating income increases resulting from ratemaking activity totaling $80.1 million, $104.2 million and $122.5 million, became effective in fiscal 2018, 2017 and 2016, as summarized below. The ratemaking out- comes for fiscal 2018 include the effect of tax reform legislation enacted effective January 1, 2018 and do not reflect the true economic benefit of the outcomes because they do not include the corresponding income tax benefit we will receive due to the decrease in our statutory tax rate. Rate Action Annual formula rate mechanisms . . . . . . . . . . . . . . . . . . . Rate case filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other ratemaking activity . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Annual Increase (Decrease) to Operating Income For the Fiscal Year Ended September 30 2017 (In thousands) $ 90,427 12,961 784 $ 92,472 (12,853) 457 $114,974 7,716 (183) 2016 $ 80,076 $104,172 $122,507 9 Additionally, the following ratemaking efforts seeking $52.8 million in annual operating income were ini- tiated during fiscal 2018 but had not been completed as of September 30, 2018: Division Rate Action Jurisdiction Operating Income Requested (In thousands) Mid-Tex . . . . . . . . . . . . . . . . . . . . . Mid-Tex . . . . . . . . . . . . . . . . . . . . . Mid-Tex . . . . . . . . . . . . . . . . . . . . . Mississippi . . . . . . . . . . . . . . . . . . . Mississippi . . . . . . . . . . . . . . . . . . . Kentucky/Mid-States . . . . . . . . . . . Kentucky/Mid-States . . . . . . . . . . . Kentucky/Mid-States . . . . . . . . . . . Kentucky/Mid-States . . . . . . . . . . . West Texas . . . . . . . . . . . . . . . . . . West Texas . . . . . . . . . . . . . . . . . . Formula Rate Mechanism Rate Case Rate Case Infrastructure Mechanism Formula Rate Mechanism Formula Rate Mechanism Formula Rate Mechanism True-Up Rate Case Rate Case Formula Rate Mechanism Rate Case Mid-Tex Cities(1)(2) ATM Cities(1) Environs(1)(7) Mississippi(1)(3) Mississippi(1)(3) Tennessee(1)(4) Tennessee(1)(5) Kentucky(1) Virginia(1) WT Cities(1)(6) Environs(1)(7) $28,036 4,252 (1,875) 7,976 4,119 (5,032) (3,220) 14,424 605 4,030 (485) $52,830 (1) The filing amount reflects a 21% federal income tax rate resulting from the Tax Cuts and Jobs Act of 2017 (TCJA). (2) The Mid-Tex Cities approved a rate increase of $17.6 million effective October 1, 2018. (3) The Mississippi Public Service Commission approved a settlement at its meeting on October 23, 2018, for a combined $7.0 million increase. New rates were implemented November 1, 2018. (4) The Tennessee Public Utility Commission approved the Formula Rate Mechanism filing, which included $0.4 million related to the May 2017 true-up, at its October 15, 2018 meeting. (5) The Tennessee Formula Rate Mechanism Test Period Ended May 2018 reflects the discontinuance of the prior year true-up. (6) The West Texas Cities approved a rate increase of $2.8 million effective October 1, 2018. (7) Settlement pending Texas Railroad Commission approval. 10 Our recent ratemaking activity is discussed in greater detail below. Annual Formula Rate Mechanisms As an instrument to reduce regulatory lag, formula rate mechanisms allow us to refresh our rates on an annual basis without filing a formal rate case. However, these filings still involve discovery by the appropriate regulatory authorities prior to the final determination of rates under these mechanisms. The following table summarizes our annual formula rate mechanisms by state. State Infrastructure Programs Formula Rate Mechanisms Annual Formula Rate Mechanisms Colorado . . . . . . . . . . System Safety and Integrity Rider (SSIR) — Kansas . . . . . . . . . . . . Gas System Reliability Surcharge (GSRS) Kentucky . . . . . . . . . . Pipeline Replacement Program (PRP) Louisiana . . . . . . . . . . (1) Mississippi . . . . . . . . . System Integrity Rider (SIR) Tennessee . . . . . . . . . — Texas . . . . . . . . . . . . . Gas Reliability Infrastructure Program (GRIP), (1) Virginia . . . . . . . . . . . Steps to Advance Virginia Energy (SAVE) — — — Rate Stabilization Clause (RSC) Stable Rate Filing (SRF), Supplemental Growth Filing (SGR) Annual Rate Mechanism (ARM) Dallas Annual Rate Review (DARR), Rate Review Mechanism (RRM) (1) Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all expenses associated with capi- tal expenditures incurred pursuant to these rules, which primarily consists of interest, depreciation and other taxes (Texas only), until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recoverable through base rates. The following table summarizes our annual formula rate mechanisms with effective dates during the fiscal years ended September 30, 2018, 2017 and 2016: Division Jurisdiction Test Year Ended Increase (Decrease) in Annual Operating Income (In thousands) Effective Date 2018 Filings: Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGS(1) West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amarillo, Lubbock, Dalhart and Channing(1) Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environs(1) West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Environs(1) Atmos Pipeline — Texas . . . . . . . . . . . . . . . . . . . . . . Texas(1) Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trans La(1) Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas GSRS Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SIR Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SGR(2) Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SRF(2) Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado SSIR Atmos Pipeline — Texas . . . . . . . . . . . . . . . . . . . . . . Texas Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . Kentucky-PRP Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . Virginia- SAVE(3) Total 2018 Filings . . . . . . . . . . . . . . . . . . . . . . . . . 12/2017 $ (1,521) 07/01/2018 12/2017 12/2017 12/2017 12/2017 09/2017 09/2018 10/2018 10/2018 10/2018 12/2018 12/2016 09/2018 09/2017 4,418 1,604 826 42,173 (1,913) 820 7,658 1,245 — 2,228 28,988 5,638 06/08/2018 06/05/2018 06/05/2018 05/22/2018 05/01/2018 02/27/2018 01/01/2018 01/01/2018 01/01/2018 12/20/2017 12/05/2017 10/27/2017 308 10/01/2017 $ 92,472 11 Division Jurisdiction Test Year Ended 2017 Filings: Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGS Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex DARR Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex Cities RRM Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Tennessee ARM Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex Environs West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas Environs West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas ALDC Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trans La West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas Cities RRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SGR Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . Kansas Mississippi Mississippi Mississippi Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . Colorado-SSIR Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Kentucky-PRP Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Virginia-SAVE Total 2017 Filings . . . . . . . . . . . . . . . . . . . . . . 2016 Filings: Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGS Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Tennessee Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex Cities RRM Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex DARR Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mid-Tex Environs Atmos Pipeline — Texas . . . . . . . . . . . . . . . . . . Texas West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas Environs West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas ALDC Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trans La Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . Colorado Mississippi Mississippi Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Kentucky-PRP Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . Virginia-SAVE West Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . West Texas Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi-SGR 12/2016 09/2016 12/2016 05/2018 12/2016 12/2016 12/2016 09/2016 09/2016 09/2016 10/2017 10/2017 10/2017 12/2017 09/2017 09/2017 12/2015 05/2017 12/2015 09/2015 12/2015 12/2015 12/2015 12/2015 09/2015 12/2016 10/2016 10/2016 09/2016 09/2016 09/2015 Increase (Decrease) in Annual Operating Income (In thousands) $ 6,237 9,672 36,239 6,740 1,568 872 4,682 4,392 4,255 801 4,390 3,334 1,292 1,350 4,981 (378) $ 90,427 $ 8,686 4,888 25,816 5,429 1,325 40,658 646 3,484 6,216 764 9,192 250 3,786 118 3,716 Effective Date 07/01/2017 06/01/2017 06/01/2017 06/01/2017 05/23/2017 05/23/2017 04/25/2017 04/01/2017 03/15/2017 02/09/2017 02/01/2017 01/01/2017 01/01/2017 01/01/2017 10/14/2016 10/01/2016 07/01/2016 06/01/2016 06/01/2016 06/01/2016 05/03/2016 05/03/2016 05/03/2016 04/26/2016 04/01/2016 01/01/2016 01/01/2016 12/01/2015 10/01/2015 10/01/2015 10/01/2015 Total 2016 Filings . . . . . . . . . . . . . . . . . . . . . . $114,974 (1) The operating income reflects a 21% federal income tax rate resulting from the TCJA. (2) In our next SRF filing, the SGR rate base will be combined with the SRF rate base, per Commission order. (3) The Company completed our Steps to Advance Virginia Energy (SAVE) program. On October 1, 2017 a refund factor was removed from the rate resulting in an operating income increase of $0.3 million. Rate Case Filings A rate case is a formal request from Atmos Energy to a regulatory authority to increase rates that are charged to customers. Rate cases may also be initiated when the regulatory authorities request us to justify our 12 rates. This process is referred to as a “show cause” action. Adequate rates are intended to provide for recovery of the Company’s costs as well as a fair rate of return to our shareholders and ensure that we continue to safely deliver reliable, reasonably priced natural gas service to our customers. The following table summarizes our recent rate cases: Division State Increase (Decrease) in Annual Operating Income (In thousands) Effective Date 2018 Rate Case Filings: Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado(1) Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kentucky(1) Mid-Tex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . City of Dallas (1) $ (241) (7,504) 05/03/2018 05/03/2018 (5,108) 02/14/2018 Total 2018 Rate Case Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,853) 2017 Rate Case Filings: Atmos Pipeline — Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Virginia Total 2017 Rate Case Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 Rate Case Filings: Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kentucky Kentucky/Mid-States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Virginia Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado Total 2016 Rate Case Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,955 6 $ 12,961 $ 2,723 537 2,372 2,084 $ 7,716 08/01/2017 12/27/2016 08/15/2016 04/01/2016 03/17/2016 01/01/2016 (1) The operating income reflects a 21% federal income tax rate resulting from the TCJA. Other Ratemaking Activity The following table summarizes other ratemaking activity during the fiscal years ended September 30, 2018, 2017 and 2016: Division Jurisdiction Rate Activity 2018 Other Rate Activity: Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . Total 2018 Other Rate Activity . . . . . . . 2017 Other Rate Activity: Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . Total 2017 Other Rate Activity . . . . . . . 2016 Other Rate Activity: Colorado-Kansas . . . . . . . . . . . . . . . . . . . . . Total 2016 Other Rate Activity . . . . . . . Kansas Ad Valorem(1) Kansas Ad-Valorem(1) Kansas Ad-Valorem(1) Increase (Decrease) in Annual Operating Income (In thousands) $ 457 $ 457 $ 784 $ 784 $(183) $(183) Effective Date 02/01/2018 02/01/2017 02/01/2016 (1) The Ad Valorem filing relates to property taxes that are either over or uncollected compared to the amount included in our Kansas service area’s base rates. 13 Other Regulation We are regulated by various state or local public utility authorities. We are also subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of our transmission and distribution facilities. In addition, our operations are also subject to various state and federal laws regulating environmental matters. From time to time, we receive inquiries regarding various environmental matters. We believe that our properties and operations substantially comply with, and are operated in substantial conformity with, applicable safety and environmental statutes and regulations. There are no admin- istrative or judicial proceedings arising under environmental quality statutes pending or known to be con- templated by governmental agencies which would have a material adverse effect on us or our operations. Our environmental claims have arisen primarily from former manufactured gas plant sites. The Pipeline and Hazard- ous Materials Safety Administration (PHMSA), within the U.S. Department of Transportation, develops and enforces regulations for the safe, reliable and environmentally sound operation of the pipeline transportation system. The PHMSA pipeline safety statutes provide for states to assume safety authority over intrastate and natural gas pipelines. State pipeline safety programs are responsible for adopting and enforcing the federal and state pipeline safety regulations for intrastate natural gas transmission and distribution pipelines. The Federal Energy Regulatory Commission (FERC) allows, pursuant to Section 311 of the Natural Gas Policy Act (NGA), gas transportation services through our Atmos Pipeline—Texas assets “on behalf of” inter- state pipelines or local distribution companies served by interstate pipelines, without subjecting these assets to the jurisdiction of the FERC under the NGA. Additionally, the FERC has regulatory authority over the use and release of interstate pipeline and storage capacity. The FERC also has authority to detect and prevent market manipulation and to enforce compliance with FERC’s other rules, policies and orders by companies engaged in the sale, purchase, transportation or storage of natural gas in interstate commerce. We have taken what we believe are the necessary and appropriate steps to comply with these regulations. The SEC and the Commodities Futures Trading Commission, pursuant to the Dodd–Frank Act, established numerous regulations relating to U.S. financial markets. We enacted procedures and modified existing business practices and contractual arrangements to comply with such regulations. There are, however, some rulemaking proceedings that have not yet been finalized, including those relating to capital and margin rules for (non– cleared) swaps. We do not expect these rules to directly impact our business practices or collateral requirements. However, depending on the substance of these final rules, in addition to certain international regulatory require- ments still under development that are similar to Dodd–Frank, our swap counterparties could be subject to addi- tional and potentially significant capitalization requirements. These regulations could motivate counterparties to increase our collateral requirements or cash postings. Competition Although our regulated distribution operations are not currently in significant direct competition with any other distributors of natural gas to residential and commercial customers within our service areas, we do compete with other natural gas suppliers and suppliers of alternative fuels for sales to industrial customers. We compete in all aspects of our business with alternative energy sources, including, in particular, electricity. Electric utilities offer electricity as a rival energy source and compete for the space heating, water heating and cooking markets. Promotional incentives, improved equipment efficiencies and promotional rates all contribute to the acceptability of electrical equipment. The principal means to compete against alternative fuels is lower prices, and natural gas historically has maintained its price advantage in the residential, commercial and industrial markets. Our pipeline and storage operations have historically faced competition from other existing intrastate pipe- lines seeking to provide or arrange transportation, storage and other services for customers. In the last few years, several new pipelines have been completed, which has increased the level of competition in this segment of our business. Employees At September 30, 2018, we had 4,628 employees, consisting of 4,564 employees in our distribution oper- ations and 64 employees in our pipeline and storage operations. 14 Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports, and amendments to those reports, and other forms that we file with or furnish to the Securities and Exchange Commission (SEC) at their website, www.sec.gov, are also available free of charge at our website, www.atmosenergy.com, under “Publications and Filings” under the “Investors” tab, as soon as reasonably practi- cable, after we electronically file these reports with, or furnish these reports to, the SEC. We will also provide copies of these reports free of charge upon request to Shareholder Relations at the address and telephone number appearing below: Shareholder Relations Atmos Energy Corporation P.O. Box 650205 Dallas, Texas 75265-0205 972-855-3729 Corporate Governance In accordance with and pursuant to relevant related rules and regulations of the SEC as well as corporate governance-related listing standards of the New York Stock Exchange (NYSE), the Board of Directors of the Company has established and periodically updated our Corporate Governance Guidelines and Code of Conduct, which is applicable to all directors, officers and employees of the Company. In addition, in accordance with and pursuant to such NYSE listing standards, our Chief Executive Officer during fiscal 2018, Michael E. Haefner, certified to the New York Stock Exchange that he was not aware of any violations by the Company of NYSE corporate governance listing standards. The Board of Directors also annually reviews and updates, if necessary, the charters for each of its Audit, Human Resources and Nominating and Corporate Governance Committees. All of the foregoing documents are posted on the Corporate Responsibility page of our website. We will also provide copies of all corporate governance documents free of charge upon request to Shareholder Relations at the address listed above. ITEM 1A. Risk Factors. Our financial and operating results are subject to a number of risk factors, many of which are not within our control. Although we have tried to discuss key risk factors below, please be aware that other or new risks may prove to be important in the future. Investors should carefully consider the following discussion of risk factors as well as other information appearing in this report. These factors include the following: We are subject to state and local regulations that affect our operations and financial results. We are subject to regulatory oversight from various state and local regulatory authorities in the eight states that we serve. Therefore, our returns are continuously monitored and are subject to challenge for their reason- ableness by the appropriate regulatory authorities or other third-party intervenors. In the normal course of busi- ness, as a regulated entity, we often need to place assets in service and establish historical test periods before rate cases that seek to adjust our allowed returns to recover that investment can be filed. Further, the regulatory review process can be lengthy in the context of traditional ratemaking. Because of this process, we suffer the negative financial effects of having placed assets in service without the benefit of rate relief, which is commonly referred to as “regulatory lag.” However, in the last several years, a number of regulatory authorities in the states we serve have approved rate mechanisms that provide for annual adjustments to rates that allow us to recover the cost of investments made to replace existing infrastructure or reflect changes in our cost of service. These mechanisms work to effec- tively reduce the regulatory lag inherent in the ratemaking process. However, regulatory lag could significantly increase if the regulatory authorities modify or terminate these rate mechanisms. The regulatory process also involves the risk that regulatory authorities may (i) review our purchases of natural gas and adjust the amount of our gas costs that we pass through to our customers or (ii) limit the costs we may have incurred from our cost of service that can be recovered from customers. 15 We are also subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local governmental authorities relating to protection of the environment and health and safety matters, including those that govern discharges of substances into the air and water, the management and disposal of hazardous substances and waste, the clean-up of contaminated sites, groundwater quality and availability, plant and wildlife protection, as well as work practices related to employee health and safety. Environmental legis- lation also requires that our facilities, sites and other properties associated with our operations be operated, main- tained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Failure to comply with these laws, regulations, permits and licenses may expose us to fines, penalties or interruptions in our operations that could be significant to our financial results. In addition, existing environmental regulations may be revised or our operations may become subject to new regulations. Some of our operations are subject to increased federal regulatory oversight that could affect our operations and financial results. FERC has regulatory authority over some of our operations, including the use and release of interstate pipe- line and storage capacity. FERC has adopted rules designed to prevent market power abuse and market manipu- lation and to promote compliance with FERC’s other rules, policies and orders by companies engaged in the sale, purchase, transportation or storage of natural gas in interstate commerce. These rules carry increased penalties for violations. Although we have taken steps to structure current and future transactions to comply with appli- cable current FERC regulations, changes in FERC regulations or their interpretation by FERC or additional regu- lations issued by FERC in the future could also adversely affect our business, financial condition or financial results. We may experience increased federal, state and local regulation of the safety of our operations. The safety and protection of the public, our customers and our employees is our top priority. We constantly monitor and maintain our pipeline and distribution systems to ensure that natural gas is delivered safely, reliably and efficiently through our network of more than 75,000 miles of distribution and transmission lines. However, in recent years, natural gas distribution and pipeline companies have faced increasing federal, state and local oversight of the safety of their operations. Although we believe these costs should be ultimately recoverable through our rates, the costs of complying with new laws and regulations may have at least a short-term adverse impact on our operating costs and financial results. Distributing, transporting and storing natural gas involve risks that may result in accidents and additional operating costs. Our operations involve a number of hazards and operating risks inherent in storing and transporting natural gas that could affect the public safety and reliability of our distribution system. While Atmos Energy, with the support from each of its regulatory commissions, is accelerating the replacement of aging pipeline infrastructure, operating issues such as as leaks, accidents, equipment problems and incidents, including explosions and fire, could result in legal liability, repair and remediation costs, increased operating costs, significant increased capital expenditures, regulatory fines and penalties and other costs and a loss of customer confidence. We maintain liability and property insurance coverage in place for many of these hazards and risks. However, because some of our transmission pipeline and storage facilities are near or are in populated areas, any loss of human life or adverse financial results resulting from such events could be large. If these events were not fully covered by our general liability and property insurance, which policies are subject to certain limits and deductibles, our oper- ations or financial results could be adversely affected. Our growth in the future may be limited by the nature of our business, which requires extensive capital spending. Our operations are capital-intensive. We must make significant capital expenditures on a long-term basis to modernize our distribution and transmission system to improve the safety and reliability and to comply with the safety rules and regulations issued by the regulatory authorities responsible for the service areas we operate. In 16 addition, we must continually build new capacity to serve the growing needs of the communities we serve. The magnitude of these expenditures may be affected by a number of factors, including new regulations, the general state of the economy and weather. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The cost and availability of borrowing funds from third party lenders or issuing equity is dependent on the liquidity of the credit markets, interest rates and other market conditions. This in turn may limit the amount of funds we can invest in our infrastructure. The Company is dependent on continued access to the credit and capital markets to execute our business strategy. Our long-term debt is currently rated as “investment grade” by Standard & Poor’s Corporation and Moody’s Investors Service, Inc. Similar to most companies, we rely upon access to both short-term and long-term credit and capital markets to satisfy our liquidity requirements. If adverse credit conditions were to cause a significant limitation on our access to the private credit and public capital markets, we could see a reduction in our liquidity. A significant reduction in our liquidity could in turn trigger a negative change in our ratings outlook or even a reduction in our credit ratings by one or more of the credit rating agencies. Such a downgrade could further limit our access to private credit and/or public capital markets and increase our costs of borrowing. While we believe we can meet our capital requirements from our operations and the sources of financing available to us, we can provide no assurance that we will continue to be able to do so in the future, especially if the market price of natural gas increases significantly in the near term. The future effects on our business, liquid- ity and financial results of a deterioration of current conditions in the credit and capital markets could be material and adverse to us, both in the ways described above or in other ways that we do not currently anticipate. We are exposed to market risks that are beyond our control, which could adversely affect our financial results. We are subject to market risks beyond our control, including (i) commodity price volatility caused by mar- ket supply and demand dynamics, counterparty performance or counterparty creditworthiness, and (ii) interest rate risk. We are generally insulated from commodity price risk through our purchased gas cost mechanisms. With respect to interest rate risk, we have been operating in a relatively low interest-rate environment in recent years compared to historical norms for both short and long-term interest rates. However, increases in interest rates could adversely affect our future financial results to the extent that we do not recover our actual interest expense in our rates. The concentration of our operations in the State of Texas exposes our operations and financial results to economic conditions, weather patterns and regulatory decisions in Texas. Approximately 70 percent of our consolidated operations are located in the State of Texas. This concen- tration of our business in Texas means that our operations and financial results may be significantly affected by changes in the Texas economy in general, weather patterns and regulatory decisions by state and local regulatory authorities in Texas. A deterioration in economic conditions could adversely affect our customers and negatively impact our financial results. Any adverse changes in economic conditions in the United States, especially in the states in which we oper- ate, could adversely affect the financial resources of many domestic households. As a result, our customers could seek to use less gas and it may be more difficult for them to pay their gas bills. This would likely lead to slower collections and higher than normal levels of accounts receivable. This, in turn, could increase our financing requirements. Additionally, should economic conditions deteriorate, our industrial customers could seek alter- native energy sources, which could result in lower sales volumes. 17 Increased gas costs could adversely impact our customer base and customer collections and increase our level of indebtedness. Rapid increases in the costs of purchased gas would cause us to experience a significant increase in short- term debt. We must pay suppliers for gas when it is purchased, which can be significantly in advance of when these costs may be recovered through the collection of monthly customer bills for gas delivered. Increases in purchased gas costs also slow our natural gas distribution collection efforts as customers are more likely to delay the payment of their gas bills, leading to higher than normal accounts receivable. This could result in higher short-term debt levels, greater collection efforts and increased bad debt expense. If contracted gas supplies, interstate pipeline and/or storage services are not available or delivered in a timely manner, our ability to meet our customers’ natural gas requirements may be impaired and our financial condition may be adversely affected. In order to meet our customers’ annual and seasonal natural gas demands, we must obtain a sufficient sup- ply of natural gas, interstate pipeline capacity and storage capacity. If we are unable to obtain these, either from our suppliers’ inability to deliver the contracted commodity or the inability to secure replacement quantities, our financial condition and results of operations may be adversely affected. If a substantial disruption to or reduction in interstate natural gas pipelines’ transmission and storage capacity occurred due to operational failures or dis- ruptions, legislative or regulatory actions, hurricanes, tornadoes, floods, terrorist or cyber-attacks or acts of war, our operations or financial results could be adversely affected. Our operations are subject to increased competition. In residential and commercial customer markets, our distribution operations compete with other energy products, such as electricity and propane. Our primary product competition is with electricity for heating, water heating and cooking. Increases in the price of natural gas could negatively impact our competitive position by decreasing the price benefits of natural gas to the consumer. This could adversely impact our business if our customer growth slows or if our customers further conserve their use of gas, resulting in reduced gas purchases and customer billings. In the case of industrial customers, such as manufacturing plants, adverse economic conditions, including higher gas costs, could cause these customers to use alternative sources of energy, such as electricity, or bypass our systems in favor of special competitive contracts with lower per-unit costs. Our pipeline and storage oper- ations historically have faced limited competition from other existing intrastate pipelines and gas marketers seek- ing to provide or arrange transportation, storage and other services for customers. However, in the last few years, several new pipelines have been completed, which has increased the level of competition in this segment of our business. Adverse weather conditions could affect our operations or financial results. We have weather-normalized rates for approximately 97 percent of our residential and commercial meters in our distribution operations, which substantially mitigates the adverse effects of warmer-than-normal weather for meters in those service areas. However, there is no assurance that we will continue to receive such regulatory protection from adverse weather in our rates in the future. The loss of such weather-normalized rates could have an adverse effect on our operations and financial results. In addition, our operating results may continue to vary somewhat with the actual temperatures during the winter heating season. Additionally, sustained cold weather could challenge our ability to adequately meet customer demand in our operations. The costs of providing health care benefits, pension and postretirement health care benefits and related funding requirements may increase substantially. We provide health care benefits, a cash-balance pension plan and postretirement health care benefits to eligi- ble full-time employees. The costs of providing health care benefits to our employees could significantly increase 18 over time due to rapidly increasing health care inflation, and any future legislative changes related to the provi- sion of health care benefits. The impact of additional costs which are likely to be passed on to the Company is difficult to measure at this time. The costs of providing a cash-balance pension plan to eligible full-time employees prior to 2011 and post- retirement health care benefits to eligible full-time employees and related funding requirements could be influ- enced by changes in the market value of the assets funding our pension and postretirement health care plans. Any significant declines in the value of these investments due to sustained declines in equity markets or a reduction in bond yields could increase the costs of our pension and postretirement health care plans and related funding requirements in the future. Further, our costs of providing such benefits and related funding requirements are also subject to a number of factors, including (i) changing demographics, including longer life expectancy of benefi- ciaries and an expected increase in the number of eligible former employees over the next five to ten years; (ii) various actuarial calculations and assumptions which may differ materially from actual results due primarily to changing market and economic conditions, including changes in interest rates, and higher or lower withdrawal rates; and (iii) future government regulation. The costs to the Company of providing these benefits and related funding requirements could also increase materially in the future, should