Edgar Filing: ATMOS ENERGY CORP

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)


Texas and Virginia		75-1743247
(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)

Three Lincoln Centre, Suite 1800 5430 LBJ Freeway, Dallas, Texas		75240 (Zip code)
(Address of principal executive offices)

(972) 934-9227

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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 ¨		Non-Accelerated Filer ¨		Smaller Reporting Company ¨

(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 ¨ No þ

Number of shares outstanding of each of the issuer’s classes of common stock, as of April 27, 2012.


Class		Shares Outstanding
No Par Value		90,030,471

GLOSSARY OF KEY TERMS


AEC		Atmos Energy Corporation
AEH		Atmos Energy Holdings, Inc.
AEM		Atmos Energy Marketing, LLC
AOCI		Accumulated other comprehensive income
APS		Atmos Pipeline and Storage, LLC
Bcf		Billion cubic feet
CFTC		Commodity Futures Trading Commission
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
PRP		Pipeline Replacement Program
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

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2012			September 30, 2011
	(Unaudited)
	(In thousands, except share data)
ASSETS
Property, plant and equipment	$	6,992,899		$	6,816,794
Less accumulated depreciation and amortization		1,658,887			1,668,876

Net property, plant and equipment		5,334,012			5,147,918
Current assets
Cash and cash equivalents		47,040			131,419
Accounts receivable, net		350,261			273,303
Gas stored underground		221,112			289,760
Other current assets		275,428			316,471

Total current assets		893,841			1,010,953
Goodwill and intangible assets		740,185			740,207
Deferred charges and other assets		400,689			383,793

	$	7,368,727		$	7,282,871

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, 2012 — 90,029,852 shares;
September 30, 2011 — 90,296,482 shares	$	450		$	451
Additional paid-in capital		1,728,150			1,732,935
Retained earnings		685,206			570,495
Accumulated other comprehensive loss		(53,094	)		(48,460	)

Shareholders’ equity		2,360,712			2,255,421
Long-term debt		1,956,213			2,206,117

Total capitalization		4,316,925			4,461,538
Current liabilities
Accounts payable and accrued liabilities		309,864			291,205
Other current liabilities		374,123			367,563
Short-term debt		173,996			206,396
Current maturities of long-term debt		250,131			2,434

Total current liabilities		1,108,114			867,598
Deferred income taxes		1,062,488			960,093
Regulatory cost of removal obligation		414,001			428,947
Deferred credits and other liabilities		467,199			564,695

	$	7,368,727		$	7,282,871

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended March 31
	2012			2011
	(Unaudited)
	(In thousands, except per share data)
Operating revenues
Natural gas distribution segment	$	889,008		$	1,077,414
Regulated transmission and storage segment		58,037			54,976
Nonregulated segment		370,763			583,531
Intersegment eliminations		(74,358	)		(134,424	)

		1,243,450			1,581,497
Purchased gas cost
Natural gas distribution segment		508,206			698,410
Regulated transmission and storage segment		—			—
Nonregulated segment		374,992			563,473
Intersegment eliminations		(74,009	)		(134,054	)

		809,189			1,127,829

Gross profit		434,261			453,668
Operating expenses
Operation and maintenance		110,708			114,162
Depreciation and amortization		60,272			55,467
Taxes, other than income		54,919			53,558
Asset impairment		—			19,282

Total operating expenses		225,899			242,469

Operating income		208,362			211,199
Miscellaneous income		616			26,202
Interest charges		36,660			37,875

Income from continuing operations before income taxes		172,318			199,526
Income tax expense		66,408			71,366

Income from continuing operations		105,910			128,160
Income from discontinued operations, net of tax ($1,834 and $2,642)		3,201			4,049

Net income	$	109,111		$	132,209

Basic earnings per share
Income per share from continuing operations	$	1.16		$	1.41
Income per share from discontinued operations		0.04			0.04

Net income per share — basic	$	1.20		$	1.45

Diluted earnings per share
Income per share from continuing operations	$	1.16		$	1.41
Income per share from discontinued operations		0.04			0.04

Net income per share — diluted	$	1.20		$	1.45

Cash dividends per share	$	0.345		$	0.340

Weighted average shares outstanding:
Basic		90,020			90,246

Diluted		90,322			90,533

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Six Months Ended March 31
	2012			2011
	(Unaudited)
	(In thousands, except per share data)
Operating revenues
Natural gas distribution segment	$	1,582,300		$	1,780,876
Regulated transmission and storage segment		114,796			103,983
Nonregulated segment		814,939			1,059,171
Intersegment eliminations		(167,412	)		(229,271	)

		2,344,623			2,714,759
Purchased gas cost
Natural gas distribution segment		910,413			1,110,936
Regulated transmission and storage segment		—			—
Nonregulated segment		803,763			1,013,935
Intersegment eliminations		(166,696	)		(228,504	)

		1,547,480			1,896,367

Gross profit		797,143			818,392
Operating expenses
Operation and maintenance		226,770			228,652
Depreciation and amortization		119,487			110,244
Taxes, other than income		98,117			93,726
Asset impairment		—			19,282

Total operating expenses		444,374			451,904

Operating income		352,769			366,488
Miscellaneous income (expense)		(1,259	)		25,476
Interest charges		72,102			76,770

Income from continuing operations before income taxes		279,408			315,194
Income tax expense		107,710			115,934

Income from continuing operations		171,698			199,260
Income from discontinued operations, net of tax ($3,393 and $4,532)		5,920			6,946

Net income	$	177,618		$	206,206

Basic earnings per share
Income per share from continuing operations	$	1.89		$	2.18
Income per share from discontinued operations		0.06			0.08

Net income per share — basic	$	1.95		$	2.26

Diluted earnings per share
Income per share from continuing operations	$	1.88		$	2.18
Income per share from discontinued operations		0.06			0.08

Net income per share — diluted	$	1.94		$	2.26

Cash dividends per share	$	0.690		$	0.680

Weighted average shares outstanding:
Basic		90,137			90,157

Diluted		90,440			90,455

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended March 31
	2012			2011
	(Unaudited) (In thousands)
Cash Flows From Operating Activities
Net income	$	177,618		$	206,206
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairment		—			19,282
Depreciation and amortization:
Charged to depreciation and amortization		122,532			113,297
Charged to other accounts		203			98
Deferred income taxes		102,052			115,302
Other		9,874			10,255
Net assets / liabilities from risk management activities		15,690			(17,478	)
Net change in operating assets and liabilities		(67,246	)		(8,491	)

Net cash provided by operating activities		360,723			438,471
Cash Flows From Investing Activities
Capital expenditures		(311,123	)		(246,663	)
Other, net		(3,878	)		(1,535	)

Net cash used in investing activities		(315,001	)		(248,198	)
Cash Flows From Financing Activities
Net decrease in short-term debt		(48,945	)		(128,884	)
Unwinding of Treasury lock agreements		—			27,803
Repayment of long-term debt		(2,369	)		(10,066	)
Cash dividends paid		(62,907	)		(62,067	)
Repurchase of common stock		(12,535	)		—
Repurchase of equity awards		(3,509	)		(3,333	)
Issuance of common stock		164			7,568

Net cash used in financing activities		(130,101	)		(168,979	)

Net increase (decrease) in cash and cash equivalents		(84,379	)		21,294
Cash and cash equivalents at beginning of period		131,419			131,952

Cash and cash equivalents at end of period	$	47,040		$	153,246

See accompanying notes to condensed consolidated financial statements.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2012

1. Nature of Business

Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as certain other nonregulated businesses. Our corporate headquarters and shared-services function are located in Dallas, Texas and our customer support centers are located in Amarillo and Waco, Texas.

