10-Q 1 d74537e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 1-10042
 
Atmos Energy Corporation
(Exact name of registrant as specified in its charter)
 
     
Texas and Virginia
(State or other jurisdiction of
incorporation or organization)
  75-1743247
(IRS employer
identification no.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
(Address of principal executive offices)
  75240
(Zip code)
 
(972) 934-9227
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o     No þ
 
Number of shares outstanding of each of the issuer’s classes of common stock, as of July 29, 2010.
 
     
Class
 
Shares Outstanding
 
No Par Value
  90,154,801
 


TABLE OF CONTENTS

GLOSSARY OF KEY TERMS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
SIGNATURE
EXHIBITS INDEX
EX-12
EX-15
EX-31
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT


Table of Contents

 
GLOSSARY OF KEY TERMS
 
     
AEC
  Atmos Energy Corporation
AEH
  Atmos Energy Holdings, Inc.
AEM
  Atmos Energy Marketing, LLC
AOCI
  Accumulated other comprehensive income
APS
  Atmos Pipeline and Storage, LLC
Bcf
  Billion cubic feet
FASB
  Financial Accounting Standards Board
Fitch
  Fitch Ratings, Ltd.
GRIP
  Gas Reliability Infrastructure Program
GSRS
  Gas System Reliability Surcharge
ISRS
  Infrastructure System Replacement Surcharge
Mcf
  Thousand cubic feet
MMcf
  Million cubic feet
Moody’s
  Moody’s Investors Services, Inc.
NYMEX
  New York Mercantile Exchange, Inc.
PPA
  Pension Protection Act of 2006
RRC
  Railroad Commission of Texas
RRM
  Rate Review Mechanism
S&P
  Standard & Poor’s Corporation
SEC
  United States Securities and Exchange Commission
WNA
  Weather Normalization Adjustment


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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
                 
    June 30,
    September 30,
 
    2010     2009  
    (Unaudited)        
    (In thousands, except
 
    share data)  
 
ASSETS
Property, plant and equipment
  $ 6,402,065     $ 6,086,618  
Less accumulated depreciation and amortization
    1,733,022       1,647,515  
                 
Net property, plant and equipment
    4,669,043       4,439,103  
Current assets
               
Cash and cash equivalents
    180,383       111,203  
Accounts receivable, net
    299,835       232,806  
Gas stored underground
    263,752       352,728  
Other current assets
    130,003       132,203  
                 
Total current assets
    873,973       828,940  
Goodwill and intangible assets
    739,593       740,064  
Deferred charges and other assets
    303,041       335,659  
                 
    $ 6,585,650     $ 6,343,766  
                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
               
Common stock, no par value (stated at $.005 per share);
               
200,000,000 shares authorized; issued and outstanding:
               
June 30, 2010 — 93,112,688 shares;
               
September 30, 2009 — 92,551,709 shares
  $ 466     $ 463  
Additional paid-in capital
    1,812,088       1,791,129  
Retained earnings
    515,742       405,353  
Accumulated other comprehensive loss
    (14,566 )     (20,184 )
                 
Shareholders’ equity
    2,313,730       2,176,761  
Long-term debt
    1,809,546       2,169,400  
                 
Total capitalization
    4,123,276       4,346,161  
Current liabilities
               
Accounts payable and accrued liabilities
    254,150       207,421  
Other current liabilities
    393,478       457,319  
Short-term debt
          72,550  
Current maturities of long-term debt
    360,131       131  
                 
Total current liabilities
    1,007,759       737,421  
Deferred income taxes
    755,722       570,940  
Regulatory cost of removal obligation
    314,708       321,086  
Deferred credits and other liabilities
    384,185       368,158  
                 
    $ 6,585,650     $ 6,343,766  
                 
 
See accompanying notes to condensed consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
                 
    Three Months Ended
 
    June 30  
    2010     2009  
    (Unaudited)
 
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 405,271     $ 386,985  
Regulated transmission and storage segment
    44,957       49,345  
Natural gas marketing segment
    421,406       453,504  
Pipeline, storage and other segment
    8,196       8,226  
Intersegment eliminations
    (109,573 )     (117,285 )
                 
      770,257       780,775  
Purchased gas cost
               
Natural gas distribution segment
    208,378       195,303  
Regulated transmission and storage segment
           
Natural gas marketing segment
    415,101       438,482  
Pipeline, storage and other segment
    2,730       4,212  
Intersegment eliminations
    (109,180 )     (116,862 )
                 
      517,029       521,135  
                 
Gross profit
    253,228       259,640  
Operating expenses
               
Operation and maintenance
    113,348       110,895  
Depreciation and amortization
    53,288       54,181  
Taxes, other than income
    52,483       47,577  
Asset impairments
          3,304  
                 
Total operating expenses
    219,119       215,957  
                 
Operating income
    34,109       43,683  
Miscellaneous income (expense)
    (850 )     1,219  
Interest charges
    37,290       41,511  
                 
Income (loss) before income taxes
    (4,031 )     3,391  
Income tax expense (benefit)
    (877 )     1,427  
                 
Net income (loss)
  $ (3,154 )   $ 1,964  
                 
Basic net income (loss) per share
  $ (0.03 )   $ 0.02  
                 
Diluted net income (loss) per share
  $ (0.03 )   $ 0.02  
                 
Cash dividends per share
  $ 0.335     $ 0.330  
                 
Weighted average shares outstanding:
               
Basic
    92,648       91,338  
                 
Diluted
    92,648       91,652  
                 
 
See accompanying notes to condensed consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
                 
    Nine Months Ended
 
    June 30  
    2010     2009  
    (Unaudited)
 
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 2,574,153     $ 2,673,373  
Regulated transmission and storage segment
    146,998       163,261  
Natural gas marketing segment
    1,657,829       1,949,657  
Pipeline, storage and other segment
    28,869       36,946  
Intersegment eliminations
    (404,474 )     (504,724 )
                 
      4,003,375       4,318,513  
Purchased gas cost
               
Natural gas distribution segment
    1,697,248       1,816,227  
Regulated transmission and storage segment
           
Natural gas marketing segment
    1,585,259       1,881,068  
Pipeline, storage and other segment
    5,732       9,771  
Intersegment eliminations
    (403,262 )     (503,456 )
                 
      2,884,977       3,203,610  
                 
Gross profit
    1,118,398       1,114,903  
Operating expenses
               
Operation and maintenance
    354,298       365,312  
Depreciation and amortization
    160,207       160,757  
Taxes, other than income
    154,648       150,028  
Asset impairments
          5,382  
                 
Total operating expenses
    669,153       681,479  
                 
Operating income
    449,245       433,424  
Miscellaneous expense
    (1,070 )     (647 )
Interest charges
    115,580       116,035  
                 
Income before income taxes
    332,595       316,742  
Income tax expense
    128,293       109,812  
                 
Net income
  $ 204,302     $ 206,930  
                 
Basic net income per share
  $ 2.19     $ 2.25  
                 
Diluted net income per share
  $ 2.18     $ 2.25  
                 
Cash dividends per share
  $ 1.005     $ 0.990  
                 
Weighted average shares outstanding:
               
Basic
    92,513       90,940  
                 
Diluted
    92,856       91,246  
                 
 
See accompanying notes to condensed consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Nine Months Ended
 
    June 30  
    2010     2009  
    (Unaudited)
 
    (In thousands)  
 
Cash Flows From Operating Activities
               
Net income
  $ 204,302     $ 206,930  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization:
               
Charged to depreciation and amortization
    160,207       160,757  
Charged to other accounts
    116       60  
Deferred income taxes
    186,325       62,658  
Other
    18,425       23,009  
Net assets / liabilities from risk management activities
    3,429       53,711  
Net change in operating assets and liabilities
    21,760       317,469  
                 
Net cash provided by operating activities
    594,564       824,594  
Cash Flows From Investing Activities
               
Capital expenditures
    (362,349 )     (342,326 )
Other, net
    (438 )     (6,094 )
                 
Net cash used in investing activities
    (362,787 )     (348,420 )
Cash Flows From Financing Activities
               
Net decrease in short-term debt
    (76,019 )     (366,449 )
Net proceeds from issuance of long-term debt
          445,623  
Settlement of Treasury lock agreement
          1,938  
Repayment of long-term debt
    (66 )     (407,287 )
Cash dividends paid
    (93,913 )     (90,909 )
Repurchase of equity awards
    (1,173 )      
Issuance of common stock
    8,574       19,928  
                 
Net cash used in financing activities
    (162,597 )     (397,156 )
                 
Net increase in cash and cash equivalents
    69,180       79,018  
Cash and cash equivalents at beginning of period
    111,203       46,717  
                 
Cash and cash equivalents at end of period
  $ 180,383     $ 125,735  
                 
 
See accompanying notes to condensed consolidated financial statements


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2010
 
1.   Nature of Business
 
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as certain other nonregulated businesses. Our corporate headquarters and shared-services function are located in Dallas, Texas and our customer support centers are located in Amarillo and Waco, Texas.
 
Through our natural gas 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 natural gas distribution divisions which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system. Our regulated activities also include our regulated pipeline and storage operations, which include the transportation of natural gas to our distribution system and the management of our underground storage facilities. Our natural gas distribution and regulated pipeline and storage businesses are subject to federal and state regulation and/or regulation by local authorities in each of the states in which our natural gas distribution divisions operate.
 
Our nonregulated businesses operate primarily in the Midwest and Southeast and include our natural gas marketing operations and pipeline, storage and other operations. These businesses are operated through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc. (AEH), which is wholly owned by the Company and based in Houston, Texas. Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers and natural gas transportation and storage services to certain of our natural gas distribution divisions and third parties.
 
We operate the Company through the following four segments:
 
  •  the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,
 
  •  the regulated transmission and storage segment, which includes our regulated pipeline and storage operations of the Atmos Pipeline — Texas Division,
 
  •  the natural gas marketing segment, which includes a variety of nonregulated natural gas management services and
 
  •  the pipeline, storage and other segment, which is comprised of our nonregulated natural gas gathering, transmission and storage services.
 
2.   Unaudited Financial Information
 
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. 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, 2009. Because of seasonal and other factors, the results of operations for the nine-month period ended June 30, 2010 are not indicative of our results of operations for the full 2010 fiscal year, which ends September 30, 2010.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We have evaluated subsequent events from the June 30, 2010 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). On July 1, 2010, we entered into an accelerated share repurchase agreement with Goldman, Sachs & Co. to repurchase $100 million of our outstanding common stock. The agreement is designed to offset stock grants made under various employee and director incentive compensation plans. The specific number of shares that we will ultimately repurchase in the transaction will be based generally on the average of the daily volume-weighted average share price of our common stock over the duration of the agreement. The agreement is scheduled to end in March 2011, although the termination date may be accelerated. As a result of this transaction, our weighted-average shares outstanding will be reduced over the remaining three months of fiscal 2010.
 
