Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 6, 2014)
  • 10-Q (May 7, 2014)
  • 10-Q (Feb 4, 2014)
  • 10-Q (Aug 7, 2013)
  • 10-Q (May 2, 2013)
  • 10-Q (Feb 7, 2013)

 
8-K

 
Other

Atmos Energy 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-15
  4. Ex-31
  5. Ex-32
  6. Ex-32
e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2008
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
 
 
     
Texas and Virginia
  75-1743247
(State or other jurisdiction of
incorporation or organization)
  (IRS employer
identification no.)
 
     
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
  75240
(Zip code)
(Address of principal executive offices)    
 
(972) 934-9227
 
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 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 April 25, 2008.
 
     
Class
 
Shares Outstanding
 
No Par Value
  90,188,545
 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ATMOS ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2008
1. Nature of Business
2. Unaudited Interim Financial Information
3. Derivative Instruments and Hedging Activities
4. Debt
5. Shareholders’ Equity
6. Earnings Per Share
7. Interim Pension and Other Postretirement Benefit Plan Information
8. Commitments and Contingencies
9. Concentration of Credit Risk
10. Segment Information
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
SIGNATURES
EXHIBITS INDEX
Computation of Ratio of Earnings to Fixed Charges
Letter Regarding Unaudited Interim Financial Information
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications


Table of Contents

 
 
     
AEC
  Atmos Energy Corporation
AEH
  Atmos Energy Holdings, Inc.
AEM
  Atmos Energy Marketing, LLC
AES
  Atmos Energy Services, LLC
APS
  Atmos Pipeline and Storage, LLC
Bcf
  Billion cubic feet
EITF
  Emerging Issues Task Force
FASB
  Financial Accounting Standards Board
FIN
  FASB Interpretation
Fitch
  Fitch Ratings, Ltd.
GRIP
  Gas Reliability Infrastructure Program
KCC
  Kansas Corporation Commission
LGS
  Louisiana Gas Service Company and LGS Natural Gas Company, which were acquired July 1, 2001
LPSC
  Louisiana Public Service Commission
Mcf
  Thousand cubic feet
MMcf
  Million cubic feet
Moody’s
  Moody’s Investors Services, Inc.
NYMEX
  New York Mercantile Exchange, Inc.
RRC
  Railroad Commission of Texas
RSC
  Rate Stabilization Clause
S&P
  Standard & Poor’s Corporation
SEC
  United States Securities and Exchange Commission
SFAS
  Statement of Financial Accounting Standards
TRA
  Tennessee Regulatory Authority
WNA
  Weather Normalization Adjustment


1


Table of Contents

 
 
Item 1.   Financial Statements
 
ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
                 
    March 31,
    September 30,
 
    2008     2007  
    (Unaudited)        
    (In thousands, except
 
    share data)  
 
ASSETS
Property, plant and equipment
  $ 5,518,436     $ 5,396,070  
Less accumulated depreciation and amortization
    1,569,570       1,559,234  
                 
Net property, plant and equipment
    3,948,866       3,836,836  
Current assets
               
Cash and cash equivalents
    139,636       60,725  
Cash held on deposit in margin account
    29,591        
Accounts receivable, net
    805,940       380,133  
Gas stored underground
    421,980       515,128  
Other current assets
    95,567       112,909  
                 
Total current assets
    1,492,714       1,068,895  
Goodwill and intangible assets
    737,380       737,692  
Deferred charges and other assets
    242,034       253,494  
                 
    $ 6,420,994     $ 5,896,917  
                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
               
Common stock, no par value (stated at $.005 per share);
200,000,000 shares authorized; issued and outstanding:
March 31, 2008 — 90,143,376 shares;
September 30, 2007 — 89,326,537 shares
  $ 451     $ 447  
Additional paid-in capital
    1,722,056       1,700,378  
Retained earnings
    407,464       281,127  
Accumulated other comprehensive loss
    (3,978 )     (16,198 )
                 
Shareholders’ equity
    2,125,993       1,965,754  
Long-term debt
    2,119,696       2,126,315  
                 
Total capitalization
    4,245,689       4,092,069  
Current liabilities
               
Accounts payable and accrued liabilities
    809,140       355,255  
Other current liabilities
    408,575       409,993  
Short-term debt
          150,599  
Current maturities of long-term debt
    8,453       3,831  
                 
Total current liabilities
    1,226,168       919,678  
Deferred income taxes
    420,232       370,569  
Regulatory cost of removal obligation
    277,560       271,059  
Deferred credits and other liabilities
    251,345       243,542  
                 
    $ 6,420,994     $ 5,896,917  
                 
 
See accompanying notes to condensed consolidated financial statements


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Table of Contents

 
ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
                 
    Three Months Ended
 
    March 31  
    2008     2007  
    (Unaudited)  
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 1,521,856     $ 1,461,033  
Regulated transmission and storage segment
    51,440       46,068  
Natural gas marketing segment
    1,128,653       795,041  
Pipeline, storage and other segment
    10,022       14,077  
Intersegment eliminations
    (227,986 )     (240,637 )
                 
      2,483,985       2,075,582  
Purchased gas cost
               
Natural gas distribution segment
    1,164,332       1,114,787  
Regulated transmission and storage segment
           
Natural gas marketing segment
    1,112,321       771,988  
Pipeline, storage and other segment
    338       229  
Intersegment eliminations
    (227,400 )     (240,108 )
                 
      2,049,591       1,646,896  
                 
Gross profit
    434,394       428,686  
Operating expenses
               
Operation and maintenance
    120,053       111,862  
Depreciation and amortization
    48,790       51,066  
Taxes, other than income
    54,408       56,746  
                 
Total operating expenses
    223,251       219,674  
                 
Operating income
    211,143       209,012  
Miscellaneous income
    1,467       1,838  
Interest charges
    33,516       35,262  
                 
Income before income taxes
    179,094       175,588  
Income tax expense
    67,560       69,083  
                 
Net income
  $ 111,534     $ 106,505  
                 
Basic net income per share
  $ 1.25     $ 1.21  
                 
Diluted net income per share
  $ 1.24     $ 1.20  
                 
Cash dividends per share
  $ 0.325     $ 0.320  
                 
Weighted average shares outstanding:
               
Basic
    89,314       88,078  
                 
Diluted
    89,990       88,735  
                 
 
See accompanying notes to condensed consolidated financial statements


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Table of Contents

 
ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
                 
    Six Months Ended
 
    March 31  
    2008     2007  
    (Unaudited)  
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 2,450,033     $ 2,425,277  
Regulated transmission and storage segment
    96,486       85,940  
Natural gas marketing segment
    1,969,370       1,506,735  
Pipeline, storage and other segment
    16,749       25,410  
Intersegment eliminations
    (391,143 )     (365,147 )
                 
      4,141,495       3,678,215  
Purchased gas cost
               
Natural gas distribution segment
    1,819,309       1,816,463  
Regulated transmission and storage segment
           
Natural gas marketing segment
    1,907,075       1,420,548  
Pipeline, storage and other segment
    1,067       454  
Intersegment eliminations
    (389,988 )     (363,528 )
                 
      3,337,463       2,873,937  
                 
Gross profit
    804,032       804,278  
Operating expenses
               
Operation and maintenance
    241,242       227,232  
Depreciation and amortization
    97,303       100,061  
Taxes, other than income
    95,835       96,813  
                 
Total operating expenses
    434,380       424,106  
                 
Operating income
    369,652       380,172  
Miscellaneous income
    1,374       3,417  
Interest charges
    70,333       74,794  
                 
Income before income taxes
    300,693       308,795  
Income tax expense
    115,356       121,029  
                 
Net income
  $ 185,337     $ 187,766  
                 
Basic net income per share
  $ 2.08     $ 2.20  
                 
Diluted net income per share
  $ 2.06     $ 2.18  
                 
Cash dividends per share
  $ 0.65     $ 0.64  
                 
Weighted average shares outstanding:
               
Basic
    89,133       85,404  
                 
Diluted
    89,817       86,061  
                 
 
See accompanying notes to condensed consolidated financial statements


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Table of Contents

 
ATMOS ENERGY CORPORATION
 
 
                 
    Six Months Ended
 
    March 31  
    2008     2007  
    (Unaudited)  
    (In thousands)  
 
Cash Flows From Operating Activities
               
Net income
  $ 185,337     $ 187,766  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization:
               
Charged to depreciation and amortization
    97,303       100,061  
Charged to other accounts
    67       118  
Deferred income taxes
    72,277       72,755  
Other
    6,853       9,472  
Net assets / liabilities from risk management activities
    38,165       50,540  
Net change in operating assets and liabilities
    79,190       91,215  
                 
Net cash provided by operating activities
    479,192       511,927  
Cash Flows From Investing Activities
               
Capital expenditures
    (198,722 )     (172,792 )
Other, net
    (3,132 )     (3,749 )
                 
Net cash used in investing activities
    (201,854 )     (176,541 )
Cash Flows From Financing Activities
               
Net decrease in short-term debt
    (150,582 )     (382,416 )
Repayment of long-term debt
    (2,253 )     (2,206 )
Cash dividends paid
    (58,431 )     (54,640 )
Issuance of common stock
    12,839       12,428  
Net proceeds from equity offering
          191,913  
                 
Net cash used in financing activities
    (198,427 )     (234,921 )
                 
Net increase in cash and cash equivalents
    78,911       100,465  
Cash and cash equivalents at beginning of period
    60,725       75,815  
                 
Cash and cash equivalents at end of period
  $ 139,636     $ 176,280  
                 
 
See accompanying notes to condensed consolidated financial statements


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Table of Contents

 
ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2008
 
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. Through our natural gas distribution business, we distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions, in the service areas described below:
 
     
Division   Service Area
 
Atmos Energy Colorado-Kansas Division
  Colorado, Kansas, Missouri(1)
Atmos Energy Kentucky/Mid-States Division
  Georgia(1), Illinois(1), Iowa(1), Kentucky, Missouri(1), Tennessee, Virginia(1)
Atmos Energy Louisiana Division
  Louisiana
Atmos Energy Mid-Tex Division
  Texas, including the Dallas/Fort Worth metropolitan area
Atmos Energy Mississippi Division
  Mississippi
Atmos Energy West Texas Division
  West Texas
 
 
(1) Denotes states where we have more limited service areas.
 