there be a material reduction in the amount of the recovery of these costs through our rates or should significant delays develop in the timing of the recovery of such costs, which could adversely affect our financial results. The inability to continue to hire, train and retain operational, technical and managerial personnel could adversely affect our results of operations. Although the average age of the employee base of Atmos Energy is not significantly changing year over year, there are still a number of employees who will become eligible to retire within the next five to 10 years. If we were unable to hire appropriate personnel or contractors to fill future needs, the Company could encounter operating challenges and increased costs, primarily due to a loss of knowledge, errors due to inexperience or the lengthy time period typically required to adequately train replacement personnel. In addition, higher costs could result from loss of productivity or increased safety compliance issues. The inability to hire, train and retain new operational, technical and managerial personnel adequately and to transfer institutional knowledge and expertise could adversely affect our ability to manage and operate our business. If we were unable to hire, train and retain appropriately qualified personnel, our results of operations could be adversely affected. The operations and financial results of the Company could be adversely impacted as a result of climate change or related additional legislation or regulation in the future. To the extent climate change occurs, our businesses could be adversely impacted, although we believe it is likely that any such resulting impacts would occur very gradually over a long period of time and thus would be difficult to quantify with any degree of specificity. To the extent climate change would result in warmer temper- atures in our service territories, financial results could be adversely affected through lower gas volumes and revenues. Such climate change could also cause shifts in population, including customers moving away from our service territories near the Gulf Coast in Louisiana and Mississippi. Another possible climate change would be more frequent and more severe weather events, such as hurri- canes and tornadoes, which could increase our costs to repair damaged facilities and restore service to our customers. If we were unable to deliver natural gas to our customers, our financial results would be impacted by lost revenues, and we generally would have to seek approval from regulators to recover restoration costs. To the extent we would be unable to recover those costs, or if higher rates resulting from our recovery of such costs would result in reduced demand for our services, our future business, financial condition or financial results could be adversely impacted. In addition, there have been a number of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide. The adoption of this type of legislation by Congress or similar 19 legislation by states or the adoption of related regulations by federal or state governments mandating a substantial reduction in greenhouse gas emissions in the future could have far-reaching and significant impacts on the energy industry. Such new legislation or regulations could result in increased compliance costs for us or additional oper- ating restrictions on our business, affect the demand for natural gas or impact the prices we charge to our customers. At this time, we cannot predict the potential impact of such laws or regulations that may be adopted on our future business, financial condition or financial results. Cyber-attacks or acts of cyber-terrorism could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information. Our business operations and information technology systems may be vulnerable to an attack by individuals or organizations intending to disrupt our business operations and information technology systems, even though the Company has implemented policies, procedures and controls to prevent and detect these activities. We use our information technology systems to manage our distribution and intrastate pipeline and storage operations and other business processes. Disruption of those systems could adversely impact our ability to safely deliver natural gas to our customers, operate our pipeline and storage systems or serve our customers timely. Accordingly, if such an attack or act of terrorism were to occur, our operations and financial results could be adversely affected. In addition, we use our information technology systems to protect confidential or sensitive customer, employee and Company information developed and maintained in the normal course of our business. Any attack on such systems that would result in the unauthorized release of customer, employee or other confidential or sensitive data could have a material adverse effect on our business reputation, increase our costs and expose us to additional material legal claims and liability. Even though we have insurance coverage in place for many of these cyber-related risks, if such an attack or act of terrorism were to occur, our operations and financial results could be adversely affected to the extent not fully covered by such insurance coverage. Natural disasters, terrorist activities or other significant events could adversely affect our operations or financial results. Natural disasters are always a threat to our assets and operations. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could affect our operations. Also, companies in our industry may face a heightened risk of exposure to actual acts of terrorism, which could subject our operations to increased risks. As a result, the availability of insurance covering such risks may become more limited, which could increase the risk that an event could adversely affect our operations or financial results. ITEM 1B. Unresolved Staff Comments. Not applicable. ITEM 2. Properties. Distribution, transmission and related assets At September 30, 2018, in our distribution segment, we owned an aggregate of 70,071 miles of underground distribution and transmission mains throughout our distribution systems. These mains are located on easements or rights-of-way. We maintain our mains through a program of continuous inspection and repair and believe that our system of mains is in good condition. Through our pipeline and storage segment we owned 5,678 miles of gas transmission lines as well. 20 Storage Assets We own underground gas storage facilities in several states to supplement the supply of natural gas in peri- ods of peak demand. The following table summarizes certain information regarding our underground gas storage facilities at September 30, 2018: State Usable Capacity (Mcf) Cushion Gas (Mcf)(1) Total Capacity (Mcf) Maximum Daily Delivery Capability (Mcf) Distribution Segment Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi . . . . . . . . . . . . . . . . . . . . . . . . 7,956,991 3,239,000 1,907,571 9,562,283 2,300,000 2,442,917 17,519,274 5,539,000 4,350,488 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,103,562 14,305,200 27,408,762 158,100 45,000 31,000 234,100 Pipeline and Storage Segment Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . 46,083,549 411,040 15,878,025 256,900 61,961,574 667,940 1,710,000 56,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,494,589 16,134,925 62,629,514 1,766,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,598,151 30,440,125 90,038,276 2,000,100 (1) Cushion gas represents the volume of gas that must be retained in a facility to maintain reservoir pressure. Additionally, we contract for storage service in underground storage facilities on many of the interstate and intrastate pipelines serving us to supplement our proprietary storage capacity. The following table summarizes our contracted storage capacity at September 30, 2018: Segment Division/Company Distribution Segment Colorado-Kansas Division Kentucky/Mid-States Division Louisiana Division Mid-Tex Division Mississippi Division West Texas Division Maximum Storage Quantity (MMBtu) 6,129,562 8,175,103 2,536,779 5,500,000 5,083,801 5,000,000 Maximum Daily Withdrawal Quantity (MDWQ)(1) 136,996 226,739 174,805 225,000 163,627 161,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,425,245 1,088,167 Pipeline and Storage Segment Trans Louisiana Gas Pipeline, Inc. 1,000,000 47,500 Total Contracted Storage Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,425,245 1,135,667 (1) Maximum daily withdrawal quantity (MDWQ) amounts will fluctuate depending upon the season and the month. Unless otherwise noted, MDWQ amounts represent the MDWQ amounts as of November 1, which is the beginning of the winter heating season. Offices Our administrative offices and corporate headquarters are consolidated in a leased facility in Dallas, Texas. We also maintain field offices throughout our service territory, some of which are located in leased facilities. 21 ITEM 3. Legal Proceedings. See Note 11 to the consolidated financial statements, which is incorporated in this Item 3 by reference. ITEM 4. Mine Safety Disclosures. Not applicable. PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our stock trades on the New York Stock Exchange under the trading symbol “ATO.” The dividends paid per share of our common stock for fiscal 2018 and 2017 are listed below. Quarter ended: December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2018 Fiscal 2017 $0.485 0.485 0.485 0.485 $ 1.94 $0.450 0.450 0.450 0.450 $ 1.80 Dividends are payable at the discretion of our Board of Directors out of legally available funds. The Board of Directors typically declares dividends in the same fiscal quarter in which they are paid. The number of record holders of our common stock on October 31, 2018 was 12,550. Future payments of dividends, and the amounts of these dividends, will depend on our financial condition, results of operations, capital requirements and other fac- tors. We sold no securities during fiscal 2018 that were not registered under the Securities Act of 1933, as amended. 22 Performance Graph The performance graph and table below compares the yearly percentage change in our total return to share- holders for the last five fiscal years with the total return of the S&P 500 Stock Index (S&P 500) and the cumu- lative total return of a customized peer company group, the Comparison Company Index. The Comparison Company Index is comprised of natural gas distribution companies with similar revenues, market capitalizations and asset bases to that of the Company. The graph and table below assume that $100.00 was invested on Sep- tember 30, 2013 in our common stock, the S&P 500 and in the common stock of the companies in the Compar- ison Company Indices, as well as a reinvestment of dividends paid on such investments throughout the period. Comparison of Five-Year Cumulative Total Return among Atmos Energy Corporation, S&P 500 Index and Comparison Company Index $260 $250 $240 $230 $220 $210 $200 $190 $180 $170 $160 $150 $140 $130 $120 $110 $100 $90 9/30/2013 9/30/2014 9/30/2015 9/30/2016 9/30/2017 9/30/2018 Atmos Energy Corporation S&P 500 Peer Group Cumulative Total Return 9/30/2013 9/30/2014 9/30/2015 9/30/2016 9/30/2017 9/30/2018 Atmos Energy Corporation . . . . . . . . . . . . S&P 500 Stock Index . . . . . . . . . . . . . . . . . Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 100.00 100.00 115.52 119.73 116.03 145.03 119.00 128.49 190.13 137.36 158.62 218.98 162.92 185.66 250.80 192.10 196.95 The Comparison Company Index reflects the cumulative total return of companies in our peer group, which is comprised of a hybrid group of utility companies, primarily natural gas distribution companies, recommended by our independent executive compensation consulting firm and approved by the Board of Directors. The companies in the index are Alliant Energy Corporation, Ameren Corporation, CenterPoint Energy, Inc., CMS Energy Corporation, DTE Energy Company, National Fuel Gas Company, NiSource Inc., ONE Gas, Inc., Spire Inc. (formerly The Laclede Group, Inc.), Vectren Corporation, WEC Energy Group, Inc., WGL Holdings, Inc., and Xcel Energy, Inc. (1) WGL Holdings Inc. was acquired prior to September 30, 2018. As a result, the cumulative total return of this company is not included in the Comparison Company Index represented in the graph above. 23 The following table sets forth the number of securities authorized for issuance under our equity compensa- tion plans at September 30, 2018. Number of securities to be issued upon exercise of outstanding options, restricted stock units, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders: 1998 Long-Term Incentive Plan . . . . . . . 1,041,519(1) Total equity compensation plans approved by security holders . . . . . . 1,041,519 Equity compensation plans not approved by security holders . . . . . . — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,041,519 $ $ — — — — 1,752,235 1,752,235 — 1,752,235 (1) Comprised of a total of 422,996 time-lapse restricted stock units, 343,952 director share units and 274,571 performance-based restricted stock units at the target level of performance granted under our 1998 Long- Term Incentive Plan. ITEM 6. Selected Financial Data. The following table sets forth selected financial data of the Company and should be read in conjunction with the consolidated financial statements included herein. Results of Operations Operating revenues . . . . . . . . . . . . . Contribution margin . . . . . . . . . . . . Income from continuing operations . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . Diluted income per share from continuing operations . . . . . . . . . Diluted net income per share . . . . . . Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . Financial Condition Net property, plant and equipment(1) . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . Capitalization: Shareholders’ equity . . . . . . . . . . Long-term debt (excluding Fiscal Year Ended September 30 2018 2017 2016 2015 2014 (In thousands, except per share data) $ 3,115,546 $ 1,947,698 $ 2,759,735 $ 1,834,199 $ 2,454,648 $ 1,708,456 $2,926,985 $1,631,310 $3,243,904 $1,521,844 $ $ $ $ $ 603,064 603,064 5.43 5.43 1.94 $ $ $ $ $ 382,711 396,421 3.60 3.73 1.80 $ $ $ $ $ 345,542 350,104 $ 305,623 $ 315,075 $ 270,331 $ 289,817 3.33 3.38 1.68 $ $ $ 3.00 3.09 1.56 $ $ $ 2.76 2.96 1.48 $10,371,147 $11,874,437 $ 9,259,182 $10,749,596 $ 8,268,606 $10,010,889 $7,416,700 $9,075,072 $6,709,926 $8,581,006 $ 4,769,951 $ 3,898,666 $ 3,463,059 $3,194,797 $3,086,232 current maturities) . . . . . . . . . . 2,493,665 3,067,045 2,188,779 2,437,515 2,442,288 Total capitalization . . . . . . . . . . . . . $ 7,263,616 $ 6,965,711 $ 5,651,838 $5,632,312 $5,528,520 (1) Amounts shown are net of assets held for sale related to the divestiture of our natural gas marketing business for fiscal years 2014 through 2016. 24 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION This section provides management’s discussion of the financial condition, changes in financial condition and results of operations of Atmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management’s interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our con- solidated financial statements and notes thereto. Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, “Risk Factors”. They should be considered in connection with evaluating forward-looking state- ments contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements. Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995 The statements contained in this Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking state- ments made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, mar- kets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: state and local regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; possible increased federal, state and local regulation of the safety of our operations; the inherent hazards and risks involved in distributing, transporting and storing natural gas; the capital-intensive nature of our business; our ability to continue to access the credit and capital markets to execute our business strategy; market risks beyond our control affecting our risk management activities, including commodity price volatility, counterparty performance or creditworthiness and interest rate risk; the concentration of our operations in Texas; the impact of adverse economic conditions on our customers; changes in the availability and price of natural gas; the avail- ability and accessibility of contracted gas supplies, interstate pipeline and/or storage services; increased competi- tion from energy suppliers and alternative forms of energy; adverse weather conditions; increased costs of providing health care benefits, along with pension and postretirement health care benefits and increased funding requirements; the inability to continue to hire, train and retain operational, technical and managerial personnel; the impact of climate change or related additional legislation or regulation in the future; the threat of cyber- attacks or acts of cyber-terrorism that could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer, employee or Company information; natural disasters, terrorist activities or other events and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control. Accordingly, while we believe these forward- looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judg- ments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of 25 contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from estimates. Our significant accounting policies are discussed in Notes 2 and 15 to our consolidated financial statements. The accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult, subjective or complex accounting estimates. Accordingly, these critical accounting policies are reviewed periodically by the Audit Committee of the Board of Directors. Critical Accounting Policy Summary of Policy Regulation . . . . . . . . . . . . . . Our distribution and pipeline operations meet the criteria of a cost-based, rate-regulated entity under accounting principles generally accepted in the United States. Accordingly, the financial results for these operations reflect the effects of the rate- making and accounting practices and policies of the various regulatory commissions to which we are subject. 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 recovered through rates. Further, regulation may impact the period in which revenues or expenses are recog- nized. The amounts expected to be recovered or recognized are based upon historical experience and our understanding of the regulations. Discontinuing the application of this method of accounting for regulatory assets and liabilities or changes in the accounting for our various regu- latory mechanisms could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income. Unbilled Revenue . . . . . . . . . We follow the revenue accrual method of account- ing for distribution segment revenues whereby revenues attributable to gas delivered to custom- ers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense. When permitted, we implement rates that have not been formally approved by our regulatory author- ities, subject to refund.We recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the juris- diction in which the rates were implemented. Pension and other postretirement plan costs and liabilities are determined on an actuarial basis using a September 30 measurement date and are affected by numerous assumptions and estimates including the market value of plan assets, esti- 26 Pension and other postretirement plans . . . . . Factors Influencing Application of the Policy Decisions of regulatory authorities Issuance of new regu- lations or regulatory mechanisms Assessing the probability of the recoverability of deferred costs Continuing to meet the criteria of a cost-based, rate regulated entity for accounting purposes Estimates of delivered sales volumes based on actual tariff information and weather information and estimates of customer consumption and/or behavior Estimates of purchased gas costs related to esti- mated deliveries Estimates of amounts bil- led subject to refund General economic and market conditions Assumed investment returns by asset class Critical Accounting Policy Factors Influencing Application of the Policy Assumed future salary increases Assumed discount rate Projected timing of future cash disbursements Health care cost experi- ence trends Participant demographic information Actuarial mortality assumptions Impact of legislation Impact of regulation Summary of Policy mates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. 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 calculat- ing the actuarial present value of our pension and postretirement obligations and net periodic pen- sion and postretirement benefit plan costs. When establishing our discount rate, we consider high quality corporate bond rates based on bonds avail- able in the marketplace that are suitable for set- tling the obligations, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit dis- bursements 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 our annual pension and post- retirement plan costs. 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 in 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 costs are not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years. The market-related value of our plan assets repre- sents the fair market value of the plan assets, adjusted to smooth out short-term market fluctua- tions over a five-year period. The use of this methodology will delay the impact of current market fluctuations on the pension expense for the period. We estimate the assumed health care cost trend rate used in determining our postretirement net 27 Critical Accounting Policy Summary of Policy Factors Influencing Application of the Policy expense based upon our actual health care cost experience, the effects of recently enacted legis- lation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date. Impairment assessments . . . We review the carrying value of our long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstance indicate that such carrying values may not be recoverable, and at least annually for goodwill, as required by U.S. accounting stan- dards. The evaluation of our goodwill balances and other long-lived assets or identifiable assets for which uncertainty exists regarding the recoverability of the carrying value of such assets involves the assessment of future cash flows and external market conditions and other subjective factors that could impact the estimation of future cash flows including, but not limited to the commodity prices, the amount and timing of future cash flows, future growth rates and the discount rate. Unforeseen events and changes in circumstances or market conditions could adversely affect these estimates, which could result in an impairment charge. General economic and market conditions Projected timing and amount of future dis- counted cash flows Judgment in the evalua- tion of relevant data Non-GAAP Financial Measures Our operations are affected by the cost of natural gas, which is passed through to our customers without markup and includes commodity price, transportation, storage, injection and withdrawal fees and settlements of financial instruments used to mitigate commodity price risk. These costs are reflected in the income statement as purchased gas cost. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe Contribution Margin, a non-GAAP financial measure, defined as operating revenues less purchased gas cost, is a more useful and relevant measure to analyze our financial performance than operat- ing revenues. As such, the following discussion and analysis of our financial performance will reference Con- tribution Margin rather than operating revenues and purchased gas cost individually. Further, the term Contribution Margin is not intended to represent operating income, the most comparable GAAP financial meas- ure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies. As described further in Note 12, the enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) required us to remeasure our deferred tax assets and liabilities at our new federal statutory income tax rate as of December 22, 2017. The remeasurement of our net deferred tax liabilities resulted in the recognition of a non-cash income tax benefit of $158.8 million for the fiscal year ended September 30, 2018. Due to the non-recurring nature of this benefit, we believe that income from continuing operations and diluted earnings per share from continuing operations before the non-cash income tax benefit provide a more relevant measure to analyze our financial performance than income from continuing operations and consolidated diluted earnings per share from continuing operations in order to allow investors to better analyze our core results and allow the information to be presented on a comparative basis to the prior year. Accordingly, the following discussion and 28 analysis of our financial performance will reference adjusted income from continuing operations and diluted earnings per share, which is calculated as follows: Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCJA non-cash income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the Fiscal Year Ended September 30 2018 Change 2017 (In thousands, except per share data) $382,711 — $ 603,064 (158,782) $ 220,353 (158,782) Adjusted income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 444,282 $382,711 $ 61,571 Consolidated diluted EPS from continuing operations . . . . . . . . . . . . . . . . Diluted EPS from TCJA non-cash income tax benefit . . . . . . . . . . . . . . . . Adjusted diluted EPS from continuing operations . . . . . . . . . . . . . . . . . . . $ $ 5.43 (1.43) 4.00 $ $ 3.60 — 3.60 $ $ 1.83 (1.43) 0.40 RESULTS OF OPERATIONS Overview Atmos Energy strives to operate its businesses safely and reliably while delivering superior shareholder value. Our commitment to modernizing our natural gas distribution and transmission systems requires a sig- nificant level of capital spending. We have the ability to begin recovering a significant portion of these invest- ments timely through rate designs and mechanisms that reduce or eliminate regulatory lag and separate the recovery of our approved rate from customer usage patterns. The execution of our capital spending program, the ability to recover these investments timely and our ability to access the capital markets to satisfy our financing needs are the primary drivers that affect our financial performance. During fiscal 2018, we recorded income from continuing operations of $603.1 million, or $5.43 per diluted share, compared to income from continuing operations of $382.7 million, or $3.60 per diluted share in the prior year. After adjusting for the nonrecurring benefit recognized after implementing the TCJA, we recognized adjusted income from continuing operations of $444.3 million, or $4.00 per diluted share for the year ended September 30, 2018, compared to adjusted income from continuing operations of $382.7 million, or $3.60 per diluted share for the year ended September 30, 2017. The year-over-year increase of $61.6 million, or 16 percent, largely reflects rate increases driven by safety and reliability spending, weather that was 36 percent colder than the prior year, customer growth in our distribution business and the impact of the TCJA on our effective income tax rate, partially offset by reduced revenues as a result of implementing the TCJA. During the year ended Sep- tember 30, 2018, we completed 18 regulatory proceedings, resulting in an increase in annual operating income of $80.1 million and had 11 ratemaking efforts in progress at September 30, 2018, seeking a total increase in annual operating income of $52.8 million. Capital expenditures for fiscal 2018 totaled $1,467.6 million. Over 80 percent was invested to improve the safety and reliability of our distribution and transmission systems, with a significant portion of this investment incurred under regulatory mechanisms that reduce regulatory lag to six months or less. We funded our current- year capital expenditures program primarily through operating cash flows of $1,124.7 million. Additionally, we issued $400 million of common stock during the year ended September 30, 2018. The net proceeds from the issuance were primarily used to repay short-term debt under our commercial paper program, to fund capital spending and for general corporate purposes. On October 4, 2018, we completed a public offering of $600 million 4.30% senior notes due 2048. We received net proceeds from the offering, after underwriting dis- count and estimated offering expenses of approximately $591 million, that were used to repay working capital borrowings pursuant to our commercial paper program. The effective interest rate of these notes is 4.37% after giving effect to the offering costs. As a result of the continued contribution and stability of our earnings, cash flows and capital structure, our Board of Directors increased the quarterly dividend by 8.2% percent for fiscal 2019. 29 TCJA Impact The TCJA introduced several significant changes to corporate income tax laws in the United States, which have been reflected in our consolidated financial statements for the year ended September 30, 2018. As a rate regulated entity, the effects of lower tax rates included in our cost of service rates will ultimately flow through to our utility customers in the form of adjusted rates. Therefore, the favorable impact of the reduction in our federal statutory income tax rate on our financial performance will be limited to items that impact our income before income taxes in the current period that have not yet been reflected in our rates (most notably increases to and decreases in commission-approved regulatory assets and liabilities recorded on our consolidated balance sheet) and market-based revenues that are earned from customers who utilize our assets. Note 12 to the consolidated financial statements details the various impacts of the TCJA on our financial position and results from oper- ations. The most significant changes are summarized as follows: ‰ Because our fiscal year started on October 1, 2017, our federal statutory income tax rate for fiscal 2018 was reduced from 35% to 24.5%. Our effective income tax rate for fiscal 2018 was 27.5%, before the effect of the return of the excess deferred tax liability and the one-time, non-cash income tax benefit. Our federal statutory income tax rate declined to 21% on October 1, 2018. ‰ As a result of implementing the TCJA, we remeasured our net deferred tax liability using our new federal statutory income tax rate, which reduced our net deferred tax liability by $905.3 million. Of this amount, $746.5 million was reclassified to a regulatory liability called excess deferred tax liability. The remaining $158.8 million was recognized as a one-time, non-cash income tax benefit in our consolidated statement of income for the year ended September 30, 2018. ‰ Atmos Energy supports our regulators’ efforts to ensure our utility customers receive the full benefits of changes in our cost of service rates arising from tax reform. Income taxes, like other costs, are passed through to our customers in our rates; however, changes to customer rates must be approved by our regu- lators. ‰ Beginning in the second quarter of fiscal 2018, we established regulatory liabilities in all our juris- dictions for the difference in taxes included in our cost of service rates that have been calculated based on a 35% statutory income tax rate and a 21% statutory income tax rate, which reduced our revenues. We have received approval from most of our regulators to adjust customer rates for the lower statutory income tax rate. ‰ We have also received approval from regulators in several of our states to return amounts to cus- tomers related to the regulatory liability recorded for differences in our cost of service rates due to the change in the statutory income tax rate within one year. ‰ We have received approval from regulators in several of our states to begin returning the Excess Deferred Tax Liability created upon implementation of the TCJA, as discussed above, over a period ranging from 18 to 40 years. For the year ended September 30, 2018, we amortized $1.6 million of this regulatory liability. ‰ The enactment of the TCJA is expected to reduce our future cash flows from operations primarily due to 1) the collection of taxes at a lower rate and 2) the return of regulatory liabilities established in response to the enactment of the TCJA and regulatory activities to our utility customers. We intend to externally finance this reduction in operating cash flow in a balanced fashion in order to maintain an equity-to-total- capitalization ratio ranging from 50% to 60% to maintain our current credit ratings. 30 Consolidated Results The following table presents our consolidated financial highlights for the fiscal years ended September 30, 2018, 2017 and 2016. Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations before income taxes . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time, non-cash income tax benefit . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income from continuing operations per share . . Diluted net income from discontinued operations per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the Fiscal Year Ended September 30 2016 2017 2018 (In thousands, except per share data) $2,759,735 925,536 1,106,653 727,546 120,182 604,094 221,383 — 382,711 13,710 $ 396,421 3.60 $ $3,115,546 1,167,848 1,224,564 723,134 106,646 611,144 166,862 (158,782) 603,064 — $ 603,064 5.43 $ $2,454,648 746,192 1,051,226 657,230 114,812 542,184 196,642 — 345,542 4,562 $ 350,104 3.33 $ — 0.13 3.73 $ 0.05 3.38 Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.43 $ Our consolidated net income during the last three fiscal years was earned across our business segments as follows: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution segment Pipeline and storage segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . Net income from discontinued natural gas marketing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 For the Fiscal Year Ended September 30 2017 (In thousands) $268,369 114,342 $442,966 160,098 $233,830 111,712 2016 603,064 382,711 345,542 — 13,710 4,562 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $603,064 $396,421 $350,104 See the following discussion regarding the results of operations for each of our business operating segments. Distribution Segment The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. The primary factors that impact the results of our distribution operations are our ability to earn our authorized rates of return, competitive factors in the energy industry and economic conditions in our service areas. Our ability to earn our authorized rates is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions to minimize regulatory lag and, ultimately, separate the recovery of our approved rates from customer usage patterns. Improving rate design is a long-term process and is further compli- cated by the fact that we operate in multiple rate jurisdictions. The “Ratemaking Activity” section of this Form 10-K describes our current rate strategy, progress towards implementing that strategy and recent ratemaking ini- tiatives in more detail. We are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms; therefore, increases in the cost of gas are offset by a corresponding increase in 31 revenues. Contribution margin in our Texas and Mississippi service areas include franchise fees and gross receipt taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenue is influenced by the cost of gas and the level of gas sales volumes. We record the asso- ciated tax expense as a component of taxes, other than income. Although changes in revenue related taxes arising from changes in gas costs affect Contribution Margin, over time the impact is offset within operating income. Although the cost of gas typically does not have a direct impact on our Contribution Margin, higher gas costs may adversely impact our accounts receivable collections, resulting in higher bad debt expense, and may require us to increase borrowings under our credit facilities resulting in higher interest expense. In addition, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause cus- tomers to conserve or, in the case of industrial consumers, to use alternative energy sources. Currently, gas cost risk has been mitigated by rate design that allows us to collect from our customers the gas cost portion of our bad debt expense on approximately 76 percent of our residential and commercial margins. During fiscal 2018, we completed 16 regulatory proceedings in our distribution segment, resulting in an $8.9 million increase in annual operating income. Review of Financial and Operating Results Financial and operational highlights for our distribution segment for the fiscal years ended September 30, 2018, 2017 and 2016 are presented below. Operating revenues . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . $3,003,047 1,559,836 2018 For the Fiscal Year Ended September 30 2016 2017 (In thousands, unless otherwise noted) $2,339,778 1,058,576 $ 353,872 290,380 $2,649,175 1,269,456 2018 vs. 2017 Contribution Margin . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . 1,443,211 962,344 1,379,719 874,077 1,281,202 839,318 Operating income . . . . . . . . . . . . . . . . . . . . . Miscellaneous income (expense) Interest charges . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . One-time, non-cash income tax 480,867 (1,849) 65,850 413,168 107,880 505,642 (1,695) 79,789 424,158 155,789 441,884 1,171 78,238 364,817 130,987 63,492 88,267 (24,775) (154) (13,939) (10,990) (47,909) 2017 vs. 2016 $309,397 210,880 98,517 34,759 63,758 (2,866) 1,551 59,341 24,802 benefit . . . . . . . . . . . . . . . . . . . . . . . . (137,678) — — (137,678) — Net income . . . . . . . . . . . . . . . . . . . . . . $ 442,966 $ 268,369 $ 233,830 $ 174,597 $ 34,539 Consolidated distribution sales volumes — MMcf . . . . . . . . . . . . . . . Consolidated distribution transportation volumes — MMcf . . . . . . . . . . . . . . . Total consolidated distribution 300,817 246,825 258,650 53,992 (11,825) 150,566 141,540 133,378 9,026 8,162 throughput — MMcf . . . . . . . . . . . 451,383 388,365 392,028 63,018 (3,663) Consolidated distribution average cost of gas per Mcf sold . . . . . . . . . . . . . . $ 5.19 $ 5.14 $ 4.09 $ 0.05 $ 1.05 32 Fiscal year ended September 30, 2018 compared with fiscal year ended September 30, 2017 Income before income taxes for our distribution segment decreased three percent, primarily due to an $88.3 million increase in operating expenses, partially offset by a $63.5 million increase in Contribution Margin. The year-to-date increase in Contribution Margin primarily reflects: ‰ a $70.7 million net increase in rate adjustments, excluding rate adjustments resulting from the TCJA, primarily in our Mid-Tex, Kentucky/Mid-States, Mississippi and West Texas Divisions. These rate adjustments were driven primarily by increased safety and reliability spending. ‰ a $12.2 million increase in net consumption, primarily in our Mid-Tex, Mississippi, Kentucky/Mid-States and Louisiana Divisions. ‰ a $14.8 million increase in revenue-related taxes primarily in our Mid-Tex Division, offset by a corre- sponding $15.5 million increase in the related tax expense. ‰ an $8.9 million increase in transportation margin primarily in our Kentucky/Mid-States Division. ‰ an $8.4 million increase from customer growth, primarily in our Mid-Tex Division. ‰ a $51.3 million decrease in Contribution Margin due to the inclusion of the lower statutory federal income tax rate in our revenues due to implementation of the TCJA. Of this amount, $30.0 million has been reflected in customer bills. The remaining $21.3 million relates to the establishment of regulatory liabilities for the difference between the former 35% federal statutory income tax rate and the current 21% rate. The increase in operating expenses, which include operation and maintenance expense, bad debt expense, depreciation and amortization expense and taxes, other than income, largely reflects expenses incurred after we decided to undertake a planned outage of our natural gas distribution system in Northwest Dallas that affected approximately 2,400 homes. While the system was replaced, we provided financial assistance to the affected residents and incurred other related costs of approximately $24 million. The remaining increase in operating expenses is primarily attributable to an increase in employee-related costs and incremental system integrity activities of $19.3 million, increased revenue-related taxes, as discussed above, and increased depreciation and property taxes of $22.5 million associated with increased capital invest- ments. Interest charges decreased $13.9 million, primarily from interest deferrals associated with our infrastructure spending activities in Texas and Louisiana. The decrease in income tax expense primarily reflects a reduction in our effective tax rate from 36.7% to 26.1%, as a result of the TCJA. During fiscal 2018, in certain jurisdictions, we began amortizing the excess deferred income taxes in the amount of $1.6 million. Fiscal year ended September 30, 2017 compared with fiscal year ended September 30, 2016 Income before income taxes for our distribution segment increased 16 percent, primarily due to a $98.5 million increase in Contribution Margin, partially offset by a $34.8 million increase in operating expenses. The year-over-year increase in Contribution Margin primarily reflects: ‰ a $72.4 million net increase in rate adjustments, primarily in our Mid-Tex, Louisiana, Mississippi and West Texas Divisions. These rate adjustments were driven primarily by increased safety and reliability spending. ‰ Customer growth, primarily in our Mid-Tex and Kentucky/Mid-States Divisions, which contributed an incremental $5.8 million. ‰ a $5.8 million increase in transportation margin, primarily in the Kentucky/Mid-States and Mid-Tex Divisions. ‰ a $5.2 million increase in revenue-related taxes primarily in our Mid-Tex and West Texas Divisions, off- set by a corresponding $5.1 million increase in the related tax expense. 33 ‰ a $2.9 million increase in net consumption, despite weather that was 12 percent warmer than the prior year. The increase in operating expenses was primarily due to increased depreciation expense and property taxes associated with increased capital investments, higher employee-related costs, increased revenue-related taxes, as discussed above, and higher pipeline maintenance and related activities, partially offset by lower legal costs. The following table shows our operating income by distribution division, in order of total rate base, for the fiscal years ended September 30, 2018, 2017 and 2016. The presentation of our distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes. For the Fiscal Year Ended September 30 2018 vs. 2017 2017 2016 2017 vs. 2016 Mid-Tex . . . . . . . . . . . . . . . . . . . . . Kentucky/Mid-States . . . . . . . . . . . Louisiana . . . . . . . . . . . . . . . . . . . . West Texas . . . . . . . . . . . . . . . . . . . Mississippi . . . . . . . . . . . . . . . . . . . Colorado-Kansas . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . 2018 $202,444 81,105 70,609 45,494 47,237 32,333 1,645 $233,158 75,214 69,300 46,859 38,505 34,658 7,948 (In thousands) $210,608 63,730 55,857 41,131 37,398 31,840 1,320 $(30,714) 5,891 1,309 (1,365) 8,732 (2,325) (6,303) Total . . . . . . . . . . . . . . . . . . . . . . . . $480,867 $505,642 $441,884 $(24,775) $22,550 11,484 13,443 5,728 1,107 2,818 6,628 $63,758 Pipeline and Storage Segment Our pipeline and storage segment consists of the pipeline and storage operations of Atmos Pipeline-Texas Division (APT) and our natural gas transmission operations in Louisiana. APT is one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Barnett Shale, the Texas Gulf Coast and the Delaware and Midland Basins of West Texas. APT provides transportation and storage services to our Mid-Tex Division, other third party local distribution companies, industrial and electric generation custom- ers, as well as marketers and producers. As part of its pipeline operations, APT owns and operates five under- ground storage facilities in Texas. Our natural gas transmission operations in Louisiana are comprised of a proprietary 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and, on a more limited basis, to third parties. The demand fee charged to our Louisiana distribution division for these services is subject to regulatory approval by the Louisiana Public Service Commission. We also manage two asset management plans, which have been approved by applicable state regulatory commissions. Generally, these asset management plans require us to share with our distribution customers a significant portion of the cost savings earned from these arrangements. Our pipeline and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our Texas and Louisiana service areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation and storage of natural gas. However, natural gas prices and demand for natural gas could influence the level of drilling activity in the supply areas that we serve, which may influence the level of throughput we may be able to transport on our pipe- lines. Further, natural gas price differences between the various hubs that we serve in Texas could influences the volumes of gas transported for shippers through Texas pipeline systems and rates for such transportation. The results of APT are also significantly impacted by the natural gas requirements of its local distribution company customers. Additionally, its operations may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs. APT annually uses the Gas Reliability Infrastructure Program (GRIP) to recover capital costs incurred in the prior calendar year. Following the conclusion of its rate case in August 2017, APT made a GRIP filing that 34 covered changes in net investment from October 1, 2016 through December 31, 2016 with a requested increase in operating income of $29.0 million. On December 5, 2017, the filing was approved. On February 15, 2018, APT made a GRIP filing that covered changes in net investment from January 1, 2017 through December 31, 2017 with a requested increase in operating income of $42.2 million. On May 22, 2018, the filing was approved. On December 21, 2016, the Louisiana Public Service Commission approved an annual increase of five per- cent to the demand fee charged by our natural gas transmission pipeline for each of the next 10 years, effective October 1, 2017. Review of Financial and Operating Results Financial and operational highlights for our pipeline and storage segment for the fiscal years ended Sep- tember 30, 2018, 2017 and 2016 are presented below. 2018 Mid-Tex / Affiliate transportation revenue . . Third-party transportation revenue . . . . . . . . Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . $354,885 140,231 12,597 Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchased gas cost Contribution Margin . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . Miscellaneous expense . . . . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . One-time, non-cash income tax benefit . . . . . 507,713 1,978 505,735 263,468 242,267 (3,495) 40,796 197,976 58,982 (21,104) 2016 For the Fiscal Year Ended September 30 2017 2018 vs. 2017 (In thousands, unless otherwise noted) $ 16,035 40,131 (5,483) $315,726 89,498 21,972 $338,850 100,100 18,080 457,030 2,506 454,524 232,620 221,904 (1,575) 40,393 179,936 65,594 — 427,196 (58) 427,254 211,908 215,346 (1,405) 36,574 177,367 65,655 — 50,683 (528) 51,211 30,848 20,363 (1,920) 403 18,040 (6,612) (21,104) 2017 vs. 2016 $23,124 10,602 (3,892) 29,834 2,564 27,270 20,712 6,558 (170) 3,819 2,569 (61) — Net income $160,098 $114,342 $111,712 $ 45,756 $ 2,630 Gross pipeline transportation volumes — MMcf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 871,904 770,348 686,042 101,556 84,306 Consolidated pipeline transportation volumes —MMcf . . . . . . . . . . . . . . . . . . . . 663,900 596,179 505,303 67,721 90,876 Fiscal year ended September 30, 2018 compared with fiscal year ended September 30, 2017 Income before income taxes for our pipeline and storage segment increased ten percent, primarily due to a $51.2 million increase in Contribution Margin, partially offset by a $30.8 million increase in operating expenses. The increase in Contribution Margin primarily reflects: ‰ a $74.3 million increase in rates from the approved APT rate case and the GRIP filings approved in December 2017 and May 2018. The increase in rates was driven primarily by increased safety and reli- ability spending. ‰ a net increase of $1.3 million due to wider spreads and positive supply and demand dynamics affecting the Permian Basin. ‰ a $24.1 million decrease in Contribution Margin due to the inclusion of the lower statutory federal income tax rate in our revenues due to implementation of the TCJA. Of this amount, $11.4 million has been reflected in customer bills. The remaining $12.7 million relates to the establishment of regulatory liabilities, as discussed above. 35 The increase in operating expenses is primarily due to higher depreciation expense of $25.8 million asso- ciated with increased capital investments and an increase in employee-related costs. The decrease in income tax expense primarily reflects a reduction in our effective tax rate from 36.5% to 29.8%, as a result of the TCJA. Fiscal year ended September 30, 2017 compared with fiscal year ended September 30, 2016 Income before income taxes for our pipeline and storage segment increased slightly, primarily due to a $27.3 million increase in Contribution Margin, partially offset by a $20.7 million increase in operating expenses. The increase in Contribution Margin primarily reflects a $24.6 million increase in rates from the approved 2016 GRIP filing and the rate case finalized in August 2017 and higher through system revenue of $8.3 million, largely related to higher basis spreads due to increased production in the Permian Basin and incremental throughput on a pipeline acquired in the first quarter of fiscal 2017. Partially offsetting these increases was a decrease in Contribution Margin of $2.3 million due to lower excess retention gas sales in the current year. As noted above, as a result of the annual rate case, we did not file our annual GRIP filing during the second quarter of fiscal 2017, which influenced this segment’s performance year-over-year. Operating expenses increased $20.7 million, primarily due to increased depreciation expense and property taxes associated with increased capital investments. Natural Gas Marketing Segment Through December 31, 2016, we were engaged in an unregulated natural gas marketing business, which was conducted by Atmos Energy Marketing (AEM). AEM’s primary business was to aggregate and purchase gas supply, arrange transportation and storage logistics and ultimately deliver gas to customers at competitive prices. As more fully described in Note 15, effective January 1, 2017, we sold all of the equity interests of AEM to CenterPoint Energy Services, Inc. (CES), a subsidiary of CenterPoint Energy Inc. As a result of the sale, Atmos Energy has fully exited the nonregulated natural gas marketing business. Accordingly, a gain on sale from dis- continued operations for $2.7 million was recorded and net income of $11.0 million for AEM is reported as dis- continued operations for the year ended September 30, 2017, compared to net income of $4.6 million for AEM reported for discontinued operations for the year ended September 30, 2016. 36 Review of Financial and Operating Results Financial and operational highlights for our natural gas marketing segment for the fiscal years ended Sep- tember 30, 2017 and 2016 are presented below. Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations, net of tax . . . . . . . . . . . . . . . . . 25,920 7,874 18,046 30 241 17,835 6,841 10,994 2,716 For the Fiscal Year Ended September 30 2017 2016 (In thousands, unless otherwise noted) $1,005,090 968,118 $(701,616) (690,564) 2017 vs. 2016 $303,474 277,554 36,972 26,184 10,788 109 2,604 8,293 3,731 4,562 — 4,562 (11,052) (18,310) 7,258 (79) (2,363) 9,542 3,110 6,432 2,716 $ 9,148 Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . $ 13,710 $ Gross natural gas marketing delivered gas sales volumes — MMcf . . . . 90,223 371,319 (281,096) Consolidated natural gas marketing delivered gas sales volumes — MMcf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,646 325,537 (246,891) Net physical position (Bcf) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 18.1 (18.1) Fiscal year ended September 30, 2017 compared with fiscal year ended September 30, 2016 The $9.1 million year-over-year increase in net income from discontinued operations primarily reflects the recognition of a net $6.6 million noncash gain from unwinding hedge accounting for certain of the natural gas marketing business’s financial positions in connection with the sale of AEM. Additionally we recognized a $2.7 million net gain on sale upon completion of the sale of AEM to CES in January 2017. LIQUIDITY AND CAPITAL RESOURCES The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. External debt financing is provided primarily through the issuance of long-term debt, a $1.5 billion commercial paper program and three committed revolving credit facilities with a total availability from third-party lenders of approximately $1.5 billion. The commercial paper program and credit facilities provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company’s desired capital structure with an equity-to-total-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Additionally, we have various uncommitted trade credit lines with our gas suppliers that we uti- lize to purchase natural gas on a monthly basis. The liquidity provided by these sources is expected to be suffi- cient to fund the Company’s working capital needs and capital expenditures program for fiscal year 2019 and beyond. Please refer to the TCJA Impact section above regarding anticipated impacts on our liquidity, capital resources and cash flows. To support our capital market activities, we have a registration statement on file with the SEC that permits us to issue a total of $2.5 billion in common stock and/or debt securities. The shelf registration statement expires on March 26, 2019. Under the shelf registration statement, in November 2017, we filed a prospectus supplement for an at-the-market (ATM) equity distribution program under which we may issue and sell shares of our com- mon stock up to an aggregate offering price of $500 million. 37 At September 30, 2018, approximately $650.0 million of securities remained available for issuance under the shelf registration statement. On October 4, 2018, we completed a public offering of $600 million of 4.30% senior notes due 2048. The effective rate of this note is 4.37% after giving effect to the offering costs. We received net proceeds from the offering, after underwriting discount and estimated offering expenses of approx- imately $591 million, that were used to repay working capital borrowings pursuant to our commercial paper program. The issuance of these notes effectively exhausted our existing shelf registration statement. During the first quarter of fiscal 2019, we intend to file a new registration statement for the issuance, from time to time, of up to $3.0 billion in common stock and/or debt securities In addition, during the first quarter of fiscal 2019, we plan to enter into a new ATM equity distribution agreement under which we may issue and sell shares of our common stock, up to an aggregate offering price of $500 million, under the new shelf registration statement. The following table presents our capitalization as of September 30, 2018 and 2017: September 30 2018 2017 (In thousands, except percentages) Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575,780 3,068,665 4,769,951 6.8% $ 447,745 36.5% 3,067,045 56.7% 3,898,666 6.0% 41.4% 52.6% Total capitalization, including short-term debt . . . . . . . . . . . . . . . . $8,414,396 100.0% $7,413,456 100.0% Cash Flows Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for our services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors. Cash flows from operating, investing and financing activities for the years ended September 30, 2018, 2017 and 2016 are presented below. Total cash provided by (used in) Operating activities . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . Change in cash and cash 2018 For the Fiscal Year Ended September 30 2016 2017 (In thousands) 2018 vs. 2017 2017 vs. 2016 $ 1,124,662 (1,463,566) 326,266 $ 867,090 (1,056,306) 168,091 $ 794,990 (1,079,732) 303,623 $ 257,572 (407,260) 158,175 $ 72,100 23,426 (135,532) equivalents . . . . . . . . . . . . . . . . . . . (12,638) (21,125) 18,881 8,487 (40,006) Cash and cash equivalents at beginning of period . . . . . . . . . . . . 26,409 47,534 28,653 (21,125) 18,881 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 13,771 $ 26,409 $ 47,534 $ (12,638) $ (21,125) Cash flows from operating activities Year-over-year changes in our operating cash flows primarily are attributable to changes in net income and working capital changes, particularly within our distribution segment resulting from changes in the price of natural gas and the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries. 38 Fiscal Year ended September 30, 2018 compared with fiscal year ended September 30, 2017 For the fiscal year ended September 30, 2018, we generated operating cash flows of $1,124.7 million com- pared with $867.1 million in the prior year. The year-over-year increase primarily reflects the positive cash effects of successful rate case outcomes achieved in fiscal 2017 driven primarily by increased safety and reli- ability spending and changes in working capital, primarily as a result of the timing of gas cost recoveries under our purchase gas cost mechanisms as a result of a year-over-year increase in sale volumes. This increase in sales volumes also contributed to the year-over-year increase in operating cash flow. Fiscal Year ended September 30, 2017 compared with fiscal year ended September 30, 2016 For the fiscal year ended September 30, 2017, we generated operating cash flows of $867.1 million com- pared with $795.0 million in fiscal 2016. The year-over-year increase primarily reflects the positive cash effect of successful rate case outcomes achieved in fiscal 2016. Cash flows from investing activities In recent years, we have used substantial amounts of cash to fund our ongoing construction program, which enables us to improve safety and reliability by modernizing our distribution and transmission system, used to provide distribution services to our existing customer base, expand our natural gas distribution services into new markets, enhance the integrity of our pipelines and, more recently, expand our intrastate pipeline network. Over the last three fiscal years, approximately 82 percent of our capital spending has been committed to improving the safety and reliability of our system. In executing our regulatory strategy, we target our capital spending on regulatory mechanisms that permit us to earn an adequate return timely on our investment without compromising the safety or reliability of our system. Substantially all of our regulated jurisdictions have rate tariffs that provide the opportunity to include in their rate base approved capital costs on a periodic basis without being required to file a rate case. For the fiscal year ended September 30, 2018, we had $1,467.6 million in capital expenditures compared with $1,137.1 million for the fiscal year ended September 30, 2017 and $1,087.0 million for the fiscal year ended September 30, 2016. Fiscal Year ended September 30, 2018 compared with fiscal year ended September 30, 2017 The $330.5 million increase in capital expenditures in fiscal 2018 compared to fiscal 2017 primarily reflects planned increases to modernize our distribution and transmission system, and increases in spending in our pipe- line and storage segment to improve the reliability of gas service to our local distribution company customers. The year-over-year increase also reflects the absence in the current year period of $140.3 million in net proceeds received from the sale of AEM, $29.8 million in proceeds received from the completion of a State of Texas use tax audit and the $86.1 million used to acquire a pipeline in December 2016. Fiscal Year ended September 30, 2017 compared with fiscal year ended September 30, 2016 The $50.1 million increase in capital expenditures in fiscal 2017 compared to fiscal 2016 primarily reflects a: ‰ $109.7 million increase due to planned increases in our distribution segment to replace vintage pipe. ‰ $59.2 million decrease in spending in our pipeline and storage segment as a result of the substantial com- pletion of an APT project to improve the reliability of gas service to its local distribution company customers. Cash flows from investing activities for the year ended September 30, 2017 also include proceeds of $140.3 million received from the sale of AEM, proceeds received from the completion of a State of Texas use tax audit and $86.1 million used to purchase a pipeline in the first fiscal quarter of 2017. 39 Cash flows from financing activities We generated a net amount of $326.3 million, $168.1 million and $303.6 million in cash from financing activities for fiscal years 2018, 2017 and 2016. Our significant financing activities for the fiscal years ended September 30, 2018, 2017 and 2016 are summarized as follows: 2018 During the fiscal year ended September 30, 2018, our financing activities generated $326.3 million of cash compared with $168.1 million of cash generated in the prior year. The $158.2 million increase in cash provided by financing activities reflects higher net short-term borrowings due to increased capital expenditures and period- over-period changes in working capital funding needs compared to the prior year, as well as net proceeds received of $395.1 million from equity financing. Cash dividends increased due to a 7.8% increase in our divi- dend rate and an increase in shares outstanding. 2017 During the fiscal year ended September 30, 2017, our financing activities generated $168.1 million of cash compared with $303.6 million of cash generated in the prior year. The $135.5 million decrease in cash provided by financing activities is primarily due to the reduction in our short–term debt, partially offset by an increase in our long-term debt. During fiscal 2017, we completed approximately $975 million of debt and equity financing. On June 8, 2017, we completed a public offering of $500 million of 3.00% senior unsecured notes due 2027 and $250 million of 4.125% senior unsecured notes due 2044. The net proceeds of approximately $753 million were used to repay our $250 million 6.35% senior unsecured notes at maturity on June 15, 2017 and for general corpo- rate purposes, including the repayment of working capital borrowings pursuant to our commercial paper pro- gram. In October 2016, we issued $125 million of long-term debt under our three year, $200 million multi-draw term loan agreement. Additionally, during fiscal 2017 we issued 1.3 million shares under our ATM program and received net proceeds of $98.8 million. As of September 30, 2017, substantially all of shares under this program had been issued. 2016 During the fiscal year ended September 30, 2016, our financing activities generated $303.6 million of cash compared with $131.1 million of cash generated in fiscal 2015. The increase is primarily due to higher net short- term borrowings due to increased capital expenditures and period-over-period changes in working capital funding needs compared to the prior year, as well as proceeds received from the issuance of common stock under our ATM program in the third fiscal quarter of 2016. The following table shows the number of shares issued for the fiscal years ended September 30, 2018, 2017 and 2016: Shares issued: For the Fiscal Year Ended September 30 2017 2016 2018 Direct Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 Long-Term Incentive Plan (LTIP) . . . . . . . . . . . . . . . . . . . . . . . . . November 2017 Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At-the-Market (ATM) Equity Sales Program . . . . . . . . . . . . . . . . . . . . . 131,213 94,081 385,351 4,558,404 112,592 228,326 529,662 — — 1,303,494 133,133 359,414 598,439 — 1,360,756 Total shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,169,049 2,174,074 2,451,742 40 Credit Ratings Our credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities and funding status. In addition, the rating agencies consider qual- itative factors such as consistency of our earnings over time, the quality of our management and business strategy and the regulatory environment in the states where we operate. Our debt is rated by two rating agencies: Standard & Poor’s Corporation (S&P) and Moody’s Investors Service (Moody’s). As of September 30, 2018, both rating agencies maintained a stable outlook. Our current debt ratings are all considered investment grade and are as follows: S&P Moody’s A Senior unsecured long-term debt Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A2 P-1 A significant degradation in our operating performance or a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of deteriorating global or national finan- cial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the two credit rating agencies. This would mean more limited access to the private and public credit markets and an increase in the costs of such borrowings. A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating is AAA for S&P and Aaa for Moody’s. The lowest investment grade credit rating is BBB- for S&P and Baa3 for Moody’s. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independently of any other rating. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant. Debt Covenants We were in compliance with all of our debt covenants as of September 30, 2018. Our debt covenants are described in Note 5 to the consolidated financial statements. Contractual Obligations and Commercial Commitments The following table provides information about contractual obligations and commercial commitments at September 30, 2018. Contractual Obligations . . . . . . . . . . . . . . . . . . Long-term debt(1) . . . . . . . . . . . . . . . . . . Short-term debt(1) Interest charges(2) . . . . . . . . . . . . . . . . . . Operating leases(3) . . . . . . . . . . . . . . . . . Financial instrument obligations(4) . . . . . Pension and postretirement benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Uncertain tax positions(6) contributions(5) Total Less than 1 year Payments Due by Period 1-3 years (In thousands) 3-5 years More than 5 years $3,085,000 575,780 2,257,307 104,191 56,837 $ 575,000 575,780 134,227 17,655 56,734 $ — — 222,759 32,685 103 $ — $2,510,000 — — 1,677,562 222,759 22,226 31,625 — — 275,907 26,203 24,882 — 56,310 26,203 63,525 — 131,190 — Total contractual obligations . . . . . $6,381,225 $1,384,278 $338,060 $317,909 $4,340,978 (1) See Note 5 to the consolidated financial statements. 41 (2) Interest charges were calculated using the effective rate for each debt issuance. (3) See Note 10 to the consolidated financial statements. (4) Represents liabilities for natural gas commodity and interest rate financial instruments that were valued as of September 30, 2018. The ultimate settlement amounts of these remaining liabilities are unknown because they are subject to continuing market risk until the financial instruments are settled. (5) Represents expected contributions to our pension and postretirement benefit plans, which are discussed in Note 7 to the consolidated financial statements. (6) Represents liabilities associated with uncertain tax positions claimed or expected to be claimed on tax returns. The amount does not include interest and penalties that may be applied to these positions. We maintain supply contracts with several vendors that generally cover a period of up to one year. Commit- ments 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 individual contracts. 