Except for the accelerated share repurchase agreement, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the financial statements.
 
Significant accounting policies
 
Our accounting policies are described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
 
During the second quarter of fiscal 2010, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
 
During the nine months ended June 30, 2010, six new accounting standards became applicable to the Company. Except as indicated below, the adoption of these standards did not have a material impact on our financial position, results of operations or cash flows. There were no other significant changes to our accounting policies during the nine months ended June 30, 2010.
 
The determination of participating securities in the basic earnings per share calculation — The Financial Accounting Standards Board (FASB) issued guidance related to determining whether instruments granted in share-based payment transactions are considered participating securities. The FASB determined that non-vested share-based payments with a nonforfeitable right to dividends or dividend equivalents are participating securities and, as a result, companies with these types of participating securities must use the two-class method to compute earnings per share. Based on this guidance, the Company is required to calculate earnings per share using the two-class method and will include non-vested restricted stock and restricted stock units for which vesting is only predicated upon the passage of time in the basic earnings per share calculation. Non-vested restricted stock and restricted stock units for which vesting is predicated, in part upon the achievement of specified performance targets, continue to be excluded from the calculation of earnings per share. Although the provisions of this standard were effective for us as of October 1, 2009, prior-period earnings per share data must be recalculated and adjusted accordingly. The calculation of basic and diluted earnings per share pursuant


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
to the two-class method is presented in Note 6. The application of the two-class method resulted in the following changes to basic and diluted earnings per share for the three and nine months ended June 30, 2009.
 
                 
    Three Months Ended
    Nine Months Ended
 
    June 30, 2009     June 30, 2009  
    (In thousands, except per share amounts)  
 
Basic Earnings Per Share
               
Basic EPS — as previously reported
  $ 0.02     $ 2.28  
Basic EPS — as adjusted
  $ 0.02     $ 2.25  
Weighted average shares outstanding — as previously reported
    91,338       90,940  
Weighted average shares outstanding — as adjusted
    91,338       90,940  
Diluted Earnings Per Share
               
Diluted EPS — as previously reported
  $ 0.02     $ 2.26  
Diluted EPS — as adjusted
  $ 0.02     $ 2.25  
Weighted average shares outstanding — as previously reported
    92,002       91,590  
Weighted average shares outstanding — as adjusted
    91,652       91,246  
 
Fair value measurements of plan assets of a defined benefit pension or other postretirement plan — This guidance requires employers to disclose annually information about fair value measurements of the assets of a defined benefit pension or other postretirement plan in a manner similar to the requirements established for financial and non-financial assets. The objectives of the required disclosures are to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value of plan assets and significant concentrations of risk within plan assets. These disclosures will appear in our Form 10-K for the year ending September 30, 2010.
 
Measurement of liabilities at fair value — This guidance requires that, effective October 1, 2009, when a quoted price in an active market for an identical liability is not available, we will be required to measure fair value using a valuation technique that uses quoted prices of similar liabilities, quoted prices of identical or similar liabilities when traded as assets, or another valuation technique that is consistent with U.S. generally accepted accounting principles (GAAP), such as the income or market approach. Additionally, when estimating the fair value of a liability, we will not be required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents our transfer of the liability. The adoption of this guidance did not impact our financial position, results of operations or cash flows.
 
Business combination accounting — Effective October 1, 2009, this new pronouncement established new principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. This update significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under the new guidelines, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact current period income tax expense.
 
Accounting and reporting for minority interests — In December 2007, the FASB issued guidance related to the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changed the accounting for transactions with minority interest holders beginning October 1, 2009. As of June 30, 2010, Atmos Energy did not have any transactions with minority interest holders.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fair value disclosures — The FASB issued guidance that requires new disclosures surrounding fair value measurements to enhance the existing disclosure requirements including 1) information about transfers in and out of Level 1 and Level 2 fair value measurements as well as a detailed reconciliation of activity in Level 3 fair value measurements; 2) a more detailed level of disaggregation for each class of assets and liabilities; and 3) a requirement to disclose information about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures became effective for us on January 1, 2010, except for the disclosures related to the detailed reconciliation of Level 3 fair value measurements, which will become effective for us on October 1, 2011. As a result of adopting this standard, beginning in our second fiscal quarter we added a disclosure about the valuation techniques and inputs we used to measure fair value for our Level 2 recurring and nonrecurring fair value measurements which is included in Note 4. As of June 30, 2010, we did not have any Level 3 fair value measurements.
 
Regulatory assets and liabilities
 
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is reported separately.
 
Significant regulatory assets and liabilities as of June 30, 2010 and September 30, 2009 included the following:
 
                 
    June 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Regulatory assets:
               
Pension and postretirement benefit costs
  $ 189,566     $ 197,743  
Merger and integration costs, net
    6,826       7,161  
Deferred gas costs
    678       22,233  
Environmental costs
    851       866  
Rate case costs
    3,991       5,923  
Deferred franchise fees
    466       10,014  
Deferred income taxes, net
    639       639  
Other
    762       6,218  
                 
    $ 203,779     $ 250,797  
                 
Regulatory liabilities:
               
Deferred gas costs
  $ 56,463     $ 110,754  
Regulatory cost of removal obligation
    343,765       335,428  
Other
    6,257       7,960  
                 
    $ 406,485     $ 454,142  
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Currently, our authorized rates do not include a return on certain of our merger and integration costs; however, we recover the amortization of these costs. Merger and integration costs, net, are generally amortized on a straight-line basis over estimated useful lives ranging up to 20 years. Environmental costs have been deferred to be included in future rate filings in accordance with rulings received from various state regulatory commissions.
 
Comprehensive income
 
The following table presents the components of comprehensive income, net of related tax, for the three-month and nine-month periods ended June 30, 2010 and 2009:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    June 30     June 30  
    2010     2009     2010     2009  
    (In thousands)  
 
Net income (loss)
  $ (3,154 )   $ 1,964     $ 204,302     $ 206,930  
Unrealized holding gains (losses) on investments, net of tax expense (benefit) of $(996) and $1,282 for the three months ended June 30, 2010 and 2009 and of $(198) and $(2,477) for the nine months ended June 30, 2010 and 2009
    (1,696 )     2,086       (337 )     (4,209 )
Other than temporary impairment of investments, net of tax expense of $1,222 and $2,012 for the three and nine months ended June 30, 2009
          2,082             3,370  
Amortization and unrealized gain on interest rate hedging transactions, net of tax expense of $247 and $320 for the three months ended June 30, 2010 and 2009 and $743 and $2,155 for the nine months ended June 30, 2010 and 2009
    422       543       1,265       3,184  
Net unrealized gains (losses) on commodity hedging transactions, net of tax expense (benefit) of $5,066 and $16,582 for the three months ended June 30, 2010 and 2009 and $2,999 and $(4,759) for the nine months ended June 30, 2010 and 2009
    7,921       25,936       4,690       (6,379 )
                                 
Comprehensive income
  $ 3,493     $ 32,611     $ 209,920     $ 202,896  
                                 
 
Accumulated other comprehensive loss, net of tax, as of June 30, 2010 and September 30, 2009 consisted of the following unrealized gains (losses):
 
                 
    June 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Accumulated other comprehensive loss:
               
Unrealized holding gains on investments
  $ 2,123     $ 2,460  
Treasury lock agreements
    (6,233 )     (7,498 )
Cash flow hedges
    (10,456 )     (15,146 )
                 
    $ (14,566 )   $ (20,184 )
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
3.   Financial Instruments
 
We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. The accounting for these financial instruments is fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Currently, we utilize financial instruments in our natural gas distribution, natural gas marketing and pipeline, storage and other segments. However, our pipeline, storage and other segment uses financial instruments acquired from Atmos Energy Marketing, LLC (AEM) on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.
 
Our financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when our financial instruments are in net liability positions.
 
Regulated Commodity Risk Management Activities
 
Although our purchased gas cost adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our customers are exposed to the effect 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 natural gas distribution gas supply department is responsible for executing this segment’s commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2009-2010 heating season, in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 29 percent, or 26.9 Bcf of the planned winter flowing gas requirements. We have not designated these financial instruments as hedges.
 
The costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with applicable authoritative accounting guidance. Accordingly, there is no earnings impact on our natural gas distribution segment as a result of the use of financial instruments.
 
Nonregulated Commodity Risk Management Activities
 
Our natural gas marketing segment, through AEM, aggregates and purchases gas supply, arranges transportation and/or storage logistics and ultimately delivers gas to our customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers’ request.
 
We also perform asset optimization activities in both our natural gas marketing segment and pipeline, storage and other segment. Through asset optimization activities, we seek to maximize the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from pricing differences that occur over time. We purchase physical natural gas and then sell financial instruments at advantageous prices to


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
lock in a gross profit margin. Through the use of transportation and storage services and financial instruments, we also seek to capture gross profit margin through the arbitrage of pricing differences that exist in various locations and by recognizing pricing differences that occur over time. Over time, gains and losses on the sale of storage gas inventory should be offset by gains and losses on the financial instruments, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.
 
As a result of these activities, our nonregulated operations are exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Futures contracts provide the right to buy or sell the commodity at a fixed price in the future. Option contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.
 
We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our natural gas marketing segment associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 49 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our natural gas marketing and pipeline, storage and other segments.
 
Also, in our natural gas marketing segment, we use storage swaps and futures to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges.
 
Our nonregulated risk management activities are controlled through various risk management policies and procedures. Our Audit Committee has oversight responsibility for our nonregulated risk management limits and policies. A risk committee, comprised of corporate and business unit officers, is responsible for establishing and enforcing our nonregulated risk management policies and procedures.
 
Under our risk management policies, we seek to match our financial instrument positions to our physical storage positions as well as our expected current and future sales and purchase obligations to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Our operations can also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on June 30, 2010, AEH had net open positions (including existing storage) of 0.3 Bcf.
 
Interest Rate Risk Management Activities
 
Currently, we are not managing interest rate risk with financial instruments. However, in prior years, we periodically managed interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings. These Treasury locks were settled at various times at a cumulative net loss. These realized gains and losses were recorded as a component of accumulated other comprehensive income (loss) 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 these Treasury locks extend through fiscal 2035. However, the majority of the remaining amounts associated with these Treasury locks will be recognized by the end of fiscal 2019.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Quantitative Disclosures Related to Financial Instruments
 
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.
 