Through our natural gas distribution business, we deliver natural gas through sales and transportation arrangements to over three million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions which currently cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system. In May 2011, we entered into a definitive agreement to sell our natural gas distribution operations in Missouri, Illinois and Iowa, representing approximately 84,000 customers. After the closing of this transaction, which we currently anticipate will occur during fiscal 2012, we will operate in nine states. 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 regulated 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 through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc., (AEH). AEH is wholly owned by the Company and based in Houston, Texas. Through AEH, we provide natural gas management and transportation services to municipalities, natural gas distribution companies, including certain divisions of Atmos Energy and third parties. AEH also seeks to maximize, through asset optimization activities, the economic value associated with storage and transportation capacity it owns or controls. Certain of these arrangements are with regulated affiliates of the Company, which have been approved by applicable state regulatory commissions.

We operate the Company through the following three 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 and

•

the nonregulated segment, which includes our nonregulated natural gas management, nonregulated natural gas transmission, storage and other 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, 2011. 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, 2011. Because of seasonal and other factors, the results of operations for the six-month period ended March 31, 2012 are not indicative of our results of operations for the full 2012 fiscal year, which ends September 30, 2012.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have evaluated subsequent events from the March 31, 2012 balance sheet date through the date these financial statements were filed with the Securities and Exchange Commission (SEC). Except as discussed in Note 6, no events have occurred subsequent to the balance sheet date that would require recognition or disclosure in the condensed consolidated financial statements.

Significant accounting policies

Our accounting policies are described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Due to the pending sale of our distribution operations in our Missouri, Illinois and Iowa service areas, the financial results for these service areas are shown in discontinued operations. Accordingly, certain prior-year amounts have been reclassified to conform with the current year presentation.

During the second quarter of fiscal 2012, we completed our annual goodwill impairment assessment. Based on the assessment performed, we determined that our goodwill was not impaired.

During the six months ended March 31, 2012, two new accounting standards were announced that will become applicable to the Company in future periods. The first standard requires enhanced disclosure of offsetting arrangements for financial instruments and will become effective for annual periods beginning after January 1, 2013 and for interim periods within those annual periods. The second standard indefinitely defers the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income as prescribed by a previously issued standard, which were initially to be effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards should not have an 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, 2012.

Regulatory assets and liabilities

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

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant regulatory assets and liabilities as of March 31, 2012 and September 30, 2011 included the following:


	March 31, 2012		September 30, 2011
	(In thousands)
Regulatory assets:
Pension and postretirement benefit costs	$	245,096	$	254,666
Merger and integration costs, net		5,998		6,242
Deferred gas costs		19,547		33,976
Regulatory cost of removal asset		10,233		8,852
Environmental costs		117		385
Rate case costs		4,503		4,862
Deferred franchise fees		333		379
Other		8,861		3,534

	$	294,688	$	312,896

Regulatory liabilities:
Deferred gas costs	$	15,232	$	8,130
Regulatory cost of removal obligation		463,740		464,025
Other		13,090		14,025

	$	492,062	$	486,180

The amounts above do not include regulatory assets and liabilities related to our Missouri, Illinois and Iowa service areas, which are classified as assets held for sale as discussed in Note 5.

During the prior fiscal year, the Railroad Commission of Texas’ Division of Public Safety issued a new rule requiring natural gas distribution companies to develop and implement a risk-based program for the renewal or replacement of distribution facilities, including steel service lines. The rule allows for the deferral of all expenses associated with capital expenditures incurred pursuant to this rule, including the recording of interest on the deferred expenses until the next rate proceeding (rate case or annual rate filing) at which time investment and costs would be recovered through base rates. As of March 31, 2012, we had deferred $0.7 million associated with the requirements of this rule which are recorded in “Other” in the regulatory assets table above.

Effective January 1, 2012, the Texas Legislature amended its Gas Utility Regulatory Act (GURA) to permit natural gas utilities to defer into a regulatory asset or liability the difference between a gas utility’s actual pension and postretirement expense and the level of such expense recoverable in its existing rates. The deferred amount will become eligible for inclusion in the utility’s rates in its next rate proceeding. During the quarter, we elected to utilize this provision of GURA, effective January 1, 2012, and established a regulatory asset totaling $2.5 million, which is recorded in “Other” in the regulatory assets table above. Of this amount, $1.4 million represented a reduction to operation and maintenance expense during the second quarter of fiscal 2012.

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.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Comprehensive income

The following table presents the components of comprehensive income (loss), net of related tax, for the three-month and six-month periods ended March 31, 2012 and 2011:


	Three Months Ended March 31						Six Months Ended March 31
	2012			2011			2012			2011
	(In thousands)
Net income	$	109,111		$	132,209		$	177,618		$	206,206
Unrealized holding gains on investments, net of tax expense of $1,203 and $477 for the three months ended March 31, 2012 and 2011 and of $1,717 and $932 for the six months ended March 31, 2012 and 2011		2,046			810			2,947			1,586
Amortization, unrealized gain and unwinding of treasury lock agreements, net of tax expense (benefit) of $9,042 and $(6,125) for the three months ended March 31, 2012 and 2011 and $8,404 and $12,579 for the six month ended March 31, 2012 and 2011		15,396			(10,427	)		14,309			21,420
Net unrealized gains (losses) on cash flow hedging transactions, net of tax expense (benefit) of $(3,399) and $2,573 for the three months ended March 31, 2012 and 2011 and $(13,996) and $9,190 for the six months ended March 31, 2012 and 2011		(5,315	)		4,025			(21,890	)		14,375

Comprehensive income	$	121,238		$	126,617		$	172,984		$	243,587

Accumulated other comprehensive income (loss), net of tax, as of March 31, 2012 and September 30, 2011 consisted of the following unrealized gains (losses):


	March 31, 2012			September 30, 2011
	(In thousands)
Accumulated other comprehensive income (loss):
Unrealized holding gains on investments	$	5,505		$	2,558
Treasury lock agreements		(19,848	)		(34,157	)
Cash flow hedges		(38,751	)		(16,861	)

	$	(53,094	)	$	(48,460	)

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 consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the six months ended March 31, 2012 there were no changes in our objectives, strategies and accounting for these financial instruments. Currently, we utilize finan-

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

cial instruments in our natural gas distribution and nonregulated segments. 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 payments to be accelerated when our financial instruments are in net liability positions.

Regulated Commodity Risk Management Activities

Although our purchased gas cost adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our customers are exposed to the effects of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.

Our 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 2011-2012 heating season (generally October through March), in the jurisdictions where we are permitted to utilize financial instruments, we hedged approximately 25 percent, or 25.7 Bcf of the 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 cost adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with applicable authoritative accounting guidance. Accordingly, there is no earnings impact on our natural gas distribution segment as a result of the use of financial instruments.

Nonregulated Commodity Risk Management Activities

The primary business in our nonregulated operations is to aggregate and purchase gas supply, arrange transportation and/or storage logistics and ultimately deliver gas to our customers at competitive prices. We utilize proprietary and customer-owned transportation and storage assets to serve these customers, and will seek to maximize the value of this storage capacity through the arbitrage of pricing differences that occur over time by selling financial instruments at advantageous prices to lock in a gross profit margin to enhance our gross profit by maximizing the economic value associated with the storage and transportation capacity we own or control.

As a result of these activities, our nonregulated segment is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange traded options and swap contracts with counterparties. Future 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 nonregulated operations associated with deliveries under fixed-priced forward contracts to deliver gas to customers. These financial instruments have maturity dates ranging from one to 56 months. We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our nonregulated segment.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Also, in our nonregulated operations, 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.

Interest Rate Risk Management Activities

We periodically manage interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings.

As of March 31, 2012, we had three Treasury lock agreements outstanding to fix the Treasury yield component of 30-year unsecured notes, which we plan to issue to refinance our $250 million unsecured 5.125% Senior Notes that mature in January 2013.

