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Atmos Energy 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-3.1
  3. Ex-3.2
  4. Ex-12
  5. Ex-15
  6. Ex-31
  7. Ex-32
  8. 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, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number 1-10042
 
 
     
Texas and Virginia
(State or other jurisdiction of
incorporation or organization)
  75-1743247
(IRS employer
identification no.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
(Address of principal executive offices)
  75240
(Zip code)
 
(972) 934-9227
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*  Yes o     No o
 
* The registrant has not yet been phased into the interactive data requirements.
 
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 30, 2010.
 
     
Class
 
Shares Outstanding
 
No Par Value
  93,147,184
 


TABLE OF CONTENTS

GLOSSARY OF KEY TERMS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 5. Other Information
Item 6. Exhibits
SIGNATURE
EXHIBITS INDEX Item 6
EX-3.1
EX-3.2
EX-12
EX-15
EX-31
EX-32


Table of Contents

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


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Table of Contents

 
 
Item 1.   Financial Statements
 
ATMOS ENERGY CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
                 
    March 31,
    September 30,
 
    2010     2009  
    (Unaudited)        
    (In thousands, except
 
    share data)  
 
ASSETS
Property, plant and equipment
  $ 6,295,260     $ 6,086,618  
Less accumulated depreciation and amortization
    1,704,785       1,647,515  
                 
Net property, plant and equipment
    4,590,475       4,439,103  
Current assets
               
Cash and cash equivalents
    231,153       111,203  
Accounts receivable, net
    546,356       232,806  
Gas stored underground
    208,589       352,728  
Other current assets
    121,261       132,203  
                 
Total current assets
    1,107,359       828,940  
Goodwill and intangible assets
    739,750       740,064  
Deferred charges and other assets
    315,606       335,659  
                 
    $ 6,753,190     $ 6,343,766  
                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
               
Common stock, no par value (stated at $.005 per share);
               
200,000,000 shares authorized; issued and outstanding:
               
March 31, 2010 — 93,146,535 shares;
               
September 30, 2009 — 92,551,709 shares
  $ 466     $ 463  
Additional paid-in capital
    1,809,331       1,791,129  
Retained earnings
    550,259       405,353  
Accumulated other comprehensive loss
    (21,213 )     (20,184 )
                 
Shareholders’ equity
    2,338,843       2,176,761  
Long-term debt
    2,159,475       2,169,400  
                 
Total capitalization
    4,498,318       4,346,161  
Current liabilities
               
Accounts payable and accrued liabilities
    521,913       207,421  
Other current liabilities
    432,469       457,319  
Short-term debt
          72,550  
Current maturities of long-term debt
    10,131       131  
                 
Total current liabilities
    964,513       737,421  
Deferred income taxes
    594,269       570,940  
Regulatory cost of removal obligation
    317,203       321,086  
Deferred credits and other liabilities
    378,887       368,158  
                 
    $ 6,753,190     $ 6,343,766  
                 
 
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  
    2010     2009  
    (Unaudited)  
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 1,365,988     $ 1,230,420  
Regulated transmission and storage segment
    55,181       59,234  
Natural gas marketing segment
    692,152       708,658  
Pipeline, storage and other segment
    9,050       12,272  
Intersegment eliminations
    (182,105 )     (189,178 )
                 
      1,940,266       1,821,406  
Purchased gas cost
               
Natural gas distribution segment
    980,603       863,340  
Regulated transmission and storage segment
           
Natural gas marketing segment
    685,672       685,114  
Pipeline, storage and other segment
    1,369       1,656  
Intersegment eliminations
    (181,699 )     (188,755 )
                 
      1,485,945       1,361,355  
                 
Gross profit
    454,321       460,051  
Operating expenses
               
Operation and maintenance
    117,088       121,740  
Depreciation and amortization
    53,080       53,450  
Taxes, other than income
    59,613       58,314  
                 
Total operating expenses
    229,781       233,504  
                 
Operating income
    224,540       226,547  
Miscellaneous income (expense)
    49       (1,565 )
Interest charges
    39,582       35,533  
                 
Income before income taxes
    185,007       189,449  
Income tax expense
    70,881       60,446  
                 
Net income
  $ 114,126     $ 129,003  
                 
Basic net income per share
  $ 1.22     $ 1.41  
                 
Diluted net income per share
  $ 1.22     $ 1.40  
                 
Cash dividends per share
  $ 0.335     $ 0.330  
                 
Weighted average shares outstanding:
               
Basic
    92,518       90,895  
                 
Diluted
    92,853       91,192  
                 
 
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  
    2010     2009  
    (Unaudited)  
    (In thousands, except
 
    per share data)  
 
Operating revenues
               
Natural gas distribution segment
  $ 2,168,882     $ 2,286,388  
Regulated transmission and storage segment
    102,041       113,916  
Natural gas marketing segment
    1,236,423       1,496,153  
Pipeline, storage and other segment
    20,673       28,720  
Intersegment eliminations
    (294,901 )     (387,439 )
                 
      3,233,118       3,537,738  
Purchased gas cost
               
Natural gas distribution segment
    1,488,870       1,620,924  
Regulated transmission and storage segment
           
Natural gas marketing segment
    1,170,158       1,442,586  
Pipeline, storage and other segment
    3,002       5,559  
Intersegment eliminations
    (294,082 )     (386,594 )
                 
      2,367,948       2,682,475  
                 
Gross profit
    865,170       855,263  
Operating expenses
               
Operation and maintenance
    240,950       254,417  
Depreciation and amortization
    106,919       106,576  
Taxes, other than income
    102,165       102,451  
Asset impairments
          2,078  
                 
Total operating expenses
    450,034       465,522  
                 
Operating income
    415,136       389,741  
Miscellaneous expense
    (220 )     (1,866 )
Interest charges
    78,290       74,524  
                 
Income before income taxes
    336,626       313,351  
Income tax expense
    129,170       108,385  
                 
Net income
  $ 207,456     $ 204,966  
                 
Basic net income per share
  $ 2.22     $ 2.24  
                 
Diluted net income per share
  $ 2.22     $ 2.23  
                 
Cash dividends per share
  $ 0.670     $ 0.660  
                 
Weighted average shares outstanding:
               
Basic
    92,336       90,637  
                 
Diluted
    92,681       90,935  
                 
 
See accompanying notes to condensed consolidated financial statements


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ATMOS ENERGY CORPORATION
 
 
                 
    Six Months Ended
 
    March 31  
    2010     2009  
    (Unaudited)  
    (In thousands)  
 
Cash Flows From Operating Activities
               
Net income
  $ 207,456     $ 204,966  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization:
               
Charged to depreciation and amortization
    106,919       106,576  
Charged to other accounts
    96       21  
Deferred income taxes
    44,097       97,892  
Other
    11,759       13,634  
Net assets/liabilities from risk management activities
    1,234       5,810  
Net change in operating assets and liabilities
    111,897       185,723  
                 
Net cash provided by operating activities
    483,458       614,622  
Cash Flows From Investing Activities
               
Capital expenditures
    (232,629 )     (221,330 )
Other, net
    (946 )     (3,925 )
                 
Net cash used in investing activities
    (233,575 )     (225,255 )
Cash Flows From Financing Activities
               
Net decrease in short-term debt
    (75,907 )     (353,468 )
Net proceeds from issuance of long-term debt
          446,188  
Settlement of Treasury lock agreement
          1,938  
Repayment of long-term debt
    (66 )     (625 )
Cash dividends paid
    (62,550 )     (60,446 )
Issuance of common stock
    8,590       12,414  
                 
Net cash provided by (used in) financing activities
    (129,933 )     46,001  
                 
Net increase in cash and cash equivalents
    119,950       435,368  
Cash and cash equivalents at beginning of period
    111,203       46,717  
                 
Cash and cash equivalents at end of period
  $ 231,153     $ 482,085  
                 
 
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, 2010
 
1.   Nature of Business
 
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as certain other nonregulated businesses. Our corporate headquarters and shared-services function are located in Dallas, Texas and our customer support centers are located in Amarillo and Waco, Texas.
 