As of June 30, 2010, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of June 30, 2010, we had net long/(short) commodity contracts outstanding in the following quantities:
 
                             
        Natural
  Natural
  Pipeline,
    Hedge
  Gas
  Gas
  Storage and
Contract Type   Designation   Distribution   Marketing   Other
        Quantity (MMcf)
 
Commodity contracts
  Fair Value           (19,288 )     (1,710 )
    Cash Flow           26,768       (2,580 )
    Not designated     24,772       37,278       2,620  
                             
          24,772       44,758       (1,670 )
                             
 
Financial Instruments on the Balance Sheet
 
The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of June 30, 2010 and September 30, 2009. As required by authoritative accounting literature, the fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include $18.0 million and $11.7 million of cash held on deposit in margin accounts as of June 30, 2010 and September 30, 2009 to collateralize certain financial instruments. Therefore, these gross balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not be equal to the amounts presented on our condensed consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 4.
 
                             
        Natural
    Natural
       
        Gas
    Gas
       
    Balance Sheet Location   Distribution     Marketing(1)     Total  
        (In thousands)  
 
June 30, 2010
                           
Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets   $     $ 19,181     $ 19,181  
Noncurrent commodity contracts
  Deferred charges and other assets           3,893       3,893  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities           (33,480 )     (33,480 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (5,100 )     (5,100 )
                             
Total
              (15,506 )     (15,506 )
Not Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets     1,048       23,299       24,347  
Noncurrent commodity contracts
  Deferred charges and other assets     46       2,482       2,528  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities     (21,209 )     (12,254 )     (33,463 )
Noncurrent commodity contracts
  Deferred credits and other liabilities     (275 )     (231 )     (506 )
                             
Total
        (20,390 )     13,296       (7,094 )
                             
Total Financial Instruments
      $ (20,390 )   $ (2,210 )   $ (22,600 )
                             
 
(1) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
                             
        Natural
    Natural
       
        Gas
    Gas
       
    Balance Sheet Location   Distribution     Marketing(1)     Total  
        (In thousands)        
 
September 30, 2009
                           
Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets   $     $ 53,526     $ 53,526  
Noncurrent commodity contracts
  Deferred charges and other assets           6,800       6,800  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities           (47,146 )     (47,146 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (999 )     (999 )
                             
Total
              12,181       12,181  
Not Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets     4,395       27,559       31,954  
Noncurrent commodity contracts
  Deferred charges and other assets     1,620       7,964       9,584  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities     (20,181 )     (19,657 )     (39,838 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (1,349 )     (1,349 )
                             
Total
        (14,166 )     14,517       351  
                             
Total Financial Instruments
      $ (14,166 )   $ 26,698     $ 12,532  
                             
 
 
(1) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.
 
Impact of Financial Instruments on the Income Statement
 
The following tables present the impact that financial instruments had on our condensed consolidated income statement, by operating segment, as applicable, for the three and nine months ended June 30, 2010 and 2009.
 
Hedge ineffectiveness for our natural gas marketing and pipeline storage and other segments is recorded as a component of unrealized gross profit and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended June 30, 2010 and 2009 we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $3.8 million and $0.2 million. For the nine months ended June 30, 2010 and 2009 we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $44.2 million and $24.7 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fair Value Hedges
 
The impact of commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three and nine months ended June 30, 2010 and 2009 is presented below.
 
                         
    Three Months Ended June 30, 2010  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
    (In thousands)  
 
Commodity contracts
  $ (9,923 )   $ (602 )   $ (10,525 )
Fair value adjustment for natural gas inventory designated as the hedged item
    13,654       1,024       14,678  
                         
Total impact on revenue
  $ 3,731     $ 422     $ 4,153  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ (235 )   $     $ (235 )
Timing ineffectiveness
    3,966       422       4,388  
                         
    $ 3,731     $ 422     $ 4,153  
                         
 
                         
    Three Months Ended June 30, 2009  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
    (In thousands)  
 
Commodity contracts
  $ 2,710     $ 1,390     $ 4,100  
Fair value adjustment for natural gas inventory designated as the hedged item
    3,929       (741 )     3,188  
                         
Total impact on revenue
  $ 6,639     $ 649     $ 7,288  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ 678     $     $ 678  
Timing ineffectiveness
    5,961       649       6,610  
                         
    $ 6,639     $ 649     $ 7,288  
                         
 
                         
    Nine Months Ended June 30, 2010  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
    (In thousands)  
 
Commodity contracts
  $ 18,820     $ 1,476     $ 20,296  
Fair value adjustment for natural gas inventory designated as the hedged item
    21,997       4,198       26,195  
                         
Total impact on revenue
  $ 40,817     $ 5,674     $ 46,491  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ (684 )   $     $ (684 )
Timing ineffectiveness
    41,501       5,674       47,175  
                         
    $ 40,817     $ 5,674     $ 46,491  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Nine Months Ended June 30, 2009  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
    (In thousands)  
 
Commodity contracts
  $ 48,263     $ 7,435     $ 55,698  
Fair value adjustment for natural gas inventory designated as the hedged item
    (26,493 )     (2,731 )     (29,224 )
                         
Total impact on revenue
  $ 21,770     $ 4,704     $ 26,474  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ 4,958     $     $ 4,958  
Timing ineffectiveness
    16,812       4,704       21,516  
                         
    $ 21,770     $ 4,704     $ 26,474  
                         
 
Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on revenue.
 
Cash Flow Hedges
 
The impact of cash flow hedges on our condensed consolidated income statements for the three and nine months ended June 30, 2010 and 2009 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized or will realize when the underlying physical and financial transactions are settled.
 
                                 
    Three Months Ended June 30, 2010  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
    (In thousands)  
 
Loss reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (8,523 )   $     $ (8,523 )
Loss arising from ineffective portion of commodity contracts
          (350 )           (350 )
                                 
Total impact on revenue
          (8,873 )           (8,873 )
Net loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (669 )                 (669 )
                                 
Total Impact from Cash Flow Hedges
  $ (669 )   $ (8,873 )   $     $ (9,542 )
                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    Three Months Ended June 30, 2009  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
    (In thousands)  
 
Loss reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (36,669 )   $ (2,503 )   $ (39,172 )
Loss arising from ineffective portion of commodity contracts
          (7,120 )           (7,120 )
                                 
Total impact on revenue
          (43,789 )     (2,503 )     (46,292 )
Net loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (863 )                 (863 )
                                 
Total Impact from Cash Flow Hedges
  $ (863 )   $ (43,789 )   $ (2,503 )   $ (47,155 )
                                 
 
                                 
    Nine Months Ended June 30, 2010  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
    (In thousands)  
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (43,079 )   $ 2,883     $ (40,196 )
Loss arising from ineffective portion of commodity contracts
          (2,307 )           (2,307 )
                                 
Total impact on revenue
          (45,386 )     2,883       (42,503 )
Net loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (2,008 )                 (2,008 )
                                 
Total Impact from Cash Flow Hedges
  $ (2,008 )   $ (45,386 )   $ 2,883     $ (44,511 )
                                 
 
                                 
    Nine Months Ended June 30, 2009  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
    (In thousands)  
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (142,986 )   $ 25,213     $ (117,773 )
Loss arising from ineffective portion of commodity contracts
          (1,748 )           (1,748 )
                                 
Total impact on revenue
          (144,734 )     25,213       (119,521 )
Net loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (3,401 )                 (3,401 )
                                 
Total Impact from Cash Flow Hedges
  $ (3,401 )   $ (144,734 )   $ 25,213     $ (122,922 )
                                 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and nine months ended June 30, 2010 and 2009. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.
 
                                 
    Three Months Ended
    Nine Months Ended
 
    June 30     June 30  
    2010     2009     2010     2009  
    (In thousands)  
 
Increase (decrease) in fair value:
                               
Treasury lock agreements
  $     $     $     $ 1,221  
Forward commodity contracts
    2,722       2,041       (19,829 )     (78,220 )
Recognition of losses in earnings due to settlements:
                               
Treasury lock agreements
    422       543       1,265       1,963  
Forward commodity contracts
    5,199       23,895       24,519       71,841  
                                 
Total other comprehensive income (loss) from hedging, net of tax(1)
  $ 8,343     $ 26,479     $ 5,955     $ (3,195 )
                                 
 
 
(1) Utilizing an income tax rate of approximately 37 percent comprised of the effective rates in each taxing jurisdiction.
 
Deferred losses recorded in AOCI associated with our treasury lock agreements are recognized in earnings as they are amortized, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of June 30, 2010:
 
                         
    Treasury
             
    Lock
    Commodity
       
    Agreements     Contracts     Total  
    (In thousands)  
 
Next twelve months
  $ (1,687 )   $ (7,081 )   $ (8,768 )
Thereafter
    (4,546 )     (3,375 )     (7,921 )
                         
Total(1)
  $ (6,233 )   $ (10,456 )   $ (16,689 )
                         
 
 
(1) Utilizing an income tax rate of approximately 37 percent comprised of the effective rates in each taxing jurisdiction.
 
Financial Instruments Not Designated as Hedges
 
The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three and nine months ended June 30, 2010 and 2009 is presented below. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.
 
As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact on our natural gas distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
 
                                 
    Three Months Ended
    Nine Months Ended
 
    June 30     June 30  
    2010     2009     2010     2009  
    (In thousands)  
 
Natural gas marketing commodity contracts
  $ (6 )   $ 6,167     $ 12,457     $ 12,928  
Pipeline, storage and other commodity contracts
    704       (6,853 )     536       (6,753 )
                                 
Total impact on revenue
  $ 698     $ (686 )   $ 12,993     $ 6,175  
                                 
 
4.   Fair Value Measurements
 
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the three and nine months ended June 30, 2010, there were no changes in these methods.
 
Effective October 1, 2009, the authoritative guidance related to nonrecurring fair value measurements became effective for us with respect to asset retirement obligations, most nonfinancial assets and liabilities that may be acquired in a business combination and impairment analyses performed for nonfinancial assets. The adoption of the FASB’s fair value guidance for the reporting of these nonrecurring fair value measurements did not have a material impact on our financial position, results of operations or cash flows for the three and nine months ended June 30, 2010.
 
Although fair value measurements also apply to the valuation of our pension and post-retirement plan assets, the current fair value disclosure requirements are not applicable to our pension and post-retirement plan assets. Accordingly, these plan assets are not included in the tabular disclosures below. However, similar disclosures about fair value measurements for our pension and post-retirement plan assets will appear in our Form 10-K for the year ending September 30, 2010.
 