In addition, we transport natural gas for others through our distribution system. Our natural gas distribution business is 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 corporate headquarters and shared-services function are located in Dallas, Texas, and our customer support centers are located in Amarillo and Waco, Texas.
 
Our regulated transmission and storage business consists of the regulated operations of our Atmos Pipeline — Texas Division. The Atmos Pipeline — Texas Division transports natural gas to our Mid-Tex Division, transports natural gas for third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary to the pipeline industry including parking arrangements, lending and sales of inventory on hand. Parking arrangements provide short-term interruptible storage of gas on our pipeline. Lending services provide short-term interruptible loans of natural gas from our pipeline to meet market demands.
 
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.
 
Our natural gas marketing operations are managed by Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH. AEM provides a variety of natural gas management services to municipalities, natural gas utility systems and industrial natural gas customers, primarily in the southeastern and midwestern states and to our Colorado-Kansas, Kentucky/Mid-States and Louisiana divisions. These services consist primarily of furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of derivative instruments.


6


Table of Contents

 
ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., each of which are wholly-owned by AEH. APS owns or has an interest in underground storage fields in Kentucky and Louisiana. We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Additionally, APS manages our natural gas gathering operations, which were limited in nature as of March 31, 2008. AES provides limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services. Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles.
 
2.   Unaudited Interim Financial Information
 
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 its Annual Report on Form 10-K for the fiscal year ended September 30, 2007. Because of seasonal and other factors, the results of operations for the three and six-month periods ended March 31, 2008 are not indicative of our results of operations for the full 2008 fiscal year, which ends September 30, 2008.
 
 
Our accounting policies are described in Note 2 to the financial statements in our Annual Report on Form 10-K for the year ended September 30, 2007. Except for the Company’s adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), discussed below, there were no significant changes to those accounting policies during the six months ended March 31, 2008.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
 
We adopted the provisions of FIN 48 on October 1, 2007. As a result of adopting FIN 48, we determined that we had $6.1 million of liabilities associated with uncertain tax positions. Of this amount, $0.5 million was recognized as a result of adopting FIN 48 with an offsetting reduction to retained earnings.
 
Prior to October 1, 2007, the $5.6 million liability previously recorded for uncertain tax positions was reflected on the consolidated balance sheet as a component of deferred income taxes. As a result of adopting FIN 48, we recorded a $3.7 million liability as a component of other current liabilities and $2.4 million as a component of deferred credits and other liabilities, with offsetting decreases to the deferred income tax liability.


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Table of Contents

 
ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of March 31, 2008, we had recorded liabilities associated with uncertain tax positions totaling $5.6 million. The realization of all of these tax benefits would reduce our income tax expense by approximately $5.6 million.
 
We recognize accrued interest related to unrecognized tax benefits as a component of interest expense. We recognize penalties related to unrecognized tax benefits as a component of miscellaneous income (expense) in accordance with regulatory requirements. We did not recognize any material penalty and interest expenses during the six months ended March 31, 2008.
 
We file income tax returns in the U.S. federal jurisdiction as well as in various states where we have operations. We have concluded substantially all U.S. federal income tax matters through fiscal year 2001. The Internal Revenue Service is currently conducting a routine examination of our fiscal 2002, 2003 and 2004 tax returns, and we anticipate these examinations will be completed by the end of fiscal 2008. We believe all material tax items which relate to the years under audit have been properly accrued.
 
Additionally, during the second quarter of fiscal 2008, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
 
 
We record certain costs as regulatory assets in accordance with Statement of Financial Accounting Standards (SFAS) 71, Accounting for the Effects of Certain Types of Regulation, 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 March 31, 2008 and September 30, 2007 included the following:
 
                 
    March 31,
    September 30,
 
    2008     2007  
    (In thousands)  
 
Regulatory assets:
               
Pension and postretirement benefit costs
  $ 54,758     $ 59,022  
Merger and integration costs, net
    7,791       7,996  
Deferred gas cost
    41,113       14,797  
Environmental costs
    1,083       1,303  
Rate case costs
    12,538       10,989  
Deferred franchise fees
    721       796  
Other
    9,676       10,719  
                 
    $ 127,680     $ 105,622  
                 
Regulatory liabilities:
               
Deferred gas cost
  $ 27,388     $ 84,043  
Regulatory cost of removal obligation
    301,678       295,241  
Deferred income taxes, net
    165       165  
Other
    7,363       7,503  
                 
    $ 336,594     $ 386,952  
                 


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Table of Contents

 
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.
 
 
The following table presents the components of comprehensive income, net of related tax, for the three-month and six-month periods ended March 31, 2008 and 2007:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2008     2007     2008     2007  
    (In thousands)  
 
Net income
  $ 111,534     $ 106,505     $ 185,337     $ 187,766  
Unrealized holding gains (losses) on investments, net of tax expense (benefit) of $(1,385) and $(134) for the three months ended March 31, 2008 and 2007 and of $(671) and $749 for the six months ended March 31, 2008 and 2007
    (2,262 )     (219 )     (1,097 )     1,222  
Amortization and unrealized gain on interest rate hedging transactions, net of tax expense of $482 and $982 for the three months ended March 31, 2008 and 2007 and $964 and $1,510 for the six months ended March 31, 2008 and 2007
    787       1,602       1,574       2,462  
Net unrealized gains on commodity hedging transactions, net of tax expense of $2,260 and $8,117 for the three months ended March 31, 2008 and 2007 and $7,197 and $15,336 for the six months ended March 31, 2008 and 2007
    3,690       13,244       11,743       25,022  
                                 
Comprehensive income
  $ 113,749     $ 121,132     $ 197,557     $ 216,472  
                                 
 
Accumulated other comprehensive loss, net of tax, as of March 31, 2008 and September 30, 2007 consisted of the following unrealized gains (losses):
 
                 
    March 31,
    September 30,
 
    2008     2007  
    (In thousands)  
 
Accumulated other comprehensive loss:
               
Unrealized holding gains on investments
  $ 1,710     $ 2,807  
Treasury lock agreements
    (12,678 )     (14,252 )
Cash flow hedges
    6,990       (4,753 )
                 
    $ (3,978 )   $ (16,198 )
                 
 
Recently issued accounting pronouncements
 
In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS 161 expands the disclosure requirements for derivative instruments and for hedging activities. This statement requires specific disclosures regarding how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The provisions of this standard will be effective for us beginning January 1, 2009. Since SFAS 161 only requires additional


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
disclosures concerning derivatives and hedging activities, this standard is not expected to have a material impact on our financial position, results of operations or cash flows.
 
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations. SFAS 141(R) establishes 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. SFAS 141(R) 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 SFAS 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we may complete after October 1, 2009.
 
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No. 51. SFAS 160 changes 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 changes the accounting for transactions with minority interest holders. The provisions of the standard will be effective for us beginning October 1, 2009. This standard is not expected to have a material impact on our financial position, results of operations or cash flows.
 
3.   Derivative Instruments and Hedging Activities
 
We conduct risk management activities through both our natural gas distribution and natural gas marketing segments. We record our derivatives as a component of risk management assets and liabilities, which are classified as current or noncurrent other assets or liabilities based upon the anticipated settlement date of the underlying derivative. Our determination of the fair value of these derivative financial instruments reflects the estimated amounts that we would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains and losses on open contracts. In our determination of fair value, we consider various factors, including closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. These risk management assets and liabilities are subject to continuing market risk until the underlying derivative contracts are settled.
 
The following table shows the fair values of our risk management assets and liabilities by segment at March 31, 2008 and September 30, 2007:
 
                         
    Natural
    Natural
       
    Gas
    Gas
       
    Distribution     Marketing     Total  
    (In thousands)  
 
March 31, 2008:
                       
Assets from risk management activities, current
  $ 9,505     $ 4,951     $ 14,456  
Assets from risk management activities, noncurrent
          4,952       4,952  
Liabilities from risk management activities, current
          (31,908 )     (31,908 )
Liabilities from risk management activities, noncurrent
          (970 )     (970 )
                         
Net assets (liabilities)
  $ 9,505     $ (22,975 )   $ (13,470 )
                         
September 30, 2007:
                       
Assets from risk management activities, current
  $     $ 21,849     $ 21,849  
Assets from risk management activities, noncurrent
          5,535       5,535  
Liabilities from risk management activities, current
    (21,053 )     (286 )     (21,339 )
Liabilities from risk management activities, noncurrent
          (290 )     (290 )
                         
Net assets (liabilities)
  $ (21,053 )   $ 26,808     $ 5,755  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
We use a combination of physical storage, fixed physical contracts and fixed financial contracts to partially insulate us and our customers against gas price volatility during the winter heating season. Because the gains or losses of financial derivatives used in our natural gas distribution segment ultimately are recovered through our rates, current period changes in the assets and liabilities from these risk management activities are recorded as a component of deferred gas costs in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation. Accordingly, there is no impact on earnings from our natural gas distribution operations as a result of the use of financial derivatives.
 
 
AEH manages its exposure to the risk of natural gas price changes through a combination of physical storage and financial derivatives, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Our financial derivative activities include fair value hedges to offset changes in the fair value of our natural gas inventory and cash flow hedges to offset anticipated purchases and sales of gas in the future. AEH also utilizes basis swaps and other non-hedge derivative instruments to manage its exposure to market volatility.
 
For the three and six-month periods ended March 31, 2008, the change in the deferred hedging position in accumulated other comprehensive loss primarily was attributable to increases in future commodity prices relative to the commodity prices stipulated in the derivative contracts, and the recognition for the six months ended March 31, 2008 of $2.1 million in net deferred hedging losses ($3.4 million in net deferred hedging gains being attributable to the three months ended March 31, 2008) in net income when the derivative contracts matured according to their terms. The net deferred hedging gain associated with open cash flow hedges remains subject to market price fluctuations until the positions are either settled under the terms of the hedge contracts or terminated prior to settlement. Most of the deferred hedging balance as of March 31, 2008 is expected to be recognized in net income in fiscal 2008 along with the corresponding hedged purchases and sales of natural gas.
 
