Unaudited Financial Information

9 Months Ended

Jun. 30, 2021

These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis, aside from accounting policy changes noted below, as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Because of seasonal and other factors, the results of operations for the nine-month period ended June 30, 2021 are not indicative of our results of operations for the full 2021 fiscal year, which ends September 30, 2021.

Except as described in Note 8, Note 10 and Note 11 to the unaudited condensed consolidated financial statements, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the unaudited condensed consolidated financial statements.

Significant accounting policies

Except as noted below, related to the change in policies as a result of our adoption of new accounting standards, our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

During the second quarter of fiscal 2021, we completed our goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.

Accounting pronouncements adopted in fiscal 2021

Effective October 1, 2020, we adopted new accounting guidance that requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model. Under this model, we estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. The new guidance also introduces a new impairment recognition model for available-for-sale debt securities that will require credit losses to be recorded through an allowance account. We adopted the new guidance using a modified retrospective method. The adoption of this standard did not have a material impact on our financial position, results of operations and cash flows and no adjustments were made to October 1, 2020 opening balances as a result of this adoption. As required under the modified retrospective method of adoption, results for the reporting period beginning after October 1, 2020 are presented under Accounting Standards Codification (ASC) 326, while prior period amounts are not adjusted. See Notes 5 and 12 to the unaudited condensed consolidated financial statements for further discussion of implementation of the standard.

Accounting pronouncements that will be effective after fiscal 2021

In March 2020, the Financial Accounting Standards Board (FASB) issued optional guidance which will ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the cessation of the London Interbank Offered Rate (LIBOR). The amendments can be elected immediately, as of March 12, 2020, through December 31, 2022. We are currently evaluating if we will apply the optional guidance as we assess the impact

of the cessation of LIBOR on our current contracts and hedging relationships and the potential impact on our financial position, results of operations and cash flows.

Regulatory assets and liabilities

Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and 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.

Significant regulatory assets and liabilities as of June 30, 2021 and September 30, 2020 included the following:


	June 30, 2021		September 30, 2020
	(In thousands)
Regulatory assets:
Pension and postretirement benefit costs	$	135,411	$	149,089
Infrastructure mechanisms(1)	222,263		183,943
Winter Storm Uri incremental costs(2)	2,093,779		—
Deferred gas costs	27,593		40,593
Regulatory excess deferred taxes	8,838		—
Recoverable loss on reacquired debt	3,893		4,894
Deferred pipeline record collection costs	31,283		29,839


Other	3,952		6,283
	$	2,527,012	$	414,641
Regulatory liabilities:
Regulatory excess deferred taxes	$	694,018	$	718,651

Regulatory cost of removal obligation	536,317		531,096
Deferred gas costs	55,572		19,985
Asset retirement obligation	20,348		20,348
APT annual adjustment mechanism	37,358		57,379

Other	19,371		19,554
	$	1,362,984	$	1,367,013

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

(2)Includes extraordinary gas costs incurred during Winter Storm Uri and related carrying costs. See Note 8 to the unaudited condensed consolidated financial statements for further information. This amount is recorded within deferred charges and other assets on the condensed consolidated balance sheet as of June 30, 2021.

Regulatory excess net deferred taxes represent changes in our net deferred tax liability related to our cost of service ratemaking due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA") and a Kansas legislative change enacted in fiscal 2020. As of June 30, 2021 and September 30, 2020, $106.3 million and $20.9 million is recorded in other current liabilities. This amount has increased during fiscal 2021 due to regulatory approvals received during the fiscal year that shortened the refund period in certain of our jurisdictions. As a result, our effective income tax rate decreased to 18.8% for the nine months ended June 30, 2021. Our effective income tax rate in the prior year period was 19.2%, which reflected the income tax benefit recognized upon enactment of the new Kansas legislation.

Currently, the regulatory excess net deferred tax liability is being returned over various periods. Of this amount, $243.0 million, is being returned to customers over 35 - 60 months. An additional $430.1 million is being returned to customers on a provisional basis over 15 - 69 years until our regulators establish the final refund periods. We will work with the Kansas Corporation Commission during our next rate proceeding to determine the refund period for the remaining $12.1 million.