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. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). 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 June 30, 2010 and


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
September 30, 2009. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
                                         
    Quoted
    Significant
    Significant
             
    Prices in
    Other
    Other
             
    Active
    Observable
    Unobservable
    Netting and
       
    Markets
    Inputs
    Inputs
    Cash
    June 30,
 
    (Level 1)     (Level 2)(1)     (Level 3)     Collateral(2)     2010  
    (In thousands)  
 
Assets:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 1,094     $      —     $     $ 1,094  
Natural gas marketing segment
    10,902       37,952             (27,266 )     21,588  
                                         
Total financial instruments
    10,902       39,046             (27,266 )     22,682  
Hedged portion of gas stored underground
                                       
Natural gas marketing segment
    84,723                         84,723  
Pipeline, storage and other segment(3)
    7,112                         7,112  
                                         
Total gas stored underground
    91,835                         91,835  
Available-for-sale securities
    38,972                         38,972  
                                         
Total assets
  $ 141,709     $ 39,046     $     $ (27,266 )   $ 153,489  
                                         
Liabilities:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 21,484     $     $     $ 21,484  
Natural gas marketing segment
    29,045       22,019             (45,283 )     5,781  
                                         
Total liabilities
  $ 29,045     $ 43,503     $     $ (45,283 )   $ 27,265  
                                         
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                         
    Quoted
    Significant
    Significant
             
    Prices in
    Other
    Other
             
    Active
    Observable
    Unobservable
    Netting and
       
    Markets
    Inputs
    Inputs
    Cash
    September 30,
 
    (Level 1)     (Level 2)(1)     (Level 3)     Collateral(2)     2009  
    (In thousands)  
 
Assets:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 6,015     $      —     $     $ 6,015  
Natural gas marketing segment
    34,281       61,568             (56,186 )     39,663  
                                         
Total financial instruments
    34,281       67,583             (56,186 )     45,678  
Hedged portion of gas stored underground
                                       
Natural gas marketing segment
    47,967                         47,967  
Pipeline, storage and other segment(3)
    6,789                         6,789  
                                         
Total gas stored underground
    54,756                         54,756  
Available-for-sale securities
    41,699                         41,699  
                                         
Total assets
  $ 130,736     $ 67,583     $     $ (56,186 )   $ 142,133  
                                         
Liabilities:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 20,181     $     $     $ 20,181  
Natural gas marketing segment
    48,268       20,883             (67,850 )     1,301  
                                         
Total liabilities
  $ 48,268     $ 41,064     $     $ (67,850 )   $ 21,482  
                                         
 
 
(1) Our Level 2 measurements primarily consist of non-exchange-traded financial instruments, such as over-the-counter options and swaps where market data for pricing is observable. The fair values for these assets and liabilities are determined 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.
 
(2) This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and authoritative accounting literature. In addition, as of June 30, 2010 and September 30, 2009 we had $18.0 million and $11.7 million of cash held in margin accounts used to collateralize certain financial instruments which has been reflected as a financial instrument asset.
 
(3) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Other Fair Value Measures
 
Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations. The following table presents the carrying value and fair value of our debt as of June 30, 2010:
 
         
    June 30,
 
    2010  
    (In thousands)  
 
Carrying Amount
  $ 2,172,761  
Fair Value
  $ 2,406,975  
 
5.   Debt
 
Long-term debt
 
Long-term debt at June 30, 2010 and September 30, 2009 consisted of the following:
 
                 
    June 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Unsecured 7.375% Senior Notes, due May 2011
  $ 350,000     $ 350,000  
Unsecured 10% Notes, due December 2011
    2,303       2,303  
Unsecured 5.125% Senior Notes, due 2013
    250,000       250,000  
Unsecured 4.95% Senior Notes, due 2014
    500,000       500,000  
Unsecured 6.35% Senior Notes, due 2017
    250,000       250,000  
Unsecured 8.50% Senior Notes, due 2019
    450,000       450,000  
Unsecured 5.95% Senior Notes, due 2034
    200,000       200,000  
Medium term notes
               
Series A, 1995-2, 6.27%, due December 2010
    10,000       10,000  
Series A, 1995-1, 6.67%, due 2025
    10,000       10,000  
Unsecured 6.75% Debentures, due 2028
    150,000       150,000  
Rental property term note due in installments through 2013
    458       524  
                 
Total long-term debt
    2,172,761       2,172,827  
Less:
               
Original issue discount on unsecured senior notes and debentures
    (3,084 )     (3,296 )
Current maturities
    (360,131 )     (131 )
                 
    $ 1,809,546     $ 2,169,400  
                 
 
As noted above, our Unsecured 7.375% Senior Notes will mature in May 2011 and our Series A, 1995-2, 6.27% medium term notes will mature in December 2010; accordingly, these have been classified within the current maturities of long-term debt.
 
Short-term debt
 
Our short-term borrowing requirements are affected 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.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We finance our short-term borrowing requirements through a combination of a $566.7 million commercial paper program and four committed revolving credit facilities with third-party lenders that provide approximately $1.2 billion of working capital funding. At June 30, 2010, there were no short-term debt borrowings outstanding. At September 30, 2009, there was a total of $72.6 million outstanding under our commercial paper program. We also use intercompany credit facilities to supplement the funding provided by these third-party committed credit facilities. These facilities are described in greater detail below.
 
Regulated Operations
 
We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $800 million of working capital funding. The first facility is a five-year $566.7 million unsecured facility, expiring December 15, 2011, that bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. This credit facility serves as a backup liquidity facility for our commercial paper program. At June 30, 2010, there were no borrowings under this facility nor was there any commercial paper outstanding.
 
The second facility is a $200 million unsecured 364-day facility that expires October 22, 2010. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from 1.75 percent to 3.00 percent, based on the Company’s credit ratings. At June 30, 2010, there were no borrowings outstanding under this facility.
 
The third facility is a $25 million unsecured facility that bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin. At June 30, 2010, there were no borrowings outstanding under this facility. This facility expired on March 31, 2010 and was replaced with a $25 million unsecured facility effective April 1, 2010 that also bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin.
 
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 June 30, 2010, our total-debt-to-total-capitalization ratio, as defined, was 51 percent. In addition, both the interest margin over the Eurodollar rate and the fees that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.
 
In addition to these third-party facilities, the Company has a $200 million intercompany revolving credit facility provided by AEH. This facility bears interest at the lower of (i) the one-month LIBOR rate plus 0.45 percent or (ii) the marginal borrowing rate available to the Company on the date of borrowing. The marginal borrowing rate is defined as the lower of (i) a rate based upon the lower of the Prime Rate or the Eurodollar rate under the five year revolving credit facility, (ii) a rate based upon the lower of the Prime Rate or the Eurodollar rate under the 364-day revolving credit facility or (iii) the lowest rate outstanding under the commercial paper program. Applicable state regulatory commissions have approved our use of this facility through December 31, 2010. There was $67.4 million outstanding under this facility at June 30, 2010.
 
Nonregulated Operations
 
On December 10, 2009, AEM and the participating banks amended and restated AEM’s $450 million committed revolving credit facility extending it to December 9, 2010.
 
AEM uses this facility primarily to issue letters of credit and, on a less frequent basis, to borrow funds for gas purchases and other working capital needs. At AEM’s option, borrowings made under the credit facility


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
are based on a base rate or an offshore rate, in each case plus an applicable margin. The base rate is a floating rate equal to the higher of: (a) 0.50 percent per annum above the latest Federal Funds rate; (b) the per annum rate of interest established by BNP Paribas from time to time as its “prime rate” or “base rate” for U.S. dollar loans; (c) an offshore rate (based on LIBOR with a three-month interest period) as in effect from time to time; and (d) the “cost of funds” rate which is the cost of funds as reasonably determined by the administrative agent plus 0.50 percent. The offshore rate is a floating rate equal to the higher of (a) an offshore rate based upon LIBOR for the applicable interest period; and (b) a “cost of funds” rate referred to above. In the case of both base rate and offshore rate loans, the applicable margin ranges from 2.250 percent to 2.625 percent per annum, depending on the excess tangible net worth of AEM, as defined in the credit facility. This facility has swing line loan features, which allow AEM to borrow, on a same day basis, an amount ranging from $17 million to $27 million based on the terms of an election within the agreement. This facility is collateralized by substantially all of the assets of AEM and is guaranteed by AEH.
 
At June 30, 2010, there were no borrowings outstanding under this credit facility. However, at June 30, 2010, AEM letters of credit totaling $22.7 million had been issued under the facility, which reduced the amount available by a corresponding amount. The amount available under this credit facility is also limited by various covenants, including covenants based on working capital. Under the most restrictive covenant, the amount available to AEM under this credit facility was $159.6 million at June 30, 2010.
 
AEM is required by the financial covenants in this facility to maintain a ratio of total liabilities to tangible net worth that does not exceed a maximum of 5 to 1. At June 30, 2010, AEM’s ratio of total liabilities to tangible net worth, as defined, was 1.12 to 1. Additionally, AEM must maintain minimum levels of net working capital and net worth ranging from $75 million to $112.5 million. As defined in the financial covenants, at June 30, 2010, AEM’s net working capital was $166.8 million and its tangible net worth was $179.4 million.
 
To supplement borrowings under this facility, AEM has a $300 million intercompany demand credit facility with AEH, which bears interest at the greater of (i) the one-month LIBOR rate plus 3.00 percent or (ii) the rate for AEM’s offshore borrowings under its committed credit facility plus 0.75 percent. Amounts outstanding under this facility are subordinated to AEM’s committed credit facility. There were no borrowings outstanding under this facility at June 30, 2010.
 
Finally, AEH has a $200 million intercompany demand credit facility with AEC, which bears interest at greater of (i) the one-month LIBOR rate plus 3.00 percent or (ii) the rate for AEM’s offshore borrowings under its committed credit facility plus 0.75 percent. Applicable state regulatory commissions have approved the new facility through December 31, 2010. There were no borrowings outstanding under this facility at June 30, 2010.
 
Shelf Registration
 
On March 31, 2010, we filed a registration statement with the SEC to issue, from time to time, up to $1.3 billion in common stock and/or debt securities available for issuance.
 
We received approvals from all requisite state regulatory commissions to issue a total of $1.3 billion in common stock and/or debt securities under the new shelf registration statement, including the carryforward of the $450 million of securities remaining available for issuance under our shelf registration statement filed with the SEC on March 23, 2009. Due to certain restrictions imposed by one state regulatory commission on our ability to issue securities under the new registration statement, we will be able to issue a total of $950 million in debt securities and $350 million in equity securities.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Debt Covenants
 
In addition to the financial covenants described above, our credit facilities and public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers.
 
Additionally, our public debt indentures relating to our senior notes and debentures, as well as our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity.
 
Further, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate.
 
Finally, AEM’s credit agreement contains a provision that would limit the amount of credit available if Atmos Energy were downgraded below an S&P rating of BBB and a Moody’s rating of Baa2. We have no other triggering events in our debt instruments that are tied to changes in specified credit ratings or stock price, nor have we entered into any transactions that would require us to issue equity, based on our credit rating or other triggering events.
 