Unrealized margins recorded in our income statement are comprised of various components, including, but not limited to, unrealized gains and losses arising from hedge ineffectiveness. Our hedge ineffectiveness primarily results from differences in the location and timing of the derivative instrument and the hedged item and could materially affect our results of operations for the reported period. Although these unrealized gains and losses are currently recorded in our income statement, they are not indicative of the economic gross profit we anticipate to realize when the underlying physical and financial transactions are settled.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fair value and cash flow hedge ineffectiveness arising from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments is referred to as basis ineffectiveness. Ineffectiveness arising from changes in the fair value of the fair value hedges due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity are referred to as timing ineffectiveness. The portion of our unrealized margins related to basis and timing ineffectiveness gains and losses for the three and six months ended March 31, 2008 and 2007 are as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2008     2007     2008     2007  
    (In thousands)  
 
Basis ineffectiveness:
                               
Fair value basis ineffectiveness
  $ (739 )   $ 515     $ 1,217     $ (131 )
Cash flow basis ineffectiveness
    (634 )     (893 )     126       (769 )
                                 
Total basis ineffectiveness
    (1,373 )     (378 )     1,343       (900 )
Timing ineffectiveness:
                               
Fair value timing ineffectiveness
    6,965       19,570       43,618       80,302  
                                 
Total hedge ineffectiveness
  $ 5,592     $ 19,192     $ 44,961     $ 79,402  
                                 
 
Under our risk management policies, we seek to match our financial derivative positions to our physical storage positions as well as our expected current and future sales and purchase obligations to maintain no net 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. We may 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 March 31, 2008, AEH had a net open position (including existing storage) of 0.2 Bcf.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
4.   Debt
 
 
Long-term debt at March 31, 2008 and September 30, 2007 consisted of the following:
 
                 
    March 31,
    September 30,
 
    2008     2007  
    (In thousands)  
 
Unsecured 4.00% Senior Notes, due October 2009
  $ 400,000     $ 400,000  
Unsecured 7.375% Senior Notes, due 2011
    350,000       350,000  
Unsecured 10% Notes, due 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 5.95% Senior Notes, due 2034
    200,000       200,000  
Medium term notes
               
Series A, 1995-2, 6.27%, due 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  
First Mortgage Bonds
               
Series P, 10.43% due May 2008
    6,250       7,500  
Other term notes due in installments through 2013
    2,887       3,890  
                 
Total long-term debt
    2,131,440       2,133,693  
Less:
               
Original issue discount on unsecured senior notes and debentures
    (3,291 )     (3,547 )
Current maturities
    (8,453 )     (3,831 )
                 
    $ 2,119,696     $ 2,126,315  
                 
 
 
At March 31, 2008, there were no borrowings outstanding under our commercial paper program or bank credit facilities. At September 30, 2007, there was $150.6 million outstanding under our commercial paper program and bank credit facilities.
 
 
On December 4, 2006, we filed a registration statement with the Securities and Exchange Commission (SEC) to issue, from time to time, up to $900 million in new common stock and/or debt securities available for issuance. As of March 31, 2008, we had approximately $450 million of availability remaining under the registration statement. Due to certain restrictions placed by one state regulatory commission on our ability to issue securities under the registration statement, we are permitted to issue a total of approximately $100 million of equity securities, $50 million of senior debt securities and $300 million of subordinated debt securities. In addition, due to restrictions imposed by another state regulatory commission, if the credit ratings on our senior unsecured debt were to fall below investment grade from either Standard & Poor’s Corporation (BBB-), Moody’s Investors Services, Inc. (Baa3) or Fitch Ratings, Ltd. (BBB-), our ability to issue any type of debt securities under the registration statement would be suspended until we received an investment grade rating from all of the three credit rating agencies.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
We maintain both committed and uncommitted credit facilities. Borrowings under our uncommitted credit facilities are made on a when-and-as-needed basis at the discretion of the banks. Our credit capacity and the amount of unused borrowing capacity are affected by the seasonal nature of the natural gas business and our short-term borrowing requirements, which are typically highest during colder winter months. Our working capital needs can vary significantly due to changes in the price of natural gas and the increased gas supplies required to meet customers’ needs during periods of cold weather.
 
 
As of March 31, 2008, we had three short-term committed revolving credit facilities totaling $918 million. The first facility is a five-year unsecured facility, expiring December 2011, for $600 million that bears interest at a base rate or at the LIBOR rate for the applicable interest period, plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings, and serves as a backup liquidity facility for our $600 million commercial paper program. At March 31, 2008, there were no borrowings outstanding under our commercial paper program.
 
The second facility is a $300 million unsecured 364-day facility expiring November 2008, that bears interest at a base rate or the LIBOR rate for the applicable interest period, plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. At March 31, 2008, there were no borrowings under this facility.
 
The third facility is an $18 million unsecured facility that bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin. This facility expired on March 31, 2008 and was renewed effective April 1, 2008 for one year with no material changes to the terms and pricing. At March 31, 2008, there were no borrowings under this facility.
 
The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our revolving credit 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 March 31, 2008, our total-debt-to-total-capitalization ratio, as defined, was 54 percent. In addition, both the interest margin over the Eurodollar rate and the fee that we pay on unused amounts under our revolving credit facilities are subject to adjustment depending upon our credit ratings. The revolving credit facilities each contain the same limitation with respect to our total-debt-to-total-capitalization ratio.
 
 
AEM has a $580 million uncommitted demand working capital credit facility. On March 31, 2008, AEM and the participating banks amended the facility, primarily to extend it to March 31, 2009. In addition, the amendment removed the financial covenant relating to the amount of cumulative losses that could be incurred by AEM and its subsidiaries over a specific period of time and included provisions permitting the participating banks, or their affiliates, to participate in physical commodity transactions with AEM.
 
Borrowings under the credit facility can be made either as revolving loans or offshore rate loans. Revolving loan borrowings will bear interest at a floating rate equal to a base rate defined as the higher of (i) 0.50 percent per annum above the Federal Funds rate or (ii) the lender’s prime rate plus 0.25 percent. Offshore rate loan borrowings will bear interest at a floating rate equal to a base rate based upon LIBOR for the applicable interest period plus an applicable margin, ranging from 1.25 percent to 1.625 percent per annum, depending on the excess tangible net worth of AEM, as defined in the credit facility. Borrowings drawn down under letters of credit issued by the banks will bear interest at a floating rate equal to the base


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
rate, as defined above, plus an applicable margin, which will range from 1.00 percent to 1.875 percent per annum, depending on the excess tangible net worth of AEM and whether the letters of credit are swap-related standby letters of credit.
 
AEM is required by the financial covenants in the credit facility not to exceed a maximum ratio of total liabilities to tangible net worth of 5 to 1. At March 31, 2008, AEM’s ratio of total liabilities to tangible net worth, as defined, was 2.21 to 1. Additionally, AEM must maintain minimum levels of net working capital ranging from $20 million to $120 million and a minimum tangible net worth ranging from $21 million to $121 million. As defined in the financial covenants, at March 31, 2008, AEM’s net working capital was $206.7 million and its tangible net worth was $214.9 million.
 
At March 31, 2008, there were no borrowings outstanding under this credit facility. However, at March 31, 2008, AEM letters of credit totaling $172.1 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 $27.9 million at March 31, 2008. This line of credit is collateralized by substantially all of the assets of AEM and is guaranteed by AEH.
 
The Company also has an unsecured short-term uncommitted credit line of $25 million that is used for working-capital and letter-of-credit purposes. In January 2008, the unused portion of this facility was terminated by the lending bank and the remaining balance will be terminated as the outstanding letters of credit expire. At March 31, 2008, there was $5.4 million in letters of credit outstanding under this facility.
 
The Company has a $200 million intercompany uncommitted revolving credit facility with AEH. This facility bears interest at the lesser of (i) the one-month LIBOR rate plus 0.20 percent or (ii) the marginal borrowing rate available to the Company on any such date under its commercial paper program. Applicable state regulatory commissions have approved this facility through December 31, 2008. At March 31, 2008, there was $16.1 million outstanding under this facility.
 
AEH has a $200 million intercompany uncommitted demand credit facility with the Company, which bears interest at the rate of AEM’s $580 million uncommitted demand working capital credit facility plus 0.75 percent. Applicable state regulatory commissions have approved this facility through December 31, 2008. At March 31, 2008, there were no borrowings under this facility.
 
In addition, to supplement its $580 million credit facility, AEM has a $200 million intercompany uncommitted demand credit facility with AEH, which bears interest at the rate of AEM’s $580 million uncommitted demand working capital credit facility plus 0.75 percent. Any outstanding amounts under this facility are subordinated to AEM’s $580 million uncommitted demand credit facility. At March 31, 2008, there were no borrowings under this facility.
 
 
We have other covenants in addition to those described above. Our Series P First Mortgage Bonds contain provisions that allow us to prepay the outstanding balance in whole at any time, subject to a prepayment premium. The First Mortgage Bonds provide for certain cash flow requirements and restrictions on additional indebtedness, sale of assets and payment of dividends. Under the most restrictive of such covenants, cumulative cash dividends paid after December 31, 1985 may not exceed the sum of accumulated net income for periods after December 31, 1985 plus $9 million. At March 31, 2008 approximately $387.1 million of retained earnings was unrestricted with respect to the payment of dividends. In April 2008, we gave notice to the trustee and the holders of our intent to redeem our Series P First Mortgage Bonds which mature in November 2013. As the bonds will be redeemed in May 2008, the debt covenants described above will no longer apply.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We were in compliance with all of our debt covenants as of March 31, 2008. If we were unable to comply with our debt covenants, we could be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions. 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. In addition, 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. Additionally, this 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.
 
Except as described above, we have no 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.
 
5.   Shareholders’ Equity
 
 
On December 13, 2006, we completed a public offering of 6,325,000 shares of our common stock including the underwriters’ exercise of their overallotment option of 825,000 shares. The offering was priced at $31.50 and generated net proceeds of approximately $192 million. We used the net proceeds from this offering to reduce short-term debt.
 