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 market and fixed prices. At September 30, 2018, we were committed to pur- chase 54.1 Bcf within one year and 37.2 Bcf within two to three years under indexed contracts. The passage of the TCJA resulted in the remeasurement of our net deferred tax liability. At September 30, 2018, we recorded $744.9 million, which relates to our regulated operations and has been recorded as a regu- latory liability. The period and timing of the return of the excess deferred taxes is being determined by regulators in each of our jurisdictions. See Note 12 for further information. Risk Management Activities We use financial instruments to mitigate commodity price risk and, periodically, to manage interest rate risk. In our distribution and pipeline and storage segments, we use a combination of physical storage, fixed phys- ical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. Additionally, we manage interest rate risk by entering into financial instruments to effectively fix the Treasury yield component of the interest cost associated with anticipated financings. We record our financial instruments as a component of risk management assets and liabilities, which are classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instru- ment. Substantially all of our financial instruments are valued using external market quotes and indices. The following table shows the components of the change in fair value of our financial instruments for the fiscal year ended September 30, 2018 (in thousands): Fair value of contracts at September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contracts realized/settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of new contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(109,159) (1,254) 241 54,954 Fair value of contracts at September 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netting of cash collateral (55,218) — Cash collateral and fair value of contracts at September 30, 2018 . . . . . . . . . . . . . . . . . . . . . $ (55,218) 42 The fair value of our financial instruments at September 30, 2018, is presented below by time period and fair value source: Source of Fair Value Prices actively quoted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prices based on models and other valuation methods . . . . . . . . $(55,365) — $147 — Total Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(55,365) $147 $— Fair Value of Contracts at September 30, 2018 Maturity in years Less than 1 1-3 Greater than 5 4-5 (In thousands) $— — $— — $— Total Fair Value $(55,218) — $(55,218) Employee Benefits Programs An important element of our total compensation program, and a significant component of our operation and maintenance expense, is the offering of various benefits programs to our employees. These programs include medical and dental insurance coverage and pension and postretirement programs. Medical and Dental Insurance We offer medical and dental insurance programs to substantially all of our employees. We believe these programs are compliant with all current regulatory provisions and are consistent with other programs in our industry. In recent years, we have endeavored to actively manage our health care costs through the introduction of a wellness strategy that is focused on helping employees to identify health risks and to manage these risks through improved lifestyle choices. Over the last five fiscal years, we have experienced annual medical and prescription inflation of approx- imately seven percent. For fiscal 2019, we anticipate the medical and prescription drug inflation rate will increase at approximately six percent, primarily due to the inflation of health care costs and normalization of large claim activity. Net Periodic Pension and Postretirement Benefit Costs For the fiscal year ended September 30, 2018, our total net periodic pension and other benefits costs was $41.4 million, compared with $49.0 million and $46.0 million for the fiscal years ended September 30, 2017 and 2016. These costs are recoverable through our rates. A portion of these costs is capitalized into our distribution rate base and the remaining costs are recorded as a component of operation and maintenance expense. Our fiscal 2018 costs were determined using a September 30, 2017 measurement date. At that date, interest and corporate bond rates utilized to determine our discount rates were higher than the interest and corporate bond rates as of September 30, 2016, the measurement date for our fiscal 2017 net periodic cost. Therefore, we increased the discount rate used to measure our fiscal 2018 net periodic cost from 3.73 percent to 3.89 percent. We lowered the expected return on plan assets from 7.00 percent to 6.75 percent in the determination of our fis- cal 2018 net periodic pension cost based upon expected market returns for our targeted asset allocation. On October 20, 2017, the Society of Actuaries released its annually-updated mortality improvement scale for pen- sion plans incorporating new assumptions surrounding life expectancies in the United States. As of September 30, 2017, we updated our assumed mortality rates to incorporate the updated mortality table. As a result of the net impact of changes in these and other assumptions, our fiscal 2018 pension and postretirement medical costs were higher than in the prior year. Our fiscal 2017 costs were determined using a September 30, 2016 measurement date. At that date, interest and corporate bond rates utilized to determine our discount rates were lower than the interest and corporate bond rates as of September 30, 2015, the measurement date for our fiscal 2016 net periodic cost. Therefore, we decreased the discount rate used to measure our fiscal 2017 net periodic cost from 4.55 percent to 3.73 percent. We maintained the expected return on plan assets of 7.00 percent in the determination of our fiscal 2017 net periodic pension cost based upon expected market returns for our targeted asset allocation. On October 20, 2016, 43 the Society of Actuaries released its annually-updated mortality improvement scale for pension plans incorporat- ing 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. As a result of the net impact of changes in these and other assumptions, our fiscal 2017 pension and postretirement medical costs were consistent with the prior year. Pension and Postretirement Plan Funding Generally, our funding policy is to contribute annually an amount that will at least equal the minimum amount required to comply with the Employee Retirement Income Security Act of 1974 (ERISA). 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. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 2018, 2017 and 2016. Based on these valuations, we have not had a minimum required con- tribution for the last three fiscal years. However, we made voluntary contributions of $7.0 million, $5.0 million and $15.0 million to our pension plans during fiscal 2018, 2017 and 2016 to achieve a desired PPA funding threshold. We contributed $17.4 million, $13.7 million and $16.6 million to our postretirement benefits plans for the fiscal years ended September 30, 2018, 2017 and 2016. The contributions represent the portion of the postretire- ment costs we are responsible for under the terms of our plan and minimum funding required by state regulatory commissions. Outlook for Fiscal 2019 and Beyond As of September 30, 2018, interest and corporate bond rates were higher than the rates as of September 30, 2017. Therefore, we increased the discount rate used to measure our fiscal 2019 net periodic cost from 3.89 percent to 4.38 percent. The expected return on plan assets remained consistent with the prior year at 6.75 percent in the determination of our fiscal 2019 net periodic pension cost based upon expected market returns for our targeted asset allocation. On October 23, 2018, the Society of Actuaries released its annually-updated mortality improvement scale for pension plans incorporating new assumptions surrounding life expectancies in the United States. As of September 30, 2018, we updated our assumed mortality rates to incorporate the updated mortality table. As a result of the net impact of changes in these and other assumptions, we expect our fiscal 2019 net periodic pension cost to be lower than fiscal 2018. Based upon current market conditions, the current funded position of the plans and the funding requirements under the PPA, we do not anticipate a minimum required contribution for fiscal 2019. However, we may consider whether a voluntary contribution is prudent to maintain certain funding levels. The amount of this funding is contingent upon several factors, including the issuance of new mortality tables by the US Treasury Department used to establish plan funding requirements. With respect to our postretirement medical plans, we anticipate contributing between $10 million and $20 million during fiscal 2019. Actual changes in the fair market value of plan assets and differences between the actual and expected return on plan assets could have a material effect on the amount of pension costs ultimately recognized. A 0.25 percent change in our discount rate would impact our pension and postretirement costs by approximately $2.5 million. A 0.25 percent change in our expected rate of return would impact our pension and postretirement costs by approximately $1.4 million. The projected liability, future funding requirements and the amount of expense or income recognized for each of our pension and other post-retirement benefit plans are subject to change, depending on the actuarial value of plan assets, and the determination of future benefit obligations as of each subsequent calculation date. These amounts are impacted by actual investment returns, changes in interest rates, changes in the demo- graphic composition of the participants in the plans and other actuarial assumptions. 44 RECENT ACCOUNTING DEVELOPMENTS Recent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the consolidated financial statements. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to risks associated with commodity prices and interest rates. Commodity price risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. Interest-rate risk is the potential increased cost we could incur when we issue debt instruments or to provide financing and liquidity for our business activities. Additionally, interest-rate risk could affect our ability to issue cost effective equity instruments. We conduct risk management activities in our distribution and pipeline and storage segments. In our dis- tribution segment, we use a combination of physical storage, fixed-price forward contracts and financial instru- ments, 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 risk management activities and related accounting treatment are described in further detail in Note 13 to the consolidated financial statements. Additionally, our earnings are affected by changes in short-term interest rates as a result of our issuance of short- term commercial paper and our other short-term borrowings. Commodity Price Risk We purchase natural gas for our distribution operations. Substantially all of the costs of gas purchased for distribution operations are recovered from our customers through purchased gas cost adjustment mechanisms. Therefore, our distribution operations have limited commodity price risk exposure. Interest Rate Risk Our earnings are exposed to changes in short-term interest rates associated with our short-term commercial paper program and other short-term borrowings. We use a sensitivity analysis to estimate our short-term interest rate risk. For purposes of this analysis, we estimate our short-term interest rate risk as the difference between our actual interest expense for the period and estimated interest expense for the period assuming a hypothetical aver- age one percent increase in the interest rates associated with our short-term borrowings. Had interest rates asso- ciated with our short-term borrowings increased by an average of one percent, our net interest expense would have increased by approximately $0.2 million during 2018. 45 ITEM 8. Financial Statements and Supplementary Data. Index to financial statements and financial statement schedule: Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial statements and supplementary data: Consolidated balance sheets at September 30, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of income for the years ended September 30, 2018, 2017 and 2016 . . . . . . . . . Consolidated statements of comprehensive income for the years ended September 30, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of shareholders’ equity for the years ended September 30, 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated statements of cash flow for the years ended September 30, 2018, 2017 and 2016 . . . . . . . Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial statement schedule for the years ended September 30, 2018, 2017 and 2016 Page 47 48 49 50 51 52 53 101 Schedule II. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 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. 46 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Atmos Energy Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Atmos Energy Corporation (the “Company“) as of September 30, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in the Index at Item 8 (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its oper- ations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with US generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2018, 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 13, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commis- sion and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing proce- dures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the finan- cial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company‘s auditor since 1983. Dallas, Texas November 13, 2018 47 ATMOS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS September 30 2018 2017 (In thousands, except share data) ASSETS Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,217,648 $11,001,910 299,394 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,725 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,567,373 2,196,226 11,301,304 2,042,122 Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,371,147 9,259,182 Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, less allowance for doubtful accounts of $14,795 in 2018 and $10,865 in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Deferred charges and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,771 26,409 253,295 165,732 46,055 478,853 730,419 294,018 222,263 184,653 106,321 539,646 730,132 220,636 $11,874,437 $10,749,596 CAPITALIZATION AND LIABILITIES Shareholders’ equity Common stock, no par value (stated at $.005 per share); 200,000,000 shares authorized; issued and outstanding: 2018 — 111,273,683 shares, 2017 — 106,104,634 shares . . . . . . . . . . . . . . . . . . $ 556 $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt 2,974,926 (83,647) 1,878,116 4,769,951 2,493,665 531 2,536,365 (105,254) 1,467,024 3,898,666 3,067,045 Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,263,616 6,965,711 Commitments and contingencies (See Note 11) Current liabilities Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory excess deferred taxes (See Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory cost of removal obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and postretirement liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred credits and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,283 547,068 575,780 575,000 1,915,131 1,154,067 739,670 466,405 177,520 158,028 233,050 332,648 447,745 — 1,013,443 1,878,699 — 485,420 230,588 175,735 $11,874,437 $10,749,596 See accompanying notes to consolidated financial statements. 48 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME 2018 Year Ended September 30 2017 (In thousands, except per share data) 2016 Operating revenues Distribution segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline and storage segment Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,003,047 507,713 (395,214) $2,649,175 457,030 (346,470) $2,339,778 427,196 (312,326) Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,115,546 2,759,735 2,454,648 Purchased gas cost Distribution segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline and storage segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operation and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations before income taxes . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations, net of tax ($0, $6,841 and $3,731) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations, net of tax ($0, $10,215 and $0) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,559,836 1,978 (393,966) 1,167,848 599,595 361,083 263,886 723,134 (5,344) 106,646 611,144 8,080 603,064 1,269,456 2,506 (346,426) 1,058,576 (58) (312,326) 925,536 546,798 319,448 240,407 727,546 (3,270) 120,182 604,094 221,383 382,711 746,192 538,592 290,791 221,843 657,230 (234) 114,812 542,184 196,642 345,542 — — 10,994 4,562 2,716 — Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 603,064 $ 396,421 $ 350,104 Basic and diluted net income per share Income per share from continuing operations . . . . . . . . . . . . . . . . . . Income per share from discontinued operations . . . . . . . . . . . . . . . . Net income per share—basic and diluted . . . . . . . . . . . . . . . . . . . . . $ $ 5.43 — 5.43 $ $ 3.60 0.13 3.73 $ $ 3.33 0.05 3.38 Basic and diluted weighted average shares outstanding . . . . . . . . . . . . 111,012 106,100 103,524 See accompanying notes to consolidated financial statements. 49 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of tax Net unrealized holding gains (losses) on available-for-sale securities, net of tax of $(146), $1,473 and $(245) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flow hedges: Amortization and unrealized gain (loss) on interest rate agreements, net of tax of $13,017, $43,238 and $(56,723) . . . . . . . . . . . . . . . . . . Net unrealized gains on commodity cash flow hedges, net of tax of $0, $3,183 and $13,078 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Year Ended September 30 2017 (In thousands) $396,421 2016 $350,104 $603,064 (395) 2,564 (465) 44,936 75,222 (98,682) — 4,982 82,768 20,455 (78,692) Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,541 Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $647,605 $479,189 $271,412 See accompanying notes to consolidated financial statements. 50 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common stock Number of Shares Stated Value Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total (In thousands, except share and per share data) Balance, September 30, 2015 . . . . . . 101,478,818 $507 $2,230,591 Net income . . . . . . . . . . . . . . . . . . . . . — Other comprehensive loss . . . . . . . . — Cash dividends ($1.68 per share) . . . — Cumulative effect of accounting — — — — — — change . . . . . . . . . . . . . . . . . . . . . . — — — Common stock issued: Public offering . . . . . . . . . . . . . . . . Direct stock purchase plan . . . . . . . Retirement savings plan . . . . . . . . . 1998 Long-term incentive plan . . . . Employee stock-based compensation . . . . . . . . . . . . . . . 1,360,756 133,133 359,414 598,439 7 1 2 3 98,567 9,228 25,047 3,175 — — 21,419 $(109,330) $1,073,029 $3,194,797 350,104 (78,692) (175,126) 350,104 — (175,126) — (78,692) — — — — — — — 14,527 14,527 — — — — — 98,574 9,229 25,049 3,178 21,419 Balance, September 30, 2016 . . . . . . 103,930,560 Net income . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . Cash dividends ($1.80 per share) . . . Common stock issued: 520 — — — — — — 2,388,027 — — — (188,022) — 82,768 — 1,262,534 396,421 — (191,931) 3,463,059 396,421 82,768 (191,931) Public offering . . . . . . . . . . . . . . . . Direct stock purchase plan . . . . . . . Retirement savings plan . . . . . . . . . 1998 Long-term incentive plan . . . . Employee stock-based compensation . . . . . . . . . . . . . . . 1,303,494 112,592 228,326 529,662 6 1 1 3 98,749 8,970 17,551 3,698 — — 19,370 — — — — — — — — — — 98,755 8,971 17,552 3,701 19,370 Balance, September 30, 2017 . . . . . . 106,104,634 Net income . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . Cash dividends ($1.94 per share) . . . Cumulative effect of accounting 531 — — — — — — 2,536,365 — — — (105,254) — 44,541 — 1,467,024 603,064 — (214,906) 3,898,666 603,064 44,541 (214,906) change (1) . . . . . . . . . . . . . . . . . . . . — — — (22,934) 22,934 — Common stock issued: Public offering . . . . . . . . . . . . . . . . Direct stock purchase plan . . . . . . . Retirement savings plan . . . . . . . . . 1998 Long-term incentive plan . . . . Employee stock-based compensation . . . . . . . . . . . . . . . 4,558,404 22 1 131,213 94,081 — 2 385,351 395,070 11,322 8,240 3,469 — — 20,460 — — — — — — 395,092 11,323 — 8,240 — 3,471 — — 20,460 Balance, September 30, 2018 . . . . . . 111,273,683 $556 $2,974,926 $ (83,647) $1,878,116 $4,769,951 (1) See Note 2, “Recent Accounting Pronouncements” for additional information. See accompanying notes to consolidated financial statements. 51 ATMOS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS 2018 Year Ended September 30 2017 (In thousands) 2016 603,064 $ 396,421 $ 350,104 CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued cash flow hedging for commodity contracts . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities: (Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in deferred charges and other assets . . . . . . . . . . . . . . . . . . Increase (decrease) in accounts payable and accrued liabilities . . . . . . . . . . . . . Increase (decrease) in other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in deferred credits and other liabilities . . . . . . . . . . . . . . . . 361,083 158,271 (158,782) — — 12,863 7,865 5,437 (29,208) 18,921 60,424 (10,049) (11,857) 74,707 31,923 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,124,662 CASH FLOWS USED IN INVESTING ACTIVITIES 319,633 227,183 — (12,931) (10,579) 14,064 6,469 97 (58,696) (35,126) 9,991 102,254 53,017 (78,651) (66,056) 867,090 293,096 193,556 — — — 14,760 5,667 1,019 (4,847) 20,577 (18,739) (24,860) (5,195) (44,482) 14,334 794,990 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . Maturities of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Use tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,467,591) — 3,000 (46,401) 22,360 15,716 790 8,560 (1,137,089) (86,128) 140,253 (53,597) 31,792 9,332 29,790 9,341 (1,086,950) — — (32,551) 27,019 6,290 — 6,460 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,463,566) (1,056,306) (1,079,732) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt, net of premium/discount . . . . . . . . . . Net proceeds from equity offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock through stock purchase and employee retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement of interest rate agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate agreements cash collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,035 — 395,092 19,563 — — — (214,906) — (1,518) (382,066) 884,911 98,755 26,523 (36,996) 25,670 (250,000) (191,931) (6,775) — 371,884 — 98,574 34,278 — (25,670) — (175,126) (317) — Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,266 168,091 303,623 Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,638) 26,409 (21,125) 47,534 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,771 $ 26,409 $ 18,881 28,653 47,534 CASH PAID (RECEIVED) DURING THE PERIOD FOR: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,987 $ 6,102 $ 156,668 $ 5,264 $ 154,748 7,794 See accompanying notes to consolidated financial statements. 52 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business Atmos Energy Corporation (“Atmos Energy” or the “Company”) and its subsidiaries are engaged in the regulated natural gas distribution and pipeline and storage businesses. Through our distribution business, we deliver natural gas through sales and transportation arrangements to over three million residential, commercial, public-authority and industrial customers through our six regulated distribution divisions in the service areas described below: Division Service Area Atmos Energy Colorado-Kansas Division . . . . . . . . Colorado, Kansas Atmos Energy Kentucky/Mid-States Division . . . . Kentucky, Tennessee, Virginia(1) Atmos Energy Louisiana Division . . . . . . . . . . . . . . Louisiana Atmos Energy Mid-Tex Division . . . . . . . . . . . . . . Texas, including the Dallas/Fort Worth metropolitan area Atmos Energy Mississippi Division . . . . . . . . . . . . Mississippi Atmos Energy West Texas Division . . . . . . . . . . . . West Texas (1) Denotes location where we have more limited service areas. In addition, we transport natural gas for others through our distribution system. Our distribution business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which our dis- tribution divisions operate. Our corporate headquarters and shared-services function are located in Dallas, Texas, and our customer support centers are located in Amarillo and Waco, Texas. Our pipeline and storage business, which is also subject to federal and state regulation, consists of the the pipeline and storage operations of our Atmos Pipeline—Texas (APT) Division and our natural gas transmission business in Louisiana. The APT division provides transportation and storage services to our Mid-Tex Division, other third-party local distribution companies, industrial and electric generation customers, as well as marketers and producers. As part of its pipeline operations, APT manages five underground storage facilites in Texas. We also provide ancillary services customary to the pipeline industry including parking arrangements, lending and sales of inventory on hand. Our natural gas transmission operations in Louisiana are comprised of a proprietary 21-mile pipeline located in the New Orleans, Louisiana area that is primarily used to aggregate gas supply for our distribution division in Louisiana under a long-term contract and on a more limited basis, to third parties. 2. Summary of Significant Accounting Policies Principles of consolidation — The accompanying consolidated financial statements include the accounts of Atmos Energy Corporation and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process. Use of estimates — The preparation of financial statements in conformity with accounting principles gen- erally 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 allow- ance 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 meas- urements and the valuation of goodwill and other long-lived assets. Actual results could differ from those esti- mates. Regulation — Our distribution and pipeline and storage operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory author- ities 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 53 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to cus- tomers through the ratemaking process. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations. Further, regulation may impact the period in which revenues or expenses are recognized. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and a portion of our regulatory liabilities are recorded as a component of other current liabilities and deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and our regulatory excess deferred taxes and regulatory cost of removal obligation are reported separately. Significant regulatory assets and liabilities as of September 30, 2018 and 2017 included the following: Regulatory assets: . . . . . . . . . . . . . . . . . . . . . . . . . Pension and postretirement benefit costs(1) Infrastructure mechanisms(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred gas costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoverable loss on reacquired debt Deferred pipeline record collection costs . . . . . . . . . . . . . . . . . . . . . . . . . . . APT annual adjustment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate case costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory liabilities: Regulatory excess deferred taxes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory cost of service reserve(4) Regulatory cost of removal obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred gas costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . APT annual adjustment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and postretirement benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30 2018 2017 (In thousands) $ 6,496 96,739 1,927 8,702 20,467 — 2,741 6,739 $ 143,811 $ 744,895 22,508 522,175 94,705 12,887 35,228 69,113 9,486 $ 26,826 46,437 65,714 11,208 11,692 2,160 2,629 10,132 $176,798 $ — — 521,330 15,559 12,827 — — 5,941 $1,510,997 $555,657 (1) Includes $6.5 million and $9.4 million of pension and postretirement expense deferred pursuant to regulatory authorization. (2) Infrastructure mechanisms in Texas and Louisiana allow for the deferral of all eligible expenses associated with capital expenditures incurred pursuant to these rules, including the recording of interest on the deferred expenses until the next rate proceeding (rate case or annual rate filing), at which time investment and costs would be recovered through base rates. (3) The TCJA resulted in the remeasurement of the net deferred tax liability included in our rate base. Of this amount, $5.2 million is recorded in other current liabilities. The period and timing of the return of the excess 54 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) deferred taxes is being determined by regulators in each of our jurisdictions. See Note 12 for further information. (4) Effective January 1, 2018, regulators in each of our service areas required us to establish a regulatory liability for the difference in recoverable federal taxes included in revenues based on the former 35% federal statutory rate and the new 21% federal statutory rate for service provided on or after January 1, 2018. The period and timing of the return of this liability to utility customers is being determined by regulators in each of our jurisdictions. See Note 12 for further information. Revenue recognition — Sales of natural gas to our distribution customers are billed on a monthly basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for dis- tribution 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 margin generated through purchased gas cost adjustments, but they provide a dollar-for-dollar offset to increases or decreases in our distribution segment’s gas costs. The effects of these purchased gas cost adjustment mechanisms are recorded as deferred gas costs on our balance sheet. Operating revenues for our pipeline and storage segment are recognized in the period in which volumes are transported. Discontinued operations — Accounting policies specific to our discontinued natural gas marketing business are described in more detail in Note 15. Cash and cash equivalents — We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts receivable and allowance for doubtful accounts — Accounts receivable arise from natural gas sales to residential, commercial, industrial, municipal and other customers. We establish an allowance for doubt- ful accounts to reduce the net receivable balance to the amount we reasonably expect to collect based on our col- lection experience or where we are aware of a specific customer’s inability or reluctance to pay. However, if circumstances change, our estimate of the recoverability of accounts receivable could be affected. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible. Gas stored underground — Our gas stored underground is comprised of natural gas injected into storage to support the winter season withdrawals for our distribution operations. The average cost method is used for all of our distribution operations. Gas in storage that is retained as cushion gas to maintain reservoir pressure is classi- fied as property, plant and equipment and is valued at cost. Property, plant and equipment — Regulated property, plant and equipment is stated at original cost, net of contributions in aid of construction. The cost of additions includes direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), administrative and general costs and an allowance for funds used during construction. The allowance for funds used during construction represents the estimated cost of funds 55 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) used to finance the construction of major projects and are capitalized in the rate base for ratemaking purposes when the completed projects are placed in service. Interest expense of $6.8 million, $2.5 million and $2.8 million was capitalized in 2018, 2017 and 2016. Major renewals, including replacement pipe, and betterments that are recoverable under our regulatory rate base are capitalized while the costs of maintenance and repairs that are not capitalizable are charged to expense as incurred. The costs of large projects are accumulated in construction in progress until the project is completed. When the project is completed, tested and placed in service, the balance is transferred to the regulated plant in service account included in the rate base and depreciation begins. Regulated property, plant and equipment is depreciated at various rates on a straight-line basis. These rates are approved by our regulatory commissions and are comprised of two components: one based on average serv- ice life and one based on cost of removal. Accordingly, we recognize our cost of removal expense as a compo- nent of depreciation expense. The related cost of removal accrual is reflected as a regulatory liability on the consolidated balance sheet. At the time property, plant and equipment is retired, removal expenses less salvage, are charged to the regulatory cost of removal accrual. The composite depreciation rate was 3.2 percent, 3.1 percent and 3.2 percent for the fiscal years ended September 30, 2018, 2017 and 2016. Other property, plant and equipment is stated at cost. Depreciation is generally computed on the straight-line method for financial reporting purposes based upon estimated useful lives. Asset retirement obligations — We record a liability at fair value for an asset retirement obligation when the legal obligation to retire the asset has been incurred with an offsetting increase to the carrying value of the related asset. Accretion of the asset retirement obligation due to the passage of time is recorded as an operating expense. As of September 30, 2018 and 2017, we had asset retirement obligations of $12.9 million and $12.8 million. Additionally, we had $7.5 million and $7.8 million of asset retirement costs recorded as a component of property, plant and equipment that will be depreciated over the remaining life of the underlying associated assets. We believe we have a legal obligation to retire our natural gas storage facilities. However, we have not recognized an asset retirement obligation associated with our storage facilities because we are not able to determine the settlement date of this obligation as we do not anticipate taking our storage facilities out of service permanently. Therefore, we cannot reasonably estimate the fair value of this obligation. Impairment of long-lived assets — We periodically evaluate whether events or circumstances have occurred that indicate that other long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Goodwill — We annually evaluate our goodwill balances for impairment during our second fiscal quarter or more frequently as impairment indicators arise. During the second quarter of fiscal 2018, we completed our annual goodwill impairment assessment using a qualitative assessment, as permitted under U.S. GAAP. We test goodwill for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit. Based on the assessment performed, we determined that our goodwill was not impaired. Although not applicable for the fiscal 2018 analysis, if the qualitative assessment resulted in impairment indicators, we would then use a present value technique based on discounted cash flows to estimate the fair value of our reporting units. These calculations are dependent on several subjective factors including the timing of future cash flows, future growth rates and the discount rate. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value. 