We were in compliance with all of our debt covenants as of June 30, 2010. 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.   Earnings Per Share
 
As discussed in Note 2, since we have non-vested share-based payments with a nonforfeitable right to dividends or dividend equivalents (referred to as participating securities) we are required to use the two-class method of computing earnings per share as of October 1, 2009. The Company’s non-vested restricted stock and restricted stock units, granted under the 1998 Long-Term Incentive Plan, for which vesting is predicated solely on the passage of time, are considered to be participating securities. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. The presentation of earnings per share for previously reported periods has been adjusted to reflect the retrospective adoption of this


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
standard. Basic and diluted earnings per share for the three and nine months ended June 30, 2010 and 2009 are calculated as follows:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    June 30     June 30  
    2010     2009     2010     2009  
    (In thousands, except per share amounts)  
 
Basic Earnings Per Share
                               
Net income (loss)
  $ (3,154 )   $ 1,964     $ 204,302     $ 206,930  
Less: Income (loss) allocated to participating securities
    (38 )     13       2,082       1,955  
                                 
Net income (loss) available to common shareholders
  $ (3,116 )   $ 1,951     $ 202,220     $ 204,975  
                                 
Basic weighted average shares outstanding
    92,648       91,338       92,513       90,940  
                                 
Net income (loss) per share — Basic
  $ (0.03 )   $ 0.02     $ 2.19     $ 2.25  
                                 
Diluted Earnings Per Share
                               
Net income (loss) available to common shareholders
  $ (3,116 )   $ 1,951     $ 202,220     $ 204,975  
Effect of dilutive stock options and other shares
          (1 )     4       4  
                                 
Net income (loss) available to common shareholders
  $ (3,116 )   $ 1,950     $ 202,224     $ 204,979  
                                 
Basic weighted average shares outstanding
    92,648       91,338       92,513       90,940  
Additional dilutive stock options and other shares
          314       343       306  
                                 
Diluted weighted average shares outstanding
    92,648       91,652       92,856       91,246  
                                 
Net income (loss) per share — Diluted
  $ (0.03 )   $ 0.02     $ 2.18     $ 2.25  
                                 
 
There were approximately 333,000 stock options that were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2010 as their inclusion in the computation would be anti-dilutive.
 
There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the nine months ended June 30, 2010 as their exercise price was less than the average market price of the common stock during that period. There were approximately 33,000 and 132,000 out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and nine months ended June 30, 2009.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   Interim Pension and Other Postretirement Benefit Plan Information
 
The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three and nine months ended June 30, 2010 and 2009 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
 
                                 
    Three Months Ended June 30  
    Pension Benefits     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 3,993     $ 3,703     $ 3,360     $ 2,946  
Interest cost
    6,524       7,554       3,018       3,520  
Expected return on assets
    (6,320 )     (6,238 )     (615 )     (573 )
Amortization of transition asset
                377       378  
Amortization of prior service cost
    (193 )     (183 )     (375 )      
Amortization of actuarial loss
    2,822       955       93        
                                 
Net periodic pension cost
  $ 6,826     $ 5,791     $ 5,858     $ 6,271  
                                 
 
                                 
    Nine Months Ended June 30  
    Pension Benefits     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 11,982     $ 11,109     $ 10,077     $ 8,838  
Interest cost
    19,569       22,662       9,051       10,560  
Expected return on assets
    (18,960 )     (18,714 )     (1,845 )     (1,719 )
Amortization of transition asset
                1,134       1,134  
Amortization of prior service cost
    (582 )     (549 )     (1,125 )      
Amortization of actuarial loss
    8,469       2,865       282        
                                 
Net periodic pension cost
  $ 20,478     $ 17,373     $ 17,574     $ 18,813  
                                 
 
The assumptions used to develop our net periodic pension cost for the three and nine months ended June 30, 2010 and 2009 are as follows:
 
                                 
    Pension Benefits     Other Benefits  
    2010     2009     2010     2009  
 
Discount rate
    5.52 %     7.57 %     5.52 %     7.57 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %
Expected return on plan assets
    8.25 %     8.25 %     5.00 %     5.00 %
 
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 2010. Based upon this valuation, we will not be required to contribute to our pension plans during fiscal 2010.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We contributed $9.1 million to our other post-retirement benefit plans during the nine months ended June 30, 2010. We expect to contribute a total of approximately $12 million to these plans during fiscal 2010.
 
For our Supplemental Executive Retirement Plans, we own equity securities that are classified as available-for-sale securities. These securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on a fund by fund basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related fund is written down to its estimated fair value and the other-than-temporary impairment is recognized in the income statement.
 
Assets for the supplemental plans are held in separate rabbi trusts and comprise the following:
 
                                 
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
       
    Cost     Gain     Loss     Fair Value  
    (In thousands)  
 
As of June 30, 2010:
                               
Domestic equity mutual funds
  $ 29,379     $ 3,212     $     $ 32,591  
Foreign equity mutual funds
    4,753       205       (47 )     4,911  
Money market funds
    1,470                   1,470  
                                 
    $ 35,602     $ 3,417     $ (47 )   $ 38,972  
                                 
As of September 30, 2009:
                               
Domestic equity mutual funds
  $ 26,012     $ 3,012     $     $ 29,024  
Foreign equity mutual funds
    4,047       893             4,940  
Money market funds
    7,735                   7,735  
                                 
    $ 37,794     $ 3,905     $     $ 41,699  
                                 
 
During the three and nine months ended June 30, 2009, we recorded a $3.3 million and $5.4 million noncash charge to impair certain available-for-sale investments due to the deterioration of the financial markets and the uncertainty of a full recovery.
 
At June 30, 2010, we maintained an investment in one foreign equity mutual fund that was in an unrealized loss position. This fund has been in an unrealized loss position for less than 12 months as of June 30, 2010. Because this fund is only used to fund the supplemental plans, we evaluate investment performance over a long-term horizon. Based on our intent and ability to hold this investment, our ability to direct the source of the payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that this fund continues to receive good ratings from mutual fund rating companies, we do not consider this impairment to be other than temporary as of June 30, 2010.
 
8.   Commitments and Contingencies
 
Litigation and Environmental Matters
 
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 12 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, there were no material changes in the status of such litigation and environmental-related matters or claims during the nine months ended June 30, 2010. We continue to believe that the final outcome of such litigation and environmental-related matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In addition, we are involved in other litigation and environmental-related matters or claims that arise in the ordinary course of our business. While the ultimate results of such litigation or response actions to such environmental-related matters or claims cannot be predicted with certainty, we believe the final outcome of such litigation or response actions will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Purchase Commitments
 
AEM has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At June 30, 2010, AEM was committed to purchase 77.8 Bcf within one year, 11.4 Bcf within one to three years and 2.1 Bcf after three years under indexed contracts. AEM is committed to purchase 2.1 Bcf within one year, 0.8 Bcf within one to three years and 0.1 Bcf after three years under fixed price contracts with prices ranging from $4.03 to $6.36 per Mcf. Purchases under these contracts totaled $315.6 million and $256.0 million for the three months ended June 30, 2010 and 2009 and $1,208.4 million and $1,215.0 million for the nine months ended June 30, 2010 and 2009.
 
Our natural gas distribution divisions, except for our Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
 
Our Mid-Tex Division maintains 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. The estimated commitments under these contracts as of June 30, 2010 are as follows (in thousands):
 
         
2010
  $ 44,248  
2011
    265,224  
2012
    87,138  
2013
    6,705  
2014
    2,293  
Thereafter
     
         
    $ 405,608  
         
 
Our natural gas marketing and pipeline, storage and other segments maintain long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. There were no material changes to the estimated storage and transportation fees for the nine months ended June 30, 2010.
 
Regulatory Matters
 
As previously described in Note 12 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, in December 2007, the Company received data requests from the Division of Investigations of the Office of Enforcement of the Federal Energy Regulatory Commission (the “Commission”) in connection with its investigation into possible violations of the Commission’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines.
 
After responding to two sets of data requests received from the Commission, the Commission agreed to allow us to conduct our own internal investigation into compliance with the Commission’s rules. We have


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
completed our internal investigation and submitted the results to the Commission. During our investigation, we identified certain non-compliant transactions, and we continue to fully cooperate with the Commission as we work to resolve this matter. We have accrued what we believe is an adequate amount for the anticipated resolution of this proceeding. While the ultimate resolution of this investigation cannot be predicted with certainty, we believe that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
As of June 30, 2010, rate cases were in progress in our Kansas and Missouri service areas and annual rate filing mechanisms were in progress in our Mid-Tex, West Texas and Louisiana service areas. In addition, there was a GRIP filing in progress in our Mid-Tex Division along with other rate activity in our Georgia service area. We recently reached a tentative agreement to extend the rate review mechanism (RRM) for our West Texas Cities service area in our West Texas Division and are in discussions to extend the RRM in our Mid-Tex Division and in our Amarillo and Lubbock service areas in our West Texas Division. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
 
We have been replacing certain steel service lines in our Mid-Tex Division since our acquisition of the natural gas distribution system in 2004. We are committed to replacing the steel service lines on an accelerated schedule to ensure the safety and reliability of our distribution system, and as part of this commitment, we support the objectives of the rulemaking outlined by the Texas Railroad Commission (RRC) for steel service-line replacements statewide. The RRC is not scheduled to consider a formal rulemaking for this program until August 2010. Due to the preliminary status of the rulemaking process, we cannot accurately anticipate the impact this rule would have on the Company or the expected cost of the replacement program.
 
9.   Concentration of Credit Risk
 
Information regarding our concentration of credit risk is disclosed in Note 14 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the nine months ended June 30, 2010, there were no material changes in our concentration of credit risk.
 
10.   Segment Information
 
As discussed in Note 1 above, we operate the Company through the following four segments:
 
  •  The natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations.
 
  •  The regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division.
 
  •  The natural gas marketing segment, which includes a variety of nonregulated natural gas management services.
 
  •  The pipeline, storage and other segment, which includes our nonregulated natural gas gathering transmission and storage services.
 