 
In November 1997, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to shareholders of record at the close of business on May 10, 1998. Since that time, each share of common stock we have issued has included a right that entitles the holder to purchase from us a one-tenth share of our common stock at a purchase price of $8.00 per share, subject to adjustment. The description and terms of the rights are set forth in a rights agreement between us and the rights agent. The rights will terminate upon the expiration of the rights agreement on May 10, 2008.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
6.   Earnings Per Share
 
Basic and diluted earnings per share for the three and six months ended March 31, 2008 and 2007 are calculated as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2008     2007     2008     2007  
    (In thousands, except per share amounts)  
 
Net income
  $ 111,534     $ 106,505     $ 185,337     $ 187,766  
                                 
Denominator for basic income per share — weighted average common shares
    89,314       88,078       89,133       85,404  
Effect of dilutive securities:
                               
Restricted and other shares
    583       486       585       486  
Stock options
    93       171       99       171  
                                 
Denominator for diluted income per share — weighted average common shares
    89,990       88,735       89,817       86,061  
                                 
Income per share — basic
  $ 1.25     $ 1.21     $ 2.08     $ 2.20  
                                 
Income per share — diluted
  $ 1.24     $ 1.20     $ 2.06     $ 2.18  
                                 
 
There were no out-of-the-money options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2008 and 2007 as their exercise price was less than the average market price of the common stock during that period.
 
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 six months ended March 31, 2008 and 2007 are presented in the following table. All 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 March 31  
    Pension Benefits     Other Benefits  
    2008     2007     2008     2007  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 3,878     $ 4,018     $ 3,341     $ 2,807  
Interest cost
    6,736       6,495       2,912       2,641  
Expected return on assets
    (6,311 )     (6,089 )     (715 )     (597 )
Amortization of transition asset
                378       378  
Amortization of prior service cost
    (171 )     45             8  
Amortization of actuarial loss
    1,926       2,434              
                                 
Net periodic pension cost
  $ 6,058     $ 6,903     $ 5,916     $ 5,237  
                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    Six Months Ended March 31  
    Pension Benefits     Other Benefits  
    2008     2007     2008     2007  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 7,756     $ 8,036     $ 6,682     $ 5,614  
Interest cost
    13,472       12,990       5,824       5,281  
Expected return on assets
    (12,621 )     (12,178 )     (1,430 )     (1,194 )
Amortization of transition asset
                756       756  
Amortization of prior service cost
    (342 )     90             16  
Amortization of actuarial loss
    3,852       4,868              
                                 
Net periodic pension cost
  $ 12,117     $ 13,806     $ 11,832     $ 10,473  
                                 
 
The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2008 and 2007 are as follows:
 
                                 
    Pension Benefits     Other Benefits  
    2008     2007     2008     2007  
 
Discount rate
    6.30 %     6.30 %     6.30 %     6.30 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %
Expected return on plan assets
    8.25 %     8.25 %     5.00 %     5.20 %
 
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. However, we have made additional voluntary contributions to satisfy regulatory requirements in certain of our jurisdictions. During the six months ended March 31, 2008, we contributed $4.7 million to our other postretirement plans, and we expect to contribute a total of approximately $10 million to these plans during fiscal 2008.
 
8.   Commitments and Contingencies
 
 
The Company has continued to respond on a timely basis to data requests received from the Division of Investigations of the Office of Enforcement of the Federal Energy Regulatory Commission (the “Commission”) in connection with its investigation initiated in December 2007 into possible violations of the Commission’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines. The data requests include requests for information and documents concerning specified short-term capacity release transportation transactions. We intend to fully cooperate with the Commission during its investigation. However, we currently are unable to predict the final outcome of this investigation or the potential impact it could have on our financial position, results of operations or cash flows.
 
The Texas Railroad Commission recently issued a directive and is currently developing a rulemaking concerning the replacement of compression couplings at pre-bent gas meter risers which could affect all natural gas utility companies operating in Texas. Compliance with the directive along with adoption of the pending rulemaking will require us to re-direct significant capital spending. These amounts should be recoverable through our rates.
 
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 13 to the financial statements in our Annual Report on Form 10-K for the year ended September 30,

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2007, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2008. 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.
 
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 and response actions to such environmental-related matters or claims cannot be predicted with certainty, we believe the final outcome of such litigation and response actions will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
 
AEM has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At March 31, 2008, AEM was committed to purchase 85.7 Bcf within one year, 31.7 Bcf within one to three years and 0.6 Bcf after three years under indexed contracts. AEM is committed to purchase 1.6 Bcf within one year and 0.1 Bcf within one to three years under fixed price contracts with prices ranging from $6.27 to $11.25. Purchases under these contracts totaled $860.3 million and $563.0 million for the three months ended March 31, 2008 and 2007 and $1,432.3 million and $983.4 for the six months ended March 31, 2008 and 2007.
 
Our natural gas distribution operations, other than the 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 prices. The estimated fiscal year commitments under these contracts as of March 31, 2008 are as follows (in thousands):
 
         
2008
  $ 134,763  
2009
    200,640  
2010
    125,092  
2011
    10,891  
2012
    10,774  
Thereafter
    14,380  
         
    $ 496,540  
         
 
 
At March 31, 2008, we had rate cases in progress in our Georgia, Kansas, Mid-Tex and Virginia service areas. During the three months ended March 31, 2008, we reached settlement agreements with 438 of the 439 municipalities in our Mid-Tex Division, with the exception of the City of Dallas. The Railroad Commission of Texas heard arguments from the City of Dallas and Atmos Energy in late March and a final order is expected in June 2008. In our Kansas rate case, we reached a tentative settlement agreement with the Kansas Commission’s Staff in March 2008. These regulatory proceedings are discussed in further detail in Management’s Discussion and Analysis — Recent Ratemaking Developments.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
9.   Concentration of Credit Risk
 
Information regarding our concentration of credit risk is disclosed in Note 15 to the financial statements in our Annual Report on Form 10-K for the year ended September 30, 2007. During the six months ended March 31, 2008, there were no material changes in our concentration of credit risk.
 
10.   Segment Information
 
Atmos Energy Corporation and our subsidiaries are engaged primarily in the regulated natural gas distribution, transmission and storage businesses as well as certain other nonregulated businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.2 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 distribution system.
 
Through our nonregulated businesses, we provide natural gas management and marketing services to municipalities, other local distribution companies and industrial customers primarily in the Midwest and Southeast. Additionally, we provide natural gas transportation and storage services to certain of our natural gas distribution operations and to third parties.
 
Our operations are divided into 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.
 
In our determination of reportable segments, we consider the strategic operating units under which we manage sales of various products and services to customers in differing 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, 2007. 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)
 
As described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007, we changed the composition of our operating segments. All prior period segment information has been restated to conform to our new segment presentation.
 
Income statements for the three and six-month periods ended March 31, 2008 and 2007 by segment are presented in the following tables:
 
                                                 
    Three Months Ended March 31, 2008  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 1,521,636     $ 22,830     $ 931,990     $ 7,529     $     $ 2,483,985  
Intersegment revenues
    220       28,610       196,663       2,493       (227,986 )      
                                                 
      1,521,856       51,440       1,128,653       10,022       (227,986 )     2,483,985  
Purchased gas cost
    1,164,332             1,112,321       338       (227,400 )     2,049,591  
                                                 
Gross profit
    357,524       51,440       16,332       9,684       (586 )     434,394  
Operating expenses
                                               
Operation and maintenance
    98,578       15,086       5,525       1,536       (672 )     120,053  
Depreciation and amortization
    43,130       4,907       374       379             48,790  
Taxes, other than income
    52,304       1,385       407       312             54,408  
                                                 
Total operating expenses
    194,012       21,378       6,306       2,227       (672 )     223,251  
                                                 
Operating income
    163,512       30,062       10,026       7,457       86       211,143  
Miscellaneous income
    3,670       209       602       1,942       (4,956 )     1,467  
Interest charges
    29,084       6,776       2,002       524       (4,870 )     33,516  
                                                 
Income before income taxes
    138,098       23,495       8,626       8,875             179,094  
Income tax expense
    52,442       8,271       3,347       3,500             67,560  
                                                 
Net income
  $ 85,656     $ 15,224     $ 5,279     $ 5,375     $     $ 111,534  
                                                 
Capital expenditures
  $ 89,671     $ 13,700     $ 38     $ 1,158     $     $ 104,567  
                                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Three Months Ended March 31, 2007  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 1,460,861     $ 19,658     $ 583,269     $ 11,794     $     $ 2,075,582  
Intersegment revenues
    172       26,410       211,772       2,283       (240,637 )      
                                                 
      1,461,033       46,068       795,041       14,077       (240,637 )     2,075,582  
Purchased gas cost
    1,114,787             771,988       229       (240,108 )     1,646,896  
                                                 
Gross profit
    346,246       46,068       23,053       13,848       (529 )     428,686  
Operating expenses
                                               
Operation and maintenance
    92,328       12,353       6,590       1,206       (615 )     111,862  
Depreciation and amortization
    45,904       4,324       448       390             51,066  
Taxes, other than income
    53,665       2,360       407       314             56,746  
                                                 
Total operating expenses
    191,897       19,037       7,445       1,910       (615 )     219,674  
                                                 
Operating income
    154,349       27,031       15,608       11,938       86       209,012  
Miscellaneous income
    2,621       581       2,522       696       (4,582 )     1,838  
Interest charges
    29,704       6,641       379       3,034       (4,496 )     35,262  
                                                 
Income before income taxes
    127,266       20,971       17,751       9,600             175,588  
Income tax expense
    50,946       7,698       6,720       3,719             69,083  
                                                 
Net income
  $ 76,320     $ 13,273     $ 11,031     $ 5,881     $     $ 106,505  
                                                 
Capital expenditures
  $ 71,278     $ 12,777     $ 312     $ 1,439     $     $ 85,806  
                                                 
 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Six Months Ended March 31, 2008  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 2,449,665     $ 45,267     $ 1,634,712     $ 11,851     $     $ 4,141,495  
Intersegment revenues
    368       51,219       334,658       4,898       (391,143 )      
                                                 
      2,450,033       96,486       1,969,370       16,749       (391,143 )     4,141,495  
Purchased gas cost
    1,819,309             1,907,075       1,067       (389,988 )     3,337,463  
                                                 
Gross profit
    630,724       96,486       62,295       15,682       (1,155 )     804,032  
Operating expenses
                                               
Operation and maintenance
    195,825       30,518       13,402       2,824       (1,327 )     241,242  
Depreciation and amortization
    85,962       9,823       761       757             97,303  
Taxes, other than income
    87,922       3,829       3,407       677             95,835  
                                                 
Total operating expenses
    369,709       44,170       17,570       4,258       (1,327 )     434,380  
                                                 
Operating income
    261,015       52,316       44,725       11,424       172       369,652  
Miscellaneous income
    4,146       383       1,398       3,970       (8,523 )     1,374  
Interest charges
    60,298       13,847       3,316       1,223       (8,351 )     70,333  
                                                 
