UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended December 31, 2004
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission File Number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)
 
     
Texas and Virginia   75-1743247
(State or other jurisdiction of
incorporation or organization)
  (IRS employer
identification no.)
 
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
(Address of principal executive offices)
  75240
(Zip code)

(972) 934-9227

(Registrant’s telephone number, including area code)

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

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)     Yes  þ           No  o

          Number of shares outstanding of each of the issuer’s classes of common stock, as of January 31, 2005.

 
     
Class Shares Outstanding


No Par Value
  79,348,039




TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
SIGNATURES
EXHIBITS INDEX Item 6(a)
11th Amendment to Credit Agreement
Form of Non-Qualified Stock Option Agreement
Form of Restricted Stock Award Agreement
Form of Award Agreement of Performance-Based Restricted Stock Units
Form of Award Agreement of Restricted Stock with Time-Lapse Vesting
Computation of Ratio of Earnings to Fixed Charges
Letter Re: Unaudited Interim Financial Information
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications


 

PART 1. FINANCIAL INFORMATION

 
 
Item 1. Financial Statements
 

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

                     
December 31, September 30,
2004 2004


(Unaudited)
(In thousands, except share data)
ASSETS
Property, plant and equipment
  $ 4,544,069     $ 2,633,651  
 
Less accumulated depreciation and amortization
    1,320,926       911,130  
     
     
 
   
Net property, plant and equipment
    3,223,143       1,722,521  
Current assets
               
 
Cash and cash equivalents
    25,162       201,932  
 
Accounts receivable, net
    640,760       211,810  
 
Gas stored underground
    389,625       200,134  
 
Other current assets
    152,686       63,236  
     
     
 
   
Total current assets
    1,208,233       677,112  
Goodwill and intangible assets
    703,038       238,272  
Deferred charges and other assets
    271,682       231,978  
     
     
 
    $ 5,406,096     $ 2,869,883  
     
     
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
               
 
Common stock, no par value (stated at $.005 per share); 100,000,000 shares authorized; issued and outstanding:
               
    December 31, 2004 — 79,257,756 shares;
September 30, 2004 — 62,799,710 shares
  $ 396     $ 314  
 
Additional paid-in capital
    1,393,250       1,005,644  
 
Retained earnings
    177,108       142,030  
 
Accumulated other comprehensive loss
    (31,676 )     (14,529 )
     
     
 
   
Shareholders’ equity
    1,539,078       1,133,459  
Long-term debt
    2,255,173       861,311  
     
     
 
   
Total capitalization
    3,794,251       1,994,770  
Current liabilities
               
 
Accounts payable and accrued liabilities
    653,403       185,295  
 
Other current liabilities
    283,130       223,265  
 
Short-term debt
    28,797        
 
Current maturities of long-term debt
    5,897       5,908  
     
     
 
   
Total current liabilities
    971,227       414,468  
Deferred income taxes
    200,737       213,930  
Regulatory cost of removal obligation
    241,986       103,579  
Deferred credits and other liabilities
    197,895       143,136  
     
     
 
    $ 5,406,096     $ 2,869,883  
     
     
 

See accompanying notes to condensed consolidated financial statements

1


 

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

                     
Three Months Ended
December 31

2004 2003


(Unaudited)
(In thousands, except per
share data)
Operating revenues
               
 
Utility segment
  $ 913,681     $ 460,488  
 
Natural gas marketing segment
    493,801       373,829  
 
Pipeline and storage segment
    43,690       2,919  
 
Other nonutility segment
    1,359       709  
 
Intersegment eliminations
    (83,907 )     (74,329 )
     
     
 
      1,368,624       763,616  
Purchased gas cost
               
 
Utility segment
    656,370       322,064  
 
Natural gas marketing segment
    466,957       356,331  
 
Pipeline and storage segment
    3,872       327  
 
Other nonutility segment
           
 
Intersegment eliminations
    (83,027 )     (74,159 )
     
     
 
      1,044,172       604,563  
     
     
 
 
Gross profit
    324,452       159,053  
Operating expenses
               
 
Operation and maintenance
    113,126       56,916  
 
Depreciation and amortization
    43,997       23,473  
 
Taxes, other than income
    38,655       15,123  
     
     
 
   
Total operating expenses
    195,778       95,512  
     
     
 
Operating income
    128,674       63,541  
Miscellaneous income
    385       1,207  
Interest charges
    32,542       17,335  
     
     
 
Income before income taxes
    96,517       47,413  
Income tax expense
    36,918       17,872  
     
     
 
   
Net income
  $ 59,599     $ 29,541  
     
     
 
Basic net income per share
  $ 0.79     $ 0.57  
     
     
 
Diluted net income per share
  $ 0.79     $ 0.57  
     
     
 
Cash dividends per share
  $ 0.310     $ 0.305  
     
     
 
Weighted average shares outstanding:
               
 
Basic
    75,306       51,483  
     
     
 
 
Diluted
    75,725       51,861  
     
     
 

See accompanying notes to condensed consolidated financial statements

2


 

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                       
Three Months Ended
December 31

2004 2003


(Unaudited)
(In thousands)
Cash Flows From Operating Activities
               
 
Net income
  $ 59,599     $ 29,541  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation and amortization:
               
     
Charged to depreciation and amortization
    43,997       23,473  
     
Charged to other accounts
    254       672  
   
Deferred income taxes
    8,308       19,347  
   
Other
    977       (476 )
   
Net assets/liabilities from risk management activities
    22,088       (4,564 )
   
Net change in operating assets and liabilities
    (67,319 )     (56,490 )
     
     
 
     
Net cash provided by operating activities
    67,904       11,503  
Cash Flows From Investing Activities
               
 
Capital expenditures
    (67,201 )     (45,471 )
 
Acquisitions
    (1,912,532 )      
 
Other
    (1,051 )     489  
     
     
 
     
Net cash used in investing activities
    (1,980,784 )     (44,982 )
Cash Flows From Financing Activities
               
 
Net increase in short-term debt
    28,797       73,200  
 
Net proceeds from issuance of long-term debt
    1,385,847        
 
Repayment of long-term debt
    (3,373 )     (5,363 )
 
Settlement of Treasury lock agreements
    (43,770 )      
 
Cash dividends paid
    (24,521 )     (15,744 )
 
Issuance of common stock
    11,116       7,413  
 
Net proceeds from equity offering
    382,014        
     
     
 
     
Net cash provided by financing activities
    1,736,110       59,506  
     
     
 
Net increase (decrease) in cash and cash equivalents
    (176,770 )     26,027  
Cash and cash equivalents at beginning of period
    201,932       15,683  
     
     
 
Cash and cash equivalents at end of period
  $ 25,162     $ 41,710  
     
     
 

See accompanying notes to condensed consolidated financial statements

3


ATMOS ENERGY CORPORATION  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
December 31, 2004

1.     Nature of Business

      Atmos Energy Corporation (“Atmos” or “the Company”) and its subsidiaries are engaged primarily in the natural gas utility business as well as certain nonutility businesses. Through our natural gas utility business, we distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public-authority and industrial customers through our seven regulated natural gas utility divisions, which cover the following service areas:

 
     
Division Service Area


Atmos Energy Colorado-Kansas Division
  Colorado, Kansas, Missouri (2)
Atmos Energy Kentucky Division
  Kentucky
Atmos Energy Louisiana Division
  Louisiana
Atmos Energy Mid-States Division
  Georgia (2) , Illinois (2) , Iowa (2) ,
    Missouri (2) Tennessee, Virginia (2)
Atmos Energy West Texas Division
  West Texas
Mississippi Valley Gas Company Division
  Mississippi
Atmos Energy Mid-Tex Division (1)
  Texas, including the Dallas/Fort
    Worth metropolitan area


(1)   Acquired in October 2004.
 
(2)   Denotes locations where we have more limited service areas.