56 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Marketable securities — As of September 30, 2018 and 2017, all of our marketable securities were classi- fied as available for sale. In accordance with the current authoritative accounting standards, these securities, including both debt and equity securities, are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on an individual investment by investment basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than tempo- rary, the related investment is written down to its estimated fair value. Beginning on October 1, 2018, changes in fair value of our equity available for sale securities will be recorded in net income as discussed further below in the Recent accounting pronouncements section. Financial instruments and hedging activities — We use financial instruments to mitigate commodity price risk in our distribution and pipeline and storage segments and to mitigate interest rate risk. The objectives and strategies for using financial instruments have been tailored to our continuing business and are discussed in Note 13. We record all of our financial instruments on the balance sheet at fair value, with changes in fair value ulti- mately 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 settle- ment date of the underlying financial instrument. We record the cash flow impact of our financial instruments in operating cash flows based upon their balance sheet classification. The timing of when changes in fair value of our financial instruments are recorded in the income statement depends on whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment. Changes in fair value for financial instruments that do not meet one of these criteria are recognized in the income statement as they occur. Financial Instruments Associated with Commodity Price Risk In our distribution segment, the costs associated with and the realized gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas cost adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated state- ment 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. Accord- ingly, there is no earnings impact on our distribution segment as a result of the use of financial instruments. Financial Instruments Associated with Interest Rate Risk We manage interest rate risk, primarily when we plan to issue long-term debt. We currently manage this risk through the use of forward starting interest rate swaps to fix the Treasury yield component of the interest cost associated with anticipated financings. We designate these financial instruments as cash flow hedges at the time the agreements are executed. Unrealized gains and losses associated with the instruments are recorded as a component of accumulated other comprehensive income (loss). When the instruments settle, the realized gain or loss is recorded as a component of accumulated other comprehensive income (loss) and recognized as a compo- nent of interest expense over the life of the related financing arrangement. Hedge ineffectiveness to the extent incurred is reported as a component of interest expense. As of September 30, 2018 and September 30, 2017, no cash was required to be held in margin accounts. Fair Value Measurements — We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the 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. 57 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 concen- tration 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 con- dition 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 quota- tions, 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 meas- ure 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 bal- ance sheet at fair value. Our Level 1 measurements consist primarily of our available-for-sale securities. The Level 1 measurements for investments in the Atmos Energy Corporation Master Retirement Trust (the Master Trust), Supplemental Executive Benefit Plan and postretirement benefit plan consist primarily of exchange-traded financial instru- ments. 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, Supple- mental Executive Benefit Plan and postretirement benefit plan consist primarily of non-exchange traded financial instruments such as corporate bonds and government securities. Level 3 — Represents generally unobservable pricing inputs which are developed based on the best information available, including our own internal data, in situations where there is little if any market activity for the asset or liability at the measurement date. The pricing inputs utilized reflect what a market participant would use to determine fair value. We currently do not have any Level 3 investments. Pension and other postretirement plans — Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demo- graphic 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 post- retirement obligation and net pension and postretirement cost. When establishing our discount rate, we consider 58 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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 partic- ipants 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 partic- ipant census information as of the measurement date. Income taxes — Income taxes are determined based on the liability method, which results in income tax assets and liabilities arising from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on accumulated deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized. The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of interest expense. We recognize penalties related to unrecognized tax benefits as a component of miscellaneous income (expense) in accordance with regulatory requirements. Tax collections — We are allowed to recover from customers revenue-related taxes that are imposed upon us. We record such taxes as operating expenses and record the corresponding customer charges as operating revenues. However, we do collect and remit various other taxes on behalf of various governmental authorities, and we record these amounts in our consolidated balance sheets on a net basis. We do not collect income taxes from our customers on behalf of governmental authorities. Contingencies — In the normal course of business, we are confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims made by third parties or the action of various 59 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) regulatory agencies. For such matters, we record liabilities when they are considered probable and estimable, based on currently available facts and our estimates of the ultimate outcome or resolution of the liability in the future. Actual results may differ from estimates, depending on actual outcomes or changes in the facts or expect- ations surrounding each potential exposure. Subsequent events — Except as noted in Note 5 and 6 regarding the public offering of senior notes, no events occurred subsequent to the balance sheet date that would require recognition or disclosure in the financial statements. Recent accounting pronouncements Accounting pronouncements adopted in fiscal 2018 In February 2018, the Financial Accounting Standards Board (FASB) issued new guidance as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), related to the treatment of certain tax effects from accumulated other comprehensive income. The new guidance allows entities to reclassify from accumulated other compre- hensive income to retained earnings the stranded tax effects resulting from the adoption of the TCJA. The new guidance will be effective for us in the fiscal year beginning on October 1, 2019 and for interim periods within that year. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We have early adopted the new standard effective as of September 30, 2018, and reclassified the stranded tax effects of $22.9 million, resulting from the TCJA from accumulated other comprehensive income to retained earnings. This change is reflected on our consolidated statement of shareholders’ equity. In January 2017, the FASB issued new guidance that simplified the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Under the new guidance, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. We early adopted the new standard, effec- tive for our goodwill impairment test performed in our second fiscal quarter of 2018. The new standard did not have a material impact on our results of operations, consolidated balance sheets or cash flows. Accounting pronouncements that will be effective in fiscal 2019 In May 2014, the FASB issued a comprehensive new revenue recognition standard that superseded virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. Under the new standard, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under current guidance. The new guidance will become effective for us October 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We have completed the evaluation of our sources of revenue and the impact that the new guidance will have on our financial position, results of operations, cash flows and business processes. Based on this evaluation, we do not believe the implementation of the new guidance will have a material effect on our financial position, results of operations, cash flows or business processes. We intend to apply the new guidance using the modified retrospective method on the date of adoption. The most impactful change from the adoption of this standard will be the disclosure requirements. In the first quarter of fiscal 2019, we will add a new revenue footnote which will contain a disaggregation of revenues from contracts with customers by customer type. In March 2017, the FASB issued new guidance related to the income statement presentation of the compo- nents of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement 60 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) plans. The new guidance requires entities to disaggregate the current service cost component of the net benefit cost from the other components and present it with other current compensation costs for related employees in the statement of income. The other components of net benefit cost will be presented outside of income from oper- ations on the statement of income. In addition, only the service cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The Federal Energy Regulatory Commission (“FERC”), which regulates interstate transmission pipelines and also establishes, through its Uni- form System of Accounts, accounting practices for rate-regulated entities, has issued guidance that states it will permit an election to either continue to capitalize non-service benefit costs or to cease capitalizing such costs for regulatory purposes. Accounting guidelines by the FERC are typically also followed by state commissions. As such, we plan to continue to capitalize into property, plant and equipment all components of net periodic benefit cost for ratemaking purposes and will defer the non-service cost components as a regulatory asset for U.S. GAAP reporting purposes. The new guidance will be effective for us in the fiscal year beginning on October 1, 2018 and for interim periods within that year. The standard requires retrospective application for presentation of non-service cost components outside of income from operations in the statement of income and prospective application of the change in eligible costs for capitalization. We do not anticipate the new standard will have a material impact on our financial position, results of operations and cash flows. In January 2016, the FASB issued guidance related to the classification and measurement of financial instruments. The amendments modify the accounting and presentation for certain financial liabilities and equity investments not consolidated or reported using the equity method. The guidance is effective for us beginning October 1, 2018. The standard will require that changes in fair value of our available-for-sale equity securities be recorded in net income. However, the accounting for our available-for-sale debt securities remains unchanged as a result of this guidance. The new guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of fiscal year 2019. We expect to record a cumulative-effect adjustment of approximately $8 million from accumulated other comprehensive income to retained earnings. We do not antici- pate the new standard will have a material impact on our financial position, results of operations or cash flows. In August 2018, the FASB issued new guidance aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new guidance is effective for us in the fiscal year beginning October 1, 2020 and for interim periods within that year. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We intend to early adopt the guidance prospectively as of the fiscal year beginning October 1, 2018. We do not anticipate the new standard will have a material impact on our financial position, results of operations or cash flows. Recently issued accounting pronouncements that will be effective after fiscal 2019 In February 2016, the FASB issued a comprehensive new leasing standard that will require lessees to recog- nize 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 adop- tion is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. Addi- tionally, in January 2018, the FASB issued amendments to the standard that provides a practical expedient for entities to not evaluate existing or expired land easements that were not previously accounted for as leases under the current guidance. In July 2018, the FASB issued an amendment to the standard that provides an additional and optional transition method to adopt the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the 61 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) effect of this standard and amendments on our financial position, results of operations, cash flows and business processes. In June 2016, the FASB issued new guidance which will require credit losses on most financial assets meas- ured 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 effec- tive for us beginning on October 1, 2021; early adoption is permitted beginning on October 1, 2019. We are cur- rently evaluating the potential impact of this new guidance on our financial position, results of operations and cash flows. In August 2018, the FASB issued new guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance removes the disclosure requirements for the amounts of gain/loss and prior service cost/credit amortization expected in the following year and the disclosure of the effect of a one-percentage-point change in the health care cost trend rate, among other changes. The guidance adds certain disclosures including the weighted average interest crediting rate for cash balance plans and a narrative description for the significant change in gains and losses as well as any other significant change in the plan obligations or assets. The new guidance is effective for us in the fiscal year begin- ning October 1, 2020 and should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The adoption of this new guidance impacts only our disclosures; however we are still evaluating the timing of our adoption. 3. Segment Information As of September 30, 2018, we manage and review our consolidated operations through the following three reportable segments: ‰ The distribution segment is primarily comprised of our regulated natural gas distribution and related sales operations in eight states. ‰ The pipeline and storage segment is comprised primarily of the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana. ‰ The natural gas marketing segment is comprised of our discontinued natural gas marketing business. Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our dis- tribution segment operations are geographically dispersed, they are aggregated and reported as a single segment as each natural gas distribution division has similar economic characteristics. In addition, because the pipeline and storage operations of our Atmos Pipeline-Texas division and our natural gas transmission operations in Louisiana have similar economic characteristics, they have been aggregated and reported as a single segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on net income or loss of the respective operating units. We allocate interest and pension expense to the pipeline and storage segment; however, there is no debt or pension liability recorded on the pipeline and storage segment balance sheet. All material intercompany transactions have been eliminated; however, we have not eliminated intercompany profits when such amounts are probable of recovery under the affiliates’ rate regulation process. Income taxes are allocated to each segment as if each segment’s taxes were calculated on a separate return basis. 62 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Income statements and capital expenditures by segment are shown in the following tables. Year Ended September 30, 2018 Distribution Pipeline and Storage Eliminations Consolidated (In thousands) Operating revenues from external parties . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,404 2,643 $115,142 392,571 $ (395,214) — $3,115,546 — Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operation and maintenance expense . . . . . . . . . . . . . . . . Depreciation and amortization expense . . . . . . . . . . . . . Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . 3,003,047 1,559,836 465,848 264,930 231,566 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . 480,867 (1,849) 65,850 413,168 (29,798) 507,713 1,978 134,995 96,153 32,320 242,267 (3,495) 40,796 197,976 37,878 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442,966 $160,098 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,025,800 $441,791 (395,214) (393,966) (1,248) — — — — — — — 3,115,546 1,167,848 599,595 361,083 263,886 723,134 (5,344) 106,646 611,144 8,080 $ $ — $ 603,064 — $1,467,591 Distribution Operating revenues from external parties . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . $2,647,813 1,362 Total operating revenues . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . Operation and maintenance expense . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . Taxes, other than income . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . Miscellaneous expense . . . . . . . . . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . Income from continuing operations before income taxes . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . Income from continuing operations . . . . . Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . 2,649,175 1,269,456 413,077 249,071 211,929 505,642 (1,695) 79,789 424,158 155,789 268,369 — — $111,922 345,108 457,030 2,506 133,765 70,377 28,478 221,904 (1,575) 40,393 179,936 65,594 114,342 Pipeline and Storage Year Ended September 30, 2017 Natural Gas Marketing (In thousands) Eliminations Consolidated $ — — $ (346,470) — $2,759,735 — — — — — — — — — — — — (346,470) (346,426) (44) 2,759,735 925,536 546,798 — — — — — — — — — — 319,448 240,407 727,546 (3,270) 120,182 604,094 221,383 382,711 10,994 2,716 — — 10,994 2,716 Net income . . . . . . . . . . . . . . . . . . . . $ 268,369 $114,342 $13,710 Capital expenditures . . . . . . . . . . . . . . . . . $ 849,950 $287,139 $ — $ $ — $ 396,421 — $1,137,089 63 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Distribution Pipeline and Storage Year Ended September 30, 2016 Natural Gas Marketing (In thousands) Eliminations Consolidated Operating revenues from external parties . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment revenues . . . . . . . . . . . . . . . $2,338,404 1,374 $116,244 310,952 $ — — $ (312,326) — $2,454,648 — Total operating revenues . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . Operation and maintenance expense . . . . Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . Taxes, other than income . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . Miscellaneous income (expense) . . . . . . . Interest charges . . . . . . . . . . . . . . . . . . . . . Income from continuing operations before income taxes . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . Income from continuing operations . . . . . Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,339,778 1,058,576 407,982 234,109 197,227 441,884 1,171 78,238 364,817 130,987 233,830 427,196 (58) 130,610 56,682 24,616 215,346 (1,405) 36,574 177,367 65,655 111,712 — — Net income . . . . . . . . . . . . . . . . . . . . $ 233,830 $111,712 Capital expenditures . . . . . . . . . . . . . . . . . $ 740,246 $346,383 — — — — — — — — — — — 4,562 $4,562 $ 321 (312,326) (312,326) — 2,454,648 746,192 538,592 — — — — — — — — — 290,791 221,843 657,230 (234) 114,812 542,184 196,642 345,542 4,562 $ $ — $ 350,104 — $1,086,950 The following table summarizes our revenues from external parties by products and services for the fiscal year ended September 30. Distribution revenues: Gas sales revenues: 2018 2017 (In thousands) 2016 Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public authority and other . . . . . . . . . . . . . . . . . . . . . . . $1,916,101 797,073 131,267 47,714 Total gas sales revenues . . . . . . . . . . . . . . . . . . . . . . Transportation revenues . . . . . . . . . . . . . . . . . . . . . . . . . . Other gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total distribution revenues . . . . . . . . . . . . . . . . . . . . . . Pipeline and storage revenues . . . . . . . . . . . . . . . . . . . . . . . . 2,892,155 99,250 8,999 3,000,404 115,142 $1,642,918 708,167 133,372 45,820 2,530,277 86,332 31,204 2,647,813 111,922 $1,477,049 619,979 98,439 41,307 2,236,774 76,690 24,940 2,338,404 116,244 Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . $3,115,546 $2,759,735 $2,454,648 64 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Balance sheet information at September 30, 2018 and 2017 by segment is presented in the following tables. Property, plant and equipment, net . . . . . . . . . . . . . $ 7,644,693 $2,726,454 $ — $10,371,147 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,109,128 $2,963,480 $(2,198,171) $11,874,437 September 30, 2018 Distribution Pipeline and Storage Eliminations Consolidated (In thousands) September 30, 2017 Distribution Pipeline and Storage Eliminations Consolidated (In thousands) Property, plant and equipment, net . . . . . . . . . . . . . $ 6,849,517 $2,409,665 $ — $ 9,259,182 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,050,164 $2,621,601 $(1,922,169) $10,749,596 4. Earnings Per Share We use the two-class method of computing earnings per share because we have participating securities in the form of non-vested restricted stock units with a nonforfeitable right to dividend equivalents, for which vest- ing is predicated solely on the passage of time. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. Basic and diluted earnings per share for the fiscal years ended September 30 are calculated as follows: 2018 2016 2017 (In thousands, except per share data) Basic and Diluted Earnings Per Share from continuing operations Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . Less: Income from continuing operations allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations available to common $603,064 $382,711 $345,542 580 475 538 shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $602,484 $382,236 $345,004 Basic and diluted weighted average shares outstanding . . . . . . 111,012 106,100 103,524 Income from continuing operations per share — Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.43 $ 3.60 $ 3.33 Basic and Diluted Earnings Per Share from discontinued operations Income from discontinued operations . . . . . . . . . . . . . . . . . . . . Less: Income from discontinued operations allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations available to common $ — $ 13,710 $ 4,562 — 12 8 shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 13,698 $ 4,554 Basic and diluted weighted average shares outstanding . . . . . . 111,012 106,100 103,524 Income from discontinued operations per share — Basic and Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income per share — Basic and Diluted . . . . . . . . . . . . . . $ $ — $ 5.43 $ 0.13 3.73 $ $ 0.05 3.38 65 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 5. Debt Long-term debt Long-term debt at September 30, 2018 and 2017 consisted of the following: 2018 2017 (In thousands) Unsecured 8.50% Senior Notes, due March 2019 . . . . . . . . . . . . . . . . . . . . Unsecured 3.00% Senior Notes, due 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured 5.95% Senior Notes, due 2034 . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured 5.50% Senior Notes, due 2041 . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured 4.15% Senior Notes, due 2043 . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured 4.125% Senior Notes, due 2044 . . . . . . . . . . . . . . . . . . . . . . . . . Medium term Series A notes, 1995-1, 6.67%, due 2025 . . . . . . . . . . . . . . . Unsecured 6.75% Debentures, due 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating-rate term loan, due September 2019(1) $ 450,000 500,000 200,000 400,000 500,000 750,000 10,000 150,000 125,000 $ 450,000 500,000 200,000 400,000 500,000 750,000 10,000 150,000 125,000 Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,085,000 3,085,000 Less: Original issue (premium) / discount on unsecured senior notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,439) 20,774 575,000 (4,384) 22,339 — $2,493,665 $3,067,045 (1) Up to $200 million can be drawn under this term loan. Maturities of long-term debt at September 30, 2018 were as follows (in thousands): 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter $ 575,000 — — — — 2,510,000 $3,085,000 On October 4, 2018, we completed a public offering of $600 million of 4.30% senior notes due 2048. We received net proceeds from the offering, after the underwriting discount and estimated offering expenses, of approximately $591 million, that were used to repay working capital borrowings pursuant to our commercial paper program. The effective interest rate of these notes is 4.37% after giving effect to the offering costs. On June 8, 2017, we completed a public offering of $500 million of 3.00% senior notes due 2027 and $250 million of 4.125% senior notes due 2044. The effective rate of these notes is 3.12% and 4.40%, after giving effect to the offering costs and the settlement of the associated forward starting interest rate swaps. The net pro- ceeds, excluding the loss on the settlement of the interest rate swaps of $37 million, of approximately $753 million were used to repay our $250 million 6.35% senior unsecured notes at maturity on June 15, 2017 and for general corporate purposes, including the repayment of working capital borrowings pursuant to our commer- cial paper program. 66 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We utilize short-term debt to provide cost-effective, short-term financing until it can be replaced with a balance of long-term debt and equity financing that achieves the Company’s desired capital structure with an equity-to-capitalization ratio between 50% and 60%, inclusive of long-term and short-term debt. Our short-term borrowing requirements are affected primarily by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months. Currently, our short-term borrowing requirements are satisfied through a combination of a $1.5 billion commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $1.5 billion of total working capital funding. The primary source of our funding is our commercial paper program, which is supported by a five-year unsecured $1.5 billion credit facility. On March 26, 2018, we executed one of our two one-year extension options which extended the maturity date from September 25, 2021 to September 25, 2022. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable inter- est period, plus a spread ranging from zero percent to 1.25 percent, based on the Company’s credit ratings. Addi- tionally, the facility contains a $250 million accordion feature, which provides the opportunity to increase the total committed loan to $1.75 billion. At September 30, 2018 and 2017, there was $575.8 million and $447.7 million outstanding under our commercial paper program with weighted average interest rates of 2.15% and 1.25%, with weighted average maturities of less than one month. Additionally, we have a $25 million 364-day unsecured facility, which was renewed on April 1, 2018 and expires March 31, 2019, and a $10 million 364-day unsecured revolving credit facility, which is used primarily to issue letters of credit and which was renewed on September 30, 2018. At September 30, 2018, there were no borrowings outstanding under either of these facilities; however, outstanding letters of credit reduced the total amount available to us under our $10 million unsecured revolving facility to $4.4 million. The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At September 30, 2018, our total-debt-to-total- capitalization ratio, as defined, was 44 percent. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings. These credit facilities and our public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers. Additionally, our public debt indentures relating to our senior notes and debentures, as well as certain of our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. We were in compliance with all of our debt covenants as of September 30, 2018. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions. 6. Shareholders’ Equity Shelf Registration, At-the-Market Equity Sales Program and Equity Issuance On March 28, 2016, we filed a registration statement with the Securities and Exchange Commission (SEC) that originally permitted us to issue, from time to time, up to $2.5 billion in common stock and/or debt securities, which expires March 28, 2019. At September 30, 2018, approximately $650.0 million of securities remained available for issuance under the shelf registration statement. The issuance of our $600 million senior unsecured notes in October 2018, as discussed in Note 5, effectively exhausted this shelf registration statement. 67 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) On November 14, 2017, we filed a prospectus supplement under the registration statement relating to an at-the-market (ATM) equity sales program under which we may issue and sell shares of our common stock up to an aggregate offering price of $500 million, which expires March 28, 2019. During the year ended September 30, 2018, no shares of common stock were sold under our ATM equity sales program. On November 30, 2017, we filed a prospectus supplement under the registration statement relating to an underwriting agreement to sell 4,558,404 shares of our common stock for $400 million. After expenses, net pro- ceeds from the offering were $395.1 million. 1998 Long-Term Incentive Plan In August 1998, the Board of Directors approved and adopted the 1998 Long-Term Incentive Plan (LTIP), which became effective in October 1998 after approval by our shareholders. The LTIP is a comprehensive, long- term incentive compensation plan providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted stock units and stock units to certain employees and non-employee directors of the Company and our subsidiaries. The objectives of this plan include attracting and retaining the best available personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire our common stock. Accumulated Other Comprehensive Income (Loss) We record deferred gains (losses) in accumulated other comprehensive income (AOCI) related to available-for-sale securities, which include equity and debt securities, interest rate agreement cash flow hedges and commodity contract cash flow hedges. Deferred gains (losses) for our available-for-sale securities and commodity contract cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate agreement cash flow hedges are recognized in earnings as a component of interest expense, as they are amortized. The following tables provide the components of our accumulated other compre- hensive income (loss) balances, net of the related tax effects allocated to each component of other comprehensive income (loss). Additionally, as discussed further in Note 2, we have early adopted a new accounting standard effective as of September 30, 2018. The adoption resulted in a reclassification of the stranded tax effects result- ing from the TCJA, from accumulated other comprehensive income to retained earnings, as seen in the table below. September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . Amounts reclassified from accumulated other comprehensive income . . . . $ 7,048 1,426 (1,821) Available- for-Sale Securities Interest Rate Agreement Cash Flow Hedges (In thousands) $(112,302) 43,184 1,752 Total $(105,254) 44,610 (69) Net current-period other comprehensive income (loss) . . . . . . . . . . . . . . . . (395) 44,936 44,541 Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,471 (24,405) (22,934) September 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,124 $ (91,771) $ (83,647) 68 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before Available- for-Sale Securities Interest Rate Agreement Cash Flow Hedges Commodity Contracts Cash Flow Hedges (In thousands) Total $4,484 $(187,524) $(4,982) $(188,022) reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,502 74,560 9,847 86,909 Amounts reclassified from accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Net current-period other comprehensive income . . . . . . . . . . 2,564 662 75,222 (4,865) 4,982 (4,141) 82,768 September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,048 $(112,302) $ — $(105,254) The following tables detail reclassifications out of AOCI for the fiscal years ended September 30, 2018 and 2017. Amounts in parentheses below indicate decreases to net income in the statement of income. Accumulated Other Comprehensive Income Components Available-for-sale securities(2) . . . . . . . . . . . . . . . Fiscal Year Ended September 30, 2018 Amount Reclassified from Accumulated Other Comprehensive Income (In thousands) $ 2,360 Affected Line Item in the Statement of Income Operation and maintenance expense Cash flow hedges Interest rate agreements . . . . . . . . . . . . . . . . . . . . Total reclassifications . . . . . . . . . . . . . . . . . . . . . 2,360 (539) Total before tax Tax expense $ 1,821 Net of tax $(2,375) (2,375) 623 $(1,752) $ 69 Interest charges Total before tax Tax benefit Net of tax Net of tax 69 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Accumulated Other Comprehensive Income Components Fiscal Year Ended September 30, 2017 Amount Reclassified from Accumulated Other Comprehensive Income (In thousands) Affected Line Item in the Statement of Income Available-for-sale securities(2) . . . . . . . . . . . . . . . $ (97) Operation and maintenance expense Cash flow hedges Interest rate agreements . . . . . . . . . . . . . . . . . . . . Commodity contracts . . . . . . . . . . . . . . . . . . . . . . Total reclassifications . . . . . . . . . . . . . . . . . . . . . (97) 35 Total before tax Tax benefit $ (62) Net of tax $(1,043) 7,967 6,924 (2,721) $ 4,203 $ 4,141 Interest charges Purchased gas cost(1) Total before tax Tax expense Net of tax Net of tax (1) Amounts are presented as part of income from discontinued operations on the consolidated statements of income. (2) Our available-for-sale securities include both debt and equity securities. 