Income before income taxes
    204,863       38,852       42,807       14,171             300,693  
Income tax expense
    79,043       13,781       16,928       5,604             115,356  
                                                 
Net income
  $ 125,820     $ 25,071     $ 25,879     $ 8,567     $     $ 185,337  
                                                 
Capital expenditures
  $ 173,984     $ 22,082     $ 69     $ 2,587     $     $ 198,722  
                                                 
 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Six Months Ended March 31, 2007  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 2,424,944     $ 38,335     $ 1,194,638     $ 20,298     $     $ 3,678,215  
Intersegment revenues
    333       47,605       312,097       5,112       (365,147 )      
                                                 
      2,425,277       85,940       1,506,735       25,410       (365,147 )     3,678,215  
Purchased gas cost
    1,816,463             1,420,548       454       (363,528 )     2,873,937  
                                                 
Gross profit
    608,814       85,940       86,187       24,956       (1,619 )     804,278  
Operating expenses
                                               
Operation and maintenance
    190,441       23,455       12,168       2,959       (1,791 )     227,232  
Depreciation and amortization
    89,626       8,841       777       817             100,061  
Taxes, other than income
    91,287       4,296       656       574             96,813  
                                                 
Total operating expenses
    371,354       36,592       13,601       4,350       (1,791 )     424,106  
                                                 
Operating income
    237,460       49,348       72,586       20,606       172       380,172  
Miscellaneous income
    4,401       910       4,238       1,596       (7,728 )     3,417  
Interest charges
    62,177       14,132       1,406       4,635       (7,556 )     74,794  
                                                 
Income before income taxes
    179,684       36,126       75,418       17,567             308,795  
Income tax expense
    71,530       13,202       29,440       6,857             121,029  
                                                 
Net income
  $ 108,154     $ 22,924     $ 45,978     $ 10,710     $     $ 187,766  
                                                 
Capital expenditures
  $ 143,697     $ 26,381     $ 650     $ 2,064     $     $ 172,792  
                                                 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Balance sheet information at March 31, 2008 and September 30, 2007 by segment is presented in the following tables:
 
                                                 
    March 31, 2008  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
ASSETS
                                               
Property, plant and equipment, net
  $ 3,350,194     $ 542,913     $ 7,579     $ 48,180     $     $ 3,948,866  
Investment in subsidiaries
    467,734             (2,096 )           (465,638 )      
Current assets
                                               
Cash and cash equivalents
    48,027             56,760       34,849             139,636  
Cash held on deposit in margin account
                29,591                   29,591  
Assets from risk management activities
    9,505             8,416       143       (3,608 )     14,456  
Other current assets
    730,288       16,733       598,872       31,476       (68,338 )     1,309,031  
Intercompany receivables
    499,300                   182,483       (681,783 )      
                                                 
Total current assets
    1,287,120       16,733       693,639       248,951       (753,729 )     1,492,714  
Intangible assets
                2,404                   2,404  
Goodwill
    567,775       132,490       24,282       10,429             734,976  
Noncurrent assets from risk management activities
                4,952                   4,952  
Deferred charges and other assets
    211,199       7,660       1,253       16,970             237,082  
                                                 
    $ 5,884,022     $ 699,796     $ 732,013     $ 324,530     $ (1,219,367 )   $ 6,420,994  
                                                 
CAPITALIZATION AND LIABILITIES
                                               
Shareholders’ equity
  $ 2,125,993     $ 113,789     $ 153,582     $ 200,363     $ (467,734 )   $ 2,125,993  
Long-term debt
    2,119,012                   684             2,119,696  
                                                 
Total capitalization
    4,245,005       113,789       153,582       201,047       (467,734 )     4,245,689  
Current liabilities
                                               
Current maturities of long-term debt
    6,250                   2,203             8,453  
Short-term debt
    16,100                         (16,100 )      
Liabilities from risk management activities
                32,046       3,470       (3,608 )     31,908  
Other current liabilities
    729,350       3,335       396,087       107,177       (50,142 )     1,185,807  
Intercompany payables
          536,863       144,920             (681,783 )      
                                                 
Total current liabilities
    751,700       540,198       573,053       112,850       (751,633 )     1,226,168  
Deferred income taxes
    367,415       42,134       3,700       6,983             420,232  
Noncurrent liabilities from risk management activities
                970                   970  
Regulatory cost of removal obligation
    277,560                               277,560  
Deferred credits and other liabilities
    242,342       3,675       708       3,650             250,375  
                                                 
    $ 5,884,022     $ 699,796     $ 732,013     $ 324,530     $ (1,219,367 )   $ 6,420,994  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    September 30, 2007  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
ASSETS
                                               
Property, plant and equipment, net
  $ 3,251,144     $ 531,921     $ 7,850     $ 45,921     $     $ 3,836,836  
Investment in subsidiaries
    396,474             (2,096 )           (394,378 )      
Current assets
                                               
Cash and cash equivalents
    28,881             31,703       141             60,725  
Cash held on deposit in margin account
                                   
Assets from risk management activities
                26,783       12,947       (17,881 )     21,849  
Other current assets
    643,353       20,065       337,169       76,731       (90,997 )     986,321  
Intercompany receivables
    536,985                   114,300       (651,285 )      
                                                 
Total current assets
    1,209,219       20,065       395,655       204,119       (760,163 )     1,068,895  
Intangible assets
                2,716                   2,716  
Goodwill
    567,775       132,490       24,282       10,429             734,976  
Noncurrent assets from risk management activities
                5,535                   5,535  
Deferred charges and other assets
    227,869       4,898       1,279       13,913             247,959  
                                                 
    $ 5,652,481     $ 689,374     $ 435,221     $ 274,382     $ (1,154,541 )   $ 5,896,917  
                                                 
CAPITALIZATION AND LIABILITIES
                                               
Shareholders’ equity
  $ 1,965,754     $ 88,719     $ 107,090     $ 200,665     $ (396,474 )   $ 1,965,754  
Long-term debt
    2,125,007                   1,308             2,126,315  
                                                 
Total capitalization
    4,090,761       88,719       107,090       201,973       (396,474 )     4,092,069  
Current liabilities
                                               
Current maturities of long-term debt
    1,250                   2,581             3,831  
Short-term debt
    187,284             30,000             (66,685 )     150,599  
Liabilities from risk management activities
    21,053             18,167             (17,881 )     21,339  
Other current liabilities
    519,642       6,394       186,792       53,297       (22,216 )     743,909  
Intercompany payables
          550,184       101,101             (651,285 )      
                                                 
Total current liabilities
    729,229       556,578       336,060       55,878       (758,067 )     919,678  
Deferred income taxes
    326,518       40,565       (8,925 )     12,411             370,569  
Noncurrent liabilities from risk management activities
                290                   290  
Regulatory cost of removal obligation
    271,059                               271,059  
Deferred credits and other liabilities
    234,914       3,512       706       4,120             243,252  
                                                 
    $ 5,652,481     $ 689,374     $ 435,221     $ 274,382     $ (1,154,541 )   $ 5,896,917  
                                                 


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The Board of Directors
Atmos Energy Corporation
 
We have reviewed the condensed consolidated balance sheet of Atmos Energy Corporation as of March 31, 2008, and the related condensed consolidated statements of income for the three-month and six-month periods ended March 31, 2008 and 2007, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2008 and 2007. 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, 2007, 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 27, 2007, 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, 2007, 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
May 5, 2008


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
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, 2007.
 
 
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 year ended September 30, 2007, include the following: regulatory trends and decisions, including deregulation initiatives and the impact of rate proceedings before various state regulatory commissions; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; the concentration of our distribution, pipeline and storage operations in one state; adverse weather conditions; our ability to continue to access the capital markets; the effects of inflation and changes in the availability and prices of natural gas, including the volatility of natural gas prices; the capital-intensive nature of our distribution business, increased competition from energy suppliers and alternative forms of energy; increased costs of providing pension and postretirement health care benefits; the impact of environmental regulations on our business; the inherent hazards and risks involved in operating our distribution business, natural disasters, terrorist activities or other events; and other uncertainties, which may be discussed herein, including the outcome of any pending federal or state regulatory investigations, 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.
 
 
Atmos Energy Corporation 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 approximately 3.2 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 distribution system.
 
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.


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Our operations are divided into 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.
 
 
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, 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 year ended September 30, 2007 and include the following:
 
  •  Regulation
 
  •  Revenue Recognition
 
  •  Allowance for Doubtful Accounts
 
  •  Derivatives and Hedging Activities
 
  •  Impairment Assessments
 
  •  Pension and Other Postretirement Plans
 
Our critical accounting policies are reviewed by the Audit Committee quarterly. There were no significant changes to these critical accounting policies during the six months ended March 31, 2008.


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RESULTS OF OPERATIONS
 
The following table presents our consolidated financial highlights for the three and six months ended March 31, 2008 and 2007:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2008     2007     2008     2007  
    (In thousands)  
 
Operating revenues
  $ 2,483,985     $ 2,075,582     $ 4,141,495     $ 3,678,215  
Gross profit
    434,394       428,686       804,032       804,278  
Operating expenses
    223,251       219,674       434,380       424,106  
Operating income
    211,143       209,012       369,652       380,172  
Miscellaneous income
    1,467       1,838       1,374       3,417  
Interest charges
    33,516       35,262       70,333       74,794  
Income before income taxes
    179,094       175,588       300,693       308,795  
Income tax expense
    67,560       69,083       115,356       121,029  
Net income
  $ 111,534     $ 106,505     $ 185,337     $ 187,766  
Diluted net income per share
  $ 1.24     $ 1.20     $ 2.06     $ 2.18  
 
Our consolidated net income during the three and six months ended March 31, 2008 and 2007 was earned in each of our business segments as follows:
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Natural gas distribution segment
  $ 85,656     $ 76,320     $ 9,336  
Regulated transmission and storage segment
    15,224       13,273       1,951  
Natural gas marketing segment
    5,279       11,031       (5,752 )
Pipeline, storage and other segment
    5,375       5,881       (506 )
                         
Net income
  $ 111,534     $ 106,505     $ 5,029  
                         
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Natural gas distribution segment
  $ 125,820     $ 108,154     $ 17,666  
Regulated transmission and storage segment
    25,071       22,924       2,147  
Natural gas marketing segment
    25,879       45,978       (20,099 )
Pipeline, storage and other segment
    8,567       10,710       (2,143 )
                         