      As further described in Note 3, on October 1, 2004, we completed our acquisition of the natural gas distribution and pipeline operations of TXU Gas Company (TXU Gas). The TXU Gas operations we acquired are regulated businesses engaged in the purchase, transmission, storage, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. We also own and operate a system consisting of 6,162 miles of gas transmission and gathering lines and five underground storage reservoirs, all within Texas. On October 1, 2004, we created the Atmos Energy Mid-Tex Division to provide gas distribution services to the approximately 1.5 million residential and business customers in Texas, including the Dallas/ Fort Worth metropolitan area we acquired from TXU Gas. We also created the Atmos Pipeline — Texas Division to manage the TXU Gas pipeline and storage operations we acquired.

      In addition, we transport natural gas for others through our distribution system. Our utility business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which the utility divisions operate. Our shared-services division is located in Dallas, Texas, and our customer support centers are located in Amarillo, Texas, and Metairie, Louisiana. However, on November 4, 2004, we entered into an agreement with Capgemini Energy L.P. pursuant to which we will assume the operations of the Waco, Texas call center on April 1, 2005 and will close the purchase of the related assets on October 1, 2005. In connection therewith, all call center services provided by TXU Gas under the transitional services agreement will terminate on April 1, 2005.

      Our nonutility businesses include our natural gas marketing operations, our pipeline and storage operations and our other nonutility operations which are provided in 18 states. These operations are either organized under or managed by Atmos Energy Holdings, Inc. (AEH), which is wholly-owned by Atmos Energy Corporation.

      Our natural gas marketing operations are managed by Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH. AEM provides a variety of natural gas management services to municipalities, natural

4


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

gas utility systems and industrial natural gas customers, primarily in the southeastern and midwestern states and to our Colorado-Kansas, Kentucky, Louisiana and Mid-States divisions. These services consist primarily of furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of derivative instruments.

      Our pipeline and storage operations consist of the operations of the Atmos Pipeline – Texas Division, a division of Atmos Energy Corporation; and of Atmos Pipeline and Storage, LLC (APS), which is wholly-owned by AEH. As previously discussed, the Atmos Pipeline — Texas Division was purchased from TXU Gas and supplies natural gas to the Atmos Energy Mid-Tex Division, transports natural gas to third parties and manages five underground storage reservoirs in Texas. Through APS, we own or have an interest in underground storage fields in Kentucky and Louisiana. We also use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods.

      Our other nonutility businesses consist primarily of the operations of Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., which are wholly-owned by AEH. Through AES, we provide natural gas management services to our utility operations. These services, which began April 1, 2004, include aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to our utility service areas at competitive prices. Through Atmos Power Systems, Inc., we construct electric peaking power-generating plants and associated facilities and may enter into agreements to either lease or sell these plants.

 
2. Unaudited Interim Financial Information

      In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements and notes 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 (“Atmos” or “the Company”) in its Annual Report on Form 10-K for the fiscal year ended September 30, 2004. Because of seasonal and other factors, the results of operations for the three months ended December 31, 2004 are not indicative of expected results of operations for the fiscal year ending September 30, 2005. Further, the impact of the TXU Gas acquisition on the statement of cash flows is reflected in the acquisitions line item; therefore, the net changes in operating assets and liabilities will not reflect balance sheet changes attributable to the acquisition.

 
Significant Accounting Policies

      Our accounting policies are described in Note 2 to our Annual Report on Form 10-K for the year ended September 30, 2004. There were no significant changes to our accounting policies during the three months ended December 31, 2004.

 
Stock-Based Compensation Plans

      We have two stock-based compensation plans that provide for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, bonus stock, restricted stock and performance-based restricted stock units to officers and key employees: the 1998 Long-Term Incentive Plan and the Long-Term Stock Plan for the Mid-States Division. Nonemployee directors are also eligible to receive such stock-based compensation under the 1998 Long-Term Incentive Plan. The objectives of these plans include attracting and retaining the best personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire common stock.

5


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As permitted by Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, we account for these plans under the intrinsic-value method described in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees . Under this method, no compensation cost for stock options is recognized for stock-option awards granted at or above fair-market value. Awards of restricted stock are valued at the market price of the Company’s common stock on the date of grant. The unearned compensation is amortized to operation and maintenance expense over the vesting period of the restricted stock.

      Had compensation expense for our stock options issued under the Long-Term Incentive Plan been recognized based on the fair value on the grant date under the methodology prescribed by SFAS 123, our net income and earnings per share for the three months ended December 31, 2004 and 2003 would have been impacted as shown in the following table:

                   
 
Three Months Ended
December 31

2004 2003


(In thousands, except
per share data)
Net income — as reported
  $ 59,599     $ 29,541  
Restricted stock compensation expense included in income, net of tax
    489       98  
Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes
    (741 )     (393 )
     
     
 
Net income — pro forma
  $ 59,347     $ 29,246  
     
     
 
Earnings per share:
               
 
Basic earnings per share — as reported
  $ 0.79     $ 0.57  
     
     
 
 
Basic earnings per share — pro forma
  $ 0.79     $ 0.57  
     
     
 
 
Diluted earnings per share — as reported
  $ 0.79     $ 0.57  
     
     
 
 
Diluted earnings per share — pro forma
  $ 0.78     $ 0.56  
     
     
 

      At December 31, 2004, there were 300 options outstanding under the Long-Term Stock Plan for the Mid-States Division, all of which were fully vested. Because of the limited activities of this plan, the pro forma effects of applying SFAS 123 would have less than a $0.01 per diluted share effect on earnings per share.

 
Regulatory Assets and Liabilities

      We record certain costs as regulatory assets in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation, when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and 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

6


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and the regulatory cost of removal obligation is separately reported. Significant regulatory assets and liabilities as of December 31, 2004 and September 30, 2004 included the following:

                   
December 31, September 30,
2004 2004


(In thousands)
Regulatory assets:
               
 
Deferred gas costs
  $ 68,253     $  
 
UCG merger and integration costs, net (1)
          1,992  
 
Other merger and integration costs, net
    14,572       14,644  
 
Deferred MVG operating expenses
    377       751  
 
Environmental costs
    2,924       4,057  
 
Rate case costs
    26,182        
 
Other
    7,237       3,289  
     
     
 
    $ 119,545     $ 24,733  
     
     
 
Regulatory liabilities:
               
 
Deferred gas costs
  $     $ 39,097  
 
Regulatory cost of removal obligation
    254,702       111,232  
 
Deferred income taxes, net
    1,962       1,962  
 
Other
    4,192        
     
     
 
    $ 260,856     $ 152,291  
     
     
 


(1)   Fully amortized by December 2004.

      Currently authorized rates do not include a return on 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. Certain environmental costs have been deferred to future rate filings in accordance with rulings received from various regulatory commissions.

 
 
Comprehensive Income

      The following table presents the components of comprehensive income, net of related tax, for the three-month periods ended December 31, 2004 and 2003:

                 
Three Months Ended
December 31

2004 2003


(In thousands)
Net income
  $ 59,599     $ 29,541  
Unrealized holding gains on investments, net of tax expense of $649 and $382
    1,057       625  
Net unrealized losses on commodity hedging transactions, net of tax benefit of $7,912
    (12,908 )      
Net unrealized losses on interest rate hedging transactions, net of tax benefit of $3,245
    (5,296 )      
     
     
 
Comprehensive income
  $ 42,452     $ 30,166  
     
     
 

7


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Accumulated other comprehensive loss, net of tax, as of December 31, 2004 and September 30, 2004 consisted of the following unrealized gains (losses):

                   
December 31, September 30,
2004 2004


(In thousands)
Accumulated other comprehensive income (loss):
               
 
Unrealized holding gains (losses) on investments
  $ 213     $ (844 )
 
Treasury lock agreements
    (26,564 )     (21,268 )
 
Cash flow hedges
    (5,325 )     7,583  
     
     
 
    $ (31,676 )   $ (14,529 )
     
     
 
 
Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised), Share-Based Payment . This standard revises SFAS 123, Accounting for Stock-Based Compensation and supersedes APB Opinion 25, Accounting for Stock Issued to Employees . Under SFAS 123 (R), public companies will be required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award. SFAS 123 (R) will become effective for the Company on a prospective basis during the fourth quarter of fiscal 2005. Upon adoption, we will recognize compensation cost for the portion of outstanding awards for which the requisite service has not yet been rendered, based upon the grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosure purposes. The standard also permits us to restate prior period information on a basis consistent with the calculations used for our pro forma stock compensation disclosure. We are currently assessing the impact of this standard and whether we will restate prior period information.