In prior years, we entered into Treasury lock agreements to fix the Treasury yield component of the interest cost of financing various issuances of long-term debt and senior notes. The gains and losses realized upon settlement of these Treasury locks were recorded as a component of accumulated other comprehensive income (loss) when they were settled and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement. The remaining amortization periods for the settled Treasury locks extend through fiscal 2041.

Quantitative Disclosures Related to Financial Instruments

The following tables present detailed information concerning the impact of financial instruments on our condensed consolidated balance sheet and income statements.

As of March 31, 2012, 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, 2012, we had net long/(short) commodity contracts outstanding in the following quantities:


Contract Type	Hedge Designation	Natural Gas Distribution		Nonregulated
		Quantity (MMcf)
Commodity contracts	Fair Value		—		(38,340	)
	Cash Flow		—		49,098
	Not designated		6,033		28,190

			6,033		38,948

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2012 and September 30, 2011. 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 $5.7 million and $28.8 million of cash held on deposit in margin accounts as of March 31, 2012 and September 30, 2011 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.


	Balance Sheet Location	Natural Gas Distribution			Nonregulated			Total
					(In thousands)
March 31, 2012
Designated As Hedges:
Asset Financial Instruments
Current commodity contracts	Other current assets	$	—		$	77,441		$	77,441
Noncurrent commodity contracts	Deferred charges and other assets		—			—			—
Liability Financial Instruments
Current commodity contracts	Other current liabilities		(45,818	)		(59,301	)		(105,119	)
Noncurrent commodity contracts	Deferred credits and other liabilities		—			(10,914	)		(10,914	)

Total			(45,818	)		7,226			(38,592	)
Not Designated As Hedges:
Asset Financial Instruments
Current commodity contracts	Other current assets		502			137,934			138,436
Noncurrent commodity contracts	Deferred charges and other assets		—			85,951			85,951

Liability Financial Instruments
Current commodity contracts	Other current liabilities⁽¹⁾		(2,215	)		(164,189	)		(166,404	)
Noncurrent commodity contracts	Deferred credits and other liabilities		(1	)		(69,496	)		(69,497	)

Total			(1,714	)		(9,800	)		(11,514	)

Total Financial Instruments		$	(47,532)		$	(2,574	)	$	(50,106	)

⁽¹⁾

Other current liabilities not designated as hedges in our natural gas distribution segment include $0.8 million related to risk management liabilities that were classified as assets held for sale at March 31, 2012.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Balance Sheet Location	Natural Gas Distribution			Nonregulated			Total
					(In thousands)
September 30, 2011
Designated As Hedges:
Asset Financial Instruments
Current commodity contracts	Other current assets	$	—		$	22,396		$	22,396
Noncurrent commodity contracts	Deferred charges and other assets		—			174			174
Liability Financial Instruments
Current commodity contracts	Other current liabilities		—			(31,064	)		(31,064	)
Noncurrent commodity contracts	Deferred credits and other liabilities		(67,527	)		(7,709	)		(75,236	)

Total			(67,527	)		(16,203	)		(83,730	)
Not Designated As Hedges:
Asset Financial Instruments
Current commodity contracts	Other current assets		843			67,710			68,553
Noncurrent commodity contracts	Deferred charges and other assets		998			22,379			23,377
Liability Financial Instruments
Current commodity contracts	Other current liabilities⁽¹⁾		(13,256	)		(73,865	)		(87,121	)
Noncurrent commodity contracts	Deferred credits and other liabilities		(335	)		(25,071	)		(25,406	)

Total			(11,750	)		(8,847	)		(20,597	)

Total Financial Instruments		$	(79,277)		$	(25,050	)	$	(104,327	)

⁽¹⁾

Other current liabilities not designated as hedges in our natural gas distribution segment include $1.3 million related to risk management liabilities that were classified as assets held for sale at September 30, 2011.

Impact of Financial Instruments on the Income Statement

Hedge ineffectiveness for our nonregulated segment 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, 2012 and 2011 we recognized a gain (loss) arising from fair value and cash flow hedge ineffectiveness of $(6.2) million and $4.1 million. For the six months ended March 31, 2012 and 2011 we recognized gains arising from fair value and cash flow hedge ineffectiveness of $2.2 million and $17.5 million. Additional information regarding ineffectiveness recognized in the income statement is included in the tables below.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value Hedges

The impact of our nonregulated 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, 2012 and 2011 is presented below.


	Three Months Ended March 31
	2012			2011
	(In thousands)
Commodity contracts	$	29,090		$	(1,279	)
Fair value adjustment for natural gas inventory designated as the hedged item		(35,087	)		5,586

Total impact on revenue	$	(5,997	)	$	4,307

The impact on revenue is comprised of the following:
Basis ineffectiveness	$	(739	)	$	(509	)
Timing ineffectiveness		(5,258	)		4,816

	$	(5,997	)	$	4,307


	Six Months Ended March 31
	2012			2011
	(In thousands)
Commodity contracts	$	53,153		$	(3,003	)
Fair value adjustment for natural gas inventory designated as the hedged item		(50,335	)		21,211

Total impact on revenue	$	2,818		$	18,208

The impact on revenue is comprised of the following:
Basis ineffectiveness	$	102		$	412
Timing ineffectiveness		2,716			17,796

	$	2,818		$	18,208

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.

To the extent that the Company’s natural gas inventory does not qualify as a hedged item in a fair-value hedge, or has not been designated as such, the natural gas inventory is valued at the lower of cost or market. During the six months ended March 31, 2012, we recorded a $1.7 million charge to write down nonqualifying natural gas inventory to market. We did not record a writedown for nonqualifying natural gas inventory for the six months ended March 31, 2011.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash Flow Hedges

The impact of cash flow hedges on our condensed consolidated income statements for the three and six months ended March 31, 2012 and 2011 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 when the underlying physical and financial transactions were settled.


	Three Months Ended March 31, 2012
	Natural Gas Distribution			Regulated Transmission and Storage		Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI into revenue for effective portion of commodity contracts	$	—		$	—	$	(21,181	)	$	(21,181	)
Loss arising from ineffective portion of commodity contracts		—			—		(238	)		(238	)

Total impact on revenue		—			—		(21,419	)		(21,419	)
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense		(502	)		—		—			(502	)

Total Impact from Cash Flow Hedges	$	(502	)	$	—	$	(21,419	)	$	(21,921	)


	Three Months Ended March 31, 2011
	Natural Gas Distribution			Regulated Transmission and Storage		Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI into revenue for effective portion of commodity contracts	$	—		$	—	$	(7,328	)	$	(7,328	)
Loss arising from ineffective portion of commodity contracts		—			—		(233	)		(233	)

Total impact on revenue		—			—		(7,561	)		(7,561	)
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense		(669	)		—		—			(669	)
Gain on unwinding of Treasury lock reclassified from AOCI into miscellaneous income		21,803			6,000		—			27,803

Total Impact from Cash Flow Hedges	$	21,134		$	6,000	$	(7,561	)	$	19,573

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Six Months Ended March 31, 2012
	Natural Gas Distribution			Regulated Transmission and Storage		Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI into revenue for effective portion of commodity contracts	$	—		$	—	$	(32,823	)	$	(32,823	)
Loss arising from ineffective portion of commodity contracts		—			—		(668	)		(668	)

Total impact on revenue		—			—		(33,491	)		(33,491	)
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense		(1,004	)		—		—			(1,004	)

Total Impact from Cash Flow Hedges	$	(1,004	)	$	—	$	(33,491	)	$	(34,495	)


	Six Months Ended March 31, 2011
	Natural Gas Distribution			Regulated Transmission and Storage		Nonregulated			Consolidated
	(In thousands)
Loss reclassified from AOCI into revenue for effective portion of commodity contracts	$	—		$	—	$	(21,581	)	$	(21,581	)
Loss arising from ineffective portion of commodity contracts		—			—		(677	)		(677	)

Total impact on revenue		—			—		(22,258	)		(22,258	)
Loss on settled Treasury lock agreements reclassified from AOCI into interest expense		(1,339	)		—		—			(1,339	)
Gain on unwinding of Treasury lock reclassified from AOCI into miscellaneous income		21,803			6,000		—			27,803

Total Impact from Cash Flow Hedges	$	20,464		$	6,000	$	(22,258	)	$	4,206

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, 2012 and 2011. 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 March 31						Six Months Ended March 31
	2012			2011			2012			2011
	(In thousands)
Increase (decrease) in fair value:
Treasury lock agreements	$	15,079		$	6,667		$	13,676		$	38,092
Forward commodity contracts		(18,234	)		(446	)		(41,912	)		1,211
Recognition of (gains) losses in earnings due to settlements:
Treasury lock agreements		317			(17,094	)		633			(16,672	)
Forward commodity contracts		12,919			4,471			20,022			13,164

Total other comprehensive income (loss) from hedging, net of tax⁽¹⁾	$	10,081		$	(6,402	)	$	(7,581	)	$	35,795

⁽¹⁾

Utilizing an income tax rate ranging from 37 percent to 39 percent based on the effective rates in each taxing jurisdiction.