Net income
  $ 185,337     $ 187,766     $ (2,429 )
                         


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The following tables segregate our consolidated net income and diluted earnings per share between our regulated and nonregulated operations:
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, except per share data)  
 
Regulated operations
  $ 100,880     $ 89,593     $ 11,287  
Nonregulated operations
    10,654       16,912       (6,258 )
                         
Consolidated net income
  $ 111,534     $ 106,505     $ 5,029  
                         
Diluted EPS from regulated operations
  $ 1.12     $ 1.01     $ 0.11  
Diluted EPS from nonregulated operations
    0.12       0.19       (0.07 )
                         
Consolidated diluted EPS
  $ 1.24     $ 1.20     $ 0.04  
                         
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, except per share data)  
 
Regulated operations
  $ 150,891     $ 131,078     $ 19,813  
Nonregulated operations
    34,446       56,688       (22,242 )
                         
Consolidated net income
  $ 185,337     $ 187,766     $ (2,429 )
                         
Diluted EPS from regulated operations
  $ 1.68     $ 1.52     $ 0.16  
Diluted EPS from nonregulated operations
    0.38       0.66       (0.28 )
                         
Consolidated diluted EPS
  $ 2.06     $ 2.18     $ (0.12 )
                         
 
The following summarizes the results of our operations and other significant events for the six months ended March 31, 2008:
 
  •  Regulated operations generated 81 percent of net income during the six months ended March 31, 2008 compared to 70 percent during the six months ended March 31, 2007. The $19.8 million increase in our regulated operations net income primarily reflects rate increases in our Mid-Tex, Kentucky, Louisiana and Tennessee service areas coupled with higher rates and throughput in our Atmos Pipeline — Texas Division.
 
  •  Nonregulated operations contributed 19 percent of net income during the six months ended March 31, 2008 compared to 30 percent during the six months ended March 31, 2007. The $22.2 million decrease in our nonregulated operations net income primarily reflects lower asset optimization margins partially offset by higher delivered gas margins and lower unrealized losses.
 
  •  For the six months ended March 31, 2008, we generated $479.2 million in operating cash flow compared with $511.9 million for the six months ended March 31, 2007, primarily reflecting an increase in cash required to collateralize our risk management accounts.
 
  •  In September 2007, we filed a statement of intent for a rate increase of $51.9 million in our Mid-Tex Division. During the three months ended March 31, 2008, we reached settlement agreements with 438 of the 439 cities in our Mid-Tex Division. The only city that has not settled is the City of Dallas. In March 2008, hearings were conducted at the Railroad Commission of Texas on the rate case with the City of Dallas, with a final order expected in June 2008.


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Three Months Ended March 31, 2008 compared with Three Months Ended March 31, 2007
 
 
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
 
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 include 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 revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income. Timing differences exist between the recognition of revenue for franchise fees collected from our customers and the recognition of expense of franchise taxes. The effect of these timing differences can be significant in periods of volatile gas prices, particularly in our Mid-Tex Division. These timing differences may favorably or unfavorably affect net income; however, these amounts should offset over time with no permanent impact on net income.
 
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.


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Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas distribution segment for the three months ended March 31, 2008 and 2007 are presented below.
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 357,524     $ 346,246     $ 11,278  
Operating expenses
    194,012       191,897       2,115  
                         
Operating income
    163,512       154,349       9,163  
Miscellaneous income
    3,670       2,621       1,049  
Interest charges
    29,084       29,704       (620 )
                         
Income before income taxes
    138,098       127,266       10,832  
Income tax expense
    52,442       50,946       1,496  
                         
Net income
  $ 85,656     $ 76,320     $ 9,336  
                         
Consolidated natural gas distribution sales volumes — MMcf
    135,568       133,856       1,712  
Consolidated natural gas distribution transportation volumes — MMcf
    39,730       39,567       163  
                         
Total consolidated natural gas distribution throughput — MMcf
    175,298       173,423       1,875  
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.44     $ 0.48     $ (0.04 )
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 8.59     $ 8.33     $ 0.26  
 
The following table shows our operating income by natural gas distribution division for the three months ended March 31, 2008 and 2007. The presentation of our natural gas distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Colorado-Kansas
  $ 15,536     $ 14,968     $ 568  
Kentucky/Mid-States
    29,875       28,948       927  
Louisiana
    19,236       23,026       (3,790 )
Mid-Tex
    72,479       59,007       13,472  
Mississippi
    16,514       16,204       310  
West Texas
    8,919       12,115       (3,196 )
Other
    953       81       872  
                         
Total
  $ 163,512     $ 154,349     $ 9,163  
                         
 
The $11.3 million increase in natural gas distribution gross profit primarily reflects a $13.4 million net increase in rates. The net increase in rates primarily was attributable to the Mid-Tex Division, which increased $12.4 million as a result of the 2006 Gas Reliability Infrastructure Program (GRIP) filing, the prior Mid-Tex rate case, which was substantially concluded in March 2007 and the absence of a one-time GRIP refund in the prior year. The current-year period also reflects $3.8 million in rate increases in our Kentucky, Louisiana, Tennessee and West Texas service areas.


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Gross profit also increased approximately $4.0 million in revenue-related taxes primarily due to higher revenues, on which the tax is calculated, in the current-year quarter compared to the prior-year quarter. This increase, partially offset by a $1.3 million quarter-over-quarter increase in the associated franchise and state gross receipts tax expense recorded as a component of taxes other than income, resulted in a $2.7 million increase in operating income when compared with the prior-year quarter.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, increased $2.1 million.
 
Operation and maintenance expense, excluding the provision for doubtful accounts, increased $7.9 million, primarily due to an overall increase in administrative costs. The prior-year quarter includes the favorable impact of a nonrecurring $4.3 million deferral of incremental Hurricane Katrina-related operation and maintenance expenses in the prior-year quarter.
 
The provision for doubtful accounts decreased $1.6 million to $2.8 million for the three months ended March 31, 2008. The decrease primarily was attributable to stronger collection efforts.
 
Depreciation and amortization expense decreased $2.8 million for the second quarter of fiscal 2008 compared with second quarter of fiscal 2007. The decrease primarily was attributable to changes in depreciation rates as a result of recent rate cases.
 
Results for the quarter include a $1.2 million gain on the sale of irrigation assets in our West Texas Division.
 
Interest charges allocated to the natural gas distribution segment decreased $0.6 million due to lower average effective interest rates experienced during the current-year quarter compared to the prior-year quarter.
 
 
Significant ratemaking developments that occurred during the six months ended March 31, 2008 are discussed below. The amounts described below represent the gross revenues that were requested or received in each rate filing, which may not necessarily reflect the increase in operating income obtained, as certain operating costs may have increased as a result of a commission’s final ruling.
 
Mid-Tex Division Rate Settlements
 
In September 2007, Atmos Energy filed a statement of intent for a rate increase of $51.9 million in our Mid-Tex Division. During the fiscal 2008 second quarter, we reached settlement agreements with 438 of the 439 cities, and have support from Railroad Commission of Texas staff to implement the settlement for our environs customers. The City of Dallas is the only city with whom we have not reached a settlement. The settlement agreement includes i) an increase of approximately $10 million, that was implemented effective April 1, 2008; ii) a rate review mechanism (RRM) that will reflect annual changes in the Mid-Tex Division’s cost of service and rate base; iii) an authorized return on equity of 9.6 percent; and iv) the establishment of a new program designed to encourage natural gas conservation.
 
In March 2008, hearings were conducted at the Railroad Commission of Texas (RRC) on the rate case with the City of Dallas. We expect to receive a proposal for decision in mid-May 2008 with a final order expected in June 2008.
 
In April 2008, the Mid-Tex Division filed its first Rate Review Mechanism that will adjust rates, effective October 1, 2008, for the cities that have agreed to the settlement. The proposed increase to base rates is $33.5 million.
 
Other Rate Case Filings
 
In May 2006, Atmos Energy began receiving “show cause” ordinances from several of the cities in the West Texas Division. In December 2007, our West Texas Division reached a settlement agreement with the West Texas cities resulting in an approved GRIP filing to include in rate base approximately $7.0 million of


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capital costs incurred during calendar year 2006. The filing should result in additional annual revenues of approximately $1.1 million. The settlement agreement also included an agreement to work on a rate review mechanism for our West Texas system during 2008 which, like the Mid-Tex Division’s RRM, would adjust rates on a periodic basis to reflect changes in the West Texas Division’s cost of service and rate base for this service area.
 
In October 2007, our Kentucky/Mid-States Division settled its $11.1 million rate case filed in May 2007 with the Tennessee Regulatory Authority. The settlement resulted in an increase in annual revenue of $4.0 million and a $4.1 million reduction in depreciation expense.
 
In September 2007, we filed an application with the Kansas Corporation Commission (KCC) requesting a rate increase of $5.0 million in our Kansas service area. A tentative settlement for an increase in annual revenue of $2.1 million was reached with the Kansas Commission Staff in March 2008. The settlement was contested by the Consumer Utility Ratepayer Board. A hearing on the merits of the settlement was conducted in April 2008 and a final order is expected in May 2008.
 
In February 2008, we filed for a rate increase of $0.9 million in the Virginia jurisdiction of our Kentucky/Mid-States Division. A procedural schedule has been established that should result in a final order being issued by the fourth quarter of fiscal year 2008.
 
In March 2008, we filed for a rate increase of $6.2 million in the Georgia jurisdiction of our Kentucky/Mid-States Division. A procedural schedule has been established that should result in a final order being issued by the fourth quarter of fiscal year 2008.
 
Stable Rate Filings
 
Louisiana Division.  In December 2007, we filed our TransLa annual rate stabilization clause with the Louisiana Public Service Commission requesting an increase of $2.2 million, including an increase in depreciation expense of approximately $0.4 million. The filing was for the test year ended September 30, 2007. The TransLa filing was approved in March 2008 and resulted in an increase of $2.1 million in annual revenue effective April 1, 2008. In April 2008, we filed the LGS annual rate stabilization clause, requesting an increase of $2.6 million. The filing was for the test year ended December 31, 2007 and is expected to be effective July 1, 2008.
 
Mississippi Division.  In December 2007, the Mississippi Public Service Commission approved our annual stable rate filing with no change in rates.
 