3.     TXU Gas Acquisition

      On October 1, 2004, we completed our acquisition of the natural gas distribution and pipeline operations of TXU Gas Company (TXU Gas). The purchase was accounted for as an asset purchase. The TXU Gas operations we acquired are regulated businesses engaged in the purchase, transmission, storage, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. Through these newly acquired operations, we provide gas distribution services to approximately 1.5 million residential and business customers in Texas, including the Dallas/ Fort Worth metropolitan area. We also now own and operate a system consisting of 6,162 miles of gas transmission and gathering lines and five underground storage reservoirs in Texas.

      The purchase price for the TXU Gas acquisition was approximately $1.905 billion (after preliminary closing adjustments and before transaction costs and expenses), which we paid in cash. We acquired approximately $121 million of working capital of TXU Gas and did not assume any indebtedness of TXU Gas in connection with the acquisition. TXU Gas retained certain assets and provided for the repayment of all of its indebtedness and redeemed all of its preferred stock prior to closing and retained and agreed to pay certain other liabilities under the terms of the acquisition agreement. The purchase price is subject to adjustment for the actual amount of working capital we acquired and other specified matters. We anticipate that the working capital settlement will be finalized during the second quarter of fiscal 2005.

      We funded the purchase price for the TXU Gas acquisition with approximately $235.7 million in net proceeds from our offering of 9,939,393 shares of common stock, which we completed on July 19, 2004, and approximately $1.7 billion in net proceeds from our issuance on October 1, 2004 of commercial paper

8


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

backstopped by a senior unsecured revolving credit agreement, which we entered into on September 24, 2004 for bridge financing for the TXU Gas acquisition. In October 2004, we paid off the outstanding commercial paper used to fund the acquisition through the issuance of senior unsecured notes on October 22, 2004, which generated net proceeds of approximately $1.39 billion, and the sale of 16.1 million shares of common stock on October 27, 2004, which generated net proceeds of $382.0 million.

      The following table summarizes the fair values of the assets acquired and liabilities assumed on October 1, 2004, in thousands:

           
 
Cash purchase price
  $ 1,904,877  
Transaction costs and expenses
    7,655  
     
 
 
Total purchase price
  $ 1,912,532  
     
 
Net property, plant and equipment
  $ 1,472,295  
Accounts receivable
    81,035  
Gas stored underground
    141,664  
Other current assets
    19,089  
Goodwill
    464,963  
Deferred charges and other assets
    41,634  
Accounts payable and accrued liabilities
    (43,216 )
Other current liabilities
    (88,939 )
Regulatory cost of removal obligation
    (138,991 )
Deferred income taxes
    10,993  
Deferred credits and other liabilities
    (47,995 )
     
 
 
Total
  $ 1,912,532  
     
 

      The sale of TXU Gas’s assets was held through a competitive bid process. We believe the resulting goodwill is recoverable given the expected synergies we can achieve as a result of the TXU Gas acquisition. To that end, the TXU Gas acquisition significantly expands our existing utility operations in Texas. The North Texas operations of TXU Gas bridge our geographic operations between our existing utility operations in West Texas and Louisiana. TXU Gas’s headquarters and service area are centered in Dallas, Texas, which is also the location of our corporate headquarters. Further, the addition of the regulated pipelines and storage operations in North Texas may create additional gas marketing and other opportunities for our non-regulated subsidiaries, which include gas marketing and storage operations. The goodwill generated in the acquisition is deductible for tax purposes.

      Our allocation of the purchase price is preliminary and is subject to change due to the pending completion of the working capital settlement and our continuing review of the acquired assets and liabilities. The amount currently allocated to property, plant and equipment represents our estimate of the fair value of the assets acquired. We have based that estimate on the amount we believe will ultimately be approved as rate base for rate setting purposes.

9


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The table below reflects the unaudited pro forma results of the Company and TXU Gas for the three months ended December 31, 2003 as if the acquisition and related financing had taken place at the beginning of fiscal 2004 (in thousands, except per share data):

         
Three Months Ended
December 31, 2003

Operating revenue
  $ 1,111,510  
Net income
    43,384  
Net income per diluted share
  $ 0.56  
 
4. Goodwill and Intangible Assets

      Goodwill and intangible assets are comprised of the following as of December 31, 2004 and September 30, 2004.

                 
 
December 31, September 30,
2004 2004


(In thousands)
Goodwill
  $ 699,075     $ 234,112  
Intangible assets
    3,963       4,160  
     
     
 
Total
  $ 703,038     $ 238,272  
     
     
 

      The following presents our goodwill balance allocated by segment and changes in our balance for the three months ended December 31, 2004:

                                         
 
Natural Gas Pipeline and Other
Utility Marketing Storage Non-Utility
Segment Segment Segment Segment Total





(In thousands)
Balance as of September 30, 2004
  $ 199,400     $ 24,282     $     $ 10,430     $ 234,112  
Intersegment transfer of assets (1)
                10,430       (10,430 )      
TXU Gas acquisition (Note 3)
    331,557             133,406             464,963  
     
     
     
     
     
 
Balance as of December 31, 2004
  $ 530,957     $ 24,282     $ 143,836     $     $ 699,075  
     
     
     
     
     
 


(1)   Effective October 1, 2004, we created the pipeline and storage segment which reflects the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division and the nonregulated pipeline and storage operations of Atmos Pipeline and Storage, LLC, which was previously included in our other nonutility segment. Accordingly, goodwill allocable to Atmos Pipeline and Storage, LLC was transferred to the pipeline and storage segment.

 
5. Derivative Instruments and Hedging Activities

      We conduct risk management activities through both our utility and natural gas marketing segments. We record our derivatives as a component of risk management assets and liabilities, which are classified as current or noncurrent other assets or liabilities based upon the anticipated settlement date of the underlying derivative. Our determination of the fair value of these derivative financial instruments reflects the estimated amounts that we would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains and losses on open contracts. In our determination of fair value, we consider various factors, including closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts.

10


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table shows the fair values of our risk management assets and liabilities by segment at December 31, 2004 and September 30, 2004:

                         
Natural Gas
Utility Marketing Total



(In thousands)
December 31, 2004:
                       
Assets from risk management activities, current
  $ 755     $ 12,068     $ 12,823  
Assets from risk management activities, noncurrent
                 
Liabilities from risk management activities, current
    (10,167 )     (6,002 )     (16,169 )
Liabilities from risk management activities, noncurrent
          (852 )     (852 )
     
     
     
 
Net assets (liabilities)
  $ (9,412 )   $ 5,214     $ (4,198 )
     
     
     
 
September 30, 2004:
                       
Assets from risk management activities, current
  $ 25,692     $ 18,748     $ 44,440  
Assets from risk management activities, noncurrent
          562       562  
Liabilities from risk management activities, current
    (34,304 )     (5,154 )     (39,458 )
Liabilities from risk management activities, noncurrent
          (1,138 )     (1,138 )
     
     
     
 
Net assets (liabilities)
  $ (8,612 )   $ 13,018     $ 4,406  
     
     
     
 
 
Utility Hedging Activities

      We use a combination of storage, fixed physical contracts and fixed financial contracts to partially insulate us and our customers against gas price volatility during the winter heating season. Because the gains or losses of financial derivatives used in our utility segment will ultimately be recovered through our rates, current period changes in the assets and liabilities from these risk management activities are recorded as a component of deferred gas costs in accordance with SFAS 71, Accounting for the Effects of Certain Types of Regulation . Accordingly, there is no earnings impact to our utility segment as a result of the use of financial derivatives. For the 2004-2005 heating season, we have hedged approximately 50 percent of our anticipated winter flowing gas requirements at a weighted average cost of approximately $6.22 per Mcf. Our utility hedging activities also include the cost of our Treasury lock agreements which are described in further detail below.