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in varying regulatory environments. Although our natural gas distribution segment operations are geographically dispersed, they are reported as a single segment as each natural gas distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. We evaluate performance based on net income or loss of the respective operating units.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Income statements for the three and nine month periods ended June 30, 2010 and 2009 by segment are presented in the following tables:
 
                                                 
    Three Months Ended June 30, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 405,049     $ 22,796     $ 336,408     $ 6,004     $     $ 770,257  
Intersegment revenues
    222       22,161       84,998       2,192       (109,573 )      
                                                 
      405,271       44,957       421,406       8,196       (109,573 )     770,257  
Purchased gas cost
    208,378             415,101       2,730       (109,180 )     517,029  
                                                 
Gross profit
    196,893       44,957       6,305       5,466       (393 )     253,228  
Operating expenses
                                               
Operation and maintenance
    89,112       16,050       6,486       2,093       (393 )     113,348  
Depreciation and amortization
    46,981       5,171       426       710             53,288  
Taxes, other than income
    48,521       3,010       555       397             52,483  
                                                 
Total operating expenses
    184,614       24,231       7,467       3,200       (393 )     219,119  
                                                 
Operating income (loss)
    12,279       20,726       (1,162 )     2,266             34,109  
Miscellaneous income (expense)
    (124 )     94       147       670       (1,637 )     (850 )
Interest charges
    29,042       7,667       1,767       451       (1,637 )     37,290  
                                                 
Income (loss) before income taxes
    (16,887 )     13,153       (2,782 )     2,485             (4,031 )
Income tax expense (benefit)
    (5,985 )     4,688       (683 )     1,103             (877 )
                                                 
Net income (loss)
  $ (10,902 )   $ 8,465     $ (2,099 )   $ 1,382     $     $ (3,154 )
                                                 
Capital expenditures
  $ 106,394     $ 22,964     $ 176     $ 186     $     $ 129,720  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Three Months Ended June 30, 2009  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 386,774     $ 29,558     $ 358,458     $ 5,985     $     $ 780,775  
Intersegment revenues
    211       19,787       95,046       2,241       (117,285 )      
                                                 
      386,985       49,345       453,504       8,226       (117,285 )     780,775  
Purchased gas cost
    195,303             438,482       4,212       (116,862 )     521,135  
                                                 
Gross profit
    191,682       49,345       15,022       4,014       (423 )     259,640  
Operating expenses
                                               
Operation and maintenance
    89,534       13,784       6,445       1,641       (509 )     110,895  
Depreciation and amortization
    47,928       5,066       392       795             54,181  
Taxes, other than income
    44,014       2,569       628       366             47,577  
Asset impairments
    2,823       370       90       21             3,304  
                                                 
Total operating expenses
    184,299       21,789       7,555       2,823       (509 )     215,957  
                                                 
Operating income
    7,383       27,556       7,467       1,191       86       43,683  
Miscellaneous income
    2,167       615       71       2,319       (3,953 )     1,219  
Interest charges
    32,798       8,152       4,020       408       (3,867 )     41,511  
                                                 
Income (loss) before income taxes
    (23,248 )     20,019       3,518       3,102             3,391  
Income tax expense (benefit)
    (8,307 )     7,065       1,419       1,250             1,427  
                                                 
Net income (loss)
  $ (14,941 )   $ 12,954     $ 2,099     $ 1,852     $     $ 1,964  
                                                 
Capital expenditures
  $ 86,861     $ 28,216     $ 82     $ 5,837     $     $ 120,996  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Nine Months Ended June 30, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 2,573,471     $ 64,281     $ 1,343,214     $ 22,409     $     $ 4,003,375  
Intersegment revenues
    682       82,717       314,615       6,460       (404,474 )      
                                                 
      2,574,153       146,998       1,657,829       28,869       (404,474 )     4,003,375  
Purchased gas cost
    1,697,248             1,585,259       5,732       (403,262 )     2,884,977  
                                                 
Gross profit
    876,905       146,998       72,570       23,137       (1,212 )     1,118,398  
Operating expenses
                                               
Operation and maintenance
    272,687       53,877       21,772       7,174       (1,212 )     354,298  
Depreciation and amortization
    141,586       15,395       1,261       1,965             160,207  
Taxes, other than income
    142,042       9,226       2,237       1,143             154,648  
                                                 
Total operating expenses
    556,315       78,498       25,270       10,282       (1,212 )     669,153  
                                                 
Operating income
    320,590       68,500       47,300       12,855             449,245  
Miscellaneous income (expense)
    1,309       117       642       2,103       (5,241 )     (1,070 )
Interest charges
    87,976       23,589       6,965       2,291       (5,241 )     115,580  
                                                 
Income before income taxes
    233,923       45,028       40,977       12,667             332,595  
Income tax expense
    90,646       16,039       16,506       5,102             128,293  
                                                 
Net income
  $ 143,277     $ 28,989     $ 24,471     $ 7,565     $     $ 204,302  
                                                 
Capital expenditures
  $ 302,621     $ 56,786     $ 629     $ 2,313     $     $ 362,349  
                                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Nine Months Ended June 30, 2009  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
                (In thousands)              
 
Operating revenues from external parties
  $ 2,672,742     $ 91,877     $ 1,524,438     $ 29,456     $     $ 4,318,513  
Intersegment revenues
    631       71,384       425,219       7,490       (504,724 )      
                                                 
      2,673,373       163,261       1,949,657       36,946       (504,724 )     4,318,513  
Purchased gas cost
    1,816,227             1,881,068       9,771       (503,456 )     3,203,610  
                                                 
Gross profit
    857,146       163,261       68,589       27,175       (1,268 )     1,114,903  
Operating expenses
                                               
Operation and maintenance
    276,462       58,448       27,228       4,700       (1,526 )     365,312  
Depreciation and amortization
    142,608       15,027       1,189       1,933             160,757  
Taxes, other than income
    139,861       7,929       1,667       571             150,028  
Asset impairments
    4,599       602       146       35             5,382  
                                                 
Total operating expenses
    563,530       82,006       30,230       7,239       (1,526 )     681,479  
                                                 
Operating income
    293,616       81,255       38,359       19,936       258       433,424  
Miscellaneous income (expense)
    6,123       1,713       490       6,540       (15,513 )     (647 )
Interest charges
    94,506       23,580       11,383       1,821       (15,255 )     116,035  
                                                 
Income before income taxes
    205,233       59,388       27,466       24,655             316,742  
Income tax expense
    68,465       19,308       11,444       10,595             109,812  
                                                 
Net income
  $ 136,768     $ 40,080     $ 16,022     $ 14,060     $     $ 206,930  
                                                 
Capital expenditures
  $ 260,482     $ 61,579     $ 199     $ 20,066     $     $ 342,326  
                                                 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Balance sheet information at June 30, 2010 and September 30, 2009 by segment is presented in the following tables:
 
                                                 
    June 30, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
                (In thousands)              
 
ASSETS
                                               
Property, plant and equipment, net
  $ 3,872,364     $ 715,411     $ 7,233     $ 74,035     $     $ 4,669,043  
Investment in subsidiaries
    613,652             (2,096 )           (611,556 )      
Current assets
                                               
Cash and cash equivalents
    32,777             65,446       82,160             180,383  
Assets from risk management activities
    1,048             17,102       6       (421 )     17,735  
Other current assets
    424,374       16,194       245,605       79,746       (90,064 )     675,855  
Intercompany receivables
    560,553                   108,687       (669,240 )      
                                                 
Total current assets
    1,018,752       16,194       328,153       270,599       (759,725 )     873,973  
Intangible assets
                990                   990  
Goodwill
    571,592       132,300       24,282       10,429             738,603  
Noncurrent assets from risk management activities
    46             4,950             (49 )     4,947  
Deferred charges and other assets
    269,850       10,877       1,259       16,108             298,094  
                                                 
    $ 6,346,256     $ 874,782     $ 364,771     $ 371,171     $ (1,371,330 )   $ 6,585,650  
                                                 
CAPITALIZATION AND LIABILITIES
                                               
Shareholders’ equity
  $ 2,313,730     $ 200,190     $ 73,285     $ 340,177     $ (613,652 )   $ 2,313,730  
Long-term debt
    1,809,219                   327             1,809,546  
                                                 
Total capitalization
    4,122,949       200,190       73,285       340,504       (613,652 )     4,123,276  
Current liabilities
                                               
Current maturities of long-term debt
    360,000                   131             360,131  
Short-term debt
    67,435                         (67,435 )      
Liabilities from risk management activities
    21,209             1,929       415       (421 )     23,132  
Other current liabilities
    450,488       10,484       167,203       16,854       (20,533 )     624,496  
Intercompany payables
          544,307       124,933             (669,240 )      
                                                 
Total current liabilities
    899,132       554,791       294,065       17,400       (757,629 )     1,007,759  
Deferred income taxes
    636,745       115,117       (7,190 )     11,050             755,722  
Noncurrent liabilities from risk management activities
    275             3,858       49       (49 )     4,133  
Regulatory cost of removal obligation
    314,708                               314,708  
Deferred credits and other liabilities
    372,447       4,684       753       2,168             380,052  
                                                 
    $ 6,346,256     $ 874,782     $ 364,771     $ 371,171     $ (1,371,330 )   $ 6,585,650  
                                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    September 30, 2009  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
                (In thousands)              
 
ASSETS
                                               
Property, plant and equipment, net
  $ 3,703,471     $ 672,829     $ 7,112     $ 55,691     $     $ 4,439,103  
Investment in subsidiaries
    547,936             (2,096 )           (545,840 )      
Current assets
                                               
Cash and cash equivalents
    23,655             87,266       282             111,203  
Assets from risk management activities
    4,395             27,424       2,765       (2,941 )     31,643  
Other current assets
    499,155       17,017       157,846       112,551       (100,475 )     686,094  
Intercompany receivables
    552,408                   128,104       (680,512 )      
                                                 
Total current assets
    1,079,613       17,017       272,536       243,702       (783,928 )     828,940  
Intangible assets
                1,461                   1,461  
Goodwill
    571,592       132,300       24,282       10,429             738,603  
Noncurrent assets from risk management activities
    1,620             12,415       6       (6 )     14,035  
Deferred charges and other assets
    290,327       11,932       1,065       18,300             321,624  
                                                 
    $ 6,194,559     $ 834,078     $ 316,775     $ 328,128     $ (1,329,774 )   $ 6,343,766  
                                                 
CAPITALIZATION AND LIABILITIES
                                               
Shareholders’ equity
  $ 2,176,761     $ 171,200     $ 83,354     $ 293,382     $ (547,936 )   $ 2,176,761  
Long-term debt
    2,169,007                   393             2,169,400  
                                                 
Total capitalization
    4,345,768       171,200       83,354       293,775       (547,936 )     4,346,161  
Current liabilities
                                               
Current maturities of long-term debt
                      131             131  
Short-term debt
    158,942                         (86,392 )     72,550  
Liabilities from risk management activities
    20,181             4,060       182       (2,941 )     21,482  
Other current liabilities
    510,749       9,251       116,078       19,167       (11,987 )     643,258  
Intercompany payables
          557,190       123,322             (680,512 )      
                                                 
Total current liabilities
    689,872       566,441       243,460       19,480       (781,832 )     737,421  
Deferred income taxes
    477,352       92,250       (10,675 )     12,013             570,940  
Noncurrent liabilities from risk management activities
                6             (6 )      
Regulatory cost of removal obligation
    321,086                               321,086  
Deferred credits and other liabilities
    360,481       4,187       630       2,860             368,158  
                                                 
    $ 6,194,559     $ 834,078     $ 316,775     $ 328,128     $ (1,329,774 )   $ 6,343,766  
                                                 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders of
Atmos Energy Corporation
 
We have reviewed the condensed consolidated balance sheet of Atmos Energy Corporation as of June 30, 2010, the related condensed consolidated statements of income for the three-month and nine-month periods ended June 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine-month periods ended June 30, 2010 and 2009. These financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Atmos Energy Corporation as of September 30, 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated November 16, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/  Ernst & Young LLP
 
Dallas, Texas
August 5, 2010


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
INTRODUCTION
 
The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2009.
 