Through our natural gas distribution business, we deliver natural gas through sales and transportation arrangements to over 3 million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system. Our regulated activities also include our regulated pipeline and storage operations, which include the transportation of natural gas to our distribution system and the management of our underground storage facilities. Our natural gas distribution and regulated pipeline and storage businesses are subject to federal and state regulation and/or regulation by local authorities in each of the states in which our natural gas distribution divisions operate.
 
Our nonregulated businesses operate primarily in the Midwest and Southeast and include our natural gas marketing operations and pipeline, storage and other operations. These businesses are operated through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc. (AEH), which is wholly owned by the Company and based in Houston, Texas. Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers and natural gas transportation and storage services to certain of our natural gas distribution divisions and third parties.
 
We operate the Company through the following four segments:
 
  •  the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,
 
  •  the regulated transmission and storage segment, which includes our regulated pipeline and storage operations of the Atmos Pipeline — Texas Division,
 
  •  the natural gas marketing segment, which includes a variety of nonregulated natural gas management services and
 
  •  the pipeline, storage and other segment, which is comprised of our nonregulated natural gas gathering, transmission and storage services.
 
2.   Unaudited Financial Information
 
These consolidated interim-period financial statements have been prepared in accordance with accounting principles generally accepted in the United States on the same basis as those used for the Company’s audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2010 are not indicative of our results of operations for the full 2010 fiscal year, which ends September 30, 2010. We have evaluated subsequent events from the March 31, 2010 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC).


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
No events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the financial statements.
 
 
Our accounting policies are described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
 
During the second quarter of fiscal 2010, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.
 
The Company adopted an accounting standard related to fair value disclosures effective January 1, 2010. Effective October 1, 2009, the Company adopted accounting standards related to the measurement of liabilities at fair value, fair value measurements of plan assets of a defined benefit pension or other postretirement plan, the determination of participating securities in the basic earnings per share calculation, business combination accounting and the accounting and reporting for minority interests. Except as indicated below, the adoption of these standards did not have a material impact on our financial position, results of operations or cash flows. There were no other significant changes to our accounting policies during the six months ended March 31, 2010.
 
Fair value disclosures — The Financial Accounting Standards Board (FASB) issued guidance that requires new disclosures surrounding fair value measurements to enhance the existing disclosure requirements including 1) information about transfers in and out of Level 1 and Level 2 fair value measurements as well as a detailed reconciliation of activity in Level 3 fair value measurements; 2) a more detailed level of disaggregation for each class of assets and liabilities; and 3) a requirement to disclose information about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures related to the detailed reconciliation of Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. As a result of adopting this standard, we added a disclosure about the valuation techniques and inputs we used to measure fair value for our Level 2 recurring and nonrecurring fair value measurements as of March 31, 2010 which is included in Note 4. As of March 31, 2010, we did not have any Level 3 fair value measurements.
 
Measurement of liabilities at fair value — When a quoted price in an active market for an identical liability is not available, we will be required to measure fair value using a valuation technique that uses quoted prices of similar liabilities, quoted prices of identical or similar liabilities when traded as assets, or another valuation technique that is consistent with U.S. generally accepted accounting principles (GAAP), such as the income or market approach. Additionally, when estimating the fair value of a liability, we will not be required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents our transfer of the liability.
 
Fair value measurements of plan assets of a defined benefit pension or other postretirement plan — The FASB issued guidance which requires employers to disclose annually information about fair value measurements of the assets of a defined benefit pension or other postretirement plan in a manner similar to the requirements established for financial and non-financial assets. The objectives of the required disclosures are to provide users of financial statements with an understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value of plan assets and significant concentrations of risk within plan assets. These disclosures will appear in our Form 10-K for the year ending September 30, 2010.
 
The determination of participating securities in the basic earnings per share calculation — The FASB issued guidance related to determining whether instruments granted in share-based payment transactions are


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Table of Contents

ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
considered participating securities. The FASB determined that non-vested share-based payments with a nonforfeitable right to dividends or dividend equivalents are participating securities and, as a result, companies with these types of participating securities must use the two-class method to compute earnings per share. Based on this guidance, the Company is required to calculate earnings per share using the two-class method and will include non-vested restricted stock and restricted stock units for which vesting is only predicated upon the passage of time in the basic earnings per share calculation. Non-vested restricted stock and restricted stock units for which vesting is predicated, in part upon the achievement of specified performance targets, continue to be excluded from the calculation of earnings per share. Although the provisions of this standard were effective for us as of October 1, 2009, prior-period earnings per share data must be recalculated and adjusted accordingly. The calculation of basic and diluted earnings per share pursuant to the two-class method is presented in Note 6. The application of the two-class method resulted in the following changes to basic and diluted earnings per share for the three and six months ended March 31, 2009.
 
                 
    Three Months Ended
  Six Months Ended
    March 31, 2009   March 31, 2009
    (In thousands, except per share amounts)
 
Basic Earnings Per Share
               
Basic EPS — as previously reported
  $ 1.42     $ 2.26  
Basic EPS — as adjusted
  $ 1.41     $ 2.24  
Weighted average shares outstanding — as previously reported
    90,895       90,637  
Weighted average shares outstanding — as adjusted
    90,895       90,637  
Diluted Earnings Per Share
               
Diluted EPS — as previously reported
  $ 1.41     $ 2.24  
Diluted EPS — as adjusted
  $ 1.40     $ 2.23  
Weighted average shares outstanding — as previously reported
    91,567       91,311  
Weighted average shares outstanding — as adjusted
    91,192       90,935  
 
Business combination accounting — This new pronouncement establishes new principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. This update significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under the new guidelines, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact current period income tax expense. The provisions of this standard will apply to any acquisitions we complete after October 1, 2009.
 
Accounting and reporting for minority interests — In December 2007, the FASB issued guidance related to the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. As of March 31, 2010, Atmos Energy did not have any transactions with minority interest holders.
 
 
Accounting principles generally accepted in the United States require cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates. We record certain costs as regulatory assets when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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, 2010 and September 30, 2009 included the following:
 
                 
    March 31,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Regulatory assets:
               
Pension and postretirement benefit costs
  $ 192,291     $ 197,743  
Merger and integration costs, net
    6,938       7,161  
Deferred gas costs
    67,132       22,233  
Environmental costs
    913       866  
Rate case costs
    3,554       5,923  
Deferred franchise fees
    507       10,014  
Deferred income taxes, net
    639       639  
Other
    5,707       6,218  
                 
    $ 277,681     $ 250,797  
                 
Regulatory liabilities:
               
Deferred gas costs
  $ 20,583     $ 110,754  
Deferred franchise fees
    4,730        
Regulatory cost of removal obligation
    340,869       335,428  
Other
    6,358       7,960  
                 
    $ 372,540     $ 454,142  
                 
 
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.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents the components of comprehensive income, net of related tax, for the three-month and six-month periods ended March 31, 2010 and 2009:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2010     2009     2010     2009  
          (In thousands)        
 
Net income
  $ 114,126     $ 129,003     $ 207,456     $ 204,966  
Unrealized holding gains (losses) on investments, net of tax expense (benefit) of $408 and $(429) for the three months ended March 31, 2010 and 2009 and of $798 and $(3,759) for the six months ended March 31, 2010 and 2009
    695       (862 )     1,359       (6,295 )
Other than temporary impairment of investments, net of tax expense of $790 for the six months ended March 31, 2009
                      1,288  
Amortization and unrealized gain on interest rate hedging transactions, net of tax expense of $248 and $1,353 for the three months ended March 31, 2010 and 2009 and $496 and $1,835 for the six months ended March 31, 2010 and 2009
    421       1,854       843       2,641  
Net unrealized losses on commodity hedging transactions, net of tax benefit of $6,321 and $7,524 for the three months ended March 31, 2010 and 2009 and $2,067 and $21,341 for the six months ended March 31, 2010 and 2009
    (9,885 )     (9,771 )     (3,231 )     (32,315 )
                                 
Comprehensive income
  $ 105,357     $ 120,224     $ 206,427     $ 170,285  
                                 
 
Accumulated other comprehensive loss, net of tax, as of March 31, 2010 and September 30, 2009 consisted of the following unrealized gains (losses):
 
                 
    March 31,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Accumulated other comprehensive loss:
               
Unrealized holding gains on investments
  $ 3,819     $ 2,460  
Treasury lock agreements
    (6,655 )     (7,498 )
Cash flow hedges
    (18,377 )     (15,146 )
                 
    $ (21,213 )   $ (20,184 )
                 
 
3.   Financial Instruments
 
We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. The accounting for these financial instruments is fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Currently, we utilize financial instruments in our natural gas distribution, natural gas marketing and pipeline, storage and other segments. However, our pipeline, storage and other segment uses financial instruments acquired from Atmos Energy Marketing, LLC (AEM) on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
instruments are reported in the natural gas marketing segment. We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.
 