 
Nonutility Hedging Activities

      AEM manages its exposure to the risk of natural gas price changes through a combination of storage and financial derivatives, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Our financial derivative activities include fair value hedges to offset changes in the fair value of our natural gas inventory and cash flow hedges to offset anticipated purchases and sales of gas in the future.

      Effective April 1, 2004, we elected to treat our fixed-price forward contracts as normal purchases and sales and ceased marking these contracts to market. As a result, unrealized gains and losses on these open derivative contracts are now recorded as a component of accumulated other comprehensive income and are recognized in earnings as a component of revenue when the hedged volumes are sold.

      For the three months ended December 31, 2004, the change in the deferred hedging position in accumulated other comprehensive income from an unrealized gain as of September 30, 2004 to an unrealized loss as of December 31, 2004 was attributable to increases in future commodity prices relative to the commodity prices stipulated in the derivative contracts, and the recognition of $4.3 million in net deferred hedge gains in net income when the derivatives matured according to their terms. The net deferred hedge loss associated with open cash flow hedges remains subject to market price fluctuations until the positions are

11


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

either settled under the terms of the hedge contracts or terminated prior to settlement. Substantially all of the deferred hedging position as of December 31, 2004 is expected to be recognized in net income during fiscal 2005.

      Under our risk management policies, we seek to match our financial derivative positions to our physical storage positions as well as our expected current and future sales and purchase obligations to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. We can also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on December 31, 2004, AEH had a net open position (including existing storage) of 0.3 Bcf.

 
Treasury Activities

      During fiscal 2004, we entered into four Treasury lock agreements to fix the Treasury yield component of the interest cost of financing associated with the anticipated issuance of $875 million of long-term debt subsequent to September 30, 2004. This long-term debt was issued on October 22, 2004 and was used to repay a portion of the commercial paper used to fund the TXU Gas acquisition, as described in Note 3. We designated these Treasury lock agreements as cash flow hedges of an anticipated transaction. These Treasury lock agreements were settled in October 2004 with a net $43.8 million payment to the counterparties. This amount will remain in accumulated other comprehensive income and will be recognized as a component of interest expense over the next ten years. During the first quarter of fiscal 2005, we recognized approximately $0.9 million of this obligation as a component of interest expense.

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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.     Debt

 
 
Long-Term Debt

      Long-term debt at December 31, 2004 and September 30, 2004 consisted of the following:

                     
December 31, September 30,
2004 2004


(In thousands)
Unsecured floating rate Senior Notes, due 2007
  $ 300,000     $  
Unsecured 4.00% Senior Notes, due 2009
    400,000        
Unsecured 7.375% Senior Notes, due 2011
    350,000       350,000  
Unsecured 10% Notes, due 2011
    2,303       2,303  
Unsecured 5.125% Senior Notes, due 2013
    250,000       250,000  
Unsecured 4.95% Senior Notes, due 2014
    500,000        
Unsecured 5.95% Senior Notes, due 2034
    200,000        
Medium term notes
               
 
Series A, 1995-2, 6.27%, due 2010
    10,000       10,000  
 
Series A, 1995-1, 6.67%, due 2025
    10,000       10,000  
Unsecured 6.75% Debentures, due 2028
    150,000       150,000  
First Mortgage Bonds
               
 
Series J, 9.40% due 2021
    17,000       17,000  
 
Series P, 10.43% due 2013
    10,000       11,250  
 
Series Q, 9.75% due 2020
    16,000       16,000  
 
Series T, 9.32% due 2021
    18,000       18,000  
 
Series U, 8.77% due 2022
    20,000       20,000  
 
Series V, 7.50% due 2007
    2,500       4,167  
Other term notes due in installments through 2013
    9,374       9,830  
     
     
 
   
Total long-term debt
    2,265,177       868,550  
Less:
               
 
Original issue discount on unsecured senior notes and debentures
    (4,107 )     (1,331 )
 
Current maturities
    (5,897 )     (5,908 )
     
     
 
    $ 2,255,173     $ 861,311  
     
     
 

      Our unsecured floating rate debt bears interest at a rate equal to the three-month LIBOR rate plus 0.375 percent per year. At December 31, 2004, the interest rate on our floating rate debt was 2.465 percent.

 
Short-Term Debt

      At December 31, 2004, short-term debt consisted of $15.0 million of commercial paper and $13.8 million outstanding under our bank credit facilities. At September 30, 2004, there were no short-term amounts outstanding under our commercial paper program or bank credit facilities.

 
Credit Facilities

      We maintain both committed and uncommitted credit facilities. Borrowings under our uncommitted credit facilities are made on a when-and-as-needed basis at the discretion of the bank. Our credit capacity and the amount of unused borrowing capacity are affected by the seasonal nature of the natural gas business and

13


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

our short-term borrowing requirements, which are typically highest during colder winter months. Our working capital needs can vary significantly due to changes in the price of natural gas charged by suppliers and the increased gas supplies required to meet customers’ needs during periods of cold weather.

 
Committed Credit Facilities

      As of December 31, 2004, we had two short-term committed credit facilities totaling $618.0 million, one of which is an unsecured facility for $600.0 million that bears interest at the Eurodollar rate plus 0.625 percent and serves as a backup liquidity facility for our $600.0 million commercial paper program. At December 31, 2004, $15.0 million of commercial paper was outstanding. We entered into this facility on October 22, 2004 to replace our $350.0 million credit facility that served as the backup liquidity facility for our $350.0 million commercial paper program.

      We have a second unsecured facility in place for $18.0 million that bears interest at the Fed Funds rate plus 0.5 percent and is used for working-capital purposes. At December 31, 2004, we had borrowed $13.8 million under this credit facility.

      The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently meet. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our $600.0 million credit facility to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. The total debt to total capitalization ratio is calculated quarterly and up to $200.0 million in short-term debt may be excluded from the defined capitalization ratio only for the three months ended December 31, 2004. At December 31, 2004, our total-debt-to-total-capitalization ratio, as defined, was 61 percent. Pursuant to the terms of the credit facility, we excluded $28.8 million of short-term debt from the calculation of our total-debt-to-total-capitalization ratio as of December 31, 2004. In addition, both the interest margin over the Eurodollar rate and the fee that we pay on unused amounts under our $600.0 million credit facility are subject to adjustment depending upon our credit ratings.

 
Uncommitted Credit Facilities

      AEM has a $250.0 million uncommitted-demand working capital credit facility that bears interest at the Eurodollar rate plus 2.5 percent and expires on March 31, 2005. This facility is guaranteed by AEH. At December 31, 2004, no amounts were outstanding under this credit facility. However, at December 31, 2004, AEM letters of credit totaling $117.2 million had been issued under the facility and reduce the amount available that can be borrowed. The amount available under this credit facility is also limited by various covenants, including covenants based on working capital. Under the most restrictive covenant, the amount available to AEM under this credit facility was $32.8 million at December 31, 2004. Finally, this line of credit is collateralized by a blocked account maintained at AEM whereby collections from customers are deposited into the account and AEM withdraws funds from the account through an established approval process.

      Atmos Energy Corporation also has an unsecured short-term uncommitted credit line for $25.0 million that is used for working-capital and letter-of-credit purposes. There were no borrowings under this uncommitted credit facility at December 31, 2004, but Atmos Energy Corporation (AEC) letters of credit reduced the amount available by $4.1 million. This uncommitted line is renewed or renegotiated at least annually with varying terms, and we pay no fee for the availability of the line. Borrowings under this line are made on a when- and as-available basis at the discretion of the bank.