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995
 
The statements contained in this Quarterly Report on Form 10-Q 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 statements 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, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties, which are discussed in more detail in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, include the following: our ability to continue to access the credit markets to satisfy our liquidity requirements; the impact of adverse economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the impact of possible future additional regulatory and financial risks associated with global warming and climate change on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the inherent hazards and risks involved in operating our gas distribution business; 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.
 
OVERVIEW
 
Atmos Energy and our subsidiaries are engaged primarily in the regulated natural gas distribution and transportation and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers throughout our six regulated natural gas distribution divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our regulated distribution and pipeline systems.
 
Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast and natural gas transportation and storage services to certain of our natural gas distribution divisions and to third parties. Through our asset optimization activities, we also seek to maximize the economic value associated with the storage and transportation capacity we own or control.


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We operate the Company through the following four segments:
 
  •  the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,
 
  •  the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division,
 
  •  the natural gas marketing segment, which includes a variety of nonregulated natural gas management services and
 
  •  the pipeline, storage and other segment, which is comprised of our nonregulated natural gas gathering, transmission and storage services.
 
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
 
Our condensed 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 judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results may differ from such estimates.
 
Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and include the following:
 
  •  Regulation
 
  •  Revenue Recognition
 
  •  Allowance for Doubtful Accounts
 
  •  Financial Instruments and Hedging Activities
 
  •  Impairment Assessments
 
  •  Pension and Other Postretirement Plans
 
  •  Fair Value Measurements
 
Our critical accounting policies are reviewed quarterly by the Audit Committee. There were no significant changes to these critical accounting policies during the nine months ended June 30, 2010.
 
RESULTS OF OPERATIONS
 
Due to the seasonality of our distribution business, we typically incur a net loss in our fiscal third quarter. For the three months ended June 30, 2010, we reported a net loss of $3.2 million, or $0.03 per diluted share compared with net income of $2.0 million, or $0.02 per diluted share in the prior-year quarter. The net loss for the three months ended June 30, 2010 includes noncash, unrealized net losses of $11.1 million, or $0.12 per diluted share compared with net gains of $7.0 million, or $0.08 per diluted share for the three months ended June 30, 2009. Quarter over quarter, lower net losses in our natural gas distribution operations offset lower earnings in our regulated transmission and storage segment associated with a 29 percent decrease in consolidated throughput due to reduced demand and basis spreads. Our nonregulated operations benefited from significantly higher storage and trading margins compared with the prior-year quarter, which more than offset the impact of an 11 percent quarter-over-quarter decrease in sales volumes in our natural gas marketing segment.


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We reported net income of $204.3 million, or $2.18 per diluted share for the nine months ended June 30, 2010 compared with net income of $206.9 million, or $2.25 per diluted share in the prior-year period. Unrealized losses in our nonregulated operations during the current period reduced net income by $6.2 million or $0.07 per diluted share compared with net losses recorded in the prior-year period of $9.9 million, or $0.11 per diluted share. Regulated operations contributed 84 percent of our net income during this period with our nonregulated operations contributing the remaining 16 percent. Net income in both periods was impacted by nonrecurring items. The current year period includes the positive impact of a state sales tax refund of $4.5 million, or $0.05 per diluted share. Net income in the prior-year period included the net positive impact of several one-time items totaling $17.3 million, or $0.19 per diluted share related to the following pre-tax amounts:
 
  •  $11.3 million related to a favorable one-time tax benefit.
 
  •  $7.8 million related to the favorable impact of an update to the estimate for unbilled accounts.
 
  •  $7.0 million favorable impact of the reversal of estimated uncollectible gas costs.
 
  •  $5.4 million unfavorable impact of a non-cash impairment charge related to available-for-sale securities in our Supplemental Executive Retirement Plan.
 
During the nine months ended June 30, 2010, colder-than-normal weather and recent improvements in rate designs in our natural gas distribution segment partially offset the decline in demand for natural gas, which contributed to a 26 percent year-over-year decrease in consolidated throughput in our regulated transmission and storage segment and a 5 percent year-over-year decrease in consolidated sales volumes in our natural gas marketing segment.
 
During the year, we continued to successfully access the capital markets and received updated debt ratings from three rating agencies. In October 2009, we renewed a $200 million 364-day committed credit facility and in December 2009 we renewed a $450 million 364-day committed credit facility for our nonregulated operations. In June 2010, Fitch upgraded our rating outlook from stable to positive and affirmed the existing credit rating on our senior unsecured debt and commercial paper. In March 2010, Moody’s upgraded our rating outlook from stable to positive and affirmed the existing credit rating on our senior long-term debt and commercial paper while S&P affirmed our rating outlook as stable and our senior long-term debt credit rating. The new credit facilities should help ensure we have sufficient liquidity to fund our working capital needs, while our credit ratings should help us continue to obtain financing at a reasonable cost in the future.
 
On July 1, 2010, we entered into an accelerated share repurchase program with Goldman Sachs & Co. as part of our ongoing efforts to improve shareholder value. The shares that will be repurchased under this program will offset the dilutive impact of stock grants made under our various employee and director incentive compensation plans. It is anticipated that the impact of the program will add $0.01 to $0.02 to fiscal 2010 diluted earnings per share.


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The following table presents our consolidated financial highlights for the three and nine months ended June 30, 2010 and 2009:
 
                                 
    Three Months Ended
  Nine Months Ended
    June 30   June 30
    2010   2009   2010   2009
    (In thousands, except per share data)
 
Operating revenues
  $ 770,257     $ 780,775     $ 4,003,375     $ 4,318,513  
Gross profit
    253,228       259,640       1,118,398       1,114,903  
Operating expenses
    219,119       215,957       669,153       681,479  
Operating income
    34,109       43,683       449,245       433,424  
Miscellaneous income (expense)
    (850 )     1,219       (1,070 )     (647 )
Interest charges
    37,290       41,511       115,580       116,035  
Income (loss) before income taxes
    (4,031 )     3,391       332,595       316,742  
Income tax expense (benefit)
    (877 )     1,427       128,293       109,812  
Net income (loss)
  $ (3,154 )   $ 1,964     $ 204,302     $ 206,930  
Diluted net income (loss) per share
  $ (0.03 )   $ 0.02     $ 2.18     $ 2.25  
 
Our consolidated net income (loss) during the three and nine months ended June 30, 2010 and 2009 was earned in each of our business segments as follows:
 
                         
    Three Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands)  
 
Natural gas distribution segment
  $ (10,902 )   $ (14,941 )   $ 4,039  
Regulated transmission and storage segment
    8,465       12,954       (4,489 )
Natural gas marketing segment
    (2,099 )     2,099       (4,198 )
Pipeline, storage and other segment
    1,382       1,852       (470 )
                         
Net income (loss)
  $ (3,154 )   $ 1,964     $ (5,118 )
                         
 
                         
    Nine Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands)  
 
Natural gas distribution segment
  $ 143,277     $ 136,768     $ 6,509  
Regulated transmission and storage segment
    28,989       40,080       (11,091 )
Natural gas marketing segment
    24,471       16,022       8,449  
Pipeline, storage and other segment
    7,565       14,060       (6,495 )
                         
Net income
  $ 204,302     $ 206,930     $ (2,628 )
                         


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The following tables segregate our consolidated net income (loss) and diluted earnings per share between our regulated and nonregulated operations:
 
                         
    Three Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands, except per share data)  
 
Regulated operations
  $ (2,437 )   $ (1,987 )   $ (450 )
Nonregulated operations
    (717 )     3,951       (4,668 )
                         
Consolidated net income (loss)
  $ (3,154 )   $ 1,964     $ (5,118 )
                         
Diluted EPS from regulated operations
  $ (0.02 )   $ (0.02 )   $  
Diluted EPS from nonregulated operations
    (0.01 )     0.04       (0.05 )
                         
Consolidated diluted EPS
  $ (0.03 )   $ 0.02     $ (0.05 )
                         
 
                         
    Nine Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands, except per share data)  
 
Regulated operations
  $ 172,266     $ 176,848     $ (4,582 )
Nonregulated operations
    32,036       30,082       1,954  
                         
Consolidated net income
  $ 204,302     $ 206,930     $ (2,628 )
                         
Diluted EPS from regulated operations
  $ 1.84     $ 1.92     $ (0.08 )
Diluted EPS from nonregulated operations
    0.34       0.33       0.01  
                         
Consolidated diluted EPS
  $ 2.18     $ 2.25     $ (0.07 )
                         
 
Natural Gas Distribution Segment
 
The primary factors that impact the results of our natural gas distribution operations are our ability to earn our authorized rates of return, the cost of natural gas, competitive factors in the energy industry and economic conditions in our service areas.
 
Our ability to earn our authorized rates of return is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and, ultimately, separating the recovery of our approved margins from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions.
 
Seasonal weather patterns can also affect our natural gas distribution operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which has been approved by state regulatory commissions for approximately 90 percent of our residential and commercial meters in the following states for the following time periods:
 
     
Georgia
  October — May
Kansas
  October — May
Kentucky
  November — April
Louisiana
  December — March
Mississippi
  November — April
Tennessee
  November — April
Texas: Mid-Tex
  November — April
Texas: West Texas
  October — May
Virginia
  January — December


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Our natural gas distribution operations are also affected by the cost of natural gas. The cost of gas is passed through to our customers without markup. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe gross profit is a better indicator of our financial performance than revenues. However, gross profit in our Texas and Mississippi service areas includes franchise fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the associated tax expense as a component of taxes, other than income. Although changes in these revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income. Prior to January 1, 2009, timing differences existed between the recognition of revenue for franchise fees collected from our customers and the recognition of expense of franchise taxes. These timing differences had a significant temporary effect on operating income in periods with volatile gas prices, particularly in our Mid-Tex Division. Beginning January 1, 2009, changes in our franchise fee agreements in our Mid-Tex Division became effective, which have significantly reduced the impact of this timing difference. Although this timing difference will still be present for gross receipts taxes, the timing differences described above have been and should continue to be less significant.
 
Higher gas costs may also 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. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or use alternative energy sources.
 
Three Months Ended June 30, 2010 compared with Three Months Ended June 30, 2009
 
Financial and operational highlights for our natural gas distribution segment for the three months ended June 30, 2010 and 2009 are presented below.
 