 
Our regulated transmission and storage segment consists of the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division. The Atmos Pipeline — Texas Division transports natural gas to our Mid-Tex Division and third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary in the pipeline industry including parking and lending arrangements and sales of inventory on hand.
 
Similar to our natural gas distribution segment, our regulated transmission and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our service areas. Further, as the Atmos Pipeline — Texas Division operations supply all of the natural gas for our Mid-Tex Division, the results of this segment are highly dependent upon the natural gas requirements of the Mid-Tex Division. Finally, as a regulated pipeline, the operations of the Atmos Pipeline — Texas Division may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs.


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Review of Financial and Operating Results
 
Financial and operational highlights for our regulated transmission and storage segment for the three months ended March 31, 2008 and 2007 are presented below.
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Mid-Tex transportation
  $ 28,260     $ 25,967     $ 2,293  
Third-party transportation
    18,229       13,702       4,527  
Storage and park and lend services
    1,862       1,876       (14 )
Other
    3,089       4,523       (1,434 )
                         
Gross profit
    51,440       46,068       5,372  
Operating expenses
    21,378       19,037       2,341  
                         
Operating income
    30,062       27,031       3,031  
Miscellaneous income
    209       581       (372 )
Interest charges
    6,776       6,641       135  
                         
Income before income taxes
    23,495       20,971       2,524  
Income tax expense
    8,271       7,698       573  
                         
Net income
  $ 15,224     $ 13,273     $ 1,951  
                         
Gross pipeline transportation volumes — MMcf
    223,476       199,701       23,775  
                         
Consolidated pipeline transportation volumes — MMcf
    141,108       116,995       24,113  
                         
 
The $5.4 million increase in gross profit primarily was attributable to a $3.0 million increase from rate adjustments resulting from our 2006 GRIP filing and a $1.7 million increase from transportation volumes. Consolidated throughput increased 21 percent, primarily due to increased transportation in the Barnett Shale and Carthage regions of Texas. The improvement in gross profit also reflects increased service fees and unit transportation margins due to favorable market conditions which contributed $1.7 million. These increases were partially offset by a $1.5 million decrease in sales of excess gas that occurred in the prior-year quarter.
 
Operating expenses increased $2.3 million primarily due to increased pipeline integrity and maintenance costs.
 
 
In April 2008, the RRC approved the GRIP filing for our Atmos Pipeline — Texas Division to include in rate base approximately $46.6 million of capital costs incurred during calendar year 2007. The filing should result in additional annual revenues of approximately $7.0 million. These revenues represent the gross revenues that were received in the filing, which may not necessarily result in an equal increase in operating income, as some operating costs may increase.
 
 
Our natural gas marketing segment 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, including furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of derivative products. As a result, our revenues arise from the types of commercial transactions we have structured with our customers and include the value we extract by optimizing the storage and transportation capacity we own or control as well as revenues received for services we deliver.
 
To optimize the storage and transportation capacity we own or control, we participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve


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our customers by identifying the lowest cost alternative within the natural gas supplies, transportation and markets to which we have access. Additionally, we engage in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We purchase physical natural gas and then sell financial contracts at advantageous prices to lock in a gross profit margin. Through the use of transportation and storage services and derivative contracts, we are able to capture gross profit margin through the arbitrage of pricing differences in various locations and by recognizing pricing differences that occur over time.
 
Atmos Energy Marketing, LLC (AEM) continually manages its net physical position to enhance the future economic profit it captured when an original transaction was executed. Therefore, AEM may change its scheduled injection and withdrawal plans from one time period to another based on market conditions or adjust the amount of storage capacity it holds on a discretionary basis in an effort to achieve this objective.
 
We use derivatives, designated as fair value hedges, to hedge our natural gas inventory used in our natural gas marketing storage activities. These derivatives are marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains and losses in the period of change. The hedged natural gas inventory is marked to market at the end of each month based on the Gas Daily index with changes in fair value recognized as unrealized gains and losses in the period of change. Changes in the spreads between the forward natural gas prices used to value the financial hedges designated against our physical inventory and the market (spot) prices used to value our physical storage result in the unrealized margins reported as a part of our storage activities until the underlying physical gas is cycled and the related financial derivatives are settled.
 
AEM also uses derivative instruments to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original physical inventory hedge and to insulate and protect the economic value within its storage and marketing activities. Changes in fair value associated with these financial instruments are recognized as unrealized gains and losses within AEM’s storage and marketing activities until they are settled.
 
Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas marketing segment for the three months ended March 31, 2008 and 2007 are presented below. Gross profit margin for our natural gas marketing segment consists primarily of margins earned from the delivery of gas and related services requested by our customers and asset optimization activities which are derived from the utilization of our managed proprietary and third party storage and transportation assets to capture favorable arbitrage spreads through natural gas trading activities.


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Unrealized margins represent the unrealized gains or losses on net physical gas position and related derivative contracts used by our natural gas marketing segment to manage commodity price risk as described above. These margins fluctuate based upon changes in the spreads between the physical and forward natural gas prices. Generally, if the physical/financial spread narrows, we will record unrealized gains or lower unrealized losses. If the physical/financial spread widens, we will record unrealized losses or lower unrealized gains. The magnitude of the unrealized gains and losses is also contingent upon the levels of our net physical position at the end of the reporting period.
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Delivered gas
  $ 26,195     $ 14,252     $ 11,943  
Asset optimization
    27,737       77,724       (49,987 )
Unrealized margins
    (37,600 )     (68,923 )     31,323  
                         
Gross profit
    16,332       23,053       (6,721 )
Operating expenses
    6,306       7,445       (1,139 )
                         
Operating income
    10,026       15,608       (5,582 )
Miscellaneous income
    602       2,522       (1,920 )
Interest charges
    2,002       379       1,623  
                         
Income before income taxes
    8,626       17,751       (9,125 )
Income tax expense
    3,347       6,720       (3,373 )
                         
Net income
  $ 5,279     $ 11,031     $ (5,752 )
                         
Gross natural gas marketing sales volumes — MMcf
    136,677       114,110       22,567  
                         
Consolidated natural gas marketing sales volumes — MMcf
    120,023       101,386       18,637  
                         
Net physical position (Bcf)
    20.7       19.6       1.1  
                         
 
The $6.7 million decrease in our natural gas marketing segment’s gross profit primarily reflects a $50.0 million decrease in asset optimization margins. Natural gas market conditions were significantly less volatile during the current-year quarter compared with the prior-year quarter, which created fewer opportunities to capitalize on price fluctuations. As a result, the decrease in asset optimization is primarily attributable to smaller gains realized from the settlement of financial positions related to physical gas deliveries from our storage assets compared with the prior-year quarter. Additionally, increased storage demand fees incurred to support our asset optimization activities contributed to the decrease in gross profit.
 
An $11.9 million increase in delivered gas margins partially offset the decrease in asset optimization activities resulting from increased sales volumes and increased per unit margins. Gross sales volumes increased 20 percent compared with the prior-year quarter as a result of the successful execution of our marketing efforts. The increase in delivered gas margin was also attributable to the realization of favorable gains due to the location of gas sold. After excluding the effect of these location basis gains, we experienced a 24 percent increase in per-unit margins during the three months ended March 31, 2008 compared with the prior-year quarter.
 
Gross profit margin was also favorably impacted by a $31.3 million increase in unrealized margins attributable to a narrowing of the spreads between the current cash prices and forward natural gas prices during the current-year quarter compared with the prior-year quarter.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income taxes, decreased $1.1 million primarily due to a decrease in employee and other administrative costs.


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Economic Gross Profit
 
AEM monitors the impact of its asset optimization efforts by estimating the gross profit that it captured through the purchase and sale of physical natural gas and the associated financial derivatives. The reconciliation below of the economic gross profit, combined with the effect of unrealized gains or losses recognized in accordance with generally accepted accounting principles in the financial statements in prior periods, is presented to provide a measure of the potential gross profit from asset optimization that could occur in future periods if AEM’s optimization efforts are executed as planned. We consider this measure of potential gross profit a non-GAAP financial measure as it is calculated using both forward-looking and historical financial information. The following table presents AEM’s economic gross profit and its potential gross profit at March 31, 2008, December 31, 2007 and September 30, 2007.
 
                                 
                Associated Net
       
    Net Physical
    Economic Gross
    Unrealized Gain
    Potential Gross
 
Period Ending
  Position     Profit     (Loss)     Profit  
    (Bcf)     (In millions)     (In millions)     (In millions)  
 
March 31, 2008
    20.7     $ 10.8     $ (0.6 )   $ 11.4  
December 31, 2007
    17.7     $ 44.2     $ 32.9     $ 11.3  
September 30, 2007
    12.3     $ 40.8     $ 10.8     $ 30.0  
 
As of March 31, 2008, based upon AEM’s derivatives position and inventory withdrawal schedule, the economic gross profit was $10.8 million. This amount is increased by $0.6 million of net unrealized losses recorded in the financial statements as of March 31, 2008 that will reverse when the inventory is withdrawn and the accompanying financial derivatives are settled. Therefore, the potential gross profit was $11.4 million. This potential gross profit amount will likely not result in an equal increase in future net income as AEM will incur additional storage and other operational expenses and increased income taxes to realize this amount.
 
The $0.1 million increase in potential gross profit as compared to December 31, 2007, reflects a $33.5 million decrease in unrealized gains primarily attributable to realizing previously recorded gains offset by a $33.4 million decrease in the economic gross profit. As a result of the natural gas market conditions experienced during the quarter, AEM elected to recognize most of the economic value captured as of December 31, 2007 by cycling gas from storage and executing the associated financial contracts. During this process, AEM increased its net physical position; however, the captured spreads were lower than in prior periods.
 
The economic gross profit is based upon planned injection and withdrawal schedules, and the realization of the economic gross profit is contingent upon the execution of this plan, weather and other execution factors. Since AEM actively manages and optimizes its portfolio to enhance the future profitability of its storage position, it may change its scheduled injection and withdrawal plans from one time period to another based on market conditions. Therefore, we cannot ensure that the economic gross profit or the potential gross profit calculated as of March 31, 2008 will be fully realized in the future nor can we predict in what time periods such realization will occur. Further, if we experience operational or other issues which limit our ability to optimally manage our stored gas positions, our earnings could be adversely impacted. Assuming AEM fully executes its plan in place on March 31, 2008, without encountering operational or other issues, we anticipate a portion of the potential gross profit as of March 31, 2008 will be recognized during the remainder of fiscal 2008 with most of the remainder recognized during fiscal 2009.
 