7. Retirement and Post-Retirement Employee Benefit Plans We have both funded and unfunded noncontributory defined benefit plans that together cover most of our employees. We also maintain post-retirement plans that provide health care benefits to retired employees. Finally, we sponsor a defined contribution plan that covers substantially all employees. These plans are discussed in further detail below. As a rate regulated entity, we generally recover our pension costs in our rates over a period of up to 15 years. The amounts that have not yet been recognized in net periodic pension cost that have been recorded as regulatory assets or liabilities are as follows: September 30, 2018 Unrecognized prior service (credit) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial (gain) loss . . . . . September 30, 2017 Unrecognized prior service (credit) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial (gain) loss . . . . . Defined Benefit Plan Supplemental Executive Retirement Plans Postretirement Plans Total (In thousands) $ — 33,912 $33,912 $ — 42,170 $42,170 $ 1,298 (100,966) $ 251 (69,364) $ (99,668) $(69,113) $ 1,309 (87,196) $ 31 17,362 $ (85,887) $ 17,393 $ (1,047) (2,310) $ (3,357) $ (1,278) 62,388 $61,110 70 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Defined Benefit Plans Employee Pension Plan As of September 30, 2018, we maintained one defined benefit plan, the Atmos Energy Corporation Pension Account Plan (the Plan). The assets of the Plan are held within the Atmos Energy Corporation Master Retirement Trust (the Master Trust). The Plan is a cash balance pension plan that was established effective January 1999 and covers most of the employees of Atmos Energy that were hired on or before September 30, 2010. The plan was closed to new participants effective October 1, 2010. Opening account balances were established for participants as of January 1999 equal to the present value of their respective accrued benefits under the pension plans which were previously in effect as of December 31, 1998. The Plan credits an allocation to each participant’s account at the end of each year according to a formula based on the participant’s age, service and total pay (excluding incentive pay). In addition, at the end of each year, a participant’s account is credited with interest on the employee’s prior year account balance. Participants are fully vested in their account balances after three years of service and may choose to receive their account balances as a lump sum or an annuity. Generally, our funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974, including the funding requirements under the Pension Protection Act of 2006 (PPA). However, additional voluntary contributions are made from time to time as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. During fiscal 2018 and 2017 we contributed $7.0 million and $5.0 million in cash to the Plan to achieve a desired level of funding while maximizing the tax deductibility of this payment. Based upon market conditions at September 30, 2018, the current funded position of the Plan and the funding requirements under the PPA, we do not anticipate a minimum required contribution for fiscal 2019. However, we may consider whether a voluntary contribution is prudent to maintain certain funding levels. We make investment decisions and evaluate performance of the assets in the Master Trust on a medium- term horizon of at least three to five years. We also consider our current financial status when making recom- mendations 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 max- imize 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, 2018 and 2017. Security Class Targeted Allocation Range Domestic equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35%-55% 10%-20% 5%-30% 0%-15% 0%-20% 71 Actual Allocation September 30 2017 2018 44.3% 43.9% 15.4% 17.2% 16.9% 10.6% 12.7% 11.8% 10.7% 16.5% ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) At September 30, 2018 and 2017, the Plan held 716,700 shares of our common stock which represented 12.7 percent and 11.8 percent of total Plan assets. These shares generated dividend income for the Plan of approximately $1.4 million and $1.7 million during fiscal 2018 and 2017. Our employee pension plan expenses and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets and assumed discount rates and demographic data. We review the estimates and assumptions underlying our employee pension plans annually based upon a September 30 measurement date. The develop- ment of our assumptions is fully described in our significant accounting policies in Note 2. The actuarial assump- tions used to determine the pension liability for the Plan was determined as of September 30, 2018 and 2017 and the actuarial assumptions used to determine the net periodic pension cost for the Plan was determined as of Sep- tember 30, 2017, 2016 and 2015. On October 23, 2018, the Society of Actuaries released its annually-updated mortality improvement scale for pension plans incorporating new assumptions surrounding life expectancies in the United States. As of September 30, 2018, we updated our assumed mortality rates to incorporate the updated mortality table. Additional assumptions are presented in the following table: Pension Liability 2018 2017 2018 Pension Cost 2017 2016 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.38% 3.89% 3.89% 3.73% 4.55% 3.50% 3.50% 3.50% 3.50% 3.50% 6.75% 6.75% 6.75% 7.00% 7.00% The following table presents the Plan’s accumulated benefit obligation, projected benefit obligation and funded status as of September 30, 2018 and 2017: 2018 2017 (In thousands) Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $478,750 $505,355 Change in projected benefit obligation: Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $533,455 17,264 20,803 (29,087) (37,716) $545,480 18,109 20,443 (16,347) (34,230) Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504,719 533,455 Change in plan assets: Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508,244 54,163 7,000 (37,716) 473,950 63,524 5,000 (34,230) Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531,691 508,244 Reconciliation: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,972 — — (25,211) — — Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,972 $ (25,211) 72 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Net periodic pension cost for the Plan for fiscal 2018, 2017 and 2016 is recorded as operating expense and included the following components: Fiscal Year Ended September 30 2017 2016 2018 (In thousands) Components of net periodic pension cost: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service credit . . . . . . . . . . . . . . . . . . . . . . . Recognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,264 20,803 (27,666) (231) 9,114 $ 18,109 20,443 (27,975) (231) 12,744 $ 16,419 23,193 (27,522) (226) 10,693 Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,284 $ 23,090 $ 22,557 The following table sets forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of September 30, 2018 and 2017. As required by authoritative accounting literature, assets are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The methods used to determine fair value for the assets held by the Plan are fully described in Note 2. Investments in our common/ collective trusts and limited partnerships that are measured at net asset value per share equivalent are not classi- fied in the fair value hierarchy. The net asset value amounts presented are intended to reconcile the fair value hierarchy to the total investments. In addition to the assets shown below, the Plan had net accounts receivable of $2.0 million and $0.6 million at September 30, 2018 and 2017, which materially approximates fair value due to the short-term nature of these assets. Assets at Fair Value as of September 30, 2018 Level 1 Level 2 Level 3 Total (In thousands) Investments: Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Registered investment companies . . . . . . . . . . . . . . . . . . . Government securities: Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . U.S. treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,577 — 50,895 — 23,071 — $ — 19,153 — 18,821 868 46,498 Total investments at fair value . . . . . . . . . . . . . . . . . . . . . . . $271,543 $85,340 $ Investments measured at net asset value: Common/collective trusts(1) . . . . . . . . . . . . . . . . . . . . . . Limited partnerships(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Total investments at fair value . . . . . . . . . . . . . . . . . . . . . . . 73 $ — $197,577 19,153 — 50,895 — — — — — 18,821 23,939 46,498 356,883 108,391 64,399 $529,673 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Assets at Fair Value as of September 30, 2017 Level 1 Level 2 Level 3 Total (In thousands) Investments: Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Registered investment companies . . . . . . . . . . . . . . . . . . . Government securities: Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . U.S. treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $164,910 — 64,102 — 5,129 — $ — 9,588 — 15,664 822 32,314 Total assets in the fair value hierarchy . . . . . . . . . . . . . . . . . $234,141 $58,388 $ Investments measured at net asset value: Common/collective trusts(1) . . . . . . . . . . . . . . . . . . . . . . Limited partnerships(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Total investments at fair value . . . . . . . . . . . . . . . . . . . . . . . $ — $164,910 9,588 — 64,102 — — — — — 15,664 5,951 32,314 292,529 150,976 64,135 $507,640 (1) The fair value of our common/collective trusts and limited partnerships are measured using the net asset value per share practical expedient. There are no redemption restrictions, redemption notice periods or unfunded commitments for these investments. The redemption frequency is daily. Supplemental Executive Retirement Plans We have three nonqualified supplemental plans which provide additional pension, disability and death bene- fits 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 com- pensation under which benefits paid from the underlying qualified defined benefit plan are an offset to the bene- fits under the SEBP. In August 1998, we adopted the Supplemental Executive Retirement Plan (SERP) (formerly known as the Performance-Based Supplemental Executive Benefits Plan), which covers all officers or division presidents selected to participate in the plan between August 12, 1998 and August 5, 2009 and any corporate officer who was appointed to the Management Committee through December 31, 2016. The SERP is a defined benefit arrangement which provides a benefit equal to 60 percent of covered compensation under which benefits paid from the underlying qualified defined benefit plan are an offset to the benefits under the SERP. Effective August 5, 2009, we adopted a new defined benefit Supplemental Executive Retirement Plan (the 2009 SERP), for corporate officers, division presidents or any other employees selected at the discretion of the Board. Under the 2009 SERP, a nominal account has been established for each participant, to which the Com- pany contributes at the end of each calendar year an amount equal to ten percent (25 percent for members of the Management Committee appointed on or after January 1, 2017) of the total of each participant’s base salary and cash incentive compensation earned during each prior calendar year, beginning December 31, 2009. The benefits vest after three years of service and attainment of age 55 and earn interest credits at the same annual rate as the Company’s Pension Account Plan (currently 4.69%). Due to the retirement of certain executives, during fiscal 2018 we recognized a one-time settlement charge of $4.2 million associated with our SERP and paid $13.9 million in lump sums in relation to the retirements. 74 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Similar to our employee pension plans, we review the estimates and assumptions underlying our supple- mental plans annually based upon a September 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for the supplemental plans were determined as of September 30, 2018 and 2017 and the actuarial assumptions used to determine the net periodic pension cost for the supplemental plans were determined as of September 30, 2017, 2016 and 2015. These assumptions are presented in the following table: Pension Liability 2018 2017 2018 Pension Cost 2017 2016 Discount rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.38% 3.89% 4.08% 3.73% 4.55% 3.50% 3.50% 3.50% 3.50% 3.50% (1) Reflects a weighted average discount rate for pension cost for fiscal 2018 due to settlements during the year. The following table presents the supplemental plans’ accumulated benefit obligation, projected benefit obli- gation and funded status as of September 30, 2018 and 2017: 2018 2017 (In thousands) Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,943 $ 130,070 Change in projected benefit obligation: Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,480 1,332 4,988 (1,020) (4,523) (13,887) $ 142,574 2,756 4,744 (2,452) (4,588) (8,554) Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,370 134,480 Change in plan assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at beginning of year Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 18,410 (4,523) (13,887) Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 13,142 (4,588) (8,554) — Reconciliation: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121,370) — — (134,480) — — Accrued pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(121,370) $(134,480) Assets for the supplemental plans are held in separate rabbi trusts. At September 30, 2018 and 2017, assets held in the rabbi trusts consisted of available-for-sale securities of $46.5 million and $42.9 million, which are included in our fair value disclosures in Note 14. 75 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Net periodic pension cost for the supplemental plans for fiscal 2018, 2017 and 2016 is recorded as operating expense and included the following components: Fiscal Year Ended September 30 2017 2016 2018 (In thousands) Components of net periodic pension cost: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,332 4,988 3,079 4,159 $ 2,756 4,744 4,251 2,685 $ 2,371 5,185 2,586 — Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,558 $14,436 $10,142 Estimated Future Benefit Payments The following benefit payments for our defined benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the following fiscal years: Pension Plan Supplemental Plans (In thousands) 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,603 33,509 35,838 37,176 38,684 206,563 $10,475 24,778 4,597 20,882 12,735 43,070 Postretirement Benefits We sponsor the Retiree Medical Plan for Retirees and Disabled Employees of Atmos Energy Corporation (the Atmos Retiree Medical Plan). This plan provides medical and prescription drug protection to all qualified participants based on their date of retirement. The Atmos Retiree Medical Plan provides different levels of bene- fits 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 remain- ing 20 percent. Effective January 1, 2015, for employees who had not met the participation requirements by September 30, 2009, the contribution rates for the Company are limited to a three percent cost increase in claims and administrative costs each year, with the participant responsible for the additional costs. Generally, our funding policy is to contribute annually an amount in accordance with the requirements of ERISA. However, additional voluntary contributions are made annually as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. We expect to contribute between $10 million and $20 million to our postretirement benefits plan during fiscal 2019. We maintain a formal investment policy with respect to the assets in our postretirement benefits plan to ensure the assets funding the postretirement benefit plan are appropriately invested to maintain an acceptable level of risk. We also consider our current financial status when making recommendations and decisions regard- ing the postretirement benefits plan. 76 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, 2018 and 2017. Security Class Actual Allocation September 30 2017 2018 Diversified investment funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.5% 97.5% 2.5% 2.5% Similar to our employee pension and supplemental plans, we review the estimates and assumptions under- lying our postretirement benefit plan annually based upon a September 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for our postretirement plan were determined as of September 30, 2018 and 2017 and the actuarial assumptions used to determine the net periodic pension cost for the postretirement plan were determined as of September 30, 2017, 2016 and 2015. The assumptions are presented in the following table: Postretirement Liability 2018 2017 Postretirement Cost 2017 2018 2016 4.38% 3.89% 3.89% 3.73% 4.55% 5.33% 4.29% 4.29% 4.45% 4.45% 6.50% 7.00% 7.00% 7.50% 7.50% 5.00% 5.00% 5.00% 5.00% 5.00% 2022 2022 2021 2022 2022 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . Initial trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ultimate trend reached in . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents the postretirement plan’s benefit obligation and funded status as of Sep- tember 30, 2018 and 2017: 2018 2017 (In thousands) Change in benefit obligation: Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $274,098 12,078 10,907 4,720 (17,252) (18,565) — $279,222 12,436 10,679 4,936 (21,750) (13,970) 2,545 Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,986 274,098 Change in plan assets: Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,790 10,997 17,419 4,720 (18,565) 158,977 21,160 13,687 4,936 (13,970) Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,361 184,790 Reconciliation: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66,625) — — — (89,308) — — — Accrued postretirement cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (66,625) $ (89,308) Net periodic postretirement cost for fiscal 2018, 2017 and 2016 is recorded as operating expense and included the components presented below. Fiscal Year Ended September 30 2017 2016 2018 (In thousands) Components of net periodic postretirement cost: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service cost (credit) . . . . . . . . . . . . . . . . . . . . Recognized actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,078 10,907 (8,006) — 11 (6,473) $12,436 10,679 (7,185) — (1,644) (2,827) $10,823 12,424 (6,264) 82 (1,644) (2,167) Net periodic postretirement cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,517 $11,459 $13,254 78 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Assumed health care cost trend rates have a significant effect on the amounts reported for the plan. A one-percentage point change in assumed health care cost trend rates would have the following effects on the lat- est actuarial calculations: One-Percentage Point Increase One-Percentage Point Decrease (In thousands) Effect on total service and interest cost components . . . . . . . . . . . . . . . Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 4,228 $38,633 $ (3,377) $(31,872) We are currently recovering other postretirement benefits costs through our regulated rates in substantially all of our service areas under accrual accounting as prescribed by accounting principles generally accepted in the United States. Other postretirement benefits costs have been specifically addressed in rate orders in each juris- diction served by our Kentucky/Mid-States, West Texas, Mid-Tex and Mississippi Divisions as well as our Kansas jurisdiction and Atmos Pipeline – Texas or have been included in a rate case and not disallowed. Management believes that this accounting method is appropriate and will continue to seek rate recovery of accrual-based expenses in its ratemaking jurisdictions that have not yet approved the recovery of these expenses. The following tables set forth by level, within the fair value hierarchy, the Retiree Medical Plan’s assets at fair value as of September 30, 2018 and 2017. The methods used to determine fair value for the assets held by the Retiree Medical Plan are fully described in Note 2. Assets at Fair Value as of September 30, 2018 Level 1 Level 2 Level 3 Total (In thousands) Investments: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . Registered investment companies . . . . . . . . . . . . . . . $ — $5,003 — 194,358 Total investments at fair value . . . . . . . . . . . . . . . . . . . $194,358 $5,003 $ $ — $ — 5,003 194,358 — $199,361 Assets at Fair Value as of September 30, 2017 Level 1 Level 2 Level 3 Total (In thousands) Investments: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . Registered investment companies . . . . . . . . . . . . . . . $ — $4,534 — 180,256 Total investments at fair value . . . . . . . . . . . . . . . . . . . $180,256 $4,534 $ $ — $ — 4,534 180,256 — $184,790 79 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 post- retirement benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the fol- lowing fiscal years. Company payments for fiscal 2018 include contributions to our postretirement plan trusts. Company Payments Retiree Payments Subsidy Payments Total Postretirement Benefits 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,407 13,363 13,572 14,503 15,405 88,120 (In thousands) $— — — — — — $ 3,532 3,742 3,975 4,412 4,832 29,514 $ 17,939 17,105 17,547 18,915 20,237 117,634 Defined Contribution Plan The Atmos Energy Corporation Retirement Savings Plan and Trust (the Retirement Savings Plan) covers substantially all employees and is subject to the provisions of Section 401(k) of the Internal Revenue Code. Effective January 1, 2007, employees automatically become participants of the Retirement Savings Plan on the date of employment. Participants may elect a salary reduction up to a maximum of 65 percent of eligible compensation, as defined by the Plan, not to exceed the maximum allowed by the Internal Revenue Service. New participants are automatically enrolled in the Plan at a contribution rate of four percent of eligible compensation, from which they may opt out. We match 100 percent of a participant’s contributions, limited to four percent of the participant’s salary. Participants are eligible to receive matching contributions after completing one year of service, in which they are immediately vested. Participants are also permitted to take out a loan against their accounts subject to certain restrictions. Employees hired on or after October 1, 2010 participate in the enhanced plan in which participants receive a fixed annual contribution of four percent of eligible earnings to their Retire- ment Savings Plan account. Participants will continue to be eligible for company matching contributions of up to four percent of their eligible earnings and will be fully vested in the fixed annual contribution after three years of service. Matching and fixed annual contributions to the Retirement Savings Plan are expensed as incurred and amounted to $16.2 million, $15.4 million and $15.8 million for fiscal years 2018, 2017 and 2016. At Sep- tember 30, 2018 and 2017, the Retirement Savings Plan held 3.2 percent and 3.7 percent of our outstanding common stock. 8. Stock and Other Compensation Plans Stock-Based Compensation Plans Total stock-based compensation cost was $23.9 million, $23.1 million and $24.6 million for the fiscal years ended September 30, 2018, 2017 and 2016. Of this amount, $11.1 million, $9.0 million and $9.8 million was capitalized. Tax benefits related to stock-based compensation were $2.3 million, $4.4 million and $5.0 million for the fiscal years ended September 30, 2018, 2017 and 2016. 1998 Long-Term Incentive Plan We have a Long-Term Incentive Plan (LTIP), which provides a long-term incentive compensation plan providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted 80 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) stock units and stock units to certain employees and non-employee directors of the Company and our sub- sidiaries. The objectives of this plan include attracting and retaining the best available personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire common stock. As of September 30, 2018, we were authorized to grant awards for up to a maximum cumulative amount of 11.2 million shares of common stock under this plan subject to certain adjustment provisions. As of Sep- tember 30, 2018, non-qualified stock options, bonus stock, time-lapse restricted stock, time-lapse restricted stock units, performance-based restricted stock units and stock units had been issued under this plan, and 1.8 million shares are available for future issuance through September 30, 2021. Restricted Stock Units Award Grants As noted above, the LTIP provides for discretionary awards of restricted stock units to help attract, retain and reward employees of Atmos Energy and its subsidiaries. Certain of these awards vest based upon the passage of time and other awards vest based upon the passage of time and the achievement of specified performance tar- gets. The fair value of the awards granted is based on the market price of our stock at the date of grant. We esti- mate 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 recipi- ents 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 begin- ning of the applicable three-year performance period, except for accelerated vesting in the event of death, dis- ability, change of control of the Company or termination without cause (with certain exceptions) and a performance condition based on a cumulative earnings per share target amount. The following summarizes information regarding the restricted stock units granted under the plan during the fiscal years ended September 30, 2018, 2017 and 2016: 2018 2017 2016 Weighted Average Grant-Date Fair Value Number of Restricted Units Nonvested at beginning of year 570,814 . . . . Granted . . . . . . . . . . . . . . . . . . . . . 248,710 Vested . . . . . . . . . . . . . . . . . . . . . . (274,392) (6,540) Forfeited . . . . . . . . . . . . . . . . . . . . $69.45 85.62 64.43 74.87 Weighted Average Grant-Date Fair Value $57.66 74.15 52.23 63.48 Weighted Average Grant-Date Fair Value $48.24 65.98 45.88 53.52 Number of Restricted Units 878,104 357,323 (448,136) (4,860) Number of Restricted Units 782,431 273,497 (448,326) (36,788) Nonvested at end of year . . . . . . . . . . 538,592 $80.91 570,814 $69.45 782,431 $57.66 81 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of September 30, 2018, there was $11.5 million of total unrecognized compensation cost related to non- vested restricted stock units granted under the LTIP. That cost is expected to be recognized over a weighted average period of 1.6 years. The fair value of restricted stock vested during the fiscal years ended September 30, 2018, 2017 and 2016 was $17.2 million, $23.4 million and $20.6 million. Other Plans Direct Stock Purchase Plan We maintain a Direct Stock Purchase Plan, open to all investors, which allows participants to have all or part of their cash dividends paid quarterly in additional shares of our common stock. The minimum initial investment required to join the plan is $1,250. Direct Stock Purchase Plan participants may purchase additional shares of our common stock as often as weekly with voluntary cash payments of at least $25, up to an annual maximum of $100,000. Equity Incentive and Deferred Compensation Plan for Non-Employee Directors We have an Equity Incentive and Deferred Compensation Plan for Non–Employee Directors, which pro- vides 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 oppor- tunity to share in our financial success based on the achievement of key performance measures considered crit- ical 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 meas- ure. 9. Details of Selected Consolidated Balance Sheet Captions The following tables provide additional information regarding the composition of certain of our balance sheet captions. Accounts receivable Accounts receivable was comprised of the following at September 30, 2018 and 2017: September 30 2018 2017 (In thousands) Billed accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unbilled revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $138,794 81,005 48,291 $135,091 73,143 24,894 Total accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,090 (14,795) 233,128 (10,865) Net accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $253,295 $222,263 82 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Other current assets Other current assets as of September 30, 2018 and 2017 were comprised of the following accounts. September 30 2018 2017 (In thousands) Deferred gas costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets from risk management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,927 33,233 8,106 1,369 1,420 $ 65,714 32,163 4,472 2,436 1,536 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,055 $106,321 Property, plant and equipment Property, plant and equipment was comprised of the following as of September 30, 2018 and 2017: Storage plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transmission plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible plant Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . September 30 2018 2017 (In thousands) $ 414,857 2,851,423 8,141,733 771,355 38,280 12,217,648 349,725 12,567,373 (2,196,226) $ 369,510 2,521,671 7,306,021 765,728 38,980 11,001,910 299,394 11,301,304 (2,042,122) Net property, plant and equipment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,371,147 $ 9,259,182 (1) Net property, plant and equipment includes plant acquisition adjustments of $(55.5) million and $(64.1) mil- lion at September 30, 2018 and 2017. Goodwill The following presents our goodwill balance allocated by segment and changes in the balance for the fiscal year ended September 30, 2018: Balance as of September 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . Deferred tax adjustments on prior acquisitions(1) . . . . . . . . . . . . $587,080 262 Distribution Pipeline and Storage (In thousands) $143,052 25 Total $730,132 287 Balance as of September 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . $587,342 $143,077 $730,419 (1) We annually adjust certain deferred taxes recorded in connection with acquisitions completed in fiscal 2001 and fiscal 2005, which resulted in an increase to goodwill and net deferred tax liabilities of $0.3 million for fiscal 2018. 83 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred charges and other assets Deferred charges and other assets as of September 30, 2018 and 2017 were comprised of the following accounts. September 30 2018 2017 (In thousands) Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets from risk management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,385 141,778 250 26,972 10,099 15,534 $ 88,409 110,977 803 — — 20,447 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $294,018 $220,636 Accounts payable and accrued liabilities Accounts payable and accrued liabilities as of September 30, 2018 and 2017 were comprised of the follow- ing accounts. September 30 2018 2017 (In thousands) Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued gas payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,159 48,721 33,403 $143,422 50,253 39,375 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,283 $233,050 Other current liabilities Other current liabilities as of September 30, 2018 and 2017 were comprised of the following accounts. September 30 2018 2017 (In thousands) Customer credit balances and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued employee costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred gas costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from risk management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and postretirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory cost of service reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory cost of removal obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . APT annual adjustment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory excess deferred taxes (See Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,648 52,101 94,705 39,486 56,734 123,457 10,475 22,508 55,770 19,918 5,225 14,041 $ 54,627 46,653 15,559 39,624 322 116,291 18,411 — 35,910 — — 5,251 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $547,068 $332,648 84 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Deferred credits and other liabilities Deferred credits and other liabilities as of September 30, 2018 and 2017 were comprised of the following accounts. September 30 2018 2017 (In thousands) Customer advances for construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other regulatory liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from risk management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . APT annual adjustment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,010 78,599 12,887 103 15,310 40,119 $ 9,309 5,257 12,827 112,076 — 36,266 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $158,028 $175,735 10. Leases We have entered into operating leases for towers, office and warehouse space, vehicles and heavy equip- ment used in our operations. The remaining lease terms range from one to 13 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. Renewal options exist for certain of these leases. The related future minimum lease payments at September 30, 2018 were as follows: 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter Operating Leases(1) (In thousands) $ 17,655 16,483 16,202 16,004 15,621 22,226 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,191 (1) Future minimum lease payments do not include amounts for fleet leases and other de minimis items that can be renewed beyond the initial lease term. The Company anticipates renewing the leases beyond the initial term, but the anticipated payments associated with the renewals do not meet the definition of expected minimum lease payments and therefore are not included above. Expected payments are $17.7 million in 2019, $14.7 million in 2020, $11.3 million in 2021, $8.0 million in 2022, $4.6 million in 2023 and $2.3 million thereafter. Consolidated lease and rental expense amounted to $33.8 million, $32.7 million and $32.6 million for fiscal 2018, 2017 and 2016. 