Deferred gains (losses) recorded in accumulated other comprehensive income (AOCI) associated with our treasury lock agreements are recognized in earnings as they are amortized over the terms of the underlying debt instruments, while deferred losses associated with commodity contracts are recognized in earnings upon settlement. The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred gains (losses) recorded in AOCI associated with our financial instruments, based upon the fair values of these financial instruments as of March 31, 2012. However, the table below does not include the expected recognition in earnings of our outstanding Treasury lock agreements as these instruments have not yet settled.


	Treasury Lock Agreements			Commodity Contracts			Total
	(In thousands)
Next twelve months	$	(1,266	)	$	(32,130	)	$	(33,396	)
Thereafter		10,284			(6,621	)		3,663

Total⁽¹⁾	$	9,018		$	(38,751	)	$	(29,733	)

⁽¹⁾

Utilizing an income tax rate ranging from 37 percent to 39 percent based on 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 months ended March 31, 2012 and 2011 was an increase (decrease) in revenue of $(12.8) million and $4.0 million. For the six months ended March 31, 2012 and 2011 revenue increased (decreased) $(15.0) million and $8.2 million. 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.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As discussed above, financial instruments used in our natural gas distribution segment are not designated as hedges. However, there is no earnings impact on our natural gas distribution segment as a result of the use of these financial instruments because the gains and losses arising from the use of these financial instruments are recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue. Accordingly, the impact of these financial instruments is excluded from this presentation.

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, 2011. During the three and six months ended March 31, 2012, there were no changes in these methods.

Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about fair value measurements of the assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 9 to the financial statements in our Annual Report on Form 10-K for the fiscal year ending September 30, 2011.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Quantitative Disclosures

Financial Instruments

The classification of our fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. Authoritative accounting literature establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), with the lowest priority given to unobservable inputs (Level 3). The following tables summarize, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and September 30, 2011. Assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)⁽¹⁾		Significant Other Unobservable Inputs (Level 3)		Netting and Cash Collateral⁽²⁾			March 31, 2012
	(In thousands)
Assets:
Financial instruments
Natural gas distribution segment	$	—	$	502	$	—	$	—		$	502
Nonregulated segment		52,013		249,313		—		(287,608	)		13,718

Total financial instruments		52,013		249,815		—		(287,608	)		14,220

Hedged portion of gas stored underground		73,043		—		—		—			73,043
Available-for-sale securities Money market funds		—		3,358		—		—			3,358
Registered investment companies		38,424		—		—		—			38,424
Bonds		—		23,637		—		—			23,637

Total available-for-sale securities		38,424		26,995		—		—			65,419

Total assets	$	163,480	$	276,810	$	—	$	(287,608	)	$	152,682

Liabilities:
Financial instruments
Natural gas distribution segment	$	—	$	48,034	$	—	$	—		$	48,034
Nonregulated segment		76,476		227,424		—		(293,304	)		10,596

Total liabilities	$	76,476	$	275,458	$	—	$	(293,304	)	$	58,630

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)⁽¹⁾		Significant Other Unobservable Inputs (Level 3)		Netting and Cash Collateral⁽³⁾			September 30, 2011
	(In thousands)
Assets:
Financial instruments
Natural gas distribution segment	$	—	$	1,841	$	—	$	—		$	1,841
Nonregulated segment		15,262		97,396		—		(95,156	)		17,502

Total financial instruments		15,262		99,237		—		(95,156	)		19,343

Hedged portion of gas stored underground		47,940		—		—		—			47,940
Available-for-sale securities
Money market funds		—		1,823		—		—			1,823
Registered investment companies		36,444		—		—		—			36,444
Bonds		—		14,366		—		—			14,366

Total available-for-sale securities		36,444		16,189		—		—			52,633

Total assets	$	99,646	$	115,426	$	—	$	(95,156	)	$	119,916

Liabilities:
Financial instruments
Natural gas distribution segment	$	—	$	81,118	$	—	$	—		$	81,118
Nonregulated segment		22,091		115,617		—		(123,943	)		13,765

Total liabilities	$	22,091	$	196,735	$	—	$	(123,943	)	$	94,883

⁽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. This level also includes municipal and corporate bonds where market data for pricing is observable.

⁽²⁾

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of March 31, 2012, we had $5.7 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $2.8 million was used to offset current risk management liabilities under master netting arrangements and the remaining $2.9 million is classified as current risk management assets.

⁽³⁾

This column reflects adjustments to our gross financial instrument assets and liabilities to reflect netting permitted under our master netting agreements and the relevant authoritative accounting literature. In addition, as of September 30, 2011 we had $28.8 million of cash held in margin accounts to collateralize certain financial instruments. Of this amount, $12.4 million was used to offset current risk management liabilities under master netting arrangements and the remaining $16.4 million is classified as current risk management assets.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Available-for-sale securities are comprised of the following:


	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)
As of March 31, 2012:
Domestic equity mutual funds	$	24,471	$	7,821	$	—		$	32,292
Foreign equity mutual funds		5,327		805		—			6,132
Bonds		23,525		127		(15	)		23,637
Money market funds		3,358		—		—			3,358

	$	56,681	$	8,753	$	(15	)	$	65,419

As of September 30, 2011:
Domestic equity mutual funds	$	27,748	$	4,074	$	—		$	31,822
Foreign equity mutual funds		4,597		267		(242	)		4,622
Bonds		14,390		10		(34	)		14,366
Money market funds		1,823		—		—			1,823

	$	48,558	$	4,351	$	(276	)	$	52,633

At March 31, 2012 and September 30, 2011, our available-for-sale securities included $41.8 million and $38.3 million related to assets held in separate rabbi trusts for our supplemental executive benefit plans. At March 31, 2012 we maintained investments in bonds that have contractual maturity dates ranging from April 2012 through July 2016.

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.

We maintained several bonds with a cumulative fair value of $4.4 million in an unrealized loss position of less than $0.1 million as of March 31, 2012. These bonds have been in an unrealized loss position for less than twelve months. Based upon our intent and ability to hold these investments, our ability to direct the source of payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that these bonds are investment grade, we do not consider this impairment to be other than temporary as of March 31, 2012.

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, 2012:


	March 31, 2012
	(In thousands)
Carrying Amount	$	2,210,196
Fair Value	$	2,583,071

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Discontinued Operations

On May 12, 2011, we entered into a definitive agreement to sell substantially all of our natural gas distribution assets located in Missouri, Illinois and Iowa to Liberty Energy (Midstates) Corporation, an affiliate of Algonquin Power & Utilities Corp. for a cash price of approximately $124 million. The agreement contains terms and conditions customary for transactions of this type, including typical adjustments to the purchase price at closing, if applicable. The closing of the transaction is subject to the satisfaction of customary conditions including the receipt of applicable regulatory approvals, which we currently anticipate will occur during fiscal 2012.