      In addition, AEM has a $100.0 million intercompany credit facility with AEC through AEH for its nonutility business which bears interest at the Eurodollar rate plus 2.75 percent. Any outstanding amounts under this facility are subordinated to AEM’s $250.0 million uncommitted-demand credit facility described

14


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

above. This facility is used to supplement AEM’s $250.0 million credit facility and has been approved by our state regulators through December 31, 2005. At December 31, 2004, $15.0 million was outstanding under this facility and is eliminated in consolidation.

 
Debt Covenants

      In addition to the 70 percent limit on our total debt-to-capitalization ratio imposed by our committed credit facilities, most of the First Mortgage Bonds contain provisions that allow us to prepay the outstanding balance in whole at any time, subject to a prepayment premium. The First Mortgage Bonds provide for certain cash flow requirements and restrictions on additional indebtedness, sale of assets and payment of dividends. Under the most restrictive of such covenants, cumulative cash dividends paid after December 31, 1988 may not exceed the sum of accumulated net income for periods after December 31, 1988 plus $15.0 million. At December 31, 2004 approximately $138.7 million of retained earnings was unrestricted with respect to the payment of dividends.

      We were in compliance with all of our debt covenants as of December 31, 2004. If we do not comply with our debt covenants, we may be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions. Our two public debt indentures relating to our senior notes and debentures, as well as our $600.0 million revolving credit agreement, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. In addition, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on any other financial obligation, as defined, by at least $250 thousand. Additionally, this agreement contains a provision that would limit the amount of credit available if Atmos is downgraded below an S&P rating of BBB and a Moody’s rating of Baa2.

      Except as described above, we have no triggering events in our debt instruments that are tied to changes in specified credit ratings or stock price, nor have we entered into any transactions that would require us to issue equity based on our credit rating or other triggering events.

 
7. Public Offering

      On October 27, 2004, we completed the public offering of 16,100,000 shares of our common stock including the underwriters’ exercise of their overallotment option of 2,100,000 shares. The offering was priced at $24.75 and generated net proceeds of approximately $382.0 million. We used the net proceeds from this offering, together with net proceeds of $235.7 million from a public offering we conducted in July 2004 and $1.39 billion received from the issuance of senior unsecured notes to pay off the $1.7 billion in outstanding commercial paper described in Note 3 and fund the remainder of the purchase price for the TXU Gas acquisition.

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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
8. Earnings Per Share

      Basic and diluted earnings per share at December 31 are calculated as follows:

                   
 
For the Three Months
Ended December 31

2004 2003


(In thousands)
Net income
  $ 59,599     $ 29,541  
     
     
 
Denominator for basic income per share — weighted average common shares
    75,306       51,483  
Effect of dilutive securities:
               
 
Restricted and other shares
    275       132  
 
Stock options
    144       246  
     
     
 
Denominator for diluted income per share — weighted average common shares
    75,725       51,861  
     
     
 
Income per share — basic
  $ 0.79     $ 0.57  
     
     
 
Income per share — diluted
  $ 0.79     $ 0.57  
     
     
 

      There were no out-of-the-money options excluded from the computation of diluted earnings per share for the three months ended December 31, 2004. There were 240,118 out-of-the-money options excluded from the computation of diluted earnings per share for the three months ended December 31, 2003 as their exercise price was greater than the average market price of the common stock.

 
9. Interim Pension and Other Post Retirement Benefit Plan Information

      The components of our net periodic pension cost for our pension and other post-retirement benefit plans for the three months ended December 31, 2004 and 2003 are presented below. All of these costs are recoverable through our gas utility rates; however, a portion of these costs is capitalized into our utility rate base. The remaining costs are recorded as a component of operation and maintenance expense. The amounts for the three months ended December 31, 2003 do not reflect the impact of the Medicare Prescription Drug,

16


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Improvement and Modernization Act of 2003 (the Act) as we recognized the impact of the Act beginning in the second quarter of fiscal 2004.

                                     
Pension Benefits Other Benefits


2004 2003 2004 2003




(In thousands)
Components of net periodic pension cost:
                               
 
Service cost
  $ 3,136     $ 2,433     $ 2,478     $ 1,725  
 
Interest cost
    6,017       6,004       2,366       2,103  
 
Expected return on assets
    (6,885 )     (7,524 )     (518 )     (335 )
 
Amortization of transition asset
    1       24       378       378  
 
Amortization of prior service cost
    (2 )     (2 )     96       96  
 
Amortization of actuarial loss
    1,891       2,018       151       635  
     
     
     
     
 
   
Net periodic pension cost
  $ 4,158     $ 2,953     $ 4,951     $ 4,602  
     
     
     
     
 
Actuarial assumptions used to develop net periodic pension cost:
                               
   
Discount rate
    6.25%       6.00%       6.25%       6.00%  
   
Rate of compensation increase
    4.00%       4.00%       4.00%       4.00%  
   
Expected return on plan assets
    8.75%       9.00%       5.30%       5.30%  

      We did not contribute to our pension plans during the three months ended December 31, 2004. We are not required to make a minimum funding contribution during fiscal 2005 nor do we anticipate making any voluntary contributions during fiscal 2005. During the three months ended December 31, 2004, we contributed $2.4 million to our other post-retirement plans and we expect to contribute $11.7 million to these plans during fiscal 2005.

 
10. Commitments and Contingencies
 
Litigation and Environmental Matters

      We are involved in litigation and environmental matters and claims that arise out of our ordinary business. While the results of such litigation, the ultimate results of response actions to our environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such litigation, response actions and claims will not have a material adverse effect on our financial condition, results of operations or net cash flows.

      We were the plaintiff in a case styled Energas Company, a Division of Atmos Energy Corporation v. ONEOK Energy Marketing and Trading Company, L.P., ONEOK Westex Transmission, Inc., and ONEOK Energy Marketing and Trading Company II, filed in December 2001, in the 72nd Judicial District in the District Court of Lubbock County, Texas. This case was filed to recover damages resulting from various claims involving the sale, measurement, transportation and balancing of natural gas. This case and all related claims have been settled. The settlement did not have a material effect on our financial condition, results of operations or net cash flows.

      During the three months ended December 31, 2004, there were no other material changes in the status of the litigation and environmental matters that were disclosed in Note 13 to our annual report on Form 10-K for the year ended September 30, 2004. However, with the acquisition of the natural gas distribution and pipeline operations of TXU Gas Company on October 1, 2004, we assumed responsibility for certain litigation and claims that arose in the ordinary course of the business of TXU Gas Company. We believe the final outcome

17


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of such litigation and claims will not have a material adverse effect on our financial condition, results of operations or net cash flows.

 
Purchase Commitments

      AEM has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At December 31, 2004, AEM is committed to purchase 43.3 Bcf within one year and 3.2 Bcf within one to three years under indexed contracts. AEM is committed to purchase 1.0 Bcf within one year under fixed price contracts with prices ranging from $5.24 to $8.91. Purchases under these contracts totaled $360.1 million and $296.7 million for the three months ended December 31, 2004 and 2003.

      Our historical utility operations 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 this service area which obligate it to purchase specified volumes at market prices. The estimated commitments under these contracts as of December 31, 2004 are as follows (in thousands):

         
 
2005
  $ 386,293  
2006
    117,507  
2007
    19,999  
2008
    10,717  
2009
    8,532  
Thereafter
    32,442  
     
 
    $ 575,490  
     
 
Other

      In January 2005, we signed a letter of intent with a third party to jointly construct, own and operate a 45-mile large diameter natural gas pipeline in the northern portion of the Dallas/ Fort Worth Metroplex. Under terms of the letter of intent, the third party will provide the initial capital to build the pipeline and we will contribute up to $42.5 million within two years of signing of a definitive agreement. The pipeline is expected to be in service by December 2005.