 
Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., which are each wholly-owned by Atmos Energy Holdings, Inc.
 
APS owns or has an interest in underground storage fields in Kentucky and Louisiana. We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Additionally, beginning in fiscal 2006, APS initiated activities in the natural gas gathering business. As of March 31, 2008, these activities were limited in nature.


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AES, through December 31, 2006, provided natural gas management services to our natural gas distribution operations, other than the Mid-Tex Division. These services included aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to our natural gas distribution service areas at competitive prices. Effective January 1, 2007, these activities were moved to our shared services function included in our natural gas distribution segment. AES continues to provide limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services.
 
Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles.
 
Results for this segment are primarily impacted by seasonal weather patterns and volatility in the natural gas markets. Additionally, this segment’s results include an unrealized component as APS hedges its risk associated with its asset optimization activities.
 
Review of Financial and Operating Results
 
Financial and operational highlights for our pipeline, storage and other segment for the three months ended March 31, 2008 and 2007 are presented below.
 
                         
    Three Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Storage and transportation services
  $ 4,317     $ 3,726     $ 591  
Asset optimization
    6,070       13,729       (7,659 )
Other
    1,225       788       437  
Unrealized margins
    (1,928 )     (4,395 )     2,467  
                         
Gross profit
    9,684       13,848       (4,164 )
Operating expenses
    2,227       1,910       317  
                         
Operating income
    7,457       11,938       (4,481 )
Miscellaneous income
    1,942       696       1,246  
Interest charges
    524       3,034       (2,510 )
                         
Income before income taxes
    8,875       9,600       (725 )
Income tax expense
    3,500       3,719       (219 )
                         
Net income
  $ 5,375     $ 5,881     $ (506 )
                         
 
Pipeline, storage and other gross profit decreased $4.2 million primarily due to a $7.7 million decrease in asset optimization margins as a result of a less volatile natural gas market. This decrease was partially offset by a $2.5 million increase in unrealized margins associated with asset optimization activities.
 
Operating expenses increased $0.3 million primarily due to an increase in employee and other administrative costs.


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Six Months Ended March 31, 2008 compared with Six Months Ended March 31, 2007
 
 
Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas distribution segment for the six months ended March 31, 2008 and 2007 are presented below.
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 630,724     $ 608,814     $ 21,910  
Operating expenses
    369,709       371,354       (1,645 )
                         
Operating income
    261,015       237,460       23,555  
Miscellaneous income
    4,146       4,401       (255 )
Interest charges
    60,298       62,177       (1,879 )
                         
Income before income taxes
    204,863       179,684       25,179  
Income tax expense
    79,043       71,530       7,513  
                         
Net income
  $ 125,820     $ 108,154     $ 17,666  
                         
Consolidated natural gas distribution sales volumes — MMcf
    220,335       220,256       79  
Consolidated natural gas distribution transportation volumes — MMcf
    73,479       72,261       1,218  
                         
Total consolidated natural gas distribution throughput — MMcf
    293,814       292,517       1,297  
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.44     $ 0.48     $ (0.04 )
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 8.26     $ 8.25     $ 0.01  
 
The following table shows our operating income by natural gas distribution division for the six months ended March 31, 2008 and 2007. The presentation of our natural gas distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Colorado-Kansas
  $ 22,224     $ 23,640     $ (1,416 )
Kentucky/Mid-States
    44,043       43,151       892  
Louisiana
    31,168       33,619       (2,451 )
Mid-Tex
    122,704       94,347       28,357  
Mississippi
    24,343       23,803       540  
West Texas
    13,895       18,621       (4,726 )
Other
    2,638       279       2,359  
                         
Total
  $ 261,015     $ 237,460     $ 23,555  
                         
 
The $21.9 million increase in natural gas distribution gross profit primarily reflects a $22.8 million net increase in rates. The net increase in rates primarily was attributable to the Mid-Tex Division which increased $19.1 million as a result of the 2006 GRIP filing, the previous Mid-Tex rate case, which was substantially concluded in March 2007 and the absence of a one time GRIP refund in the prior year. The current-year


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period also reflects $7.2 million in rate increases in our Kentucky, Louisiana, Tennessee and West Texas service areas.
 
Gross profit also increased approximately $6.0 million in revenue-related taxes primarily due to higher revenues, on which the tax is calculated, in the current-year period compared to the prior-year period. This increase, coupled with a $0.4 million period-over-period decrease in the associated franchise and state gross receipts tax expense recorded as a component of taxes other than income, resulted in a $6.4 million increase in operating income, when compared with the prior-year period.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, decreased by $1.6 million.
 
Operation and maintenance expense, excluding the provision for doubtful accounts, increased $8.8 million, primarily due to increased administrative and natural gas odorization costs partially offset by lower employee costs. The increase in operation and maintenance expense also reflects the absence in the current-year period of the aforementioned nonrecurring $4.3 million deferral of hurricane-related operation and maintenance expenses.
 
The provision for doubtful accounts decreased $3.4 million to $7.4 million for the six months ended March 31, 2008. The decrease primarily was attributable to stronger collection efforts.
 
Depreciation and amortization expense decreased $3.7 million for the six months ended March 31, 2008 compared with the six months ended March 31, 2007. The decrease primarily was attributable to changes in depreciation rates as a result of recent rate cases.
 
Results for the current-year period include a $1.2 million gain on the sale of irrigation assets in our West Texas Division.
 
Interest charges allocated to the natural gas distribution segment decreased $1.9 million due to lower average outstanding short-term debt balances in the current-year period compared with the prior-year period.
 
 
Review of Financial and Operating Results
 
Financial and operational highlights for our regulated transmission and storage segment for the six months ended March 31, 2008 and 2007 are presented below.
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Mid-Tex transportation
  $ 50,648     $ 46,431     $ 4,217  
Third-party transportation
    36,461       28,355       8,106  
Storage and park and lend services
    3,901       5,050       (1,149 )
Other
    5,476       6,104       (628 )
                         
Gross profit
    96,486       85,940       10,546  
Operating expenses
    44,170       36,592       7,578  
                         
Operating income
    52,316       49,348       2,968  
Miscellaneous income
    383       910       (527 )
Interest charges
    13,847       14,132       (285 )
                         
Income before income taxes
    38,852       36,126       2,726  
Income tax expense
    13,781       13,202       579  
                         
Net income
  $ 25,071     $ 22,924     $ 2,147  
                         
Gross pipeline transportation volumes — MMcf
    412,340       370,319       42,021  
                         
Consolidated pipeline transportation volumes — MMcf
    277,308       233,808       43,500  
                         


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The $10.5 million increase in gross profit primarily was attributable to a $5.7 million increase from rate adjustments resulting from our 2006 GRIP filing and a $3.7 million increase from transportation volumes. Consolidated throughput increased 19 percent primarily due to increased transportation in the Barnett Shale and Carthage regions of Texas. The improvement in gross profit also reflects increased service fees and unit transportation margins due to favorable market conditions which contributed $2.1 million. New compression contracts and transportation capacity enhancements also contributed $1.6 million. These increases were partially offset by a $1.5 million decrease in sales of excess gas compared to the same period in the prior year and a $1.2 million decrease in storage, parking and lending services due to market conditions.
 
Operating expenses increased $7.6 million primarily due to increased pipeline integrity and maintenance costs.
 
 
Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas marketing segment for the six months ended March 31, 2008 and 2007 are presented below.
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Delivered gas
  $ 44,368     $ 34,321     $ 10,047  
Asset optimization
    27,212       71,934       (44,722 )
Unrealized margins
    (9,285 )     (20,068 )     10,783  
                         
Gross profit
    62,295       86,187       (23,892 )
Operating expenses
    17,570       13,601       3,969  
                         
Operating income
    44,725       72,586       (27,861 )
Miscellaneous income
    1,398       4,238       (2,840 )
Interest charges
    3,316       1,406       1,910  
                         
Income before income taxes
    42,807       75,418       (32,611 )
Income tax expense
    16,928       29,440       (12,512 )
                         
Net income
  $ 25,879     $ 45,978     $ (20,099 )
                         
Gross natural gas marketing sales volumes — MMcf
    245,386       202,148       43,238  
                         
Consolidated natural gas marketing sales volumes — MMcf
    216,229       178,912       37,317  
                         
Net physical position (Bcf)
    20.7       19.6       1.1  
                         
 
The $23.9 million decrease in our natural gas marketing segment’s gross profit primarily reflects a $44.7 million decrease in asset optimization margins. As a result of the less volatile natural gas market, we recognized smaller gains on the settlement of financial positions related to physical gas deliveries from storage assets. Additionally, increased storage fees charged by third parties contributed to the decrease in asset optimization gross profit.
 
The decrease was partially offset by a $10.0 million increase in delivered gas margins. Gross sales volumes increased 21 percent compared with the prior-year period. The increase in delivered gas margin was also attributable to the realization of favorable gains due to the location of gas sold in certain market areas on certain contracts. After excluding the effect of these location basis gains, we experienced an 11 percent decrease in per-unit margins during the six months ended March 31, 2008, compared with the prior-year period as the increases experienced during the second quarter partially offset the decreases experienced during the first quarter of fiscal 2008.


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Gross profit margin was also favorably impacted by a $10.8 million increase in unrealized margins attributable to a narrowing of the spreads between the current cash prices and forward natural gas prices during the current-year period compared with the prior-year period.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income taxes, increased $4.0 million. The increase reflects $2.4 million for the settlement of certain tax matters coupled with a $1.6 million increase in employee and other administrative costs.
 
 
Review of Financial and Operating Results
 
Financial and operational highlights for our pipeline, storage and other segment for the six months ended March 31, 2008 and 2007 are presented below.
 
                         
    Six Months Ended
 
    March 31  
    2008     2007     Change  
    (In thousands)  
 
Storage and transportation services
  $ 7,634     $ 7,790     $ (156 )
Asset optimization
    5,112       13,194       (8,082 )
Other
    2,491       2,147       344  
Unrealized margins
    445       1,825       (1,380 )
                         
Gross profit
    15,682       24,956       (9,274 )
Operating expenses
    4,258       4,350