                         
    Three Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 196,893     $ 191,682     $ 5,211  
Operating expenses
    184,614       184,299       315  
                         
Operating income
    12,279       7,383       4,896  
Miscellaneous income (expense)
    (124 )     2,167       (2,291 )
Interest charges
    29,042       32,798       (3,756 )
                         
Loss before income taxes
    (16,887 )     (23,248 )     6,361  
Income tax benefit
    (5,985 )     (8,307 )     2,322  
                         
Net loss
  $ (10,902 )   $ (14,941 )   $ 4,039  
                         
Consolidated natural gas distribution sales volumes — MMcf
    36,339       40,081       (3,742 )
Consolidated natural gas distribution transportation volumes — MMcf
    29,589       29,597       (8 )
                         
Total consolidated natural gas distribution throughput — MMcf
    65,928       69,678       (3,750 )
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.46     $ 0.46     $  
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 5.73     $ 4.87     $ 0.86  


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The following table shows our operating income (loss) by natural gas distribution division, in order of total customers served, for the three months ended June 30, 2010 and 2009. The presentation of our natural gas distribution operating income (loss) is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                         
    Three Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands)  
 
Mid-Tex
  $ (2,179 )   $ (3,598 )   $ 1,419  
Kentucky/Mid-States
    5,055       2,931       2,124  
Louisiana
    6,537       5,459       1,078  
West Texas
    (104 )     1,010       (1,114 )
Mississippi
    950       (585 )     1,535  
Colorado-Kansas
    1,762       1,247       515  
Other
    258       919       (661 )
                         
Total
  $ 12,279     $ 7,383     $ 4,896  
                         
 
The $5.2 million increase in natural gas distribution gross profit primarily reflects a net increase of $5.5 million in rate adjustments, primarily in the Mid-Tex, Louisiana, West Texas and Mississippi service areas.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense, taxes, other than income and asset impairments increased $0.3 million. This increase was primarily due to an increase in state gross receipts taxes and ad valorem taxes, partially offset by a $2.8 million decrease due to the absence of an impairment of available-for-sale securities recorded in the prior year.
 
Nine Months Ended June 30, 2010 compared with Nine Months Ended June 30, 2009
 
Financial and operational highlights for our natural gas distribution segment for the nine months ended June 30, 2010 and 2009 are presented below.
 
                         
    Nine Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 876,905     $ 857,146     $ 19,759  
Operating expenses
    556,315       563,530       (7,215 )
                         
Operating income
    320,590       293,616       26,974  
Miscellaneous income
    1,309       6,123       (4,814 )
Interest charges
    87,976       94,506       (6,530 )
                         
Income before income taxes
    233,923       205,233       28,690  
Income tax expense
    90,646       68,465       22,181  
                         
Net income
  $ 143,277     $ 136,768     $ 6,509  
                         
Consolidated natural gas distribution sales volumes — MMcf
    294,183       253,087       41,096  
Consolidated natural gas distribution transportation volumes — MMcf
    104,090       98,994       5,096  
                         
Total consolidated natural gas distribution throughput — MMcf
    398,273       352,081       46,192  
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.46     $ 0.46     $  
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 5.77     $ 7.18     $ (1.41 )


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The following table shows our operating income by natural gas distribution division, in order of total customers served, for the nine months ended June 30, 2010 and 2009. The presentation of our natural gas distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                         
    Nine Months Ended
 
    June 30  
    2010     2009     Change  
    (In thousands)  
 
Mid-Tex
  $ 128,045     $ 129,454     $ (1,409 )
Kentucky/Mid-States
    53,858       49,360       4,498  
Louisiana
    42,775       39,825       2,950  
West Texas
    33,053       23,829       9,224  
Mississippi
    28,604       24,621       3,983  
Colorado-Kansas
    24,635       23,471       1,164  
Other
    9,620       3,056       6,564  
                         
Total
  $ 320,590     $ 293,616     $ 26,974  
                         
 
The $19.8 million increase in natural gas distribution gross profit primarily reflects rate adjustments and increased throughput as follows:
 
  •  $27.9 million net increase in rate adjustments, primarily in the West Texas, Mid-Tex, Louisiana and Mississippi service areas.
 
  •  $10.8 million increase as a result of a 13 percent increase in consolidated throughput primarily associated with higher residential and commercial consumption and colder weather in most of our service areas.
 
These increases were partially offset by:
 
  •  $7.8 million decrease due to a non-recurring adjustment recorded in the prior-year period to update the estimate for gas delivered to customers but not yet billed to reflect base rate changes.
 
  •  $7.0 million decrease related to a prior year reversal of an accrual for estimated unrecoverable gas costs that did not recur in the current year.
 
  •  $1.8 million decrease due to a decrease in revenue-related taxes, primarily due to a decrease in revenues on which the tax is calculated.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense, taxes, other than income and asset impairments decreased $7.2 million, primarily due to the following:
 
  •  $7.4 million decrease due to a state sales tax reimbursement received in March 2010.
 
  •  $4.6 million decrease due to the absence of an impairment charge for available-for-sale securities recorded in the prior year.
 
  •  $1.6 million decrease in contract labor expenses.
 
These decreases were partially offset by:
 
  •  $5.1 million increase in employee-related expenses.
 
  •  $2.2 million increase in taxes, other than income.
 
Miscellaneous income decreased $4.8 million due to lower interest income. Interest charges decreased $6.5 million primarily due to lower short-term debt balances and interest rates.


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Additionally, results for the nine months ended June 30, 2009, were favorably impacted by a one-time tax benefit of $10.5 million. During the second quarter of fiscal 2009, the Company completed a study of the calculations used to estimate its deferred tax rate, and concluded that revisions to these calculations to include more specific jurisdictional tax rates would result in a more accurate calculation of the tax rate at which deferred taxes would reverse in the future. Accordingly, the Company modified the tax rate used to calculate deferred taxes from 38 percent to an individual rate for each legal entity. These rates vary from 36-41 percent depending on the jurisdiction of the legal entity.
 
Recent Ratemaking Developments
 
Significant ratemaking developments that occurred during the nine months ended June 30, 2010 are discussed below. The amounts described below represent the operating income that was requested or received in each rate filing, which may not necessarily reflect the stated amount referenced in the final order, as certain operating costs may have changed as a result of a commission’s or other governmental authority’s final ruling.
 
Annual net operating income increases totaling $41.1 million resulting from ratemaking activity became effective in the nine months ended June 30, 2010 as summarized below:
 
         
    Annual Increase to
 
Rate Action
  Operating Income  
    (In thousands)  
 
Rate case filings
  $ 15,831  
GRIP filings
    13,768  
Annual rate filing mechanisms
    8,905  
Other rate activity
    2,630  
         
    $ 41,134  
         
 
Additionally, the following ratemaking efforts were in progress during the third quarter of fiscal 2010 but had not been completed as of June 30, 2010.
 
                 
            Operating
 
            Income
 
Division
 
Rate Action
 
Jurisdiction
  Requested  
            (In thousands)  
 
Colorado/Kansas
  Rate Case(1)   Kansas   $ 6,015  
Kentucky/Mid-States
  PRP(2)   Georgia     764  
    Rate Case(3)   Missouri     6,439  
Louisiana
  RSC(4)   LGS     4,296  
Mid-Tex
  GRIP(5)(6)   Dallas & RRC     2,985  
    Rate Review
Mechanism
(RRM)(7)
  Settled Cities     56,827  
West Texas
  RRM(8)   WT Cities     4,243  
    RRM(9)   Amarillo & Lubbock     2,388  
                 
            $ 83,957  
                 
 
 
(1) The Company, the Kansas Corporation Commission Staff and the Citizen’s Utility Ratepayer Board reached a unanimous settlement for an increase in operating income of $3.9 million which the Commission approved, effective August 1, 2010.
 
(2) The Pipeline Replacement Program (PRP) surcharge relates to a long-term cast iron replacement program.
 
(3) The Company, the Staff of the Missouri Public Service Commission, the Office of the Public Counsel, the Missouri Department of Natural Resources and Noranda Aluminum, Inc. reached a unanimous settlement


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in July 2010 for an increase in operating income of $4.0 million. The settlement is subject to final Missouri Public Service Commission approval.
 
(4) The Louisiana Commission Staff recommended an increase of $3.9 million effective July 1, 2010, which the Commission accepted.
 
(5) Gas Reliability Infrastructure Program (GRIP) is a rate adjustment that allows utilities to recover additional invested capital without filing a rate case.
 
(6) This GRIP filing is based on a Mid-Tex System-wide basis and made concurrently with the City of Dallas and the Railroad Commission of Texas (RRC) for approval of their respective jurisdictional customers. The City of Dallas filing is currently on appeal at the RRC.
 
(7) The Company and representatives of the Settled Cities are currently in negotiations to settle the filing and extend the rate review mechanism (RRM) in our Mid-Tex Division.
 
(8) The Company and representatives of the West Texas Cities have reached a tentative settlement for a one-year extension of the RRM and an increase in operating income of $0.7 million. The settlement is subject to final authorization by each of the West Texas Cities.
 
(9) Consultant reports have been received for the RRM filing in Lubbock and discussions are ongoing regarding the final resolution. A tentative settlement for the Amarillo RRM has been reached which would result in an operating income increase of $1.2 million.
 
Rate Filings
 
A rate case is a formal request from Atmos Energy to a regulatory authority to increase rates that are charged to our customers. Rate cases may also be initiated when the regulatory authorities request us to justify our 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 deliver reliable, reasonably priced natural gas service to our customers. The following table summarizes our recent rate cases:
 
                         
        Increase in Annual
    Effective
     
Division
  State   Operating Income     Date      
        (In thousands)            
 
2010 Rate Case Filings:
                       
Kentucky/Mid-States
  Kentucky   $ 6,636       06/01/2010      
    Georgia     2,935       03/31/2010      
Mid-Tex
  Texas(1)     2,963       01/26/2010      
Colorado/Kansas
  Colorado     1,900       01/04/2010      
Kentucky/Mid-States
  Virginia     1,397       11/23/2009      
                         
Total 2010 Rate Case Filings
      $ 15,831              
                         
 
 
(1) In its final order, the RRC approved a $3.0 million increase in operating income from customers in the Dallas & Environs portion of the Mid-Tex Division. Net of the GRIP 2008 rates that will be superseded, operating income will increase $0.2 million. The ruling also provided for regulatory accounting treatment for certain costs related to storage assets and costs moving from our Mid-Tex Division within our natural gas distribution segment to our regulated transmission and storage segment.


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GRIP Filings
 
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 following table summarizes our GRIP filings with effective dates during the nine months ended June 30, 2010.
 
                                 
          Incremental Net
             
          Utility Plant
    Additional Annual
    Effective
 
Division
  Calendar Year     Investment     Operating Income     Date  
          (In thousands)     (In thousands)        
 
2010 GRIP:
                               
West Texas
    2009     $ 19,158     $ 363       06/14/2010  
Atmos Pipeline — Texas
    2009       95,504       13,405       04/20/2010  
                                 
Total 2010 GRIP
          $ 114,662     $ 13,768