 
11. Concentration of Credit Risk

      Credit risk is the risk of financial loss to us if a customer fails to perform its contractual obligations. We engage in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers. These transactions principally occur in the southern and midwestern regions of the United States. We believe that this geographic concentration does not contribute significantly to our overall exposure to credit risk. Credit risk associated with trade accounts receivable for the utility segment is mitigated by the large number of individual customers and diversity in customer base.

      This diversification in AEM’s customers helps mitigate its credit exposure. AEM maintains credit policies with respect to its counterparties that it believes minimizes overall credit risk. Where appropriate, such policies include the evaluation of a prospective counterparty’s financial condition, collateral requirements and the use of standardized agreements that facilitate the netting of cash flows associated with a single counterparty. AEM also monitors the financial condition of existing counterparties on an ongoing basis. Customers not meeting minimum standards are required to provide adequate assurance of financial performance.

18


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      AEM maintains a provision for credit losses based upon factors surrounding the credit risk of customers, historical trends and other information. We believe, based on our credit policies and our provisions for credit losses, that our financial position, results of operations and cash flows will not be materially affected as a result of counterparty nonperformance.

      AEM’s estimated credit exposure is monitored in terms of the percentage of its customers that are rated as investment grade versus non-investment grade. Credit exposure is defined as the total of (1) accounts receivable, (2) delivered, but unbilled physical sales and (3) mark-to-market exposure for sales and purchases. Investment grade determinations are set internally by the credit department, but are primarily based on external ratings provided by Moody’s Investor Service Inc. and/or Standard & Poor’s Rating Service, a Division of the McGraw-Hill Companies, Inc. For non-rated entities, the default rating for municipalities is investment grade, while the default rating for non-guaranteed industrials and commercials is non-investment grade. The table below shows the percentages related to the investment ratings as of December 31, 2004 and September 30, 2004. As indicated below, a majority of AEM’s customers are rated as investment grade.

                   
 
December 31, September 30,
2004 2004


Investment grade
    57 %     55 %
Non-investment grade
    43 %     45 %
     
     
 
 
Total
    100 %     100 %
     
     
 

      The following table presents our derivative counterparty credit exposure by operating segment based upon the unrealized fair value of our derivative contracts that represent assets as of December 31, 2004. Investment grade counterparties have minimum credit ratings of BBB-, assigned by Standard & Poor’s Rating Group; or Baa3, assigned by Moody’s Investor Service. Non-investment grade counterparties are composed of counterparties that are below investment grade or that have not been assigned an internal investment grade rating due to the short-term nature of the contracts associated with that counterparty. This category is composed of numerous smaller counterparties, none of which is individually significant.

                         
 
At December 31, 2004

Natural Gas
Utility Marketing
Segment (1) Segment Consolidated



(In thousands)
Investment grade counterparties
  $ 755     $ 11,911     $ 12,666  
Non-investment grade counterparties
          157       157  
     
     
     
 
    $ 755     $ 12,068     $ 12,823  
     
     
     
 


(1)   Counterparty risk for our utility segment is minimized because hedging gains and losses are passed through to our customers.

 
12. Segment Information

      Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as certain nonutility businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers through our seven regulated utility divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system.

      Through our nonutility businesses we provide natural gas management and marketing services to industrial customers, municipalities and other local distribution companies located in 18 states. Additionally, we provide natural gas transportation and storage services to certain of our utility operations and to third parties.

19


ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Our operations are divided into four segments:

  •  the utility segment, which includes our regulated natural gas distribution and sales operations,
 
  •  the natural gas marketing segment, which includes a variety of natural gas management services,
 
  •  the pipeline and storage segment, which includes our regulated and nonregulated natural gas transmission and storage services and
 
  •  the other nonutility segment, which includes all of our other nonutility operations.

      Effective October 1, 2004, we created the pipeline and storage segment which reflects the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division and the nonregulated pipeline and storage operations of Atmos Pipeline and Storage, L.L.C, which was previously included in our other nonutility segment. Segment information for all prior year periods has been restated to reflect our new organizational structure.

      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 utility segment operations are geographically dispersed, they are reported as a single segment as each utility 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, 2004. We evaluate performance based on net income or loss of the respective operating units. Summarized income statements by segment are shown in the following tables.

                                                     
 
For the Three Months Ended December 31, 2004

Natural Gas Pipeline Other
Utility Marketing and Storage Nonutility Eliminations Consolidated






(In thousands)
Operating revenues from external parties
  $ 913,406     $ 432,910     $ 21,752     $ 556     $     $ 1,368,624  
Intersegment revenues
    275       60,891       21,938       803       (83,907 )      
     
     
     
     
     
     
 
      913,681       493,801       43,690       1,359       (83,907 )     1,368,624  
Purchased gas cost
    656,370       466,957       3,872             (83,027 )     1,044,172  
     
     
     
     
     
     
 
 
Gross profit
    257,311       26,844       39,818       1,359       (880 )     324,452  
Operating expenses
    172,224       3,859       19,471       1,154       (930 )     195,778  
     
     
     
     
     
     
 
Operating income
    85,087       22,985       20,347       205       50       128,674  
Miscellaneous income (expense)
    972       246       315       593       (1,741 )     385  
Interest charges
    27,259       401       6,171       402       (1,691 )     32,542  
     
     
     
     
     
     
 
Income before income taxes
    58,800       22,830       14,491       396             96,517  
Income tax expense
    21,777       9,568       5,407       166             36,918  
     
     
     
     
     
     
 
   
Net income
  $ 37,023     $ 13,262     $ 9,084     $ 230     $     $ 59,599  
     
     
     
     
     
     
 

20


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                     
For the Three Months Ended December 31, 2003

Natural Gas Pipeline Other
Utility Marketing and Storage Nonutility Eliminations Consolidated






(In thousands)
Operating revenues from external parties
  $ 460,209     $ 301,424     $ 1,369     $ 614     $     $ 763,616  
Intersegment revenues
    279       72,405       1,550       95       (74,329 )      
     
     
     
     
     
     
 
      460,488       373,829       2,919       709       (74,329 )     763,616  
Purchased gas cost
    322,064       356,331       327             (74,159 )     604,563  
     
     
     
     
     
     
 
 
Gross profit
    138,424       17,498       2,592       709       (170 )     159,053  
Operating expenses
    89,046       4,288       1,530       818       (170 )     95,512  
     
     
     
     
     
     
 
Operating income (loss)
    49,378       13,210       1,062       (109 )           63,541  
Miscellaneous income (expense)
    1,067       123       6       1,189       (1,178 )     1,207  
Interest charges
    17,060       792       211       450       (1,178 )     17,335  
     
     
     
     
     
     
 
Income before income taxes
    33,385       12,541       857       630             47,413  
Income tax expense
    12,274       5,005       342       251             17,872  
     
     
     
     
     
     
 
   
Net income
  $ 21,111     $ 7,536     $ 515     $ 379     $     $ 29,541  
     
     
     
     
     
     
 

21


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Balance sheet information at December 31, 2004 and September 30, 2004 by segment is presented in the following tables:

 
                                                     
At December 31, 2004

Natural Pipeline
Gas and Other
Utility Marketing Storage Nonutility Eliminations Consolidated






(In thousands)
ASSETS
Property, plant and equipment, net
  $ 2,790,193     $ 7,711     $ 423,796     $ 1,443     $     $ 3,223,143  
Investment in subsidiaries
    173,967       (1,662 )                 (172,305 )      
Current assets
                                               
 
Cash and cash equivalents
    5,594       19,053             515             25,162  
 
Assets from risk management activities
    755       15,161                   (3,093 )     12,823  
 
Other current assets
    862,819       283,166       58,526       18,913       (53,176 )     1,170,248  
 
Intercompany receivables
    501,326                   30,894       (532,220 )      
     
     
     
     
     
     
 
   
Total current assets
    1,370,494       317,380       58,526       50,322       (588,489 )     1,208,233  
Intangible assets
          3,963                         3,963  
Goodwill
    530,957       24,282       143,836                   699,075  
Noncurrent assets from risk management activities
                                   