Our financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when our financial instruments are in net liability positions.
 
 
Although our purchased gas cost adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our customers are exposed to the effect of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
 
Our natural gas distribution gas supply department is responsible for executing this segment’s commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. Historically, if the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2009-2010 heating season, in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 29 percent, or 26.9 Bcf of the planned winter flowing gas requirements. We have not designated these financial instruments as hedges.
 
The costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with applicable authoritative accounting guidance. Accordingly, there is no earnings impact on our natural gas distribution segment as a result of the use of financial instruments.
 
 
Our natural gas marketing segment, through AEM, aggregates and purchases gas supply, arranges transportation and/or storage logistics and ultimately delivers gas to our customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers’ request.
 
We also perform asset optimization activities in both our natural gas marketing segment and pipeline, storage and other segment. Through asset optimization activities, we seek to maximize the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from pricing differences that occur over time. We purchase physical natural gas and then sell financial instruments at advantageous prices to lock in a gross profit margin. Through the use of transportation and storage services and financial instruments, we also seek to capture gross profit margin through the arbitrage of pricing differences that exist in various locations and by recognizing pricing differences that occur over time. Over time, gains and losses on the sale of storage gas inventory should be offset by gains and losses on the financial instruments, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.
 
As a result of these activities, our nonregulated operations are exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
contracts with counterparties. Futures contracts provide the right to buy or sell the commodity at a fixed price in the future. Option contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.
 
We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our natural gas marketing segment associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 52 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our natural gas marketing and pipeline, storage and other segments.
 
Also, in our natural gas marketing segment, we use storage swaps and futures to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges.
 
Our nonregulated risk management activities are controlled through various risk management policies and procedures. Our Audit Committee has oversight responsibility for our nonregulated risk management limits and policies. A risk committee, comprised of corporate and business unit officers, is responsible for establishing and enforcing our nonregulated risk management policies and procedures.
 
Under our risk management policies, we seek to match our financial instrument positions to our physical storage positions as well as our expected current and future sales and purchase obligations to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Our operations can also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on March 31, 2010, AEH had net open positions (including existing storage) of 0.8 Bcf.
 
 
Currently, we are not managing interest rate risk with financial instruments. However, in prior years, we periodically managed interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings. These Treasury locks were settled at various times at a cumulative net loss. These realized gains and losses were recorded as a component of accumulated other comprehensive income (loss) and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for these Treasury locks extend through fiscal 2035. However, the majority of the remaining amounts of these Treasury locks will be recognized by the end of fiscal 2019.
 
 
The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of March 31, 2010, our financial instruments were comprised of both long and short commodity positions. A long position is a contract to purchase the commodity, while a short position is a contract to sell the commodity. As of March 31, 2010, we had net long/(short) commodity contracts outstanding in the following quantities:
 
                             
        Natural
    Natural
    Pipeline,
 
    Hedge
  Gas
    Gas
    Storage and
 
Contract Type   Designation   Distribution     Marketing     Other  
        Quantity (MMcf)  
 
Commodity contracts
  Fair Value           (19,135 )     (1,010 )
    Cash Flow           24,905       (700 )
    Not designated     14,800       59,697       380  
                             
          14,800       65,467       (1,330 )
                             
 
Financial Instruments on the Balance Sheet
 
The following tables present the fair value and balance sheet classification of our financial instruments by operating segment as of March 31, 2010 and September 30, 2009. As required by authoritative accounting literature, the fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Further, the amounts below do not include $7.2 million and $11.7 million of cash held on deposit in margin accounts as of March 31, 2010 and September 30, 2009 to collateralize certain financial instruments. Therefore, these gross balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not be equal to the amounts presented on our condensed consolidated balance sheet, nor will they be equal to the fair value information presented for our financial instruments in Note 4.
 
                             
        Natural
    Natural
       
        Gas
    Gas
       
    Balance Sheet Location   Distribution     Marketing(1)     Total  
        (In thousands)  
 
March 31, 2010
                           
Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets   $     $ 49,314     $ 49,314  
Noncurrent commodity contracts
  Deferred charges and other assets           5,899       5,899  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities           (51,648 )     (51,648 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (4,893 )     (4,893 )
                             
Total
              (1,328 )     (1,328 )
Not Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets     281       40,314       40,595  
Noncurrent commodity contracts
  Deferred charges and other assets           4,692       4,692  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities     (22,016 )     (28,812 )     (50,828 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (639 )     (639 )
                             
Total
        (21,735 )     15,555       (6,180 )
                             
Total Financial Instruments
      $ (21,735 )   $ 14,227     $ (7,508 )
                             
 
 
(1) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                             
        Natural
    Natural
       
        Gas
    Gas
       
    Balance Sheet Location   Distribution     Marketing(1)     Total  
        (In thousands)  
 
September 30, 2009
                           
Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets   $     $ 53,526     $ 53,526  
Noncurrent commodity contracts
  Deferred charges and other assets           6,800       6,800  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities           (47,146 )     (47,146 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (999 )     (999 )
                             
Total
              12,181       12,181  
Not Designated As Hedges:
                           
Asset Financial Instruments
                           
Current commodity contracts
  Other current assets     4,395       27,559       31,954  
Noncurrent commodity contracts
  Deferred charges and other assets     1,620       7,964       9,584  
Liability Financial Instruments
                           
Current commodity contracts
  Other current liabilities     (20,181 )     (19,657 )     (39,838 )
Noncurrent commodity contracts
  Deferred credits and other liabilities           (1,349 )     (1,349 )
                             
Total
        (14,166 )     14,517       351  
                             
Total Financial Instruments
      $ (14,166 )   $ 26,698     $ 12,532  
                             
 
 
(1) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.
 
Impact of Financial Instruments on the Income Statement
 
The following tables present the impact that financial instruments had on our condensed consolidated income statement, by operating segment, as applicable, for the three and six months ended March 31, 2010 and 2009.
 
Hedge ineffectiveness for our natural gas marketing and pipeline storage and other segments is recorded as a component of unrealized gross profit and primarily results from differences in the location and timing of the derivative instrument and the hedged item. Hedge ineffectiveness could materially affect our results of operations for the reported period. For the three months ended March 31, 2010 and 2009 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $(4.9) million and $4.2 million. For the six months ended March 31, 2010 and 2009 we recognized a gain arising from fair value and cash flow hedge ineffectiveness of $40.4 million and $24.6 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Fair Value Hedges
 
The impact of commodity contracts designated as fair value hedges and the related hedged item on our condensed consolidated income statement for the three and six months ended March 31, 2010 and 2009 is presented below.
 