As required under generally accepted accounting principles, the operating results of our Missouri, Illinois and Iowa operations have been aggregated and reported on the condensed consolidated statements of income as income from discontinued operations, net of income tax. Expenses related to general corporate overhead and interest expense allocated to their operations are not included in discontinued operations.

The tables below set forth selected financial and operational information related to net assets and operating results related to discontinued operations. Additionally, assets and liabilities related to our Missouri, Illinois and Iowa operations are classified as “held for sale” in other current assets and liabilities in our condensed consolidated balance sheets at March 31, 2012 and September 30, 2011. Prior period revenues and expenses associated with these assets have been reclassified into discontinued operations. This reclassification had no impact on previously reported net income.

The following table presents statement of income data related to discontinued operations.


	Three Months Ended March 31						Six Months Ended March 31
	2012			2011			2012			2011
	(In thousands)
Operating revenues	$	26,374		$	35,790		$	49,825		$	59,523
Purchased gas cost		17,026			24,636			31,977			39,533

Gross profit		9,348			11,154			17,848			19,990
Operating expenses		4,275			4,431			8,449			8,447

Operating income		5,073			6,723			9,399			11,543
Other nonoperating expense		(38	)		(32	)		(86	)		(65	)

Income from discontinued operations before income taxes		5,035			6,691			9,313			11,478
Income tax expense		1,834			2,642			3,393			4,532

Net income	$	3,201		$	4,049		$	5,920		$	6,946

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents balance sheet data related to assets held for sale.


	March 31, 2012		September 30, 2011
	(In thousands)
Net plant, property & equipment	$	126,587	$	127,577
Gas stored underground		6,517		11,931
Other current assets		515		786
Deferred charges and other assets		49		277

Assets held for sale	$	133,668	$	140,571

Accounts payable and accrued liabilities	$	5,404	$	1,917
Other current liabilities		6,857		4,877
Regulatory cost of removal		7,687		10,498
Deferred credits and other liabilities		872		1,153

Liabilities held for sale	$	20,820	$	18,445

6. Debt

The nature and terms of our debt instruments are described in detail in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes in the terms of our debt instruments during the six months ended March 31, 2012.

Long-term debt

Long-term debt at March 31, 2012 and September 30, 2011 consisted of the following:


	March 31, 2012			September 30, 2011
	(In thousands)
Unsecured 10% Notes, redeemed December 2011	$	—		$	2,303
Unsecured 5.125% Senior Notes, due January 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
Unsecured 5.50% Senior Notes, due 2041		400,000			400,000
Medium term notes
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		196			262

Total long-term debt		2,210,196			2,212,565
Less:
Original issue discount on unsecured senior notes and debentures		(3,852	)		(4,014	)
Current maturities		(250,131	)		(2,434	)

	$	1,956,213		$	2,206,117

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our unsecured 10% notes were paid on their maturity date on December 31, 2011 and were not replaced. As noted above, our Unsecured 5.125% Senior Notes will mature in January 2013; accordingly, these have been classified within the current maturities of long-term debt.

Short-term debt

Our short-term borrowing requirements are affected by the seasonal nature of the natural gas business. Changes in the price of natural gas and the amount of natural gas we need to supply our customers’ needs could significantly affect our borrowing requirements. Our short-term borrowings typically reach their highest levels in the winter months.

We finance our short-term borrowing requirements through a combination of a $750 million commercial paper program and four committed revolving credit facilities with third-party lenders. As a result, we have approximately $985 million of working capital funding. Additionally, our $750 million unsecured credit facility has an accordion feature which, if utilized, would increase borrowing capacity to $1.0 billion. At March 31, 2012 and September 30, 2011, there was $174.0 million and $206.4 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.

Regulated Operations

We fund our regulated operations as needed, primarily through our commercial paper program and three committed revolving credit facilities with third-party lenders that provide approximately $785 million of working capital funding, including a five-year $750 million unsecured facility, a $25 million unsecured facility and a $10 million revolving credit facility, which is used primarily to issue letters of credit. Due to outstanding letters of credit, the total amount available to us under our $10 million revolving credit facility was $4.2 million at March 31, 2012. Our $25 million unsecured facility was renewed effective April 1, 2012. This facility bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin.

In addition to these third-party facilities, our regulated operations had a $350 million intercompany revolving credit facility with AEH. This facility was replaced on January 1, 2012 with a $500 million intercompany revolving credit facility with AEH. This facility bears interest at the lower of (i) the Eurodollar rate under the five-year revolving credit facility or (ii) the lowest rate outstanding under the commercial paper program. Applicable state regulatory commissions have approved our use of this facility through December 31, 2012.

Nonregulated Operations

Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH, has a three-year $200 million committed revolving credit facility, expiring in December 2013, with a syndicate of third-party lenders with an accordion feature that could increase AEM’s borrowing capacity to $500 million. The credit facility is primarily used to issue letters of credit and, on a less frequent basis, to borrow funds for gas purchases and other working capital needs. This facility is collateralized by substantially all of the assets of AEM and is guaranteed by AEH. Due to outstanding letters of credit and various covenants, including covenants based on working capital, the amount available to AEM under this credit facility was $82.0 million at March 31, 2012.

To supplement borrowings under this facility, AEH had a $350 million intercompany demand credit facility with AEC. This facility was replaced on January 1, 2012 with a $500 million intercompany facility with AEC, which bears interest at a rate equal to 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. Applicable state regulatory commissions have approved our use of this facility through December 31, 2012.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Shelf Registration

We have an effective shelf registration statement with the Securities and Exchange Commission (SEC) that permits us to issue a total of $1.3 billion in common stock and/or debt securities. The shelf registration statement has been approved by all requisite state regulatory commissions. At March 31, 2012, $900 million remains available for issuance. Of this amount, $550 million is available for the issuance of debt securities and $350 million remains available for the issuance of equity securities under the shelf until March 2013.

Debt Covenants

The availability of funds under our regulated 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, 2012, our total-debt-to-total-capitalization ratio, as defined in the agreements, was 52 percent. In addition, both the interest margin and the fee that we pay on unused amounts under each of these facilities are subject to adjustment depending upon our credit ratings.

AEM is required by the financial covenants in its 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, 2012, AEM’s ratio of total liabilities to tangible net worth, as defined, was 0.97 to 1. Additionally, AEM must maintain minimum levels of net working capital and net worth ranging from $20 million to $40 million. As defined in the financial covenants, at March 31, 2012, AEM’s net working capital was $105.9 million and its tangible net worth was $142.5 million.

In addition to these financial covenants, our credit facilities and public indentures contain usual and customary covenants for our business, including covenants substantially limiting liens, substantial asset sales and mergers.

Additionally, our public debt indentures relating to our senior notes and debentures, as well as our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity.

Further, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate.

Finally, AEM’s credit agreement contains a provision that would limit the amount of credit available if Atmos Energy were downgraded below an S&P rating of BBB and a Moody’s rating of Baa2. We have no other triggering events in our debt instruments that are tied to changes in specified credit ratings or stock price, nor have we entered into any transactions that would require us to issue equity, based on our credit rating or other triggering events.

We were in compliance with all of our debt covenants as of March 31, 2012. 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.