Deferred charges and other assets
    241,080       1,610       6,882       22,119       (9 )     271,682  
     
     
     
     
     
     
 
    $ 5,106,691     $ 353,284     $ 633,040     $ 73,884     $ (760,803 )   $ 5,406,096  
     
     
     
     
     
     
 
 
CAPITALIZATION AND
LIABILITIES
Shareholders’ equity
  $ 1,539,078     $ 96,903     $ 44,410     $ 32,654     $ (173,967 )   $ 1,539,078  
Long-term debt
    2,247,779                   7,394             2,255,173  
     
     
     
     
     
     
 
   
Total capitalization
    3,786,857       96,903       44,410       40,048       (173,967 )     3,794,251  
Current liabilities
                                               
 
Current maturities of long-term debt
    3,917                   1,980             5,897  
 
Short-term debt
    28,797                   15,000       (15,000 )     28,797  
 
Liabilities from risk management activities
    10,167       11,103                   (5,101 )     16,169  
 
Other current liabilities
    653,134       215,587       78,514       7,539       (34,410 )     920,364  
 
Intercompany payables
          33,260       498,960             (532,220 )      
     
     
     
     
     
     
 
   
Total current liabilities
    696,015       259,950       577,474       24,519       (586,731 )     971,227  
Deferred income taxes
    203,680       (11,271 )     6,324       1,977       27       200,737  
Noncurrent liabilities from risk management activities
          984                   (132 )     852  
Regulatory cost of removal obligation
    241,986                               241,986  
Deferred credits and other liabilities
    178,153       6,718       4,832       7,340             197,043  
     
     
     
     
     
     
 
    $ 5,106,691     $ 353,284     $ 633,040     $ 73,884     $ (760,803 )   $ 5,406,096  
     
     
     
     
     
     
 

22


 

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
                                                     
At September 30, 2004

Natural Pipeline
Gas and Other
Utility Marketing Storage Nonutility Eliminations Consolidated






(In thousands)
ASSETS
Property, plant and equipment, net
  $ 1,669,304     $ 7,875     $ 43,784     $ 1,558     $     $ 1,722,521  
Investment in subsidiaries
    164,300       (1,484 )                 (162,816 )      
Current assets
                                               
 
Cash and cash equivalents
    182,846       18,734             352             201,932  
 
Assets from risk management activities
    25,692       24,412                   (5,664 )     44,440  
 
Other current assets
    253,829       170,363       13,473       18,815       (25,740 )     430,740  
 
Intercompany receivables
    1,995                   16,079       (18,074 )      
     
     
     
     
     
     
 
   
Total current assets
    464,362       213,509       13,473       35,246       (49,478 )     677,112  
Intangible assets
          4,160                         4,160  
Goodwill
    199,400       24,282       10,430                   234,112  
Noncurrent assets from risk management activities
          734                   (172 )     562  
Deferred charges and other assets
    207,019       1,661       25       22,711             231,416  
     
     
     
     
     
     
 
    $ 2,704,385     $ 250,737     $ 67,712     $ 59,515     $ (212,466 )   $ 2,869,883  
     
     
     
     
     
     
 
 
CAPITALIZATION AND
LIABILITIES
Shareholders’ equity
  $ 1,133,459     $ 103,376     $ 28,499     $ 32,425     $ (164,300 )   $ 1,133,459  
Long-term debt
    853,472                   7,839             861,311  
     
     
     
     
     
     
 
   
Total capitalization
    1,986,931       103,376       28,499       40,264       (164,300 )     1,994,770  
Current liabilities
                                               
 
Current maturities of long-term debt
    3,917                   1,991             5,908  
 
Short-term debt
                                   
 
Liabilities from risk management activities
    34,304       11,407                   (6,253 )     39,458  
 
Other current liabilities
    236,257       124,577       24,014       7,558       (23,304 )     369,102  
 
Intercompany payables
          9,906       8,168             (18,074 )      
     
     
     
     
     
     
 
   
Total current liabilities
    274,478       145,890       32,182       9,549       (47,631 )     414,468  
Deferred income taxes
    208,325       (3,360 )     6,961       1,977       27       213,930  
Noncurrent liabilities from risk management activities
          1,700                   (562 )     1,138  
Regulatory cost of removal obligation
    103,579                               103,579  
Deferred credits and other liabilities
    131,072       3,131       70       7,725             141,998  
     
     
     
     
     
     
 
    $ 2,704,385     $ 250,737     $ 67,712     $ 59,515     $ (212,466 )   $ 2,869,883  
     
     
     
     
     
     
 

23


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Atmos Energy Corporation

      We have reviewed the condensed consolidated balance sheet of Atmos Energy Corporation as of December 31, 2004, and the related condensed consolidated statements of income for the three-month periods ended December 31, 2004 and 2003, and the condensed consolidated statements of cash flows for the three-month periods ended December 31, 2004 and 2003. These financial statements are the responsibility of the Company’s management.

      We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

      We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Atmos Energy Corporation as of September 30, 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, not presented herein, and in our report dated November 9, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

  ERNST & YOUNG LLP

Dallas, Texas

February 7, 2005

24


 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

      The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2004.

 
Cautionary Statement for the Purposes of the Safe Harbor Under the Private Securities Litigation Reform Act of 1995

      The statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by the Company and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of the Company’s documents or oral presentations, the words “anticipate”, “believe”, “expect”, “estimate”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to the Company’s strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: adverse weather conditions, such as warmer than normal weather in the Company’s utility service territories or colder than normal weather that could adversely affect our natural gas marketing activities; regulatory trends and decisions, including deregulation initiatives and the impact of rate proceedings before various state regulatory commissions; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility and counterparty creditworthiness; national, regional and local economic conditions; the Company’s ability to continue to access the capital markets; the effects of inflation and changes in the availability and prices of natural gas, including the volatility of natural gas prices; increased competition from energy suppliers and alternative forms of energy; risks relating to the acquisition of the TXU Gas operations, including without limitation, the Company’s increased indebtedness resulting from the acquisition and the successful integration of the TXU Gas operations; and other uncertainties discussed herein, all of which are difficult to predict and many of which are beyond the control of the Company. A discussion of these risks and uncertainties may be found in the Company’s Form 10-K for the year ended September 30, 2004. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, the Company undertakes no obligation to update or revise any of its forward-looking statements whether as a result of new information, future events or otherwise.

Overview

      Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as certain other natural gas nonutility businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public-authority and industrial customers through our seven regulated utility divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system.

      Through our nonutility businesses we provide natural gas management and marketing services to industrial customers, municipalities and other local distribution companies located in 18 states. Additionally, we provide natural gas transportation and storage services to certain of our utility operations and to third parties.

      Our operations are divided into four segments:

  •  the utility segment, which includes our regulated natural gas distribution and sales operations,
 
  •  the natural gas marketing segment, which includes a variety of natural gas management services,

25


  •  the pipeline and storage segment, which includes our regulated and nonregulated natural gas transmission and storage services and
 
  •  the other nonutility segment, which includes all of our other nonutility operations.

      The first quarter of fiscal 2005 was highlighted by our acquisition of the natural gas distribution and pipeline operations of TXU Gas Company (TXU Gas). The TXU Gas operations we acquired are regulated businesses engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. Through these newly acquired operations, we provide gas distribution services to approximately 1.5 million residential and business customers in Texas, including the Dallas/ Fort Worth metropolitan area. We also now own and operate a system consisting of 6,162 miles of gas transmission and gathering lines and five underground storage reservoirs in Texas.

      The purchase price for the TXU Gas acquisition was approximately $1.905 billion, before transaction costs and expenses, which we paid in cash. We funded the purchase price for the TXU Gas acquisition with approximately $235.7 million in net proceeds from our offering of 9,939,393 shares of common stock, which we completed on July 19, 2004, and approximately $1.7 billion in net proceeds from our issuance on October 1, 2004 of commercial paper backstopped by a senior unsecured revolving credit agreement, which we entered into on September 24, 2004 for bridge financing for the TXU Gas acquisition. In October 2004, we paid off the outstanding commercial paper used to fund the acquisition through the issuance of senior unsecured notes on October 22, 2004, which generated net proceeds of approximately $1.39 billion and the sale of 16.1 million shares of common stock on October 27, 2004, which generated net proceeds of approximately $382.0 million.

      As a result of the acquisition, effective October 1, 2004, we created the pipeline and storage segment which reflects the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division and the nonregulated pipeline and storage operations of Atmos Pipeline and Storage, LLC, which was previously included in our other nonutility segment.

      The TXU Gas acquisition essentially doubled the size of the Company. The following table presents selected financial information for the Mid-Tex Division and Atmos Pipeline – Texas Division operations for the three months ended December 31, 2004:

                   
 
Mid-Tex Atmos Pipeline —
Division Texas Division


(In thousands,
unless otherwise noted)
Operating revenues
  $ 402,248     $ 38,514  
Gross profit
    113,959       34,867  
Operating expenses
    75,411       18,477  
Operating income
    38,548       16,390  
Miscellaneous income
    410       114  
Interest charges
    11,440       5,767  
Income tax expense
    10,085       3,834  
Net income
  $ 17,433     $ 6,903  
 
Utility sales volumes — MMcf
    40,150       NA  
Utility transportation volumes — MMcf
    11,799       NA  
     
     
 
 
Total utility throughput — MMcf
    51,949       NA  
     
     
 
Pipeline transportation volumes — MMcf
    NA       72,753  
     
     
 
Heating Degree Days — Percent of Normal
    78 %     NA  

26


      The impact of the TXU Gas acquisition, combined with continued strong performance in our natural gas marketing segment contributed to the following financial results during the first quarter of fiscal 2005:

  •  Our utility segment net income increased $15.9 million. The increase reflects the impact of the Mid-Tex operations ($17.4 million) and the effect of rate increases in our West Texas and Mississippi jurisdictions that were not in effect during the first quarter of fiscal 2004, partially offset by an increase in interest expense attributable to an increase in our debt balances to fund the TXU Gas acquisition.
 
  •  Our natural gas marketing segment net income increased $5.7 million during the three months ended December 31, 2004 compared with the three months ended December 31, 2003. The increase in natural gas marketing net income primarily reflects favorable results from the management of our storage portfolio coupled with a favorable movement in the forward indices used to value our storage financial instruments.
 
  •  Our pipeline and storage segment contributed $9.1 million in net income for the quarter ended December 31, 2004 compared with $0.5 million for the quarter ended December 31, 2003, primarily reflecting the acquisition of the Atmos Pipeline — Division ($6.9 million).
 
  •  Our total debt to capitalization ratio at December 31, 2004 was 59.8 percent compared with 43.3 percent at September 30, 2004 reflecting the impact of the financing for the TXU Gas acquisition.
 
  •  Operating cash flow provided $67.9 million compared with $11.5 million, reflecting favorable results in net working capital management efforts partially offset by increases in natural gas stored underground and deferred gas costs.
 
  •  Capital expenditures increased to $67.2 million from $45.5 million primarily reflecting the acquisition of the Mid-Tex Division ($23.4 million) and the Atmos Pipeline — Division ($1.1 million).

Critical Accounting Estimates

      Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Our critical accounting estimates are reviewed by the Audit Committee on a quarterly basis. Actual results may differ from estimates.

      Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the year ended September 30, 2004 and include the following:

  •  Regulation
 
  •  Revenue Recognition
 
  •  Allowance for Doubtful Accounts
 
  •  Derivatives and Hedging Activities
 
  •  Impairment Assessments
 
  •  Pension and Other Postretirement Plans

      There have been no significant changes to these critical accounting policies during the three months ended December 31, 2004.

27


 

Results of Operations

      The following table presents our financial highlights for the three months ended December 31, 2004 and 2003:

                   
Three Months Ended
December 31

2004 2003


(In thousands, unless
otherwise noted)
Operating revenues
  $ 1,368,624     $ 763,616  
Gross profit
    324,452       159,053  
Operating expenses
    195,778       95,512  
Operating income
    128,674       63,541  
Miscellaneous income
    385       1,207  
Interest charges
    32,542       17,335  
Income tax expense
    36,918       17,872  
Net income
  $ 59,599     $ 29,541  
 
Utility sales volumes — MMcf
    90,957       50,681  
Utility transportation volumes — MMcf
    27,978       17,498  
     
     
 
 
Total utility throughput — MMcf
    118,935       68,179  
     
     
 
Natural gas marketing sales volumes — MMcf
    60,296       58,917  
     
     
 
Pipeline transportation volumes — MMcf
    72,753        
     
     
 
Heating Degree Days (1)
Actual (weighted average)
    988       1,240  
 
Percent of normal
    88 %     95 %
 
Consolidated utility average transportation revenue per Mcf
  $ 0.58     $ 0.46  
Consolidated utility average cost of gas per Mcf sold
  $ 7.22     $ 6.35  


(1)   Adjusted for service areas that have weather normalized operations.

28


      The following table shows our operating income by segment for the three-month periods ended December 31, 2004 and 2003. The presentation of our utility operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.

                                   
 
For the Three Months Ended December 31

2004 2003


Operating Heating Degree Days Operating Heating Degree Days
Income Percent of Normal (3) Income Percent of Normal (3)




(In thousands, except degree day information)
Colorado-Kansas
  $ 8,235       99 %   $ 8,238       100 %
Kentucky
    5,845       94 %     6,564       99 %
Louisiana
    6,333       85 %     8,256       90 %
Mid-States
    11,138       91 %     13,871       94 %
Mid-Tex (1)
    38,548       78 %            
Mississippi Valley Gas Company
    8,607       89 %     8,233       100 %
West Texas
    5,786       100 %     4,666       86 %
Other
    595             (450 )      
     
             
         
Utility segment
    85,087       88 %     49,378       95 %
Natural gas marketing segment
    22,985             13,210        
Pipeline and storage segment (2)
    20,347             1,062        
Other nonutility segment and other
    255             (109 )      
     
             
         
 
Consolidated operating income
  $ 128,674       88 %   $ 63,541       95 %
     
             
         


(1)   Operating income for the Mid-Tex Division reflects operating income since October 1, 2004.
 
(2)   Operating income for the pipeline and storage segment reflects operating income for the Atmos Pipeline — Texas Division since October 1, 2004.
 
(3)   Adjusted for service areas that have weather normalized operations.

 
Three Months Ended December 31, 2004 Compared with Three Months Ended December 31, 2003
 
Utility Segment

      Our utility segment has historically contributed 70 to 85 percent of our consolidated net income. The primary factors that impact the results of our utility operations are seasonal weather patterns, competitive factors in the energy industry and economic conditions in our service areas. Natural gas sales to residential, commercial and public-authority customers are affected by winter heating season requirements. This generally results in higher operating revenues and net income during the period from October through March of each year and lower operating revenues and either lower net income or net losses during the period from April through September of each year. Accordingly, our second fiscal quarter has historically been our most critical earnings quarter with an average of approximately 68 percent of our consolidated net income having been earned in the second quarter during the three most recently completed fiscal years. Additionally, we typically experience higher levels of accounts receivable, accounts payable, gas stored underground and short-term debt balances during the winter heating season due to the seasonal nature of our revenues and the need to purchase and store gas to support these operations. Utility sales to industrial customers are much less weather sensitive. Utility sales to agricultural customers, which typically use natural gas to power irrigation pumps during the period from March through September, are primarily affected by rainfall amounts and the price of natural gas.

      Changes in the cost of gas impact revenue but do not directly affect our gross profit from utility operations because the fluctuations in gas prices are passed through to our customers. Accordingly, we believe gross profit margin is a better indicator of our financial performanc