                         
    Three Months Ended March 31, 2010  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
          (In thousands)        
 
Commodity contracts
  $ 30,926     $ 2,535     $ 33,461  
Fair value adjustment for natural gas inventory designated as the hedged item
    (34,969 )     (2,697 )     (37,666 )
                         
Total impact on revenue
  $ (4,043 )   $ (162 )   $ (4,205 )
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ (512 )   $     $ (512 )
Timing ineffectiveness
    (3,531 )     (162 )     (3,693 )
                         
    $ (4,043 )   $ (162 )   $ (4,205 )
                         
 
                         
    Three Months Ended March 31, 2009  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
          (In thousands)        
 
Commodity contracts
  $ 19,870     $ 2,105     $ 21,975  
Fair value adjustment for natural gas inventory designated as the hedged item
    (18,562 )     (437 )     (18,999 )
                         
Total impact on revenue
  $ 1,308     $ 1,668     $ 2,976  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ 2,327     $     $ 2,327  
Timing ineffectiveness
    (1,019 )     1,668       649  
                         
    $ 1,308     $ 1,668     $ 2,976  
                         
 
                         
    Six Months Ended March 31, 2010  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
          (In thousands)        
 
Commodity contracts
  $ 28,743     $ 2,078     $ 30,821  
Fair value adjustment for natural gas inventory designated as the hedged item
    8,343       3,174       11,517  
                         
Total impact on revenue
  $ 37,086     $ 5,252     $ 42,338  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ (449 )   $     $ (449 )
Timing ineffectiveness
    37,535       5,252       42,787  
                         
    $ 37,086     $ 5,252     $ 42,338  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    Six Months Ended March 31, 2009  
    Natural
    Pipeline,
       
    Gas
    Storage and
       
    Marketing     Other     Consolidated  
          (In thousands)        
 
Commodity contracts
  $ 45,553     $ 6,044     $ 51,597  
Fair value adjustment for natural gas inventory designated as the hedged item
    (30,422 )     (1,990 )     (32,412 )
                         
Total impact on revenue
  $ 15,131     $ 4,054     $ 19,185  
                         
The impact on revenue is comprised of the following:
                       
Basis ineffectiveness
  $ 4,279     $     $ 4,279  
Timing ineffectiveness
    10,852       4,054       14,906  
                         
    $ 15,131     $ 4,054     $ 19,185  
                         
 
Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot to forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on revenue.
 
Cash Flow Hedges
 
The impact of cash flow hedges on our condensed consolidated income statements for the three and six months ended March 31, 2010 and 2009 is presented below. Note that this presentation does not reflect the financial impact arising from the hedged physical transaction. Therefore, this presentation is not indicative of the economic gross profit we realized or will realize when the underlying physical and financial transactions are settled.
 
                                 
    Three Months Ended March 31, 2010  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
          (In thousands)        
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (10,685 )   $ 2,129     $ (8,556 )
Loss arising from ineffective portion of commodity contracts
          (739 )           (739 )
                                 
Total impact on revenue
          (11,424 )     2,129       (9,295 )
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (669 )                 (669 )
                                 
Total Impact from Cash Flow Hedges
  $ (669 )   $ (11,424 )   $ 2,129     $ (9,964 )
                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    Three Months Ended March 31, 2009  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
          (In thousands)        
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (48,585 )   $ 16,170     $ (32,415 )
Gain arising from ineffective portion of commodity contracts
          1,180             1,180  
                                 
Total impact on revenue
          (47,405 )     16,170       (31,235 )
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (1,269 )                 (1,269 )
                                 
Total Impact from Cash Flow Hedges
  $ (1,269 )   $ (47,405 )   $ 16,170     $ (32,504 )
                                 
 
                                 
    Six Months Ended March 31, 2010  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
          (In thousands)        
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (34,556 )   $ 2,883     $ (31,673 )
Loss arising from ineffective portion of commodity contracts
          (1,957 )           (1,957 )
                                 
Total impact on revenue
          (36,513 )     2,883       (33,630 )
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (1,339 )                 (1,339 )
                                 
Total Impact from Cash Flow Hedges
  $ (1,339 )   $ (36,513 )   $ 2,883     $ (34,969 )
                                 
 
                                 
    Six Months Ended March 31, 2009  
    Natural
          Pipeline,
       
    Gas
    Natural Gas
    Storage and
       
    Distribution     Marketing     Other     Consolidated  
          (In thousands)        
 
Gain (loss) reclassified from AOCI into revenue for effective portion of commodity contracts
  $     $ (76,829 )   $ 24,139     $ (52,690 )
Gain arising from ineffective portion of commodity contracts
          5,372             5,372  
                                 
Total impact on revenue
          (71,457 )     24,139       (47,318 )
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense
    (2,538 )                 (2,538 )
                                 
Total Impact from Cash Flow Hedges
  $ (2,538 )   $ (71,457 )   $ 24,139     $ (49,856 )
                                 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes the gains and losses arising from hedging transactions that were recognized as a component of other comprehensive income (loss), net of taxes, for the three and six months ended March 31, 2010 and 2009. The amounts included in the table below exclude gains and losses arising from ineffectiveness because those amounts are immediately recognized in the income statement as incurred.
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2010     2009     2010     2009  
          (In thousands)        
 
Increase (decrease) in fair value:
                               
Treasury lock agreements
  $     $ 1,221     $     $ 1,221  
Forward commodity contracts
    (15,104 )     (29,544 )     (22,551 )     (64,659 )
Recognition of losses in earnings due to settlements:
                               
Treasury lock agreements
    421       633       843       1,420  
Forward commodity contracts
    5,219       19,773       19,320       32,344  
                                 
Total other comprehensive loss from hedging, net of tax(1)
  $ (9,464 )   $ (7,917 )   $ (2,388 )   $ (29,674 )
                                 
 
 
(1) Utilizing an income tax rate of approximately 37 percent comprised of the effective rates in each taxing jurisdiction.
 
Deferred losses recorded in AOCI associated with our treasury lock agreements are recognized into earnings as they are amortized, while deferred losses associated with commodity contracts are recognized into earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred losses recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of March 31, 2010:
 
                         
    Treasury
             
    Lock
    Commodity
       
    Agreements     Contracts     Total  
          (In thousands)        
 
Next twelve months
  $ (1,687 )   $ (14,830 )   $ (16,517 )
Thereafter
    (4,968 )     (3,547 )     (8,515 )
                         
Total(1)
  $ (6,655 )   $ (18,377 )   $ (25,032 )
                         
 
 
(1) Utilizing an income tax rate of approximately 37 percent comprised of the effective rates in each taxing jurisdiction.
 
Financial Instruments Not Designated as Hedges
 
The impact of financial instruments that have not been designated as hedges on our condensed consolidated income statements for the three and six months ended March 31, 2010 and 2009 is presented below. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions associated with these financial instruments. Therefore, this presentation is not indicative of the economic gross profit we realized when the underlying physical and financial transactions were settled.
 
As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact to our natural gas distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2010     2009     2010     2009  
          (In thousands)        
 
Natural gas marketing commodity contracts
  $ (1,811 )   $ 10,593     $ 12,464     $ 6,761  
Pipeline, storage and other commodity contracts
    (1,175 )     183       (168 )     100  
                                 
Total impact on revenue
  $ (2,986 )   $ 10,776     $ 12,296     $ 6,861  
                                 
 
4.   Fair Value Measurements
 
We report certain assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We record cash and cash equivalents, accounts receivable and accounts payable at carrying value, which substantially approximates fair value due to the short-term nature of these assets and liabilities. For other financial assets and liabilities, we primarily use quoted market prices and other observable market pricing information to minimize the use of unobservable pricing inputs in our measurements when determining fair value. The methods used to determine fair value for our assets and liabilities are fully described in Note 2 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the three and six months ended March 31, 2010, there were no changes in these methods.
 
Effective October 1, 2009, the authoritative guidance related to nonrecurring fair value measurements became effective for us with respect to asset retirement obligations, most nonfinancial assets and liabilities that may be acquired in a business combination and impairment analyses performed for nonfinancial assets. The adoption of the FASB’s fair value guidance for the reporting of these nonrecurring fair value measurements did not have a material impact on our financial position, results of operations or cash flows for the three and six months ended March 31, 2010.
 
Although fair value measurements also apply to the valuation of our pension and post-retirement plan assets, the current fair value disclosure requirements are not applicable to our pension and post-retirement plan assets. Accordingly, these plan assets are not included in the tabular disclosures below. However, similar disclosures about fair value measurements for our pension and post-retirement plan assets will appear in our Form 10-K for the year ending September 30, 2010.
 
Quantitative Disclosures
 
Financial Instruments
 
The classification of our fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following table summarizes, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010. Assets


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
                                         
    Quoted
    Significant
    Significant
             
    Prices in
    Other
    Other
             
    Active
    Observable
    Unobservable
    Netting and
       
    Markets
    Inputs
    Inputs
    Cash
    March 31,
 
    (Level 1)     (Level 2)(1)     (Level 3)     Collateral(2)     2010  
                (In thousands)              
 
Assets:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 281     $      —     $     $ 281  
Natural gas marketing segment
    31,459       68,760             (72,289 )     27,930  
                                         
Total financial instruments
    31,459       69,041             (72,289 )     28,211  
Hedged portion of gas stored underground
                                       
Natural gas marketing segment
    73,655                         73,655  
Pipeline, storage and other segment(3)
    3,844                         3,844  
                                         
Total gas stored underground
    77,499                         77,499  
Available-for-sale securities
    42,558                         42,558  
                                         
Total assets
  $ 151,516     $ 69,041     $     $ (72,289 )   $ 148,268  
                                         
Liabilities:
                                       
Financial instruments
                                       
Natural gas distribution segment
  $     $ 22,016     $     $     $ 22,016  
Natural gas marketing segment
    53,387       32,605             (79,488 )     6,504  
                                         
Total liabilities
  $ 53,387     $ 54,621     $     $ (79,488 )   $ 28,520  
                                         
 
 
(1) Our Level 2 measurements primarily consist of non-exchange-traded financial instruments, such as over-the-counter options and swaps where market data for pricing is observable. The fair values for these assets and liabilities are determined using a market-based approach in which observable market prices are adjusted for criteria specific to each instrument, such as the strike price, notional amount or basis differences.
 
(2) This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and authoritative accounting literature. In addition, as of March 31, 2010, we had $7.2 million of cash held in margin accounts used to collateralize certain financial instruments which has been reflected as a financial instrument asset.
 
(3) Our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment; however, the underlying hedged item is reported in the pipeline, storage and other segment.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Other Fair Value Measures
 
Our debt is recorded at carrying value. The fair value of our debt is determined using third party market value quotations. The following table presents the carrying value and fair value of our debt as of March 31, 2010:
 
         
    March 31, 2010
    (In thousands)
 
Carrying Amount
  $ 2,172,761  
Fair Value
  $ 2,364,093  
 
5.   Debt
 
 
Long-term debt at March 31, 2010 and September 30, 2009 consisted of the following:
 
                 
    March 31,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Unsecured 7.375% Senior Notes, due May 2011
  $ 350,000     $ 350,000  
Unsecured 10% Notes, due December 2011
    2,303       2,303  
Unsecured 5.125% Senior Notes, due 2013
    250,000       250,000  
Unsecured 4.95% Senior Notes, due 2014
    500,000       500,000  
Unsecured 6.35% Senior Notes, due 2017
    250,000       250,000  
Unsecured 8.50% Senior Notes, due 2019
    450,000       450,000  
Unsecured 5.95% Senior Notes, due 2034
    200,000       200,000  
Medium term notes
               
Series A, 1995-2, 6.27%, due December 2010
    10,000       10,000  
Series A, 1995-1, 6.67%, due 2025
    10,000       10,000  
Unsecured 6.75% Debentures, due 2028
    150,000       150,000  
Rental property term note due in installments through 2013
    458       524  
                 
Total long-term debt
    2,172,761       2,172,827  
Less:
               
Original issue discount on unsecured senior notes and debentures
    (3,155 )     (3,296 )
Current maturities
    (10,131 )     (131 )
                 
    $ 2,159,475     $ 2,169,400  
                 
 
As noted above, our Series A, 1995-2, 6.27% medium term note will mature in December 2010; accordingly, it has been classified within the current maturities of long-term debt.
 
 
Our short-term borrowing requirements are affected by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.
 
We finance our short-term borrowing requirements through a combination of a $566.7 million commercial paper program and four committed revolving credit facilities with third-party lenders that provide


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
approximately $1.2 billion of working capital funding. At March 31, 2010, there were no short-term debt borrowings outstanding. At September 30, 2009, there was a total of $72.6 million outstanding under our commercial paper program. We also use intercompany credit facilities to supplement the funding provided by these third-party committed credit facilities. These facilities are described in greater detail below.
 
 
We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $800 million of working capital funding. The first facility is a five-year $566.7 million unsecured facility, expiring December 2011, that bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. This credit facility serves as a backup liquidity facility for our commercial paper program. At March 31, 2010, there were no borrowings under this facility nor was there any commercial paper outstanding.
 
The second facility is a $200 million unsecured 364-day facility that expires October 22, 2010. The facility bears interest at a base rate or at a LIBOR-based rate for the applicable interest period, plus a spread ranging from 1.75 percent to 3.00 percent, based on the Company’s credit ratings. At March 31, 2010, there were no borrowings outstanding under this facility.
 
The third facility is a $25 million unsecured facility that bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin. At March 31, 2010, there were no borrowings outstanding under this facility. This facility expired on March 31, 2010 and was replaced with a $25 million unsecured facility effective April 1, 2010 that also bears interest at a daily negotiated rate.
 
The availability of funds under these credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in each of these facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At March 31, 2010, our total-debt-to-total-capitalization ratio, as defined, was 51 percent. In addition, both the interest margin over the Eurodollar rate and the fees that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.
 
In addition to these third-party facilities, the Company has a $200 million intercompany revolving credit facility provided by AEH. This facility bears interest at the lower of (i) the one-month LIBOR rate plus 0.45 percent or (ii) the marginal borrowing rate available to the Company on the date of borrowing. The marginal borrowing rate is defined as the lower of (i) a rate based upon the lower of the Prime Rate or the Eurodollar rate under the five year revolving credit facility, (ii) a rate based upon the lower of the Prime Rate or the Eurodollar rate under the 364-day revolving credit facility or (iii) the lowest rate outstanding under the commercial paper program. Applicable state regulatory commissions have approved our use of this facility through December 31, 2010. There was $20.5 million outstanding under this facility at March 31, 2010.
 
 
On December 10, 2009, AEM and the participating banks amended and restated AEM’s $450 million committed revolving credit facility extending it to December 9, 2010.
 
AEM uses this facility primarily to issue letters of credit and, on a less frequent basis, to borrow funds for gas purchases and other working capital needs. At AEM’s option, borrowings made under the credit facility are based on a base rate or an offshore rate, in each case plus an applicable margin. The base rate is a floating rate equal to the higher of: (a) 0.50 percent per annum above the latest Federal Funds rate; (b) the per annum rate of interest established by BNP Paribas from time to time as its “prime rate” or “base rate” for U.S. dollar


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
loans; (c) an offshore rate (based on LIBOR with a three-month interest period) as in effect from time to time; and (d) the “cost of funds” rate which is the cost of funds as reasonably determined by the administrative agent plus 0.50 percent. The offshore rate is a floating rate equal to the higher of (a) an offshore rate based upon LIBOR for the applicable interest period; and (b) a “cost of funds” rate referred to above. In the case of both base rate and offshore rate loans, the applicable margin ranges from 2.250 percent to 2.625 percent per annum, depending on the excess tangible net worth of AEM, as defined in the credit facility. This facility has swing line loan features, which allow AEM to borrow, on a same day basis, an amount ranging from $17 million to $27 million based on the terms of an election within the agreement. This facility is collateralized by substantially all of the assets of AEM and is guaranteed by AEH.
 
At March 31, 2010, there were no borrowings outstanding under this credit facility. However, at March 31, 2010, AEM letters of credit totaling $42.0 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 $258.0 million at March 31, 2010.
 
AEM is required by the financial covenants in this facility to maintain a ratio of total liabilities to tangible net worth that does not exceed a maximum of 5 to 1. At March 31, 2010, AEM’s ratio of total liabilities to tangible net worth, as defined, was 0.96 to 1. Additionally, AEM must maintain minimum levels of net working capital and net worth ranging from $75 million to $112.5 million. As defined in the financial covenants, at March 31, 2010, AEM’s net working capital was $240.4 million and its tangible net worth was $254.4 million.
 
To supplement borrowings under this facility, AEM has a $300 million intercompany demand credit facility with AEH, which bears interest at the greater of (i) the one-month LIBOR rate plus 3.00 percent or (ii) the rate for AEM’s offshore borrowings under its committed credit facility plus 0.75 percent. Amounts outstanding under this facility are subordinated to AEM’s committed credit facility. There was $40.0 million outstanding under this facility at March 31, 2010.
 
Finally, AEH has a $200 million intercompany demand credit facility with AEC, which bears interest at greater of (i) the one-month LIBOR rate plus 3.00 percent or (ii) the rate for AEM’s offshore borrowings under its committed credit facility plus 0.75 percent. Applicable state regulatory commissions have approved the new facility through December 31, 2010. There were no borrowings outstanding under this facility at March 31, 2010.
 
 
On March 31, 2010, we filed a registration statement with the SEC to issue, from time to time, up to $1.3 billion in common stock and/or debt securities available for issuance.
 
We had already received approvals from all requisite state regulatory commissions to issue a total of $1.3 billion in common stock and/or debt securities under the new shelf registration statement, including the carryforward of the $450 million of securities remaining available for issuance under our shelf registration statement filed with the SEC on March 23, 2009. Due to certain restrictions imposed by one state regulatory commission on our ability to issue securities under the new registration statement, we will be able to issue a total of $950 million in debt securities and $350 million in equity securities.
 
 
In addition to the financial covenants described above, our credit facilities and public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Additionally, our public debt indentures relating to our senior notes and debentures, as well as our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity.
 
Further, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate.
 
Finally, AEM’s credit agreement contains a provision that would limit the amount of credit available if Atmos Energy were downgraded below an S&P rating of BBB and a Moody’s rating of Baa2. We have no other triggering events in our debt instruments that are tied to changes in specified credit ratings or stock price, nor have we entered into any transactions that would require us to issue equity, based on our credit rating or other triggering events.
 
We were in compliance with all of our debt covenants as of March 31, 2010. If we were unable to comply with our debt covenants, we would likely be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions.
 
6.   Earnings Per Share
 
As discussed in Note 2, since we have non-vested share-based payments with a nonforfeitable right to dividends or dividend equivalents (referred to as participating securities) we are required to use the two-class method of computing earnings per share as of October 1, 2009. The Company’s non-vested restricted stock and restricted stock units, for which vesting is predicated solely on the passage of time granted under the 1998 Long-Term Incentive Plan, are considered to be participating securities. The calculation of earnings per share using the two-class method excludes income attributable to these participating securities from the numerator and excludes the dilutive impact of those shares from the denominator. The presentation of earnings per share for previously reported periods has been adjusted to reflect the retrospective adoption of this standard. Basic and diluted earnings per share for the three and six months ended March 31, 2010 and 2009 are calculated as follows:
 
                                 
    Three Months Ended
    Six Months Ended
 
    March 31     March 31  
    2010     2009     2010     2009  
    (In thousands, except per share amounts)  
 
Basic Earnings Per Share
                               
Net income
  $ 114,126     $ 129,003     $ 207,456     $ 204,966  
Less: Income allocated to participating securities
    1,142       1,183       2,088       1,817  
                                 
Net income available to common shareholders
  $ 112,984     $ 127,820     $ 205,368     $ 203,149  
                                 
Basic weighted average shares outstanding
    92,518       90,895       92,336       90,637  
                                 
Net income per share — Basic
  $ 1.22     $ 1.41     $ 2.22     $ 2.24  
                                 
Diluted Earnings Per Share
                               
Net income available to common shareholders
  $ 112,984     $ 127,820     $ 205,368     $ 203,149  
Effect of dilutive stock options and other shares
    3       3       5       4  
                                 
Net income available to common shareholders
  $ 112,987     $ 127,823     $ 205,373     $ 203,153  
                                 
Basic weighted average shares outstanding
    92,518       90,895       92,336       90,637  
Additional dilutive stock options and other shares
    335       297       345       298  
                                 
Diluted weighted average shares outstanding
    92,853       91,192       92,681       90,935  
                                 
Net income per share — Diluted
  $ 1.22     $ 1.40     $ 2.22     $ 2.23  
                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
There were no out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2010 as their exercise price was less than the average market price of the common stock during that period. There were approximately 260,000 out-of-the-money stock options excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2009.
 
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, 2010 and 2009 are presented in the following table. Most of these costs are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
 
                                 
    Three Months Ended March 31  
    Pension Benefits     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 3,994     $ 3,703     $ 3,359     $ 2,946  
Interest cost
    6,523       7,554       3,017       3,520  
Expected return on assets
    (6,320 )     (6,238 )     (615 )     (573 )
Amortization of transition asset
                378       378  
Amortization of prior service cost
    (194 )     (183 )     (375 )      
Amortization of actuarial loss
    2,823       955       94        
                                 
Net periodic pension cost
  $ 6,826     $ 5,791     $ 5,858     $ 6,271  
                                 
 
                                 
    Six Months Ended March 31  
    Pension Benefits     Other Benefits  
    2010     2009     2010     2009  
    (In thousands)  
 
Components of net periodic pension cost:
                               
Service cost
  $ 7,987     $ 7,406     $ 6,719     $ 5,892  
Interest cost
    13,047       15,108       6,035       7,040  
Expected return on assets
    (12,640 )     (12,476 )     (1,230 )     (1,146 )
Amortization of transition asset
                756       756  
Amortization of prior service cost
    (387 )     (366 )     (750 )      
Amortization of actuarial loss
    5,645       1,910       187        
                                 
Net periodic pension cost
  $ 13,652     $ 11,582     $ 11,717     $ 12,542  
                                 
 
The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2010 and 2009 are as follows:
 
                                 
    Pension Benefits   Other Benefits
    2010   2009   2010   2009
 
Discount rate
    5.52 %     7.57 %     5.52 %     7.57 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %
Expected return on plan assets
    8.25 %     8.25 %     5.00 %     5.00 %


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy has been to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. In accordance with the Pension Protection Act of 2006 (PPA), we determined the funded status of our plans as of January 1, 2010. Based upon this valuation, we expect we will be required to contribute less than $5 million to our pension plans by September 15, 2010.
 
We contributed $5.9 million to our other post-retirement benefit plans during the six months ended March 31, 2010. We expect to contribute a total of approximately $12 million to these plans during fiscal 2010.
 
For our Supplemental Executive Retirement Plans, we own equity securities that are classified as available-for-sale securities. These securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on a fund by fund basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related fund is written down to its estimated fair value and the other-than-temporary impairment is recognized in the income statement.
 
Assets for the supplemental plans are held in separate rabbi trusts and comprise the following:
 
                                 
          Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gain     Loss     Value  
    (In thousands)  
 
As of March 31, 2010:
                               
Domestic equity mutual funds
  $ 29,306     $ 5,132     $     $ 34,438  
Foreign equity mutual funds
    4,753       927             5,680  
Money market funds
    2,440                   2,440  
                                 
    $ 36,499     $ 6,059     $     $ 42,558  
                                 
As of September 30, 2009:
                               
Domestic equity mutual funds
  $ 26,012     $ 3,012     $     $ 29,024  
Foreign equity mutual funds
    4,047       893             4,940  
Money market funds
    7,735                   7,735  
                                 
    $ 37,794     $ 3,905     $     $ 41,699  
                                 
 
During the six months ended March 31, 2009, we recorded a $2.1 million noncash charge to impair certain available-for-sale investments due to deterioration of the market and the uncertainty of a full recovery. We did not maintain any investments that are in an unrealized loss position at March 31, 2010.
 
8.   Commitments and Contingencies
 
 
With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 12 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2010. We continue to believe that the final outcome of such litigation and environmental-related matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In addition, we are involved in other litigation and environmental-related matters or claims that arise in the ordinary course of our business. While the ultimate results of such litigation or response actions to such environmental-related matters or claims cannot be predicted with certainty, we believe the final outcome of such litigation or response actions will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
 
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, 2010, AEM was committed to purchase 98.7 Bcf within one year, 8.1 Bcf within one to three years and 2.5 Bcf after three years under indexed contracts. AEM is committed to purchase 2.0 Bcf within one year, 0.9 Bcf within one to three years and 0.1 Bcf after three years under fixed price contracts with prices ranging from $3.64 to $6.36 per Mcf. Purchases under these contracts totaled $538.6 million and $431.5 million for the three months ended March 31, 2010 and 2009 and $892.7 million and $959.0 million for the six months ended March 31, 2010 and 2009.
 
Our natural gas distribution divisions, except for our Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.
 
Our Mid-Tex Division maintains long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market and fixed prices. The estimated commitments under these contracts as of March 31, 2010 are as follows (in thousands):
 
         
2010
  $ 78,356  
2011
    150,999  
2012
    86,504  
2013
    6,564  
2014
    2,273  
Thereafter
     
         
    $ 324,696  
         
 
Our natural gas marketing and pipeline, storage and other segments maintain long-term contracts related to storage and transportation. The estimated contractual demand fees for contracted storage and transportation under these contracts are detailed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. There were no material changes to the estimated storage and transportation fees for the six months ended March 31, 2010.
 