7. Earnings Per Share

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. The Company’s non-vested restricted stock and restricted stock units, for which vesting is predicated solely on the passage of time granted under our 1998 Long-Term Incentive Plan, are considered to be participat-

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ing 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. Basic and diluted earnings per share for the three and six months ended March 31, 2012 and 2011 are calculated as follows:


	Three Months Ended March 31				Six Months Ended March 31
	2012		2011		2012		2011
	(In thousands, except per share amounts)
Basic Earnings Per Share from continuing operations
Income from continuing operations	$	105,910	$	128,160	$	171,698	$	199,260
Less: Income from continuing operations allocated to participating securities		1,109		1,342		1,794		2,089

Income from continuing operations available to common shareholders	$	104,801	$	126,818	$	169,904	$	197,171

Basic weighted average shares outstanding		90,020		90,246		90,137		90,157

Income from continuing operations per share — Basic	$	1.16	$	1.41	$	1.89	$	2.18

Basic Earnings Per Share from discontinued operations
Income from discontinued operations	$	3,201	$	4,049	$	5,920	$	6,946
Less: Income from discontinued operations allocated to participating securities		34		42		62		73

Income from discontinued operations available to common shareholders	$	3,167	$	4,007	$	5,858	$	6,873

Basic weighted average shares outstanding		90,020		90,246		90,137		90,157

Income from discontinued operations per share — Basic	$	0.04	$	0.04	$	0.06	$	0.08

Net income per share — Basic	$	1.20	$	1.45	$	1.95	$	2.26

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Three Months Ended March 31				Six Months Ended March 31
	2012		2011		2012		2011
	(In thousands, except per share amounts)
Diluted Earnings Per Share from continuing operations
Income from continuing operations available to common shareholders	$	104,801	$	126,818	$	169,904	$	197,171
Effect of dilutive stock options and other shares		3		3		4		5

Income from continuing operations available to common shareholders	$	104,804	$	126,821	$	169,908	$	197,176

Basic weighted average shares outstanding		90,020		90,246		90,137		90,157
Additional dilutive stock options and other shares		302		287		303		298

Diluted weighted average shares outstanding		90,322		90,533		90,440		90,455

Income from continuing operations per share — Diluted	$	1.16	$	1.41	$	1.88	$	2.18

Diluted Earnings Per Share from discontinued operations
Income from discontinued operations available to common shareholders	$	3,167	$	4,007	$	5,858	$	6,873
Effect of dilutive stock options and other shares		—		—		—		—

Income from discontinued operations available to common shareholders	$	3,167	$	4,007	$	5,858	$	6,873

Basic weighted average shares outstanding		90,020		90,246		90,137		90,157
Additional dilutive stock options and other shares		302		287		303		298

Diluted weighted average shares outstanding		90,322		90,533		90,440		90,455

Income from discontinued operations per share — Diluted	$	0.04	$	0.04	$	0.06	$	0.08

Net income per share — Diluted	$	1.20	$	1.45	$	1.94	$	2.26

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, 2012 and 2011 as their exercise price was less than the average market price of the common stock during that period.

Share Repurchase Program

On September 28, 2011, the Board of Directors approved a new program authorizing the repurchase of up to five million shares of common stock over a five-year period. However, it may be terminated or limited at any time. Shares may be repurchased in the open market or in privately negotiated transactions in amounts the company deems appropriate. The program is primarily intended to minimize the dilutive effect of equity grants under various benefit related incentive compensation plans of the company. As of March 31, 2012, 387,991 shares had been repurchased for an aggregate value of $12.5 million.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. 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, 2012 and 2011 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
	2012			2011			2012			2011
	(In thousands)
Components of net periodic pension cost:
Service cost	$	4,298		$	4,257		$	4,088		$	3,601
Interest cost		6,678			7,055			3,466			3,203
Expected return on assets		(5,369	)		(6,285	)		(652	)		(682	)
Amortization of transition asset		—			—			378			378
Amortization of prior service cost		(36	)		(105	)		(363	)		(363	)
Amortization of actuarial loss		4,143			2,748			662			86
Curtailment gain		—			(40	)		—			—

Net periodic pension cost	$	9,714		$	7,630		$	7,579		$	6,223


	Six Months Ended March 31
	Pension Benefits						Other Benefits
	2012			2011			2012			2011
	(In thousands)
Components of net periodic pension cost:
Service cost	$	8,596		$	8,637		$	8,176		$	7,202
Interest cost		13,355			13,979			6,931			6,406
Expected return on assets		(10,737	)		(12,248	)		(1,304	)		(1,364	)
Amortization of transition asset		—			—			756			756
Amortization of prior service cost		(71	)		(217	)		(725	)		(725	)
Amortization of actuarial loss		8,285			6,242			1,324			173
Curtailment gain		—			(40	)		—			—

Net periodic pension cost	$	19,428		$	16,353		$	15,158		$	12,448

The assumptions used to develop our net periodic pension cost for the three and six months ended March 31, 2012 and 2011 are as follows:


	Pension Account Plan						Other Pension Benefits						Other Benefits
	2012			2011			2012			2011			2012			2011
Discount rate		5.05	%		5.68	%		5.05	%		5.39	%		5.05	%		5.39	%
Rate of compensation increase		3.50	%		4.00	%		3.50	%		4.00	%		N/A			N/A
Expected return on plan assets		7.75	%		8.25	%		7.75	%		8.25	%		4.70	%		5.00	%

The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2012. Based upon this valuation, we contributed $23.0 million to our defined benefit pension plans during the second fiscal quarter to achieve a desirable PPA funding threshold. The need for this funding reflects the increased pension benefit obligation due to a decrease in the discount rate compared to the prior year as well as a decline in the fair value of plan assets. During the first six months of fiscal 2012, we contributed $34.2 million to our defined benefit plans and we anticipate contributing an additional $12.4 million during the remainder of the fiscal year.

We contributed $9.1 million to our other post-retirement benefit plans during the six months ended March 31, 2012. We expect to contribute a total of approximately $10 million to $15 million to these plans during the remainder of the fiscal year.

9. Commitments and Contingencies

Litigation and Environmental Matters

With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 13 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, except as noted below, there were no material changes in the status of such litigation and environmental-related matters or claims during the six months ended March 31, 2012.

Since April 2009, Atmos Energy and two subsidiaries of AEH, AEM and Atmos Gathering Company, LLC (AGC) (collectively, the Atmos Entities), have been involved in a lawsuit filed in the Circuit Court of Edmonson County, Kentucky, Billy Joe Honeycutt et al. vs. Atmos Energy Corporation, et al., which is related to our Park City Gathering Project. The dispute which gave rise to the litigation involves the amount of royalties due from a third party producer to landowners (who own the mineral rights) for natural gas produced from the landowners’ properties. The third party producer was operating pursuant to leases between the landowners and certain investors/working interest owners. The third party producer filed a petition in bankruptcy, which was subsequently dismissed due to the lack of meaningful assets to reorganize or liquidate.

Although certain Atmos Energy companies entered into contracts with the third party producer to gather, treat and ultimately sell natural gas produced from the landowners’ properties, no Atmos Energy company had a contractual relationship with the landowners or the investors/working interest owners. After the lawsuit was filed, the landowners were successful in terminating for non-payment of royalties the leases related to the production of natural gas from their properties. Subsequent to termination, the investors/working interest owners under such leases filed additional claims against us for the termination of the leases.

During the trial, the landowners and the investors/working interest owners requested an award of compensatory damages plus punitive damages against us. On December 17, 2010, the jury returned a verdict in favor of the landowners and investor/working interest owners and awarded compensatory damages of $3.8 million and punitive damages of $27.5 million payable by Atmos Energy and the two AEH subsidiaries.

A hearing was held on February 28, 2011 to hear a number of motions, including a motion to dismiss the jury verdict and a motion for a new trial. The motions to dismiss the jury verdict and for a new trial were denied. However, the total punitive damages award was reduced from $27.5 million to $24.7 million. On October 17, 2011, we filed our brief of appellants with the Kentucky Court of Appeals, appealing the verdict of the trial court. The appellees in this case subsequently filed their appellees’ brief with the Court of Appeals on January 16, 2012, with our reply brief being filed with the Court on March 19, 2012.