11. Commitments and Contingencies Litigation In the normal course of business, we are subject to various legal and regulatory proceedings. For such mat- ters, we record liabilities when they are considered probable and estimable, based on currently available facts, 85 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) our historical experience, and our estimates of the ultimate outcome or resolution of the liability in the future. While the outcome of these proceedings is uncertain and a loss in excess of the amount we have accrued is possible though not reasonably estimable, it is the opinion of management that any amounts exceeding the accruals will not have a material adverse impact on our financial position, results of operations or cash flows. We maintain liability insurance for various risks associated with the operation of our natural gas pipelines and facilities, including for property damage and bodily injury. These liability insurance policies generally require us to be responsible for the first $1.0 million (self-insured retention) of each incident. The National Transportation Safety Board (NTSB) is investigating an incident that occurred at a Dallas, Texas residence on February 23, 2018 that resulted in one fatality and injuries to four other residents. Together with the Railroad Commission of Texas and the Pipeline and Hazardous Materials Safety Administration, Atmos Energy is a party to the investigation and in that capacity is working closely with the NTSB to help determine the cause of this incident. On March 29, 2018, a civil action was filed in Dallas, Texas against Atmos Energy in response to the Febru- ary 23rd incident. The plaintiffs seek over $1.0 million in damages for, among with others, wrongful death and personal injury. We are a party to various other litigation or claims that have arisen in the ordinary course of our business. While the results of such litigation or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation or claims will not have a material adverse effect on our financial condition, results of operations or cash flows. Environmental Matters We are a party to environmental matters and claims that have arisen in the ordinary course of our business. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such response actions will not have a material adverse effect on our financial condition, results of operations or cash flows because we believe that the expenditures related to such response actions will either be recovered through rates, shared with other parties or are adequately covered by insurance. Purchase Commitments Our distribution and pipeline and storage segments maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily pur- chases are made as necessary during the month in accordance with the terms of the individual contract. Our Mid-Tex Division maintains a limited number of long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at prices indexed to natural gas trading hubs. At September 30, 2018, we were committed to purchase 54.1 Bcf within one year and 37.2 Bcf within two to three years under indexed contracts. Purchases under these contracts totaled $57.2 million, $49.7 million and $85.3 million for 2018, 2017 and 2016. Regulatory Matters The SEC and the Commodities Futures Trading Commission, pursuant to the Dodd–Frank Act, established numerous regulations relating to U.S. financial markets. We enacted procedures and modified existing business practices and contractual arrangements to comply with such regulations. There are, however, some rulemaking proceedings that have not yet been finalized, including those relating to capital and margin rules for (non– cleared) swaps. We do not expect these rules to directly impact our business practices or collateral requirements. 86 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) However, depending on the substance of these final rules, in addition to certain international regulatory require- ments still under development that are similar to Dodd–Frank, our swap counterparties could be subject to addi- tional and potentially significant capitalization requirements. These regulations could motivate counterparties to increase our collateral requirements or cash postings. As of September 30, 2018, formula rate mechanisms were pending regulatory approval in our Mississippi and Tennessee service areas, infrastructure mechanisms were pending regulatory approval in our Mississippi service area and rate cases were pending regulatory approval in our Kentucky, Mid-Tex, Virginia and West Texas service areas. These regulatory proceedings are discussed in further detail above in the Business — Rate- making Activity section. Additionally, as discussed in further detail in Note 12, all jurisdictions are addressing impacts of the TCJA. 12. Income Taxes Impact of the Tax Cuts and Jobs Act of 2017 On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law. The TCJA introduced several significant changes to corporate income tax laws in the United States. The most significant change that affects Atmos Energy is the reduction of the federal statutory income tax rate from 35% to 21%. As a rate-regulated entity, the accelerated capital expensing and the limitation on interest deductibility provisions included in the TCJA are not applicable to us. Under generally accepted accounting principles, we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax con- sequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recov- ered or settled. At September 30, 2017, we measured our net deferred tax liability using the enacted federal statutory tax rate of 35%. The enactment of the TCJA on December 22, 2017 required us to remeasure our deferred tax assets and liabilities, including our U.S. federal income tax net operating loss carryforwards, at the newly enacted federal statutory income tax rate of 21%. As the Company’s fiscal year end is September 30, 2018, the Internal Revenue Code requires the Company to use a blended statutory federal corporate income tax rate of 24.5% for fiscal 2018. The decrease in the federal statutory income tax rate reduced our net deferred tax liability by $905.3 million. Of this amount, $746.5 million relates to regulated operations and has been recorded as a regulatory liability, a portion of which is currently being returned to utility customers in accordance with issued regulatory orders and the Internal Revenue Code. The remaining $158.8 million has been reflected as a one-time income tax benefit in our consolidated statement of income for the year ended September 30, 2018, because these taxes are not related to our cost of service ratemaking. The SEC issued guidance in Staff Accounting Bulletin 118 (SAB 118), which allows us to record provi- sional amounts during a one-year measurement period, similar to the measurement period in accounting for busi- ness combinations. The Company has determined a reasonable estimate for the measurement and accounting for certain effects of the TCJA, including the remeasurement of our net deferred tax liabilities and the establishment of a regulatory liability, which have been reflected as provisional amounts in the September 30, 2018 con- solidated financial statements. The amounts represent our best estimates based upon records, information and current guidance. We are still analyzing certain aspects of the TCJA, refining our calculations and expecting additional guidance relating to the TCJA from the U.S. Department of the Treasury and the Internal Revenue Service. Any additional guidance issued or future actions of our regulators could potentially affect the final determination of the accounting effects arising from the implementation of the TCJA. 87 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We have and continue to work with our regulators in each jurisdiction to determine the amortization of the excess deferred taxes regulatory liability of $746.5 million of which the balance is $744.9 million as of Sep- tember 30, 2018. In addition, we have recorded a cost of service regulatory liability of $22.5 million as of Sep- tember 30, 2018. Accounting orders were issued for all our service areas that required us to establish, effective January 1, 2018, a separate regulatory liability for the difference in taxes included in our rates that have been calculated based on a 35% statutory income tax rate and the new 21% statutory income tax rate. The establish- ment of this regulatory liability relating to our cost of service rates resulted in a reduction to our revenues begin- ning in the second quarter of fiscal 2018. We have received approval from regulators to update our cost of service rates to reflect the decrease in the statutory income tax rate in our Colorado, Kansas, Kentucky, Louisiana and Texas service areas. We are still working with regulators in Mississippi, Tennessee and Virginia to reflect the effects of the lower statutory income tax rate in our cost of service in rates. As of September 30, 2018, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for differences in our cost of service rates due to change in the federal statutory income tax rate in Colorado and Kansas. As of September 30, 2018, we received approval from regulators to return amounts to customers related to the regulatory liabilities recorded for the excess deferred taxes created upon implementation of the TCJA in Colorado, Kentucky and Louisiana in accordance with regulatory proceedings on a provisional basis over periods ranging from 18 to 40 years. In our remaining jurisdictions, the treatment of the effects of the TCJA in rates is being addressed in ongoing or will be addressed in future regulatory proceedings. Income Tax Expense The components of income tax expense from continuing operations for 2018, 2017 and 2016 were as fol- lows: Current 2018 2017 (In thousands) 2016 Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (10,099) 11,075 $ — $ 9,022 — 5,667 Deferred Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCJA Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,556 15,330 (158,782) — 197,013 15,348 — — 178,630 12,350 — (5) $ 8,080 $221,383 $196,642 88 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Reconciliations of the provision for income taxes computed at the statutory rate to the reported provisions for income taxes from continuing operations for 2018, 2017 and 2016 are set forth below: Tax at statutory rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock dividends deductible for tax reporting . . . . . . . . . State taxes (net of federal benefit) . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of excess deferred taxes . . . . . . . . . . . . . . . . . . . . . Remeasurement due to TCJA . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 $ 149,730 (1,745) 19,826 — (1,219) (158,782) 270 2017 (In thousands) $211,433 (2,584) 16,100 — — — (3,566) 2016 $189,764 (2,570) 11,133 1,324 — — (3,009) Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,080 $221,383 $196,642 (1) Tax expense is calculated at the statutory federal income tax rate of 24.5% for the year ended September 30, 2018 and 35% for the years ended September 30, 2017 and 2016. Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that gave rise to significant components of the deferred tax liabilities and deferred tax assets at September 30, 2018 and 2017 are presented below: Deferred tax assets: Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable and other credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . Regulatory excess deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: 2018 2017 (In thousands) 72,745 27,135 461,481 6,818 169,947 13,804 751,930 (1,465) 750,465 $ 121,288 65,171 555,043 18,873 — 10,218 770,593 (5,403) 765,190 Difference in net book value and net tax value of assets . . . . . . . . . . . . Pension funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas cost adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,859,787) (6,986) 1,005 (38,764) (2,528,485) (13,101) (60,376) (41,927) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,904,532) (2,643,889) Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,154,067) $(1,878,699) Deferred credits for rate regulated entities . . . . . . . . . . . . . . . . . . . . . . . . . $ 762 $ 985 At September 30, 2018, we had $430.0 million of federal net operating loss carryforwards. The federal net operating loss carryforwards are available to offset taxable income and will begin to expire in 2029. The Com- pany also has $10.1 million of federal alternative minimum tax credit carryforwards, which do not expire and are expected to be fully refunded to us between 2019 and 2022 as a result of changes introduced by the TCJA. These credit carryforwards are now reflected as taxes receivable within the deferred charges and other assets line item 89 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) on our consolidated balance sheet. In addition, the Company has $5.3 million in remeasured charitable con- tribution carryforwards to offset future taxable income. The Company’s charitable contribution carryforwards expiration period begins in 2019. The Company also has $31.4 million of state net operating loss carryforwards (net of $8.4 million of remeas- ured federal effects) and $1.5 million of state tax credits carryforwards (net of $0.4 million of remeasured federal effects). Depending on the jurisdiction in which the state net operating loss was generated, the carryforwards expiration period begins in 2019. Due to the changes introduced by the TCJA, we now believe it is more likely than not that the benefit from certain charitable contribution carryforwards for which a valuation allowance was previously established will be realized. As a result, we reduced our valuation allowance by $4.2 million during the first quarter of fiscal 2018. This amount is included in the $158.8 million one-time income tax benefit. We believe it is more likely than not that the benefit from certain state net operating loss carryforwards and state credit carryforwards will not be realized. Due to the uncertainty of realizing a benefit from the deferred tax asset recorded for the carryforwards, a re-measured valuation allowance of $1.5 million continues to be estab- lished for the year ended September 30, 2018. No additional valuation allowance was recorded for the year ended September 30, 2018. At September 30, 2018, we had recorded liabilities associated with unrecognized tax benefits totaling $26.2 million. The following table reconciles the beginning and ending balance of our unrecognized tax benefits: Unrecognized tax benefits — beginning balance . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) resulting from prior period tax positions . . . . . . . . . . . Increase resulting from current period tax positions . . . . . . . . . . . . . . . . . . $23,719 22 2,462 2018 2017 (In thousands) $20,298 (366) 3,787 Unrecognized tax benefits — ending balance . . . . . . . . . . . . . . . . . . . . . . . . . Less: deferred federal and state income tax benefits . . . . . . . . . . . . . . . . . . . . . . 26,203 (5,503) 23,719 (8,302) 2016 $17,069 (290) 3,519 20,298 (7,104) Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,700 $15,417 $13,194 The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penal- ties included within interest charges in our consolidated statement of income. During the years ended Sep- tember 30, 2018, 2017 and 2016, the Company recognized approximately $1.6 million, $1.1 million and $2.5 million in interest and penalties. The Company had approximately $6.1 million, $4.5 million and $3.3 million for the payment of interest and penalties accrued at September 30, 2018, 2017 and 2016. We file income tax returns in the U.S. federal jurisdiction as well as in various states where we have oper- ations. We have concluded substantially all U.S. federal income tax matters through fiscal year 2009 and con- cluded substantially all Texas income tax matters through fiscal year 2010. 13. Financial Instruments We use financial instruments to mitigate commodity price risk and interest rate risk. Our financial instru- ments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when our financial instruments are in net liability positions. As discussed in Note 2 and Note 15, we report our financial instruments as risk management assets and liabilities, each of which is classified as current or noncurrent based upon the anticipated settlement date of the 90 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) underlying financial instrument. The following table shows the fair values of our risk management assets and liabilities at September 30, 2018 and 2017. September 30 2018 2017 (In thousands) Assets from risk management activities, current . . . . . . . . . . . . . . . . . . . . . . . . Assets from risk management activities, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities from risk management activities, current . . . . . . . . . . . . . . . . . . Liabilities from risk management activities, noncurrent $ 1,369 250 (56,734) (103) $ 2,436 803 (322) (112,076) Net assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(55,218) $(109,159) Commodity Risk Management Activities Our purchased gas cost adjustment mechanisms essentially insulate our distribution segment from commod- ity price risk; however, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season. Our distribution gas supply department is responsible for executing this segment’s commodity risk manage- ment activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2017-2018 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 26 percent, or approximately 15.0 Bcf of the winter flowing gas requirements at a weighted average cost of approximately $3.20 per Mcf. We have not designated these financial instruments as hedges for accounting purposes. Interest Rate Risk Management Activities We currently manage interest rate risk through the use of forward starting interest rate swaps to fix the Treas- ury yield component of the interest cost associated with anticipated financings. In October 2012, we entered into forward starting interest rate swaps to fix the Treasury yield component associated with $210 million of the then anticipated issuance of $250 million unsecured senior notes in fiscal 2017. These notes were issued as planned in June 2017 and we settled swaps with the payment of $37.0 million. Because the swaps were effective, the realized loss was recorded as a component of accumulated other compre- hensive income (loss) and is being recognized as a component of interest expense over the 27-year life of the senior notes. Additionally, in fiscal 2014 and 2015, we entered into forward starting interest rate swaps to effectively fix the Treasury yield component associated with $450 million of the anticipated issuance of $450 million unsecured senior notes in fiscal 2019. We designated all of these swaps as cash flow hedges at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the forward starting interest rate swaps will be recorded as a component of accumulated other comprehensive income (loss). When the forward starting inter- est rate swaps settle, the realized gain or loss will be recorded as a component of accumulated other compre- hensive 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 91 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) realized upon settlement of these interest rate agreements were recorded as a component of accumulated other comprehensive income (loss) when they were settled and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for the settled interest rate agreements extend through fiscal 2045. Quantitative Disclosures Related to Financial Instruments The following tables present detailed information concerning the impact of financial instruments on our consolidated balance sheet and income statements. As of September 30, 2018, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of September 30, 2018, we had 22,874 MMcf of net long commodity contracts outstanding. These contracts have not been designated as hedges. Financial Instruments on the Balance Sheet The following tables present the fair value and balance sheet classification of our financial instruments as of September 30, 2018 and 2017. The gross amounts of recognized assets and liabilities are netted within our Con- solidated Balance Sheets to the extent that we have netting arrangements with the counterparties. Balance Sheet Location Assets Liabilities (In thousands) September 30, 2018 Designated As Hedges: Interest rate swap agreements . . . . . . . . . Other current assets / Other current liabilities Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Designated As Hedges: Commodity contracts . . . . . . . . . . . . . . . Other current assets / Other current liabilities Commodity contracts . . . . . . . . . . . . . . . Deferred charges and other assets / Deferred credits and other liabilities Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Financial Instruments . . . . . . . . . . . . Gross Amounts Offset on Consolidated Balance Sheet: Contract netting . . . . . . . . . . . . . . . . . . . . . . Net Financial Instruments . . . . . . . . . . . . . . Cash collateral . . . . . . . . . . . . . . . . . . . . . . . Net Assets/Liabilities from Risk Management Activities . . . . . . . . . . . . . . . $ — $(56,499) — (56,499) 1,369 250 1,619 1,619 — 1,619 — (235) (103) (338) (56,837) — (56,837) — $1,619 $(56,837) 92 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Balance Sheet Location Assets Liabilities (In thousands) September 30, 2017 Designated As Hedges: Interest rate swap agreements . . . . . . . . . Deferred charges and other assets / Deferred credits and other liabilities Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Designated As Hedges: Commodity contracts . . . . . . . . . . . . . . . Other current assets / Other current liabilities Commodity contracts . . . . . . . . . . . . . . . Deferred charges and other assets / Deferred credits and other liabilities Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Financial Instruments . . . . . . . . . . . . Gross Amounts Offset on Consolidated Balance Sheet: Contract netting . . . . . . . . . . . . . . . . . . . . . . Net Financial Instruments . . . . . . . . . . . . . . Cash collateral . . . . . . . . . . . . . . . . . . . . . . . Net Assets/Liabilities from Risk Management Activities . . . . . . . . . . . . . . . $ — $(112,076) — (112,076) 2,436 803 3,239 3,239 (322) — (322) (112,398) — 3,239 — — (112,398) — $3,239 $(112,398) Impact of Financial Instruments on the Income Statement Cash Flow Hedges As discussed above, our distribution segment has interest rate swap agreements, which we designated as a cash flow hedge at the time the swaps were executed. The net loss on settled interest rate agreements reclassified from AOCI into interest charges on our consolidated income statements for the years ended September 30, 2018, 2017 and 2016 was $(2.4) million, $(1.0) million and $(0.5) million. The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the years ended September 30, 2018 and 2017. The amounts included in the table below exclude gains and losses arising from ineffectiveness because these amounts are immediately recognized in the income statement as incurred. Fiscal Year Ended September 30 2018 2017 (In thousands) Increase in fair value: Interest rate agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forward commodity contracts(1) $43,184 — $74,560 9,847 Recognition of (gains) losses in earnings due to settlements: Interest rate agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forward commodity contracts(1) 1,752 — 662 (4,865) Total other comprehensive income from hedging, net of tax(2) . . . . . . . . . . . . . . . $44,936 $80,204 93 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (1) Due to the sale of AEM, these amounts are included in income from discontinued operations (2) Utilizing an income tax rate of approximately 23 percent for fiscal 2018 and an income tax rate ranging from approximately 37 percent to 39 percent for fiscal 2017 based on the effective rates in each taxing juris- diction. Deferred gains (losses) recorded in AOCI associated with our interest rate agreements are recognized in earnings as they are amortized. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of September 30, 2018. However, the table below does not include the expected recognition in earnings of our outstanding interest rate agreements as those financial instruments have not yet settled. 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter Interest Rate Agreements (In thousands) $ (1,863) (1,893) (1,893) (1,893) (1,893) (38,729) Total(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(48,164) (1) Utilizing an income tax rate of approximately 23 percent. Financial Instruments Not Designated as Hedges As discussed above, financial instruments used in our distribution segment are not designated as hedges. However, there is no earnings impact on our distribution segment as a result of the use of these financial instru- ments because the gains and losses arising from the use of these financial instruments are recognized in the con- solidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation. 14. Fair Value Measurements We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure- ment date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carry- ing 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 pric- ing 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. 94 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Quantitative Disclosures Financial Instruments The classification of our fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018 and 2017. As required under authoritative accounting literature, assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. Assets: Financial instruments . . . . . . . . . . . . . . . . . . . . . Available-for-sale securities Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2)(1) Significant Other Unobservable Inputs (Level 3) (In thousands) Netting and Cash Collateral September 30, 2018 $ — $ 1,619 $ — $ — $ 1,619 Registered investment companies . . . . . . . . . Bond mutual funds . . . . . . . . . . . . . . . . . . . . . Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . 42,644 21,507 — — Total available-for-sale securities . . . . . . . . . . . 64,151 — — 31,400 3,834 35,234 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $64,151 $ 36,853 Liabilities: Financial instruments . . . . . . . . . . . . . . . . . . . . . $ — $ 56,837 $ $ — — — — — — — — — — 42,644 21,507 31,400 3,834 99,385 — $ — $101,004 — $ — $ 56,837 Assets: Financial instruments . . . . . . . . . . . . . . . . . . . . . Available-for-sale securities Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2)(1) Significant Other Unobservable Inputs (Level 3) (In thousands) Netting and Cash Collateral September 30, 2017 $ — $ 3,239 $ — $ — $ 3,239 Registered investment companies . . . . . . . . . Bond mutual funds . . . . . . . . . . . . . . . . . . . . . Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . 41,097 16,371 — — Total available-for-sale securities . . . . . . . . . . . 57,468 — — 29,104 1,837 30,941 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,468 $ 34,180 Liabilities: Financial instruments . . . . . . . . . . . . . . . . . . . . . $ — $112,398 $ $ — — — — — — — — — — 41,097 16,371 29,104 1,837 88,409 — $ — $ 91,648 — $ — $112,398 (1) Our Level 2 measurements consist of over-the-counter options and swaps, which are valued using a market- based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences, municipal and corporate bonds, which are valued based on the most recent available quoted market prices and money market funds which are valued at cost. 95 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Available-for-sale securities, which include debt and equity securities, are comprised of the following: Amortized Cost Gross Unrealized Gain Gross Unrealized Loss (In thousands) As of September 30, 2018 Domestic equity mutual funds . . . . . . . . . . . . . . . . . Foreign equity mutual funds . . . . . . . . . . . . . . . . . . Bond mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . $26,950 4,656 21,810 31,511 3,834 $ 9,363 2,028 — 13 — $88,761 $11,404 As of September 30, 2017 Domestic equity mutual funds . . . . . . . . . . . . . . . . . Foreign equity mutual funds . . . . . . . . . . . . . . . . . . Bond mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . $25,361 4,581 16,391 29,074 1,837 $ 8,920 2,235 2 46 — $77,244 $11,203 $(353) — (303) (124) — $(780) $ — — (22) (16) — $ (38) Fair Value $35,960 6,684 21,507 31,400 3,834 $99,385 $34,281 6,816 16,371 29,104 1,837 $88,409 At September 30, 2018 and 2017, our available-for-sale securities included $46.5 million and $42.9 million related to assets held in separate rabbi trusts for our supplemental executive retirement plans as discussed in Note 7. At September 30, 2018 we maintained investments in bonds that have contractual maturity dates ranging from October 2018 through September 2021. Other Fair Value Measures In addition to the financial instruments above, we have several financial and nonfinancial assets and liabilities subject to fair value measures. These financial assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable and debt. The nonfinancial assets and liabilities include asset retirement obligations and pension and post-retirement plan assets. We record cash and cash equivalents, accounts receiv- able, accounts payable and debt at carrying value. For cash and cash equivalents, accounts receivable and accounts payable, we consider carrying value to materially approximate fair value due to the short-term nature of these assets and liabilities. Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations, which are considered Level 1 fair value measurements for debt instruments with a recent, observable trade or Level 2 fair value measurements for debt instruments where fair value is determined using the most recent available quoted market price. The following table presents the carrying value and fair value of our debt as of September 30, 2018: Carrying Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2018 (In thousands) $3,085,000 $3,161,679 96 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 15. Discontinued Operations On October 29, 2016, we entered into a Membership Interest Purchase Agreement (the Agreement) with CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, Inc. (CES) to sell all of the equity inter- ests of AEM. The transaction closed on January 3, 2017, with an effective date of January 1, 2017. CES paid a cash purchase price of $38.3 million plus working capital of $109.0 million for total cash consideration of $147.3 million. Of this amount, $7.0 million was placed into escrow, to be paid to the Company within 24 months, net of any indemnification claims agreed upon between the two companies. In January 2018, $3.0 million of this escrowed amount was released and received by the Company. We recognized a net gain of $0.03 per diluted share on the sale in the second quarter of fiscal 2017 and completed the working capital true–up during the third quarter of fiscal 2017. The operating results of our natural gas marketing reportable segment have been reported on the con- solidated statements of income as income from discontinued operations, net of income tax for the years ended September 30, 2017 and 2016. Accordingly, expenses related to allocable general corporate overhead and interest expense are not included in these results. The decision to report this segment as a discontinued operation was predicated, in part, on the following qualitative and quantitative factors: 1) the disposal resulted in the company becoming a fully regulated entity; 2) the fact that an entire reportable segment was disposed and 3) the fact the disposed segment represented in excess of 30 percent of consolidated revenues over the last five fiscal years. The tables below set forth selected financial information related to discontinued operations. Operating expenses include operation and maintenance expense, provision for doubtful accounts, depreciation and amor- tization expense and taxes, other than income. At September 30, 2018 and 2017 we did not have any assets or liabilities held for sale. The following table presents statement of income data related to discontinued operations. Year Ended September 30 2017 2016 (In thousands) Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $303,474 277,554 7,874 $1,005,090 968,118 26,184 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other nonoperating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations before income taxes . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale from discontinued operations, net of tax ($10,215 and $0) 18,046 (211) 17,835 6,841 10,994 2,716 Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,710 $ 10,788 (2,495) 8,293 3,731 4,562 — 4,562 The following table presents statement of cash flow data related to discontinued operations. Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash loss in commodity contract cash flow hedges . . . . . . . . . . . . . . . . . . . . Year Ended September 30 2017 2016 (In thousands) $ 185 $ — $ $(8,165) $ 2,304 321 $(33,533) 97 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Significant Accounting Policies Related to Discontinued Operations Except as noted below, AEM adhered to the same Significant Accounting Policies as described in Note 2. Revenue recognition — Operating revenues for our natural gas marketing segment were recognized in the period in which actual volumes were transported and storage services were provided. Operating revenues for our natural gas marketing segment and the associated carrying value of natural gas inventory (inclusive of storage costs) were recognized when we sold the gas and physically delivered it to our customers. Operating revenues include realized gains and losses arising from the settlement of financial instruments used in our natural gas marketing activities. Gas stored underground — Gas stored underground was comprised of natural gas injected into storage to conduct the operations of the natural gas marketing segment. Our natural gas marketing segment utilized the average cost method; however, most of this inventory was hedged and was therefore reported at fair value at the end of each month. Property, plant and equipment — Natural gas marketing property, plant and equipment was stated at cost. Depreciation was generally computed on the straight-line method for financial reporting purposes based upon estimated useful lives ranging from 3 to 30 years. Financial instruments and hedging activities — In our natural gas marketing segment, we previously des- ignated most of the natural gas inventory held by this operating segment as the hedged item in a fair-value hedge. This inventory was marked to market at the end of each month based on the Gas Daily index, with changes in fair value recognized as unrealized gains or losses in purchased gas cost, which is reflected in income from dis- continued operations in the period of change. The financial instruments associated with this natural gas inventory were designated as fair-value hedges and were marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains or losses in purchased gas cost in the period of change. We elected to exclude this spot/forward differential for purposes of assessing the effectiveness of these fair-value hedges. Additionally, we previously elected to treat fixed-price forward contracts used in our natural gas marketing segment to deliver natural gas as normal purchases and normal sales. As such, these deliveries were recorded on an accrual basis in accordance with our revenue recognition policy. Financial instruments used to mitigate the commodity price risk associated with these contracts were designated as cash flow hedges of anticipated pur- chases and sales at indexed prices. Accordingly, unrealized gains and losses on these open financial instruments were recorded as a component of accumulated other comprehensive income, and were recognized in earnings as a component of purchased gas cost which is reflected in income from discontinued operations when the hedged volumes were sold. Gains and losses from hedge ineffectiveness were recognized in the income statement. Fair value and cash flow hedge ineffectiveness arising from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the financial instruments is referred to as basis ineffectiveness. Ineffectiveness arising from changes in the fair value of the fair value hedges due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity is referred to as timing ineffectiveness. Hedge ineffectiveness, to the extent incurred, is reported as a component of purchased gas cost reflected in income from discontinued operations for the years ended September 30, 2017 and 2016. Our natural gas marketing segment also utilized master netting agreements with significant counterparties that allow us to offset gains and losses arising from financial instruments that would be settled in cash with gains and losses arising from financial instruments that could be settled with the physical commodity. Assets and liabilities from risk management activities, as well as accounts receivable and payable, reflect the master netting agreements in place. Additionally, the accounting guidance for master netting arrangements requires us to 98 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) include the fair value of cash collateral or the obligation to return cash in the amounts that have been netted under master netting agreements used to offset gains and losses arising from financial instruments. Fair Value Measurements — Our discontinued operations used the same fair value measurement policies as described in Note 2 for our continuing operations. Level 1 measurements included primarily exchange-traded financial instruments and gas stored underground that was been designated as the hedged item in a fair value hedge. Within our natural gas marketing operations, we utilized a mid-market pricing convention (the mid-point between the bid and ask prices), as permitted under current accounting standards. Values derived from these sources reflected the market in which transactions involving these financial instruments are executed. Level 2 measurements primarily consisted of non-exchange-traded financial instruments, such as over-the-counter options and swaps. Short-term Debt Related to Discontinued Operations AEM had one uncommitted $25 million 364-day bilateral credit facility that was scheduled to expire on July 31, 2017 and one committed $15 million 364-day bilateral credit facility that was scheduled to expire on September 30, 2017. In connection with the sale of AEM, both facilities were terminated on January 3, 2017. Commodity Risk Management Activities Our discontinued natural gas marketing segment was exposed to risks associated with changes in the market price of natural gas through the purchase, sale and delivery of natural gas to its customers at competitive prices. Through December 31, 2016, we managed our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Effective January 1, 2017, as a result of the sale of AEM, these activities were discontinued. Due to the sale of AEM, we determined that the cash flows associated with our natural gas marketing commodity cash flow hedges were no longer probable of occurring; therefore, we discontinued hedge accounting as of December 31, 2016. As a result, we reclassified the gain in accumulated other comprehensive income asso- ciated with the commodity contracts into earnings as a reduction of purchased gas cost and recognized a pre-tax gain of $10.6 million, which is included in income from discontinued operations on the consolidated statement of income for the year ended September 30, 2017. The Company’s other risk management activities are discussed in Note 13. Impact of Financial Instruments on the Income Statement Hedge ineffectiveness for our natural gas marketing segment was recorded as a component of purchased gas cost, which is included in discontinued operations on the consolidated statements of income, and primarily results from differences in the location and timing of the derivative instrument and the hedged item. For the years ended September 30, 2017 and 2016, we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $3.4 million and $21.6 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below. 99 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Fair Value Hedges The impact of our natural gas marketing segment commodity contracts designated as fair value hedges and the related hedged item on the results of discontinued operations on our consolidated income statement for the years ended September 30, 2017 and 2016 is presented below. Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value adjustment for natural gas inventory designated as the hedged Year Ended September 30 2017 2016 (In thousands) $ (9,567) $ 3,516 item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,858 18,079 Total decrease in purchased gas cost reflected in income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,291 $21,595 The decrease in purchased gas cost reflected in income from discontinued operations is comprised of the following: Basis ineffectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Timing ineffectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (597) 3,888 $ (1,390) 22,985 $ 3,291 $21,595 Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the tim- ing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on purchased gas cost. Cash Flow Hedges The impact of our natural gas marketing segment cash flow hedges on our consolidated income statements for the years ended September 30, 2017 and 2016 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transactions. Therefore, this presentation is not indicative of the economic margin we realized when the underlying physical and financial transactions were settled. Year Ended September 30 2017 2016 (In thousands) Loss reclassified from AOCI for effective portion of natural gas marketing commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,612) $(52,651) Gain (loss) arising from ineffective portion of natural gas marketing commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Gain on discontinuance of cash flow hedging of natural gas marketing commodity contracts reclassified from AOCI . . . . . . . . . . . . . . . . . . . . . . . 10,579 (19) — Total impact on purchased gas cost reflected in income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,078 $(52,670) Financial Instruments Not Designated as Hedges The impact of financial instruments that have not been designated as hedges on our consolidated income statements for the years ended September 30, 2017 and 2016 was an increase (decrease) in purchased gas cost reflected in income from discontinued operations of $(6.8) million and $15.5 million, which is included in dis- continued operations on the consolidated statements of income. Note that this presentation does not reflect the 100 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) expected gains or losses arising from the underlying physical transactions associated with these financial instru- ments. Therefore, this presentation is not indicative of the economic margin we realized when the underlying physical and financial transactions were settled. 16. Concentration of Credit Risk Credit risk is the risk of financial loss to us if a customer fails to perform its contractual obligations. We engage in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers. These transactions princi- pally occur in the southern and midwestern regions of the United States. We believe that this geographic concen- tration does not contribute significantly to our overall exposure to credit risk. Credit risk associated with trade accounts receivable for the distribution segment is mitigated by the large number of individual customers and the diversity in our customer base. The credit risk for our other segment is not significant. 17. Selected Quarterly Financial Data (Unaudited) Summarized unaudited quarterly financial data is presented below. The sum of net income per share by quarter may not equal the net income per share for the fiscal year due to variations in the weighted average shares outstanding used in computing such amounts. Our businesses are seasonal due to weather conditions in our serv- ice 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” sec- tion herein. Quarter Ended December 31 March 31 June 30 September 30 (In thousands, except per share data) Fiscal year 2018: Operating revenues Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline and storage . . . . . . . . . . . . . . . . . . . . . . . . Intersegment eliminations . . . . . . . . . . . . . . . . . . . $860,792 126,463 (98,063) $1,199,291 120,955 (100,837) $ 535,488 127,633 (100,876) $407,476 132,662 (95,438) Total operating revenues . . . . . . . . . . . . . . . . . . Purchased gas cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic and diluted earnings per share . . . . . . . . . . . . . Net income per share — basic and diluted . . . . . . . 889,192 366,917 241,561 314,132 1,219,409 626,960 268,988 178,992 562,245 130,886 122,993 71,193 444,700 43,085 89,592 38,747 $ 2.89 $ 1.60 $ 0.64 $ 0.35 101 ATMOS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Quarter Ended December 31 March 31 June 30 September 30 (In thousands, except per share data) Fiscal year 2017: Operating revenues Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pipeline and storage . . . . . . . . . . . . . . . . . . . . . . . . . . Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . $754,656 109,952 (84,440) $962,541 111,972 (86,327) $494,060 117,283 (84,842) $437,918 117,823 (90,861) Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased gas cost Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations . . . . . . . . . . . . . . . . Income from discontinued operations . . . . . . . . . . . . . . Gain on sale of discontinued operations . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic and diluted earnings per share . . . . . . . . . . . . . . . Income per share from continuing operations . . . . . . Income per share from discontinued operations . . . . . Net income per share — basic and diluted . . . . . . . . . 780,168 311,305 209,918 114,038 10,994 — 125,032 988,186 427,494 285,172 162,012 — 2,716 164,728 526,501 114,176 140,664 70,808 — — 70,808 464,880 72,561 91,792 35,853 — — 35,853 $ $ 1.08 0.11 1.19 $ $ 1.52 0.03 1.55 $ $ 0.67 — 0.67 $ $ 0.34 — 0.34 102 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. ITEM 9A. Controls and Procedures. Management’s Evaluation of Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018 to provide reasonable assurance that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, including a reasonable level of assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accord- ance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effective- ness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 frame- work) (COSO). Based on our evaluation under the framework in Internal Control-Integrated Framework issued by COSO and applicable Securities and Exchange Commission rules, our management concluded that our internal control over financial reporting was effective as of September 30, 2018, in providing reasonable assur- ance regarding the reliability of financial reporting and the preparation of financial statements for external pur- poses in accordance with generally accepted accounting principles. Ernst & Young LLP has issued its report on the effectiveness of the Company’s internal control over finan- cial reporting. That report appears below. /s/ MICHAEL E. HAEFNER /s/ CHRISTOPHER T. FORSYTHE Michael E. Haefner President, Chief Executive Officer and Director Christopher T. Forsythe Senior Vice President and Chief Financial Officer November 13, 2018 103 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Atmos Energy Corporation Opinion on Internal Control over Financial Reporting We have audited Atmos Energy Corporation’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Atmos Energy Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated November 13, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Man- agement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accu- rately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate- ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Dallas, Texas November 13, 2018 104 Changes in Internal Control over Financial Reporting We did not make any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) during the fourth quarter of the fiscal year ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. Other Information. Not applicable. PART III ITEM 10. Directors, Executive Officers and Corporate Governance. Information regarding directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 6, 2019. Information regarding executive officers is reported below: EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information as of September 30, 2018, regarding the executive officers of the Company. It is followed by a brief description of the business experience of each executive officer. Name Age Years of Service Office Currently Held Kim R. Cocklin . . . . . . . . . . . . . . . . . . . . . . Michael E. Haefner . . . . . . . . . . . . . . . . . . . Christopher T. Forsythe . . . . . . . . . . . . . . . David J. Park . . . . . . . . . . . . . . . . . . . . . . . . John K. Akers . . . . . . . . . . . . . . . . . . . . . . . Karen E. Hartsfield . . . . . . . . . . . . . . . . . . . John M. Robbins . . . . . . . . . . . . . . . . . . . . . 67 58 47 47 55 48 48 12 10 15 14 27 3 5 Executive Chairman of the Board President, Chief Executive Officer and Director Senior Vice President and Chief Financial Officer Senior Vice President, Utility Operations Senior Vice President, Safety and Enterprise Services Senior Vice President, General Counsel and Corporate Secretary Senior Vice President, Human Resources Kim R. Cocklin was named Executive Chairman of the Board on October 1, 2017. From October 1, 2010 through September 30, 2015, Mr. Cocklin served the Company as President and Chief Executive Officer and from October 1, 2015 through September 30, 2017, as Chief Executive Officer. Mr. Cocklin joined the Company in June 2006 and served as President and Chief Operating Officer of the Company from October 1, 2008 through September 30, 2010, after having served as Senior Vice President, Regulated Operations from October 2006 through September 2008. Mr. Cocklin was appointed to the Board of Directors on November 10, 2009. Michael E. Haefner was named President and Chief Executive Officer, effective October 1, 2017. Mr. Haefner joined the Company in June 2008 as Senior Vice President, Human Resources. On January 19, 2015, Mr. Haefner was promoted to Executive Vice President and assumed oversight responsibility for Atmos Pipeline — Texas, Atmos Energy Holdings, Inc. and the gas supply and services function. On October 1, 2015, Mr. Haefner was promoted to the role of President and Chief Operating Officer in which he also assumed over- sight responsibility for the operations of our six utility divisions and customer service. Mr. Haefner was appointed to the Board of Directors on November 4, 2015. Christopher T. Forsythe was named Senior Vice President and Chief Financial Officer effective February 1, 2017. Mr. Forsythe joined the Company in June 2003 and prior to his promotion, served as the Company’s Vice President and Controller from May 2009 through January 2017. 105 David J. Park was named Senior Vice President of Utility Operations, effective January 1, 2017. In this role, Mr. Park is responsible for the operations of Atmos Energy’s six utility divisions as well as gas supply. Prior to this promotion, Mr. Park served as the President of the West Texas Division from July 2012 to December 2016. Mr. Park also served as Vice President of Rates and Regulatory Affairs in the Mid-Tex Division and previously held positions in Engineering and Public Affairs. Prior to joining Atmos Energy in 2004, Mr. Park had 10 years of experience in the industry. John K. (Kevin) Akers was named Senior Vice President, Safety and Enterprise Services, effective Jan- uary 1, 2017. In this role, Mr. Akers is responsible for customer service, facilities management, safety and supply chain management. Mr. Akers joined the company in 1991. Mr. Akers assumed increased responsibilities over time and was named President of the Mississippi Division in 2002. He was later named President of the Ken- tucky/Mid-States Division in May 2007, a position he held until December 2016. Karen E. Hartsfield was named Senior Vice President, General Counsel and Corporate Secretary of Atmos Energy, effective August 7, 2017. Ms. Hartsfield joined the Company in June 2015, after having served in private practice for 19 years, most recently as Managing Partner of Jackson Lewis LLP in its Dallas office from July 2013 to June 2015. Prior to joining Jackson Lewis as a partner in January 2009, Ms. Hartsfield was a partner with Baker Botts LLP in Dallas. John M. (Matt) Robbins was named Senior Vice President, Human Resources, effective January 1, 2017. Mr. Robbins joined the Company in May 2013 and prior to this promotion served as Vice President, Human Resources from February 2015 to December 2016. Before joining Atmos Energy, Matt had over 20 years of experience in human resources. Identification of the members of the Audit Committee of the Board of Directors as well as the Board of Directors’ determination as to whether one or more audit committee financial experts are serving on the Audit Committee of the Board of Directors is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 6, 2019. The Company has adopted a code of ethics for its principal executive officer, principal financial officer and principal accounting officer. Such code of ethics is represented by the Company’s Code of Conduct, which is applicable to all directors, officers and employees of the Company, including the Company’s principal executive officer, principal financial officer and principal accounting officer. A copy of the Company’s Code of Conduct is posted on the Company’s website at www.atmosenergy.com under “Corporate Responsibility.” In addition, any amendment to or waiver granted from a provision of the Company’s Code of Conduct will be posted on the Company’s website under “Corporate Responsibility.” ITEM 11. Executive Compensation. Information on executive compensation is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 6, 2019. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Security ownership of certain beneficial owners and of management is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 6, 2019. Information concerning our equity compensation plans is provided in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, of this Annual Report on Form 10-K. ITEM 13. Certain Relationships and Related Transactions, and Director Independence. Information on certain relationships and related transactions as well as director independence is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Share- holders on February 6, 2019. ITEM 14. Principal Accountant Fees and Services. Information on our principal accountant’s fees and services is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 6, 2019. 106 ITEM 15. Exhibits and Financial Statement Schedules. (a) 1. and 2. Financial statements and financial statement schedules. PART IV The financial statements and financial statement schedule listed in the Index to Financial Statements in Item 8 are filed as part of this Form 10-K. 3. Exhibits Exhibit Number Description 2.1 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7(a) 4.7(b) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession Membership Interest Purchase Agreement by and between Atmos Energy Holdings, Inc. as Seller and CenterPoint Energy Services, Inc. as Buyer, dated as of October 29, 2016 Articles of Incorporation and Bylaws Restated Articles of Incorporation of Atmos Energy Corporation — Texas (As Amended Effective February 3, 2010) Restated Articles of Incorporation of Atmos Energy Corporation — Virginia (As Amended Effective February 3, 2010) Amended and Restated Bylaws of Atmos Energy Corporation (as of September 28, 2015) Instruments Defining Rights of Security Holders, Including Indentures Specimen Common Stock Certificate (Atmos Energy Corporation) Indenture dated as of November 15, 1995 between United Cities Gas Company and Bank of America Illinois, Trustee Indenture dated as of July 15, 1998 between Atmos Energy Corporation and U.S. Bank Trust National Association, Trustee Indenture dated as of May 22, 2001 between Atmos Energy Corporation and SunTrust Bank, Trustee Indenture dated as of June 14, 2007, between Atmos Energy Corporation and U.S. Bank National Association, Trustee Indenture dated as of March 23, 2009 between Atmos Energy Corporation and U.S. Bank National Corporation, Trustee Debenture Certificate for the 6 3/4% Debentures due 2028 Global Security for the 5.95% Senior Notes due 2034 107 Page Number or Incorporation by Reference to Exhibit 2.1 to Form 8-K dated October 29, 2016 (File No. 1-10042) Exhibit 3.1 to Form 10-Q dated March 31, 2010 (File No. 1-10042) Exhibit 3.2 to Form 10-Q dated March 31, 2010 (File No. 1-10042) Exhibit 3.1 to Form 8-K dated September 28, 2015 (File No. 1-10042) Exhibit 4.1 to Form 10-K for fiscal year ended September 30, 2012 (File No. 1-10042) Exhibit 4.11(a) to Form S-3 dated August 31, 2004 (File No. 333-118706) Exhibit 4.8 to Form S-3 dated August 31, 2004 (File No. 333-118706) Exhibit 99.3 to Form 8-K dated May 15, 2001 (File No. 1-10042) Exhibit 4.1 to Form 8-K dated June 11, 2007 (File No. 1-10042) Exhibit 4.1 to Form 8-K dated March 26, 2009 (File No. 1-10042) Exhibit 99.2 to Form 8-K dated July 22, 1998 (File No. 1-10042) Exhibit 10(2)(g) to Form 10-K for fiscal year ended September 30, 2004 (File No. 1-10042) Page Number or Incorporation by Reference to Exhibit 4.2 to Form 8-K dated March 26, 2009 (File No. 1-10042) Exhibit 4.2 to Form 8-K dated June 10, 2011 (File No. 1-10042) Exhibit 4.2 to Form 8-K dated January 8, 2013 (File No. 1-10042) Exhibit 4.2 to Form 8-K dated October 15, 2014 (File No. 1-10042) Exhibit 4.2 to Form 8-K dated June 8, 2017 (File No. 1-10042) Exhibit 4.3 to Form 8-K dated June 8, 2017 (File No. 1-10042) Exhibit 4.2 to Form 8-K dated October 4, 2018 (File No. 1-10042) Exhibit 4.3 to Form 8-K dated October 4, 2018 (File No. 1-10042) Exhibit 10.1 to Form 8-K dated October 1, 2015 (File No. 1-10042) Exhibit 10.1 to Form 8-K dated October 5, 2016 (File No. 1-10042) Exhibit 10.1 to Form 8-K dated September 22, 2016 (File No. 1-10042) Exhibit Number 4.7(c) 4.7(d) 4.7(e) 4.7(f) 4.7(g) 4.7(h) 4.7(i) 4.7(j) 10.1(a) 10.1(b) 10.1(c) 10.1(d) 10.1(e) Description Global Security for the 8.50% Senior Notes due 2019 Global Security for the 5.5% Senior Notes due 2041 Global Security for the 4.15% Senior Notes due 2043 Global Security for the 4.125% Senior Notes due 2044 Global Security for the 3.000% Senior Notes due 2027 Global Security for the 4.125% Senior Notes due 2044 Global Security for the 4.300% Senior Notes due 2048 Global Security for the 4.300% Senior Notes due 2048 Material Contracts Revolving Credit Agreement, dated as of September 25, 2015 among Atmos Energy Corporation, the Lenders from time to time parties thereto, Crédit Agricole Corporate and Investment Bank as Administrative Agent, and Mizuho Bank Ltd., as Syndication Agent First Amendment to Revolving Credit Agreement, dated as of October 5, 2016, by and among Atmos Energy Corporation, the lenders from time to time parties thereto (the “Lenders”) and Credit Agricole Corporate and Investment Bank, in its capacity as administrative agent for the Lenders Second Amendment to Revolving Credit Agreement, dated as of September 7, 2017, by and among Atmos Energy Corporation, the lenders from time to time parties thereto (the “Lenders”) and Credit Agricole Corporate and Investment Bank, in its capacity as administrative agent for the Lenders Term Loan Agreement, dated as of September 22, 2016, by and among Atmos Energy Corporation, the Lenders from time to time parties thereto and Branch Banking and Trust Company as Administrative Agent First Amendment to Term Loan Agreement, dated as of September 7, 2017, by and among Atmos Energy Corporation, the lenders from time to time parties thereto (the “Lenders”) and Branch Banking and Trust Company, in its capacity as administrative agent for the Lenders 108 Exhibit Number 10.2 Description 10.5* 10.4(a)* 10.6(a)* 10.3(a)* 10.6(b)* 10.3(b)* 10.4(b)* Equity Distribution Agreement, dated as of November 14, 2017, among Atmos Energy Corporation, Goldman, Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC Executive Compensation Plans and Arrangements Form of Atmos Energy Corporation Change in Control Severance Agreement — Tier I Form of Atmos Energy Corporation Change in Control Severance Agreement — Tier II Atmos Energy Corporation Executive Retiree Life Plan Amendment No. 1 to the Atmos Energy Corporation Executive Retiree Life Plan Atmos Energy Corporation Annual Incentive Plan for Management (as amended and restated October 1, 2016) Atmos Energy Corporation Supplemental Executive Benefits Plan, Amended and Restated in its Entirety August 7, 2007 Form of Individual Trust Agreement for the Supplemental Executive Benefits Plan Atmos Energy Corporation Supplemental Executive Retirement Plan (As Amended and Restated, Effective as of January 1, 2016) Atmos Energy Corporation Performance-Based Supplemental Executive Benefits Plan Trust Agreement, Effective Date December 1, 2000 Atmos Energy Corporation Account Balance Supplemental Executive Retirement Plan (As Amended and Restated, Effective as of January 1, 2016) Mini-Med/Dental Benefit Extension Agreement dated October 1, 1994 Amendment No. 1 to Mini-Med/Dental Benefit Extension Agreement dated August 14, 2001 Amendment No. 2 to Mini-Med/Dental Benefit Extension Agreement dated December 31, 2002 Atmos Energy Corporation Equity Incentive and Deferred Compensation Plan for Non-Employee Directors, Amended and Restated as of January 1, 2012 10.11(a)* Atmos Energy Corporation 1998 Long-Term 10.9(b)* 10.7(b)* 10.7(a)* 10.9(c)* 10.9(a)* 10.10* 10.8* Incentive Plan (as amended and restated February 3, 2016) 109 Page Number or Incorporation by Reference to Exhibit 1.1 to Form 8-K dated November 14, 2017 (File No. 1-10042) Exhibit 10.7(a) to Form 10-K for fiscal year ended September 30, 2010 (File No. 1-10042) Exhibit 10.7(b) to Form 10-K for fiscal year ended September 30, 2010 (File No. 1-10042) Exhibit 10.31 to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042) Exhibit 10.31(a) to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042) Exhibit 10.5 to Form 10-K for fiscal year ended September 30, 2016 (File No. 1-10042) Exhibit 10.8(a) to Form 10-K for fiscal year ended September 30, 2008 (File No. 1-10042) Exhibit 10.3 to Form 10-Q for quarter ended December 31, 2000 (File No. 1-10042) Exhibit 10.7(a) to Form 10-K for fiscal year ended September 30, 2016 (File No. 1-10042) Exhibit 10.1 to Form 10-Q for quarter ended December 31, 2000 (File No. 1-10042) Exhibit 10.8 to Form 10-K for fiscal year ended September 30, 2016 (File No. 1-10042) Exhibit 10.28(f) to Form 10-K for fiscal year ended September 30, 2001 (File No. 1-10042) Exhibit 10.28(g) to Form 10-K for fiscal year ended September 30, 2001 (File No. 1-10042) Exhibit 10.1 to Form 10-Q for quarter ended December 31, 2002 (File No. 1-10042) Exhibit 10.1 to Form 10-Q for quarter ended December 31, 2011 (File No. 1-10042) Exhibit 99.1 to Form S-8 dated March 29, 2016 (File No. 333-210461) Page Number or Incorporation by Reference to Signature page of Form 10-K for fiscal year ended September 30, 2018 Exhibit Number 10.11(b)* 10.11(c)* 21 23.1 24 31 32 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE Description Form of Award Agreement of Time-Lapse Restricted Stock Units under the Atmos Energy Corporation 1998 Long-Term Incentive Plan Form of Award Agreement of Performance- Based Restricted Stock Units under the Atmos Energy Corporation 1998 Long-Term Incentive Plan Other Exhibits, as indicated Subsidiaries of the registrant Consent of independent registered public accounting firm, Ernst & Young LLP Power of Attorney Rule 13a-14(a)/15d-14(a) Certifications Section 1350 Certifications** Interactive Data File XBRL Instance Document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Labels Linkbase XBRL Taxonomy Extension Presentation Linkbase * This exhibit constitutes a “management contract or compensatory plan, contract, or arrangement.” ** These certifications pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer and Chief Financial Officer, furnished as Exhibit 32 to this Annual Report on Form 10-K, will not be deemed to be filed with the Securities and Exchange Commission or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference. 110 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES ATMOS ENERGY CORPORATION (Registrant) By: /s/ CHRISTOPHER T. FORSYTHE Christopher T. Forsythe Senior Vice President and Chief Financial Officer Date: November 13, 2018 111 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby con- stitutes and appoints Michael E. Haefner and Christopher T. Forsythe, or either of them acting alone or together, as his true and lawful attorney-in-fact and agent with full power to act alone, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ KIM R. COCKLIN Kim R. Cocklin /s/ MICHAEL E. HAEFNER Michael E. Haefner Executive Chairman of the Board November 13, 2018 President, Chief Executive Officer and Director November 13, 2018 /s/ CHRISTOPHER T. FORSYTHE Christopher T. Forsythe Senior Vice President and Chief Financial Officer November 13, 2018 /s/ RICHARD M. THOMAS Richard M. Thomas /s/ ROBERT W. BEST Robert W. Best /s/ KELLY H. COMPTON Kelly H. Compton /s/ SEAN DONOHUE Sean Donohue /s/ RUBEN E. ESQUIVEL Ruben E. Esquivel /s/ RAFAEL G. GARZA Rafael G. Garza /s/ RICHARD K. GORDON Richard K. Gordon /s/ ROBERT C. GRABLE Robert C. Grable /s/ NANCY K. QUINN Nancy K. Quinn /s/ RICHARD A. SAMPSON Richard A. Sampson /s/ STEPHEN R. SPRINGER Stephen R. Springer /s/ DIANA J. WALTERS Diana J. Walters /s/ RICHARD WARE II Richard Ware II Vice President and Controller (Principal Accounting Officer) November 13, 2018 Director Director Director Director Director Director Director Director Director Director Director Director 112 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 November 13, 2018 Schedule II ATMOS ENERGY CORPORATION Valuation and Qualifying Accounts Three Years Ended September 30, 2018 Additions Balance at beginning of period Charged to cost & expenses Charged to other accounts Deductions Balance at end of period (In thousands) 2018 Allowance for doubtful accounts . . . . . . . . . . . . $10,865 $14,894 2017 Allowance for doubtful accounts . . . . . . . . . . . . $11,056 $12,269 2016 Allowance for doubtful accounts . . . . . . . . . . . . $12,934 $10,414 $— $— $— $10,964(1) $14,795 $12,460(1) $10,865 $12,292(1) $11,056 (1) Uncollectible accounts written off. 113 [THIS PAGE INTENTIONALLY LEFT BLANK]  Corporate Information Common Stock Listing New York Stock Exchange. Trading symbol: ATO Stock Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC Operations Center 6201 15th Avenue Brooklyn, New York 11219 800-543-3038 To inquire about your Atmos Energy common stock, please call AST at the telephone number above. You may use the agent’s interactive voice response system 24 hours a day to learn about transferring stock or to check your recent account activity, all without the assistance of a customer service representative. Please have available your Atmos Energy shareholder account number and your Social Security or federal taxpayer ID number. To speak to an AST customer service representative, please call the same number between 8 a.m. and 8 p.m. Eastern time, Monday through Friday. You also may send an email message on our transfer agent’s website at www.amstock.com. Please refer to Atmos Energy in your email message and include your Atmos Energy shareholder account number. Independent Registered Public Accounting Firm Ernst & Young LLP One Victory Park Suite 2000 2323 Victory Avenue Dallas, Texas 75219 214-969-8000 Annual Report Atmos Energy Corporation’s 2018 Integrated Annual Report including our Form 10-K is available at no charge from Investor Relations, Atmos Energy Corporation, P.O. Box 650205, Dallas, Texas 75265-0205 or by calling 972-855-3729, Monday through Friday, between 8 a.m. and 5 p.m. Central time. Atmos Energy’s 2018 Integrated Annual Report also may be viewed on Atmos Energy’s website at www.atmosenergy.com. Annual Meeting of Shareholders The 2019 Annual Meeting of Shareholders will be held at the Charles K. Vaughan Center, 3697 Mapleshade Lane, Plano, Texas 75075 on Wednesday, February 6, 2019, at 9:00 a.m. Central time. Direct Stock Purchase Plan Atmos Energy has a Direct Stock Purchase Plan that is available to all investors. For an Enrollment Application Form and a Plan Prospectus, please call AST at 800-543-3038. The Prospectus is also available at www.atmosenergy.com. You may also obtain information by writing to Investor Relations, Atmos Energy Corporation, P.O. Box 650205, Dallas, Texas 75265-0205. This is not an offer to sell, or a solicitation to buy, any securities of Atmos Energy Corporation. Shares of Atmos Energy common stock purchased through the Direct Stock Purchase Plan will be offered only by prospectus. Atmos Energy on the Internet Information about Atmos Energy is available at www.atmosenergy.com. Our website includes news releases, current and historical financial reports, other investor data, corporate governance documents, management biographies, customer information and facts about Atmos Energy’s operations. Atmos Energy Corporation Contacts To contact Atmos Energy’s Investor Relations, call 972-855-3729, Monday through Friday, between 8 a.m. and 5 p.m. Central time or send an email message to InvestorRelations@atmosenergy.com. Securities analysts and investment managers, please contact: Jennifer P. Hills Vice President, Investor Relations 972-855-3729 (voice) 972-855-3040 (fax) InvestorRelations@atmosenergy.com Atmos Energy Corporation P.O. Box 650205 Dallas, Texas 75265-0205 atmosenergy.com 

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