 
As previously described in Note 12 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, in December 2007, the Company received data requests from the Division of Investigations of the Office of Enforcement of the Federal Energy Regulatory Commission (the “Commission”) in connection with its investigation into possible violations of the Commission’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines.
 
After responding to two sets of data requests received from the Commission, the Commission agreed to allow us to conduct our own internal investigation into compliance with the Commission’s rules. We have


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
completed our internal investigation and submitted the results to the Commission. During our investigation, we identified certain non-compliant transactions, and we continue to fully cooperate with the Commission as we work to resolve this matter. We have accrued what we believe is an adequate amount for the anticipated resolution of this proceeding. While the ultimate resolution of this investigation cannot be predicted with certainty, we believe that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
As of March 31, 2010, rate cases were in progress in our Kansas, Kentucky and Missouri service areas and annual rate filing mechanisms were in progress in our Mid-Tex service area. In addition, there were GRIP filings in progress in our Atmos Pipeline — Texas, Mid-Tex and West Texas divisions along with other rate activity in our Georgia and Louisiana service areas. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.
 
9.   Concentration of Credit Risk
 
Information regarding our concentration of credit risk is disclosed in Note 14 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. During the six months ended March 31, 2010, there were no material changes in our concentration of credit risk.
 
10.   Segment Information
 
As discussed in Note 1 above, we operate the Company through the following four segments:
 
  •  The natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations.
 
  •  The regulated transmission and storage segment, which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division.
 
  •  The natural gas marketing segment, which includes a variety of nonregulated natural gas management services.
 
  •  The pipeline, storage and other segment, which includes our nonregulated natural gas gathering transmission and storage services.
 
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in varying regulatory environments. Although our natural gas distribution segment operations are geographically dispersed, they are reported as a single segment as each natural gas distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. We evaluate performance based on net income or loss of the respective operating units.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Income statements for the three and six month periods ended March 31, 2010 and 2009 by segment are presented in the following tables:
 
                                                 
    Three Months Ended March 31, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 1,365,736     $ 21,643     $ 545,985     $ 6,902     $     $ 1,940,266  
Intersegment revenues
    252       33,538       146,167       2,148       (182,105 )      
                                                 
      1,365,988       55,181       692,152       9,050       (182,105 )     1,940,266  
Purchased gas cost
    980,603             685,672       1,369       (181,699 )     1,485,945  
                                                 
Gross profit
    385,385       55,181       6,480       7,681       (406 )     454,321  
Operating expenses
                                               
Operation and maintenance
    87,542       20,248       6,531       3,173       (406 )     117,088  
Depreciation and amortization
    46,748       5,282       424       626             53,080  
Taxes, other than income
    55,531       2,949       747       386             59,613  
                                                 
Total operating expenses
    189,821       28,479       7,702       4,185       (406 )     229,781  
                                                 
Operating income (loss)
    195,564       26,702       (1,222 )     3,496             224,540  
Miscellaneous income
(expense)
    776       (20 )     287       980       (1,974 )     49  
Interest charges
    29,256       7,954       2,820       1,526       (1,974 )     39,582  
                                                 
Income (loss) before income taxes
    167,084       18,728       (3,755 )     2,950             185,007  
Income tax expense (benefit)
    64,353       6,658       (1,313 )     1,183             70,881  
                                                 
Net income (loss)
  $ 102,731     $ 12,070     $ (2,442 )   $ 1,767     $     $ 114,126  
                                                 
Capital expenditures
  $ 95,765     $ 20,063     $ 47     $ 1,315     $     $ 117,190  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Three Months Ended March 31, 2009  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 1,230,196     $ 32,097     $ 549,136     $ 9,977     $     $ 1,821,406  
Intersegment revenues
    224       27,137       159,522       2,295       (189,178 )      
                                                 
      1,230,420       59,234       708,658       12,272       (189,178 )     1,821,406  
Purchased gas cost
    863,340             685,114       1,656       (188,755 )     1,361,355  
                                                 
Gross profit
    367,080       59,234       23,544       10,616       (423 )     460,051  
Operating expenses
                                               
Operation and maintenance
    90,710       17,327       12,323       1,889       (509 )     121,740  
Depreciation and amortization
    47,541       5,006       396       507             53,450  
Taxes, other than income
    55,101       2,572       446       195             58,314  
                                                 
Total operating expenses
    193,352       24,905       13,165       2,591       (509 )     233,504  
                                                 
Operating income
    173,728       34,329       10,379       8,025       86       226,547  
Miscellaneous income
(expense)
    835       283       118       2,060       (4,861 )     (1,565 )
Interest charges
    28,821       7,349       3,461       677       (4,775 )     35,533  
                                                 
Income before income taxes
    145,742       27,263       7,036       9,408             189,449  
Income tax expense
    44,166       7,798       3,688       4,794             60,446  
                                                 
Net income
  $ 101,576     $ 19,465     $ 3,348     $ 4,614     $     $ 129,003  
                                                 
Capital expenditures
  $ 84,618     $ 28,303     $ 88     $ 954     $     $ 113,963  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Six Months Ended March 31, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 2,168,422     $ 41,485     $ 1,006,806     $ 16,405     $     $ 3,233,118  
Intersegment revenues
    460       60,556       229,617       4,268       (294,901 )      
                                                 
      2,168,882       102,041       1,236,423       20,673       (294,901 )     3,233,118  
Purchased gas cost
    1,488,870             1,170,158       3,002       (294,082 )     2,367,948  
                                                 
Gross profit
    680,012       102,041       66,265       17,671       (819 )     865,170  
Operating expenses
                                               
Operation and maintenance
    183,575       37,827       15,286       5,081       (819 )     240,950  
Depreciation and amortization
    94,605       10,224       835       1,255             106,919  
Taxes, other than income
    93,521       6,216       1,682       746             102,165  
                                                 
Total operating expenses
    371,701       54,267       17,803       7,082       (819 )     450,034  
                                                 
Operating income
    308,311       47,774       48,462       10,589             415,136  
Miscellaneous income
(expense)
    1,433       23       495       1,433       (3,604 )     (220 )
Interest charges
    58,934       15,922       5,198       1,840       (3,604 )     78,290  
                                                 
Income before income taxes
    250,810       31,875       43,759       10,182             336,626  
Income tax expense
    96,631       11,351       17,189       3,999             129,170  
                                                 
Net income
  $ 154,179     $ 20,524     $ 26,570     $ 6,183     $     $ 207,456  
                                                 
Capital expenditures
  $ 196,227     $ 33,822     $ 453     $ 2,127     $     $ 232,629  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Six Months Ended March 31, 2009  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     Storage     Marketing     Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 2,285,968     $ 62,319     $ 1,165,980     $ 23,471     $     $ 3,537,738  
Intersegment revenues
    420       51,597       330,173       5,249       (387,439 )      
                                                 
      2,286,388       113,916       1,496,153       28,720       (387,439 )     3,537,738  
Purchased gas cost
    1,620,924             1,442,586       5,559       (386,594 )     2,682,475  
                                                 
Gross profit
    665,464       113,916       53,567       23,161       (845 )     855,263  
Operating expenses
                                               
Operation and maintenance
    186,928       44,664       20,783       3,059       (1,017 )     254,417  
Depreciation and amortization
    94,680       9,961       797       1,138             106,576  
Taxes, other than income
    95,847       5,360       1,039       205             102,451  
Asset impairments
    1,776       232       56       14             2,078  
                                                 
Total operating expenses
    379,231       60,217       22,675       4,416       (1,017 )     465,522  
                                                 
Operating income
    286,233       53,699       30,892       18,745       172       389,741  
Miscellaneous income
(expense)
    3,956       1,098       419       4,221       (11,560 )     (1,866 )
Interest charges
    61,708       15,428       7,363       1,413       (11,388 )     74,524  
                                                 
Income before income taxes
    228,481       39,369       23,948       21,553             313,351  
Income tax expense
    76,772       12,243       10,025       9,345             108,385  
                                                 
Net income
  $ 151,709     $ 27,126     $ 13,923     $ 12,208     $     $ 204,966  
                                                 
Capital expenditures
  $ 173,621     $ 33,363     $ 117     $ 14,229     $     $ 221,330  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Balance sheet information at March 31, 2010 and September 30, 2009 by segment is presented in the following tables:
 
                                                 
    March 31, 2010  
    Natural
    Regulated
    Natural
    Pipeline,
             
    Gas
    Transmission
    Gas
    Storage and
             
    Distribution     and Storage     Marketing     Other     Eliminations     Consolidated  
                (In thousands)              
 
ASSETS
                                               
Property, plant and equipment, net
  $ 3,811,548     $ 697,167     $ 7,229     $ 74,531     $     $ 4,590,475  
Investment in subsidiaries
    597,982             (2,096 )           (595,886 )      
Current assets
                                               
Cash and cash equivalents
    53,441             173,340       4,372             231,153  
Assets from risk management activities
    281             19,017       833       (833 )     19,298  
Other current assets
    571,092       14,726       278,909       71,287       (79,106 )     856,908  
Intercompany receivables
    507,490                   176,488       (683,978 )      
                                                 
Total current assets
    1,132,304       14,726       471,266       252,980       (763,917 )     1,107,359  
Intangible assets
                1,147                   1,147  
Goodwill
    571,592       132,300       24,282       10,429             738,603  
Noncurrent assets from risk management activities
                8,913                   8,913  
Deferred charges and other assets
    280,265       8,701       1,164       16,563             306,693  
                                                 
    $ 6,393,691     $ 852,894     $ 511,905     $ 354,503     $ (1,359,803 )   $ 6,753,190  
                                                 
CAPITALIZATION AND LIABILITIES
                                               
Shareholders’ equity
  $ 2,338,843     $ 191,724     $ 107,420     $ 298,838     $ (597,982 )   $ 2,338,843  
Long-term debt
    2,159,148                   327             2,159,475  
                                                 
Total capitalization
    4,497,991       191,724       107,420       299,165       (597,982 )     4,498,318  
Current liabilities
                                               
Current maturities of long-term debt
    10,000                   131             10,131  
Short-term debt
    20,475             40,000             (60,475 )      
Liabilities from risk management activities
    22,016             3,483             (833 )     24,666  
Other current liabilities
    657,020       7,961       239,894       41,376       (16,535 )     929,716  
Intercompany payables
          555,141       128,837             (683,978 )      
                                                 
Total current liabilities
    709,511       563,102       412,214       41,507       (761,821 )     964,513  
Deferred income taxes
    501,447       93,550       (12,277 )     11,549             594,269  
Noncurrent liabilities from risk management activities
                3,854                   3,854  
Regulatory cost of removal obligation
    317,203                               317,203  
Deferred credits and other liabilities
    367,539       4,518       694       2,282             375,033  
                                                 
    $ 6,393,691     $ 852,894     $ 511,905     $ 354,503     $ (1,359,803 )   $ 6,753,190  
                                                 
 


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

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The Board of Directors and Shareholders of
Atmos Energy Corporation
 
We have reviewed the condensed consolidated balance sheet of Atmos Energy Corporation as of March 31, 2010, the related condensed consolidated statements of income for the three-month and six-month periods ended March 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2010 and 2009. These financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Atmos Energy Corporation as of September 30, 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated November 16, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/  Ernst & Young LLP
 
Dallas, Texas
May 6, 2010


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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, 2009.
 
 
The statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties, which are discussed in more detail in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, include the following: our ability to continue to access the credit markets to satisfy our liquidity requirements; the impact of adverse economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the impact of possible future additional regulatory and financial risks associated with global warming and climate change on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the inherent hazards and risks involved in operating our gas distribution business; natural disasters, terrorist activities or other events; and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which are beyond our control. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.
 
 
Atmos Energy and our subsidiaries are engaged primarily in the regulated natural gas distribution and transportation and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to over 3 million residential, commercial, public authority and industrial customers throughout our six regulated natural gas distribution divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our regulated distribution and pipeline systems.
 
Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast and natural gas transportation and storage services to certain of our natural gas distribution divisions and to third parties. Through our asset optimization activities, we also seek to maximize the economic value associated with the storage and transportation capacity we own or control.


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We operate the Company through the following four segments:
 
  •  the natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations,
 
  •  the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division,
 
  •  the natural gas marketing segment, which includes a variety of nonregulated natural gas management services and
 
  •  the pipeline, storage and other segment, which is comprised of our nonregulated natural gas gathering, transmission and storage services.
 
 
Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results may differ from such estimates.
 
Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and include the following:
 
  •  Regulation
 
  •  Revenue Recognition
 
  •  Allowance for Doubtful Accounts
 
  •  Financial Instruments and Hedging Activities
 
  •  Impairment Assessments
 
  •  Pension and Other Postretirement Plans
 
  •  Fair Value Measurements
 
Our critical accounting policies are reviewed quarterly by the Audit Committee. There were no significant changes to these critical accounting policies during the six months ended March 31, 2010.
 
RESULTS OF OPERATIONS
 
The second quarter is our most important earnings quarter, where historically, we have earned about 64 percent of our annual net income. For the three months ended March 31, 2010, we reported net income of $114.1 million, or $1.22 per diluted share compared with net income of $129.0 million, or $1.40 per diluted share in the prior-year quarter. During the three months ended March 31, 2010, we experienced a 26 percent increase in consolidated distribution throughput due to colder weather in most of our service areas, which was partially offset by a 20 percent decrease in consolidated throughput in our regulated transmission and storage segment due to reduced demand and basis spreads. In addition, net income for the second quarter includes the positive impact of a state sales tax refund of $4.5 million which contributed $0.05 per diluted share. The results of our nonregulated operations also include noncash, unrealized net losses of $25.5 million, or ($0.27) per diluted share recognized during the quarter.


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We reported net income of $207.5 million, or $2.22 per diluted share for the six months ended March 31, 2010 compared with net income of $205.0 million, or $2.23 per diluted share in the prior-year period. Regulated operations contributed 84 percent of our net income during this period with our nonregulated operations contributing the remaining 16 percent. The primary driver in the year-over-year increase in net income was due to our natural gas marketing segment experiencing a significant increase in unrealized margins. The favorable movement in our unrealized margins was primarily the result of the period-over-period timing of storage withdrawal gains and the associated reversal of unrealized gains into realized gains.
 
During the six months ended March 31, 2010, colder-than-normal-weather during the current year and recent improvements in rate designs in our natural gas distribution segment partially offset the decline in demand for natural gas, which contributed to a 25 percent year-over-year decrease in consolidated throughput in our regulated transmission and storage segment and a three percent year-over-year decrease in consolidated sales volumes in our natural gas marketing segment.
 
During the year, we continued to successfully access the capital markets and received updated debt ratings from two rating agencies. In October 2009, we renewed a $200 million 364-day committed credit facility and in December 2009 we renewed a $450 million 364-day committed credit facility for our nonregulated operations. In March 2010, Moody’s upgraded our rating outlook from stable to positive and affirmed the existing credit rating on our senior long-term debt and commercial paper while S&P affirmed our rating outlook as stable and our senior long-term debt credit rating. The new credit facilities should help ensure we have sufficient liquidity to fund our working capital needs, while our credit ratings should help us continue to obtain financing at a reasonable cost in the future.
 
The following table presents our consolidated financial highlights for the three and six months ended March 31, 2010 and 2009:
 
                                 
    Three Months Ended
  Six Months Ended
    March 31   March 31
    2010   2009   2010   2009
    (In thousands, except per share data)
 
Operating revenues
  $ 1,940,266     $ 1,821,406     $ 3,233,118     $ 3,537,738  
Gross profit
    454,321       460,051       865,170       855,263  
Operating expenses
    229,781       233,504       450,034       465,522  
Operating income
    224,540       226,547       415,136       389,741  
Miscellaneous income (expense)
    49       (1,565 )     (220 )     (1,866 )
Interest charges
    39,582       35,533       78,290       74,524  
Income before income taxes
    185,007       189,449       336,626       313,351  
Income tax ex