In addition, in a related development, on July 12, 2011, the Atmos Entities filed a lawsuit in the United States District Court, Western District of Kentucky, Atmos Energy Corporation et al.vs. Resource Energy Technologies, LLC and Robert Thorpe and John F. Charles, against the third party producer and its affiliates to

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recover all costs, including attorneys’ fees, incurred by the Atmos Entities, which are associated with the defense and appeal of the case discussed above as well as for all damages awarded to the plaintiffs in such case against the Atmos Entities. The total amount of damages being claimed in the lawsuit is “open-ended” since the appellate process and related costs are ongoing. This lawsuit is based upon the indemnification provisions agreed to by the third party producer in favor of Atmos Gathering that are contained in an agreement entered into between Atmos Gathering and the third party producer in May 2009. The defendants filed a motion to dismiss the case on August 25, 2011, with Atmos Energy filing a brief in response to such motion on September 19, 2011. On March 27, 2012 the court denied the motion to dismiss.

We have accrued what we believe is an adequate amount for the anticipated resolution of this matter; however, the amount accrued is less than the amount of the verdict. The Company does not have insurance coverage that could mitigate any losses that may arise from the resolution of this matter. However, we continue to believe that the final outcome will not have a material adverse effect on our financial condition, results of operations or cash flows.

We are a party to other litigation and environmental-related matters or claims that have arisen in the ordinary course of our business. While the results of such litigation and response actions to such environmental-related matters or claims cannot be predicted with certainty, we continue to believe the final outcome of such litigation and matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.

Purchase Commitments

AEH has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At March 31, 2012, AEH was committed to purchase 96.2 Bcf within one year, 23.5 Bcf within one to three years and 0.6 Bcf after three years under indexed contracts. AEH is committed to purchase 3.5 Bcf within one year and 0.6 Bcf within one to three years under fixed price contracts with prices ranging from $1.75 to $6.36 per Mcf. Purchases under these contracts totaled $264.3 million and $438.9 million for the three months ended March 31, 2012 and 2011 and $576.4 million and $773.1 million for the six months ended March 31, 2012 and 2011.

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, 2012 are as follows (in thousands):


2012	$	33,347
2013		71,496
2014		61,594
2015		—
2016		—
Thereafter		—

	$	166,437

Our nonregulated segment maintains 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

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Annual Report on Form 10-K for the fiscal year ended September 30, 2011. There were no material changes to the estimated storage and transportation fees for the six months ended March 31, 2012.

Regulatory Matters

As previously described in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, 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. Since that time, we have fully cooperated with the Commission during this investigation.

The Company and the Commission entered into a stipulation and consent agreement, which was approved by the Commission on December 9, 2011, thereby resolving this investigation. The Commission’s findings of violations were limited to the nonregulated operations of the Company. Under the terms of the agreement, the Company paid to the United States Treasury a total civil penalty of approximately $6.4 million and to energy assistance programs approximately $5.6 million in disgorgement of unjust profits plus interest for violations identified during the investigation. The resolution of this matter did not have a material adverse impact on the Company’s financial position, results of operations or cash flows and none of the payments were charged to any of the Company’s customers. In addition, none of the services the Company provides to any of its regulated or nonregulated customers were affected by the agreement.

As discussed in Note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, in 2010, our Mid-Tex Division agreed to install 100,000 steel service line replacements by September 30, 2012. As of March 31, 2012, we had replaced 73,822 lines and are on schedule for completion in September 2012. Under the terms of the agreement, special rate recovery of the associated return, depreciation and taxes is approved for lines replaced between October 1, 2010 and September 30, 2012. Since October 1, 2010, we have spent $81.4 million on steel service line replacements.

In July 2010, the Dodd-Frank Act was enacted, representing an extensive overhaul of the framework for regulation of U.S. financial markets. The Dodd-Frank Act calls for various regulatory agencies, including the SEC and the Commodity Futures Trading Commission (CFTC) to establish rules and regulations for implementation of many of the provisions of the Dodd-Frank Act. Although the SEC and CFTC have issued a number of rules and regulations, we expect additional rules and regulations to be issued, which should provide additional clarity regarding the extent of the impact of this legislation on the Company. The costs of participating in financial markets for hedging certain risks inherent in our business may be increased as a result of the new legislation and related rules and regulations. Additional reporting and disclosure obligations have been imposed upon the Company, the full extent of which will not be known until the SEC and the CFTC have completed their ongoing rulemaking process.

As of March 31, 2012, rate cases were in progress in our Mid-Tex, West Texas and Kansas service areas and annual rate filing mechanisms were in progress in our Mid-Tex and Louisiana service areas along with one infrastructure program filing in progress in our Atmos Pipeline — Texas service area. These regulatory proceedings are discussed in further detail below in Management’s Discussion and Analysis — Recent Ratemaking Developments.

10. Concentration of Credit Risk

Information regarding our concentration of credit risk is disclosed in Note 15 to the financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. During the six months ended March 31, 2012, there were no material changes in our concentration of credit risk.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. Segment Information

As discussed in Note 1 above, we operate the Company through the following three 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 and

•

The nonregulated segment, which is comprised of our nonregulated natural gas management, nonregulated natural gas transmission, storage and other services.

Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our 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, 2011. We evaluate performance based on net income or loss of the respective operating units.

Income statements for the three and six month periods ended March 31, 2012 and 2011 by segment are presented in the following tables:


	Three Months Ended March 31, 2012
	Natural Gas Distribution		Regulated Transmission and Storage			Nonregulated			Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	888,685	$	20,430		$	334,335		$	—		$	1,243,450
Intersegment revenues		323		37,607			36,428			(74,358	)		—

		889,008		58,037			370,763			(74,358	)		1,243,450
Purchased gas cost		508,206		—			374,992			(74,009	)		809,189

Gross profit		380,802		58,037			(4,229	)		(349	)		434,261
Operating expenses
Operation and maintenance		89,443		15,847			5,769			(351	)		110,708
Depreciation and amortization		51,755		7,792			725			—			60,272
Taxes, other than income		50,313		3,915			691			—			54,919

Total operating expenses		191,511		27,554			7,185			(351	)		225,899

Operating income (loss)		189,291		30,483			(11,414	)		2			208,362
Miscellaneous income (expense)		733		(56	)		567			(628	)		616
Interest charges		28,833		7,614			839			(626	)		36,660

Income (loss) from continuing operations before income taxes		161,191		22,813			(11,686	)		—			172,318
Income tax expense (benefit)		62,890		8,193			(4,675	)		—			66,408

Income (loss) from continuing operations		98,301		14,620			(7,011	)		—			105,910
Income from discontinued operations, net of tax		3,201		—			—			—			3,201

Net income (loss)	$	101,502	$	14,620		$	(7,011	)	$	—		$	109,111

Capital expenditures	$	114,402	$	38,871		$	3,456		$	—		$	156,729

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Three Months Ended March 31, 2011
	Natural Gas Distribution		Regulated Transmission and Storage		Nonregulated			Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	1,077,178	$	21,597	$	482,722		$	—		$	1,581,497
Intersegment revenues		236		33,379		100,809			(134,424	)		—

		1,077,414		54,976		583,531			(134,424	)		1,581,497
Purchased gas cost		698,410		—		563,473			(134,054	)		1,127,829

Gross profit		379,004		54,976		20,058			(370	)		453,668
Operating expenses
Operation and maintenance		92,266		15,231		7,035			(370	)		114,162
Depreciation and amortization		48,555		5,798		1,114			—			55,467
Taxes, other than income		50,088		4,113		(643	)		—			53,558
Asset impairment		—		—		19,282			—			19,282

Total operating expenses		190,909		25,142		26,788			(370	)		242,469

Operating income (loss)		188,095		29,834		(6,730	)		—			211,199
Miscellaneous income		20,156		5,861		306			(121	)		26,202
Interest charges		29,605		8,085		306			(121	)		37,875

Income (loss) from continuing operations before income taxes		178,646		27,610		(6,730	)		—			199,526
Income tax expense (benefit)		64,085		9,871		(2,590	)		—			71,366

Income (loss) from continuing operations		114,561		17,739		(4,140	)		—			128,160
Income from discontinued operations, net of tax		4,049		—		—			—			4,049

Net income (loss)	$	118,610	$	17,739	$	(4,140	)	$	—		$	132,209

Capital expenditures	$	109,762	$	11,818	$	1,921		$	—		$	123,501

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Six Months Ended March 31, 2012
	Natural Gas Distribution			Regulated Transmission and Storage			Nonregulated			Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	1,581,753		$	39,870		$	723,000		$	—		$	2,344,623
Intersegment revenues		547			74,926			91,939			(167,412	)		—

		1,582,300			114,796			814,939			(167,412	)		2,344,623
Purchased gas cost		910,413			—			803,763			(166,696	)		1,547,480

Gross profit		671,887			114,796			11,176			(716	)		797,143
Operating expenses
Operation and maintenance		182,857			32,812			11,820			(719	)		226,770
Depreciation and amortization		102,586			15,443			1,458			—			119,487
Taxes, other than income		88,792			7,699			1,626			—			98,117

Total operating expenses		374,235			55,954			14,904			(719	)		444,374

Operating income (loss)		297,652			58,842			(3,728	)		3			352,769
Miscellaneous income (expense)		(1,023	)		(336	)		603			(503	)		(1,259	)
Interest charges		56,688			14,823			1,091			(500	)		72,102

Income (loss) from continuing operations before income taxes		239,941			43,683			(4,216	)		—			279,408
Income tax expense (benefit)		93,735			15,649			(1,674	)		—			107,710

Income (loss) from continuing operations		146,206			28,034			(2,542	)		—			171,698
Income from discontinued operations, net of tax		5,920			—			—			—			5,920

Net income (loss)	$	152,126		$	28,034		$	(2,542	)	$	—		$	177,618

Capital expenditures	$	243,135		$	62,991		$	4,997		$	—		$	311,123

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Six Months Ended March 31, 2011
	Natural Gas Distribution		Regulated Transmission and Storage		Nonregulated		Eliminations			Consolidated
	(In thousands)
Operating revenues from external parties	$	1,780,439	$	42,830	$	891,490	$	—		$	2,714,759
Intersegment revenues		437		61,153		167,681		(229,271	)		—

		1,780,876		103,983		1,059,171		(229,271	)		2,714,759
Purchased gas cost		1,110,936		—		1,013,935		(228,504	)		1,896,367

Gross profit		669,940		103,983		45,236		(767	)		818,392
Operating expenses
Operation and maintenance		181,495		30,805		17,119		(767	)		228,652
Depreciation and amortization		96,449		11,597		2,198		—			110,244
Taxes, other than income		84,536		7,666		1,524		—			93,726
Asset impairment		—		—		19,282		—			19,282

Total operating expenses		362,480		50,068		40,123		(767	)		451,904

Operating income		307,460		53,915		5,113		—			366,488
Miscellaneous income		19,458		5,579		596		(157	)		25,476
Interest charges		59,302		16,149		1,476		(157	)		76,770

Income from continuing operations before income taxes		267,616		43,345		4,233		—			315,194
Income tax expense		98,634		15,504		1,796		—			115,934

Income from continuing operations		168,982		27,841		2,437		—			199,260
Income from discontinued operations, net of tax		6,946		—		—		—			6,946

Net income	$	175,928	$	27,841	$	2,437	$	—		$	206,206

Capital expenditures	$	219,261	$	24,557	$	2,845	$	—		$	246,663

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Balance sheet information at March 31, 2012 and September 30, 2011 by segment is presented to reflect our business structure as of March 31, 2012 in the following tables.


	March 31, 2012
	Natural Gas Distribution		Regulated Transmission and Storage		Nonregulated			Eliminations			Consolidated
	(In thousands)
ASSETS
Property, plant and equipment, net	$	4,382,291	$	886,507	$	65,214		$	—		$	5,334,012
Investment in subsidiaries		674,594		—		(2,096	)		(672,498	)		—
Current assets
Cash and cash equivalents		40,140		—		6,900			—			47,040
Assets from risk management activities		502		—		2,877			—			3,379
Other current assets		632,486		13,278		399,389			(201,731	)		843,422
Intercompany receivables		584,018		—		—			(584,018	)		—

Total current assets		1,257,146		13,278		409,166			(785,749	)		893,841
Intangible assets		—		—		185			—			185
Goodwill		572,908		132,381		34,711			—			740,000
Noncurrent assets from risk management activities		—		—		10,841			—			10,841
Deferred charges and other assets		366,329		13,203		10,316			—			389,848

	$	7,253,268	$	1,045,369	$	528,337		$	(1,458,247	)	$	7,368,727

CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	2,360,712	$	293,135	$	381,459		$	(674,594	)	$	2,360,712
Long-term debt		1,956,147		—		66			—			1,956,213

Total capitalization		4,316,859		293,135		381,525			(674,594	)		4,316,925
Current liabilities
Current maturities of long-term debt		250,000		—		131			—			250,131
Short-term debt		371,996		—		—			(198,000	)		173,996
Liabilities from risk management activities		47,281		—		5,296			—			52,577
Other current liabilities		507,354		6,309		119,382			(1,635	)		631,410
Intercompany payables		—		551,330		32,688			(584,018	)		—

Total current liabilities		1,176,631		557,639		157,497			(783,653	)		1,108,114
Deferred income taxes		890,455		188,936		(16,903	)		—			1,062,488
Noncurrent liabilities from risk management activities		1		—		5,300			—			5,301
Regulatory cost of removal obligation		414,001		—		—			—			414,001
Deferred credits and other liabilities		455,321		5,659		918			—			461,898

	$	7,253,268	$	1,045,369	$	528,337		$	(1,458,247	)	$	7,368,727

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	September 30, 2011
	Natural Gas Distribution		Regulated Transmission and Storage		Nonregulated			Eliminations			Consolidated
	(In thousands)
ASSETS
Property, plant and equipment, net	$	4,248,198	$	838,302	$	61,418		$	—		$	5,147,918
Investment in subsidiaries		670,993		—		(2,096	)		(668,897	)		—
Current assets
Cash and cash equivalents		24,646		—		106,773			—			131,419
Assets from risk management activities		843		—		17,501			—			18,344
Other current assets		655,716		15,413		386,215			(196,154	)		861,190
Intercompany receivables		569,898		—		—			(569,898	)		—

Total current assets		1,251,103		15,413		510,489			(766,052	)		1,010,953
Intangible assets		—		—		207			—			207
Goodwill		572,908		132,381		34,711			—			740,000
Noncurrent assets from risk management activities		998		—		—			—			998
Deferred charges and other assets		353,960		18,028		10,807			—			382,795

	$	7,098,160	$	1,004,124	$	615,536		$	(1,434,949	)	$	7,282,871

CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	2,255,421	$	265,102	$	405,891		$	(670,993	)	$	2,255,421
Long-term debt		2,205,986		—		131			—			2,206,117

Total capitalization		4,461,407		265,102		406,022			(670,993	)		4,461,538
Current liabilities
Current maturities of long-term debt		2,303		—		131			—			2,434
Short-term debt		387,691		—		—			(181,295	)		206,396
Liabilities from risk management activities		11,916		—		3,537			—			15,453
Other current liabilities		474,783		10,369		170,926			(12,763	)		643,315
Intercompany payables		—		543,084		26,814			(569,898	)		—

Total current liabilities		876,693		553,453		201,408			(763,956	)		867,598
Deferred income taxes		789,649		173,351		(2,907	)		—			960,093
Noncurrent liabilities from risk management activities		67,862		—		10,227			—			78,089
Regulatory cost of removal obligation		428,947		—		—			—			428,947
Deferred credits and other liabilities		473,602		12,218		786			—			486,606

	$	7,098,160	$	1,004,124	$	615,536		$	(1,434,949	)	$	7,282,871

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM