ATMOS ENERGY CORP.

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, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of January 31, 2007.


Class		Shares Outstanding

No Par Value		88,577,022


GLOSSARY OF KEY TERMS
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME
ATMOS ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ATMOS ENERGY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 2006
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
Computation of Ratio of Earnings to Fixed Charges
Letter Regarding Unaudited Interim Financial Information
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications

GLOSSARY OF KEY TERMS


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

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31,			September 30,
	2006			2006
	(Unaudited)
	(In thousands, except
	share data)

ASSETS
Property, plant and equipment	$	5,162,006		$	5,101,308
Less accumulated depreciation and amortization		1,494,091			1,472,152

Net property, plant and equipment		3,667,915			3,629,156
Current assets
Cash and cash equivalents		94,406			75,815
Cash held on deposit in margin account		—			35,647
Accounts receivable, net		766,632			374,629
Gas stored underground		520,034			461,502
Other current assets		194,566			169,952

Total current assets		1,575,638			1,117,545
Goodwill and intangible assets		738,369			738,521
Deferred charges and other assets		234,473			234,325

	$	6,216,395		$	5,719,547


CAPITALIZATION AND LIABILITIES
Shareholders’ equity
Common stock, no par value (stated at $.005 per share);
200,000,000 shares authorized; issued and outstanding:
December 31, 2006 — 88,504,847 shares; September 30, 2006 — 81,739,516 shares	$	442		$	409
Additional paid-in capital		1,670,487			1,467,240
Retained earnings		279,299			224,299
Accumulated other comprehensive loss		(29,771	)		(43,850	)

Shareholders’ equity		1,920,457			1,648,098
Long-term debt		1,878,733			2,180,362

Total capitalization		3,799,190			3,828,460
Current liabilities
Accounts payable and accrued liabilities		762,487			345,108
Other current liabilities		407,351			388,451
Short-term debt		154,471			382,416
Current maturities of long-term debt		303,209			3,186

Total current liabilities		1,627,518			1,119,161
Deferred income taxes		324,296			306,172
Regulatory cost of removal obligation		255,321			261,376
Deferred credits and other liabilities		210,070			204,378

	$	6,216,395		$	5,719,547

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended
	December 31
	2006			2005
	(Unaudited)
	(In thousands, except
	per share data)

Operating revenues
Utility segment	$	964,244		$	1,405,010
Natural gas marketing segment		711,694			1,101,845
Pipeline and storage segment		49,852			39,712
Other nonutility segment		1,353			1,492
Intersegment eliminations		(124,510	)		(264,239	)

		1,602,633			2,283,820
Purchased gas cost
Utility segment		701,676			1,124,829
Natural gas marketing segment		648,560			1,075,526
Pipeline and storage segment		225			—
Other nonutility segment		—			—
Intersegment eliminations		(123,420	)		(263,125	)

		1,227,041			1,937,230

Gross profit		375,592			346,590
Operating expenses
Operation and maintenance		115,370			108,217
Depreciation and amortization		48,995			43,260
Taxes, other than income		40,067			45,416

Total operating expenses		204,432			196,893

Operating income		171,160			149,697
Miscellaneous income		1,579			448
Interest charges		39,532			36,189

Income before income taxes		133,207			113,956
Income tax expense		51,946			42,929

Net income	$	81,261		$	71,027

Basic net income per share	$	0.98		$	0.88

Diluted net income per share	$	0.97		$	0.88

Cash dividends per share	$	0.320		$	0.315

Weighted average shares outstanding:
Basic		82,726			80,259

Diluted		83,350			80,722

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	December 31
	2006			2005
	(Unaudited)
	(In thousands)

Cash Flows From Operating Activities
Net income	$	81,261		$	71,027
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization:
Charged to depreciation and amortization		48,995			43,260
Charged to other accounts		83			147
Deferred income taxes		13,869			20,448
Other		4,718			3,680
Net assets / liabilities from risk management activities		(34,857	)		13,695
Net change in operating assets and liabilities		50,900			(347,626	)

Net cash provided by (used in) operating activities		164,969			(195,369	)
Cash Flows From Investing Activities
Capital expenditures		(86,986	)		(102,465	)
Other, net		(1,324	)		(1,121	)

Net cash used in investing activities		(88,310	)		(103,586	)
Cash Flows From Financing Activities
Net increase (decrease) in short-term debt		(227,945	)		329,250
Repayment of long-term debt		(1,717	)		(1,695	)
Cash dividends paid		(26,261	)		(25,429	)
Issuance of common stock		5,594			6,164
Net proceeds from equity offering		192,261			—

Net cash provided by (used in) financing activities		(58,068	)		308,290

Net increase in cash and cash equivalents		18,591			9,335
Cash and cash equivalents at beginning of period		75,815			40,116

Cash and cash equivalents at end of period	$	94,406		$	49,451

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2006


1.	Nature of Business

Atmos Energy Corporation (“Atmos” or “the Company”) and our subsidiaries are engaged primarily in the natural gas utility business as well as other natural gas nonutility businesses. Our natural gas utility business distributes natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers throughout our six regulated natural gas utility divisions, in the service areas described below:


Division		Service Area

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


⁽¹⁾		Effective October 1, 2006, the Kentucky and Mid-States Divisions were combined.

⁽²⁾		Denotes locations where we have more limited service areas.

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 and Waco, Texas.

Our nonutility businesses operate in 22 states and include our natural gas marketing operations, pipeline and storage operations and other nonutility operations. These operations are either organized under or managed by Atmos Energy Holdings, Inc. (AEH), which is wholly-owned by the Company.

Our natural gas marketing operations are managed by Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH. AEM provides a variety of natural gas management services to municipalities, natural gas utility systems and industrial natural gas customers, primarily in the southeastern and midwestern states and to our Louisiana and Kentucky/Mid-States utility 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 business includes the regulated operations of our Atmos Pipeline — Texas Division, a division of Atmos Energy Corporation, and the nonregulated operations of Atmos Pipeline and Storage, LLC (APS), which is wholly-owned by AEH. The Atmos Pipeline — Texas Division transports natural gas to our Atmos Energy Mid-Tex Division and to third parties, as well as 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 each wholly-owned by AEH. Through AES, we have provided natural gas management services to our utility operations, other than the Mid-Tex Division. These services included aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

our utility service areas at competitive prices. The revenues of AES represent charges to our utility divisions equal to the costs incurred to provide those services. Effective January 1, 2007, our shared services division began providing these services to our utility operations, which were formerly provided by AES. Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through sales-type lease agreements.


2.	Unaudited Interim Financial Information

In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim-period financial statements. These consolidated interim-period financial statements are condensed as permitted by the instructions to Form 10-Q and should be read in conjunction with the audited consolidated financial statements of Atmos Energy Corporation included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2006. Because of seasonal and other factors, the results of operations for the three-month period ended December 31, 2006 are not indicative of expected results of operations for the full 2007 fiscal year, which ends September 30, 2007.

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, 2006. There were no significant changes to those accounting policies during the three months ended December 31, 2006.

Regulatory assets and liabilities

We record certain costs as regulatory assets in accordance with Statement of Financial Accounting Standards (SFAS) 71, Accounting for the Effects of Certain Types of Regulation , when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Substantially all of our regulatory assets are recorded as a component of deferred charges and other assets and substantially all of our regulatory liabilities are recorded as a component of deferred credits and other liabilities. Deferred gas costs are recorded either in other current assets or liabilities and the regulatory cost of removal obligation is separately reported.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Significant regulatory assets and liabilities as of December 31, 2006 and September 30, 2006 included the following:


	December 31,		September 30,
	2006		2006
	(In thousands)

Regulatory assets:
Merger and integration costs, net	$	8,541	$	8,644
Deferred gas cost		86,024		44,992
Environmental costs		1,234		1,234
Rate case costs		11,318		10,579
Deferred franchise fees		1,004		1,311
Other		8,065		9,055

	$	116,186	$	75,815

Regulatory liabilities:
Deferred gas cost	$	15,498	$	68,959
Regulatory cost of removal obligation		276,300		276,490
Deferred income taxes, net		235		235
Other		10,320		10,825

	$	302,353	$	356,509

Currently, our authorized rates do not include a return on certain of our merger and integration costs; however, we recover the amortization of these costs. Merger and integration costs, net, are generally amortized on a straight-line basis over estimated useful lives ranging up to 20 years. Environmental costs have been deferred to be included in future rate filings in accordance with rulings received from various state regulatory commissions.

Comprehensive income

The following table presents the components of comprehensive income, net of related tax, for the three-month periods ended December 31, 2006 and 2005:


	Three Months Ended
	December 31
	2006		2005
	(In thousands)

Net income	$	81,261	$	71,027
Unrealized holding gains on investments, net of tax expense of $883 and $248		1,441		405
Amortization of interest rate hedging transactions, net of tax expense of $528 and $528		860		860
Net unrealized gains (losses) on commodity hedging transactions, net of tax expense (benefit) of $7,219 and $(14,749)		11,778		(24,063	)

Comprehensive income	$	95,340	$	48,229

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated other comprehensive loss, net of tax, as of December 31, 2006 and September 30, 2006 consisted of the following unrealized gains (losses):


	December 31,			September 30,
	2006			2006
	(In thousands)

Accumulated other comprehensive loss:
Unrealized holding gains on investments	$	3,007		$	1,566
Treasury lock agreements		(19,680	)		(20,540	)
Cash flow hedges		(13,098	)		(24,876	)

	$	(29,771	)	$	(43,850	)

Recent accounting pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). The new standard makes a significant change to the existing rules by requiring recognition in the balance sheet of the overfunded or underfunded positions of defined benefit pension and other postretirement plans, along with a corresponding noncash, after-tax adjustment to stockholders’ equity. Additionally, this standard requires that the measurement date must correspond to the fiscal year end balance sheet date. This standard does not change how net periodic pension and postretirement cost or the projected benefit obligation is determined. The balance sheet recognition guidance of this standard will be effective as of September 30, 2007 and the measurement date provisions of this guidance can be adopted as late as fiscal 2008 for our company.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by establishing standards for measurement and recognition in financial statements of positions taken by an entity in its income tax returns. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties, accounting for income taxes in interim periods and income tax disclosures. We will be required to apply the provisions of FIN 48 beginning October 1, 2007. We are currently evaluating the impact this standard may have on our financial position, results of operations and cash flows.


3.	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. These risk management assets and liabilities are subject to continuing market risk until the underlying derivative contracts are settled.

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, 2006 and September 30, 2006:


				Natural Gas
	Utility			Marketing			Total
	(In thousands)

December 31, 2006:
Assets from risk management activities, current	$	241		$	68,170		$	68,411
Assets from risk management activities, noncurrent		—			8,344			8,344
Liabilities from risk management activities, current		(33,556	)		(1,274	)		(34,830	)
Liabilities from risk management activities, noncurrent		—			(277	)		(277	)

Net assets (liabilities)	$	(33,315	)	$	74,963		$	41,648

September 30, 2006:
Assets from risk management activities, current	$	—		$	12,553		$	12,553
Assets from risk management activities, noncurrent		—			6,186			6,186
Liabilities from risk management activities, current		(27,209	)		(3,460	)		(30,669	)
Liabilities from risk management activities, noncurrent		—			(276	)		(276	)

Net assets (liabilities)	$	(27,209	)	$	15,003		$	(12,206	)

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 ultimately will 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.

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. AEM also utilizes basis swaps and other non-hedge derivative instruments to manage its exposure to market volatility.

For the three-month period ended December 31, 2006, the change in the deferred hedging position in accumulated other comprehensive loss was attributable to decreases in future commodity prices relative to the commodity prices stipulated in the derivative contracts, and the recognition for the three months ended December 31, 2006 of $21.0 million in net deferred hedging losses in net income when the derivative contracts matured according to their terms. The net deferred hedging loss associated with open cash flow hedges remains subject to market price fluctuations until the positions are either settled under the terms of the hedge contracts or terminated prior to settlement. The majority of the deferred hedging balance as of December 31, 2006 is expected to be recognized in net income in fiscal 2007 along with the corresponding hedged purchases and sales of natural gas. The remainder of the deferred hedging balance is expected to be recognized in net income in fiscal 2008 and beyond.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our hedge ineffectiveness primarily results from differences in the location and timing of the derivative hedging instrument and the hedged item and could materially affect our results as ineffectiveness is recognized in the income statement. Fair value and cash flow hedge ineffectiveness arising from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments is referred to as basis ineffectiveness. Fair value hedge ineffectiveness arising from the timing of the settlement of physical contracts and the settlement of the related fair value hedge is referred to as timing ineffectiveness. Gains and losses arising from basis and timing ineffectiveness for the three months ended December 31, 2006 and 2005 is as follows:


	Three Months Ended
	December 31
	2006			2005
	(In thousands)

Basis ineffectiveness:
Fair value basis ineffectiveness	$	(646	)	$	8,114
Cash flow basis ineffectiveness		124			982

Total basis ineffectiveness		(522	)		9,096
Timing ineffectiveness:
Fair value timing ineffectiveness		(1,284	)		(439	)

Total hedge ineffectiveness	$	(1,806	)	$	8,657

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 may also be affected by intraday fluctuations of gas prices, since the price of natural gas purchased or sold for future delivery earlier in the day may not be hedged until later in the day. At times, limited net open positions related to our existing and anticipated commitments may occur. At the close of business on December 31, 2006, AEH had a net open position (including existing storage) of less than 0.1 Bcf.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


4.	Debt

Long-term debt

Long-term debt at December 31, 2006 and September 30, 2006 consisted of the following:


	December 31,			September 30,
	2006			2006
	(In thousands)

Unsecured floating rate Senior Notes, due October 2007	$	300,000		$	300,000
Unsecured 4.00% Senior Notes, due 2009		400,000			400,000
Unsecured 7.375% Senior Notes, due 2011		350,000			350,000
Unsecured 10% Notes, due 2011		2,303			2,303
Unsecured 5.125% Senior Notes, due 2013		250,000			250,000
Unsecured 4.95% Senior Notes, due 2014		500,000			500,000
Unsecured 5.95% Senior Notes, due 2034		200,000			200,000
Medium term notes
Series A, 1995-2, 6.27%, due 2010		10,000			10,000
Series A, 1995-1, 6.67%, due 2025		10,000			10,000
Unsecured 6.75% Debentures, due 2028		150,000			150,000
First Mortgage Bonds
Series P, 10.43% due 2013		7,500			8,750
Other term notes due in installments through 2013		5,358			5,825

Total long-term debt		2,185,161			2,186,878
Less:
Original issue discount on unsecured senior notes and debentures		(3,219	)		(3,330	)
Current maturities		(303,209	)		(3,186	)

	$	1,878,733		$	2,180,362

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, 2006, the interest rate on our floating rate debt was 5.749 percent.

Short-term debt

At December 31, 2006 and September 30, 2006, there was $154.5 million and $382.4 million outstanding under our commercial paper program and bank credit facilities.

Shelf Registration

On December 4, 2006, we filed a registration statement with the Securities and Exchange Commission (SEC) to issue, from time to time, up to $900 million in new common stock and/or debt securities available for issuance, including approximately $401.5 million of capacity carried over from our prior shelf registration statement filed with the SEC in August 2004. As discussed in Note 5, in December 2006, we sold 6.3 million shares of common stock under the new registration statement, the net proceeds of which were used to reduce short-term debt. As of December 31, 2006, we have approximately $701 million of availability remaining under the registration statement.

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 banks. Our credit capacity and the amount

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Committed credit facilities

As of December 31, 2006, we had three short-term committed revolving credit facilities totaling $918 million. The first facility is a five-year unsecured facility for $600 million that we entered into in December 2006. This credit facility replaced our $600 million three-year revolving credit facility entered into in October 2005. The new facility, expiring December 2011, bears interest at a base rate or at the LIBOR rate plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings, and serves as a backup liquidity facility for our $600 million commercial paper program. At December 31, 2006, there was $154.5 million outstanding under our commercial paper program.

We have a second unsecured facility in place which is a 364-day facility expiring November 2007, for $300 million that bears interest at a base rate or at the LIBOR rate plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. At December 31, 2006, there were no borrowings under this facility.

We have a third unsecured facility in place for $18 million that bears interest at the Federal Funds rate plus 0.5 percent. This facility expires in March 2007. At December 31, 2006, there were no borrowings under this facility.

The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in both our $600 million five-year credit facility and $300 million 364-day 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. At December 31, 2006, our total-debt-to-total-capitalization ratio, as defined, was 58 percent. In addition, the fees that we pay on unused amounts under both the $600 million and $300 million credit facilities are subject to adjustment depending upon our credit ratings.

Uncommitted credit facilities

AEM has a $580 million uncommitted demand working capital credit facility that expires in March 2007. Borrowings under the credit facility can be made either as revolving loans or offshore rate loans. Revolving loan borrowings will bear interest at a floating rate equal to a base rate (defined as the higher of 0.50 percent per annum above the Federal Funds rate or the lender’s prime rate) plus 0.25 percent. Offshore rate loan borrowings will bear interest at a floating rate equal to a base rate based upon LIBOR plus an applicable margin, ranging from 1.25 percent to 1.625 percent per annum, depending on the excess tangible net worth of AEM, as defined in the credit facility. Borrowings drawn down under letters of credit issued by the banks will bear interest at a floating rate equal to the base rate, as defined above, plus an applicable margin, which will range from 1.00 percent to 1.875 percent per annum, depending on the excess tangible net worth of AEM and whether the letters of credit are swap-related standby letters of credit.

AEM is required by the financial covenants in the credit facility to maintain a maximum ratio of total liabilities to tangible net worth of 5 to 1, along with minimum levels of net working capital ranging from $20 million to $120 million. Additionally, AEM must maintain a minimum tangible net worth ranging from $21 million to $121 million, and must not have a maximum cumulative loss from March 30, 2005 exceeding $4 million to $23 million, depending on the total amount of borrowing elected from time to time by AEM. At December 31, 2006, AEM’s ratio of total liabilities to tangible net worth, as defined, was 1.61 to 1.

At December 31, 2006, there were no borrowings outstanding under this credit facility. However, at December 31, 2006, AEM letters of credit totaling $153.9 million had been issued under the facility, which

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

reduced the amount available by a corresponding amount. The amount available under this credit facility is also limited by various covenants, including covenants based on working capital. Under the most restrictive covenant, the amount available to AEM under this credit facility was $21.1 million at December 31, 2006. This line of credit is collateralized by substantially all of the assets of AEM and is guaranteed by AEH.

The Company also has an unsecured short-term uncommitted credit line of $25 million that is used for working-capital and letter-of-credit purposes. There were no borrowings under this uncommitted credit facility at December 31, 2006, but letters of credit reduced the amount available by $5.4 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.

AEH, the parent company of AEM, has a $100 million intercompany uncommitted demand credit facility with the Company which bears interest at LIBOR plus 2.75 percent. State regulators have approved this facility through December 31, 2007 and have authorized an increase in the intercompany facility to $200 million. At December 31, 2006, there were no borrowings under this facility.

In addition, AEM has a $120 million intercompany uncommitted demand credit facility with AEH for its nonutility business which bears interest at LIBOR plus 2.75 percent. Any outstanding amounts under this facility are subordinated to AEM’s $580 million uncommitted demand credit facility described above. This facility is used to supplement AEM’s $580 million credit facility. At December 31, 2006, there were no borrowings under this facility.

Debt Covenants

We have other covenants in addition to those described above. Our Series P First Mortgage Bonds contain provisions that allow us to prepay the outstanding balance in whole at any time, after November 2007, subject to a prepayment premium. The First Mortgage Bonds provide for certain cash flow requirements and restrictions on additional indebtedness, sale of assets and payment of dividends. Under the most restrictive of such covenants, cumulative cash dividends paid after December 31, 1985 may not exceed the sum of accumulated net income for periods after December 31, 1985 plus $9 million. At December 31, 2006 approximately $258.3 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, 2006. If we were unable to comply with our debt covenants, we could be required to repay our outstanding balances on demand, provide additional collateral or take other corrective actions. Our two public debt indentures relating to our senior notes and debentures, as well as our $600 million and $300 million revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. In addition, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate. Additionally, this agreement contains a provision that would limit the amount of credit available if Atmos were downgraded below an S&P rating of BBB and a Moody’s rating of Baa2.

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


5.	Public Offering

On December 13, 2006, we completed the public offering of 6,325,000 shares of our common stock including the underwriters’ exercise of their overallotment option of 825,000 shares. The offering was priced at $31.50 and generated net proceeds of approximately $192 million. We used the net proceeds from this offering to reduce short-term debt.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Earnings Per Share

Basic and diluted earnings per share for the three months ended December 31, 2006 and 2005 are calculated as follows:


	Three Months
	Ended
	December 31
	2006		2005
	(In thousands, except per share amounts)

Net income	$	81,261	$	71,027

Denominator for basic income per share — weighted average common shares		82,726		80,259
Effect of dilutive securities:
Restricted and other shares		453		365
Stock options		171		98

Denominator for diluted income per share — weighted average common shares		83,350		80,722

Income per share — basic	$	0.98	$	0.88

Income per share — diluted	$	0.97	$	0.88

There were no out-of-the-money options excluded from the computation of diluted earnings per share for the three months ended December 31, 2006 and 2005 as their exercise price was less than the average market price of the common stock during that period.


7.	Interim Pension and Other Postretirement Benefit Plan Information

The components of our net periodic pension cost for our pension and other postretirement benefit plans for the three months ended December 31, 2006 and 2005 are presented in the following table. 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.


	Three Months Ended December 31
	Pension Benefits						Other Benefits
	2006			2005			2006			2005
				(In thousands)

Components of net periodic pension cost:
Service cost	$	4,018		$	4,117		$	2,807		$	3,271
Interest cost		6,495			5,722			2,640			2,210
Expected return on assets		(6,089	)		(6,400	)		(597	)		(547	)
Amortization of transition asset		—			—			378			378
Amortization of prior service cost		45			16			8			90
Amortization of actuarial loss		2,434			3,299			—			320

Net periodic pension cost	$	6,903		$	6,754		$	5,236		$	5,722

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assumptions used to develop our net periodic pension cost for the three months ended December 31, 2006 and 2005 are as follows:


	Pension Benefits						Other Benefits
	2006			2005			2006			2005

Discount rate		6.30	%		5.00	%		6.30	%		5.00	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%		4.00	%
Expected return on plan assets		8.25	%		8.50	%		5.20	%		5.30	%

The discount rate used to compute the present value of a plan’s liabilities generally is based on rates of high-grade corporate bonds with maturities similar to the average period over which the benefits will be paid. Generally, our funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974. However, additional voluntary contributions are made to satisfy regulatory requirements in certain of our jurisdictions. During the three months ended December 31, 2006, we contributed $2.8 million to our other postretirement plans, and we expect to contribute a total of approximately $11 million to these plans during fiscal 2007.


8.	Commitments and Contingencies

Litigation and Environmental Matters

With respect to the specific litigation and environmental-related matters or claims that were disclosed in Note 13 to our annual report on Form 10-K for the year ended September 30, 2006, there were no material changes in the status of such litigation and environmental-related matters or claims during the three months ended December 31, 2006. We continue to believe that the final outcome of such litigation and environmental-related matters or claims will not have a material adverse effect on our financial condition, results of operations or cash flows.

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

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, 2006, AEM was committed to purchase 89.5 Bcf within one year and 56.7 Bcf within one to three years under indexed contracts. AEM is committed to purchase 1.6 Bcf within one year and 0.1 Bcf within one to three years under fixed price contracts with prices ranging from $5.26 to $12.00. Purchases under these contracts totaled $420.4 million and $787.7 million for the three months ended December 31, 2006 and 2005.

Our utility operations, other than the Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our Mid-Tex Division maintains long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market prices. The estimated fiscal year commitments under these contracts as of December 31, 2006 are as follows (in thousands):


2007	$	332,401
2008		109,656
2009		9,588
2010		9,189
2011		8,589
Thereafter		19,418

	$	488,841

Regulatory Matters

In February 2005, the Attorney General of the State of Kentucky filed a complaint with the Kentucky Public Service Commission (KPSC) alleging that our rates were producing revenues in excess of reasonable levels. We answered the complaint and filed a Motion to Dismiss with the KPSC. In February 2006, the KPSC issued an Order denying our Motion to Dismiss but stated that the Attorney General had not met his burden of proof concerning his complaint. In November 2006, we requested dismissal of the case through our filing of a notice of intent to file a general rate case in December 2006. Upon receipt of the notice of intent, the KPSC suspended the procedural schedule until it issues a decision regarding the motion for dismissal. A hearing should be scheduled for early 2007. We believe that the Attorney General will not be able to demonstrate that our present rates are in excess of reasonable levels.

In December 2006, the Company filed a rate application for an increase in base rates of $10.4 million in Kentucky. Additionally, we proposed to implement a process to review our rates annually and to collect the bad debt portion of gas costs directly rather than through the base rate. A decision is expected in the case in July 2007.

During fiscal 2006, we received “show cause” resolutions from approximately 80 cities served by our Mid-Tex Division, including the City of Dallas, which require the Mid-Tex Division to demonstrate that the existing distribution rates are just and reasonable. In May 2006, the Mid-Tex Division filed a Statement of Intent with the Railroad Commission of Texas (RRC) which consolidated the “show cause” resolutions and seeks incremental annual revenues of approximately $60 million and several rate design changes including WNA, revenue stabilization and recovery of the gas cost component of bad debt expense. In exchange for an agreement to provide the intervening parties in the case an additional two months to prepare for the hearing, the Mid-Tex Division obtained an agreement and approval to implement WNA in its rates for the 2006-2007 winter season and to implement WNA in the final rates in this proceeding. The hearing was completed on November 17, 2006. The hearing examiners in the case issued their Proposal for Decision (PFD) on February 2, 2007, which contained their recommendations to the RRC. In the PFD, the examiners recommended a total annual decrease in the Mid-Tex Division’s rates of approximately $22.8 million, a customer refund of $2.6 million and a permanent weather normalization adjustment mechanism based on 10-year weather data. We are in the process of preparing our responses to the recommendations in the PFD. We continue to believe that the evidence presented in the case supports our request to increase rates in order to earn a fair rate of return. While the RRC is required by statute to issue its final decision by April 2, 2007, it could issue a final order sometime in March 2007. Any rate increase will be effective prospectively from the date of the final order; however, any rate decrease will be effective from May 31, 2006.

In January 2006, the Lubbock, Texas City Council passed a resolution requiring Atmos to submit copies of all documentation necessary for the city to review the rates of Atmos’ West Texas Division to ensure they are just and reasonable. Information was provided to the city in February 2006. We believe that we will be able to ultimately demonstrate to the City of Lubbock that our rates are just and reasonable.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In May 2006, Atmos began receiving “show cause” ordinances from several of the cities in the West Texas Division. We made a filing in response to the ordinances in October 2006. We believe that we will be able to ultimately demonstrate to the West Texas cities that our rates are just and reasonable.

Other

In May 2006, we announced plans to form a joint venture and construct a natural gas gathering system in Eastern Kentucky, referred to as the Straight Creek Project. The Company is continuing to evaluate the scale and scope of the original project design, as well as the in-service date.


9.	Concentration of Credit Risk

Information regarding our concentration of credit risk is disclosed in Note 15 to our annual report on Form 10-K for the year ended September 30, 2006. During the three months ended December 31, 2006, there were no material changes in our concentration of credit risk.


10.	Segment Information

Atmos Energy Corporation and our subsidiaries are engaged primarily in the 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 throughout our six 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 22 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 related sales operations,

	•	the natural gas marketing segment, which includes a variety of nonregulated 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 nonregulated nonutility operations.

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, 2006. We evaluate performance based on net income or loss of the respective operating units.

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income statements for the three-month periods ended December 31, 2006 and 2005 by segment are presented in the following tables:


	Three Months Ended December 31, 2006
					Pipeline
			Natural Gas		and		Other
	Utility		Marketing		Storage		Nonutility			Eliminations			Consolidated
					(In thousands)

Operating revenues from external parties	$	964,083	$	611,369	$	26,775	$	406		$	—		$	1,602,633
Intersegment revenues		161		100,325		23,077		947			(124,510	)		—

		964,244		711,694		49,852		1,353			(124,510	)		1,602,633
Purchased gas cost		701,676		648,560		225		—			(123,420	)		1,227,041

Gross profit		262,568		63,134		49,627		1,353			(1,090	)		375,592
Operating expenses
Operation and maintenance		98,113		5,578		11,616		1,239			(1,176	)		115,370
Depreciation and amortization		43,722		329		4,918		26			—			48,995
Taxes, other than income		37,622		249		2,127		69			—			40,067

Total operating expenses		179,457		6,156		18,661		1,334			(1,176	)		204,432

Operating income		83,111		56,978		30,966		19			86			171,160
Miscellaneous income		1,780		1,716		776		453			(3,146	)		1,579
Interest charges		32,473		1,027		8,421		671			(3,060	)		39,532

Income (loss) before income taxes		52,418		57,667		23,321		(199	)		—			133,207
Income tax expense (benefit)		20,584		22,720		8,721		(79	)		—			51,946

Net income (loss)	$	31,834	$	34,947	$	14,600	$	(120	)	$	—		$	81,261

Capital expenditures	$	72,419	$	338	$	14,229	$	—		$	—		$	86,986

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Three Months Ended December 31, 2005

Natural Gas
Pipeline
Other

Utility Marketing and Storage Nonutility Eliminations Consolidated

(In thousands)

Operating revenues from external parties
$ 1,404,806 $ 860,613 $ 17,881 $ 520 $ — $ 2,283,820

Intersegment revenues
204 241,232 21,831 972 (264,239 ) —

1,405,010 1,101,845 39,712 1,492 (264,239 ) 2,283,820

Purchased gas cost
1,124,829 1,075,526 — — (263,125 ) 1,937,230

Gross profit
280,181 26,319 39,712 1,492 (1,114 ) 346,590

Operating expenses

Operation and maintenance
92,766 4,352 10,998 1,265 (1,164 ) 108,217

Depreciation and amortization
38,264 470 4,502 24 — 43,260

Taxes, other than income
42,902 243 2,160 111 — 45,416

Total operating expenses
173,932 5,065 17,660 1,400 (1,164 ) 196,893

Operating income
106,249 21,254 22,052 92 50 149,697

Miscellaneous income
2,837 590 1,405 661 (5,045 ) 448

Interest charges
31,588 2,862 5,973 761 (4,995 ) 36,189

Income (loss) before income taxes
77,498 18,982 17,484 (8 ) — 113,956

Income tax expense (benefit)
29,085 7,530 6,317 (3 ) — 42,929

Net income (loss)
$ 48,413 $ 11,452 $ 11,167 $ (5 ) $ — $ 71,027

Capital expenditures
$ 72,415 $ 332 $ 29,718 $ — $ — $ 102,465

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Balance sheet information at December 31, 2006 and September 30, 2006 by segment is presented in the following tables:


	December 31, 2006
			Natural			Pipeline
			Gas			and		Other
	Utility		Marketing			Storage		Nonutility		Eliminations			Consolidated
						(In thousands)

ASSETS
Property, plant and equipment, net	$	3,112,635	$	7,693		$	546,329	$	1,258	$	—		$	3,667,915
Investment in subsidiaries		342,347		(2,155	)		—		—		(340,192	)		—
Current assets
Cash and cash equivalents		20,825		66,626			—		6,955		—			94,406
Cash held on deposit in margin account		—		—			—		—		—			—
Assets from risk management activities		241		68,362			33,125		—		(33,317	)		68,411
Other current assets		958,929		459,212			29,346		7,934		(42,600	)		1,412,821
Intercompany receivables		590,431		—			—		13,431		(603,862	)		—

Total current assets		1,570,426		594,200			62,471		28,320		(679,779	)		1,575,638
Intangible assets		—		3,000			—		—		—			3,000
Goodwill		567,221		24,282			143,866		—		—			735,369
Noncurrent assets from risk management activities		—		8,345			1		—		(2	)		8,344
Deferred charges and other assets		203,499		1,270			5,163		16,197		—			226,129

	$	5,796,128	$	636,635		$	757,830	$	45,775	$	(1,019,973	)	$	6,216,395

CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	1,920,457	$	179,538		$	129,289	$	33,520	$	(342,347	)	$	1,920,457
Long-term debt		1,875,334		—			—		3,399		—			1,878,733

Total capitalization		3,795,791		179,538			129,289		36,919		(342,347	)		3,799,190
Current liabilities
Current maturities of long-term debt		301,250		—			—		1,959		—			303,209
Short-term debt		154,471		—			—		—		—			154,471
Liabilities from risk management activities		33,556		34,399			111		—		(33,236	)		34,830
Other current liabilities		747,305		343,128			85,101		—		(40,526	)		1,135,008
Intercompany payables		—		101,630			502,232		—		(603,862	)		—

Total current liabilities		1,236,582		479,157			587,444		1,959		(677,624	)		1,627,518
Deferred income taxes		307,800		(22,878	)		37,173		2,201		—			324,296
Noncurrent liabilities from risk management activities		—		278			1		—		(2	)		277
Regulatory cost of removal obligation		255,321		—			—		—		—			255,321
Deferred credits and other liabilities		200,634		540			3,923		4,696		—			209,793

	$	5,796,128	$	636,635		$	757,830	$	45,775	$	(1,019,973	)	$	6,216,395

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

September 30, 2006

Natural
Pipeline

Gas
and
Other

Utility Marketing Storage Nonutility Eliminations Consolidated

(In thousands)

ASSETS

Property, plant and equipment, net
$ 3,083,301 $ 7,531 $ 537,028 $ 1,296 $ — $ 3,629,156

Investment in subsidiaries
281,143 (2,155 ) — — (278,988 ) —

Current assets

Cash and cash equivalents
8,738 45,481 — 21,596 — 75,815

Cash held on deposit in margin account
— 35,647 — — — 35,647

Assets from risk management activities
— 13,164 19,040 — (19,651 ) 12,553

Other current assets
714,472 261,435 26,325 8,119 (16,821 ) 993,530

Intercompany receivables
602,809 — — — (602,809 ) —

Total current assets
1,326,019 355,727 45,365 29,715 (639,281 ) 1,117,545

Intangible assets
— 3,152 — — — 3,152

Goodwill
567,221 24,282 143,866 — — 735,369

Noncurrent assets from risk management activities
— 6,190 5 — (9 ) 6,186

Deferred charges and other assets
204,617 1,315 5,301 16,906 — 228,139

$ 5,462,301 $ 396,042 $ 731,565 $ 47,917 $ (918,278 ) $ 5,719,547

CAPITALIZATION AND LIABILITIES

Shareholders’ equity
$ 1,648,098 $ 139,863 $ 107,640 $ 33,640 $ (281,143 ) $ 1,648,098

Long-term debt
2,176,473 — — 3,889 — 2,180,362

Total capitalization
3,824,571 139,863 107,640 37,529 (281,143 ) 3,828,460

Current liabilities

Current maturities of long-term debt
1,250 — — 1,936 — 3,186

Short-term debt
382,416 — — — — 382,416

Liabilities from risk management activities
27,209 22,500 531 — (19,571 ) 30,669

Other current liabilities
473,101 183,077 61,458 — (14,746 ) 702,890

Intercompany payables
— 75,665 525,895 1,249 (602,809 ) —

Total current liabilities
883,976 281,242 587,884 3,185 (637,126 ) 1,119,161

Deferred income taxes
297,821 (25,777 ) 31,927 2,201 — 306,172

Noncurrent liabilities from risk management activities
— 280 5 — (9 ) 276

Regulatory cost of removal obligation
261,376 — — — — 261,376

Deferred credits and other liabilities
194,557 434 4,109 5,002 — 204,102

$ 5,462,301 $ 396,042 $ 731,565 $ 47,917 $ (918,278 ) $ 5,719,547

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, 2006, and the related condensed consolidated statements of income for the three-month periods ended December 31, 2006 and 2005, and the condensed consolidated statements of cash flows for the three-month periods ended December 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Atmos Energy Corporation as of September 30, 2006, 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 20, 2006, 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, 2006, 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 5, 2007


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, 2006.

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

The statements contained in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of our documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “objective”, “plan”, “projection”, “seek”, “strategy” or similar words are intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties include the following: regulatory trends and decisions, including deregulation initiatives and the impact of rate proceedings before various state regulatory commissions; adverse weather conditions, such as warmer than normal weather in our utility service territories or colder than normal weather that could adversely affect our natural gas marketing activities; the concentration of our distribution, pipeline and storage operations in one state; impact of environmental regulations on our business; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; our ability to continue to access the capital markets; the effects of inflation and changes in the availability and prices of natural gas, including the volatility of natural gas prices; increased competition from energy suppliers and alternative forms of energy; increased costs of providing pension and postretirement health care benefits; the capital-intensive nature of our distribution business; the inherent hazards and risks involved in operating our distribution business; and other uncertainties, which may be discussed herein, all of which are difficult to predict and many of which are beyond our control. A more detailed discussion of these risks and uncertainties may be found in our Form 10-K for the year ended September 30, 2006. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

Through our nonutility businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers in 22 states and 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 related sales operations,

	•	the natural gas marketing segment, which includes a variety of nonregulated 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 nonregulated nonutility operations.

The following summarizes the results of our operations and other significant events for the three months ended December 31, 2006:


	•	Our utility segment net income decreased by $16.6 million during the three months ended December 31, 2006 compared with the three months ended December 31, 2005. The decrease reflects lower gross profit margin primarily associated with lower revenue-related taxes coupled with higher operating expenses.

	•	Our natural gas marketing segment net income increased $23.5 million during the three months ended December 31, 2006 compared with the three months ended December 31, 2005. The increase in natural gas marketing net income primarily reflects favorable movements in AEM’s unrealized margin, partially offset by lower realized margins.

	•	Our pipeline and storage segment net income increased $3.4 million during the three months ended December 31, 2006 compared with the three months ended December 31, 2005. Increased net income primarily reflects incremental gross profit margins from our North Side Loop and other pipeline compression projects completed in fiscal 2006 and increased margins from the Gas Reliability Infrastructure Program (GRIP).

	•	In December 2006, we filed a new $900 million shelf registration statement that replaced our previously existing shelf registration statement. Upon completion of the filing of this new registration statement, we issued approximately 6.3 million shares of common stock, which generated approximately $192 million of net proceeds which we used to repay a portion of our short-term debt.

	•	Our total-debt-to-capitalization ratio at December 31, 2006 was 54.9 percent compared with 60.9 percent at September 30, 2006 primarily reflecting the favorable impact of our equity offering in December 2006.

	•	For the three months ended December 31, 2006, we generated $165.0 million in operating cash flow compared with $195.4 million used in operations for the three months ended December 31, 2005, primarily reflecting the favorable impact of lower natural gas prices on our working capital.

	•	Capital expenditures decreased to $87.0 million during the three months ended December 31, 2006 from $102.5 million in the prior-year period. The decrease primarily reflects the absence of capital spending for the North Side Loop and other compression projects, which were completed in fiscal 2006.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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

Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the year ended September 30, 2006 and include the following:


	•	Regulation

	•	Revenue Recognition

	•	Allowance for Doubtful Accounts


	•	Derivatives and Hedging Activities

	•	Impairment Assessments

	•	Pension and Other Postretirement Plans

Our critical accounting policies are reviewed by the Audit Committee on a quarterly basis. There have been no significant changes to these critical accounting policies during the three months ended December 31, 2006.

RESULTS OF OPERATIONS

The following table presents our financial highlights for the three-month periods ended December 31, 2006 and 2005:


	Three Months Ended
	December 31
	2006			2005
	(In thousands, unless otherwise noted)

Operating revenues	$	1,602,633		$	2,283,820
Gross profit		375,592			346,590
Operating expenses		204,432			196,893
Operating income		171,160			149,697
Miscellaneous income		1,579			448
Interest charges		39,532			36,189
Income before income taxes		133,207			113,956
Income tax expense		51,946			42,929
Net income	$	81,261		$	71,027

Utility sales volumes — MMcf		86,400			95,188
Utility transportation volumes — MMcf		32,694			30,602

Total utility throughput — MMcf		119,094			125,790

Natural gas marketing sales volumes — MMcf		77,526			71,496

Pipeline transportation volumes — MMcf		118,955			91,595

Heating degree days ⁽¹⁾
Actual (weighted average)		1,135			1,056
Percent of normal		101	%		93	%

Consolidated utility average transportation revenue per Mcf	$	0.48		$	0.51
Consolidated utility average cost of gas per Mcf sold	$	8.12		$	11.82


⁽¹⁾		Adjusted for service areas that have weather-normalized operations. For service areas that have weather normalized operations, normal degree days are used instead of actual degree days in computing the total number of heating degree days.

The following table shows our operating income by segment for the three-month periods ended December 31, 2006 and 2005. The presentation of our utility operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.


	Three Months Ended December 31
	2006					2005
	Operating		Heating Degree Days			Operating		Heating Degree Days
	Income		Percent of Normal ⁽¹⁾			Income		Percent of Normal ⁽¹⁾
	(In thousands, except degree day information)

Colorado-Kansas	$	8,672		103	%	$	8,610		99	%
Kentucky/Mid-States ⁽²⁾		14,203		101	%		20,490		99	%
Louisiana		10,593		107	%		7,891		95	%
Mid-Tex		35,340		100	%		50,787		83	%
Mississippi		7,599		103	%		9,993		103	%
West Texas		6,506		100	%		6,131		100	%
Other		198		—			2,347		—

Utility segment		83,111		101	%		106,249		93	%
Natural gas marketing segment		56,978		—			21,254		—
Pipeline and storage segment		30,966		—			22,052		—
Other nonutility segment and other		105		—			142		—

Consolidated operating income	$	171,160		101	%	$	149,697		93	%


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

⁽²⁾		Effective October 1, 2006, the Kentucky and Mid-States Divisions were combined. Prior year amounts have been restated to conform to this new presentation.

Three Months Ended December 31, 2006 compared with Three Months Ended December 31, 2005

Utility segment

Our utility segment has historically contributed 65 to 85 percent of our consolidated net income. However, in recent years, this contribution has slightly declined as our nonutility businesses have grown and our utility operations have experienced the adverse effects of warmer than normal weather.

Natural gas sales to residential, commercial and public authority customers are affected by winter heating season requirements, whereas natural gas sales to industrial customers are much less weather sensitive. As residential, commercial and public authority customers comprise approximately 90 percent of our gas sales volumes, the results of operations for our utility segment are seasonal. We typically experience 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 64 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.

The primary factors that currently impact the results of our utility operations are regulatory decisions and trends, the increased use of energy-efficient appliances by our customers, competitive factors in the energy industry and economic conditions in our service areas.

Seasonal weather patterns can also affect our utility operations. However, the effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which, beginning


	September 30, 2006
			Natural			Pipeline
			Gas			and		Other
	Utility		Marketing			Storage		Nonutility		Eliminations			Consolidated
	(In thousands)

ASSETS
Property, plant and equipment, net	$	3,083,301	$	7,531		$	537,028	$	1,296	$	—		$	3,629,156
Investment in subsidiaries		281,143		(2,155	)		—		—		(278,988	)		—
Current assets
Cash and cash equivalents		8,738		45,481			—		21,596		—			75,815
Cash held on deposit in margin account		—		35,647			—		—		—			35,647
Assets from risk management activities		—		13,164			19,040		—		(19,651	)		12,553
Other current assets		714,472		261,435			26,325		8,119		(16,821	)		993,530
Intercompany receivables		602,809		—			—		—		(602,809	)		—

Total current assets		1,326,019		355,727			45,365		29,715		(639,281	)		1,117,545
Intangible assets		—		3,152			—		—		—			3,152
Goodwill		567,221		24,282			143,866		—		—			735,369
Noncurrent assets from risk management activities		—		6,190			5		—		(9	)		6,186
Deferred charges and other assets		204,617		1,315			5,301		16,906		—			228,139

	$	5,462,301	$	396,042		$	731,565	$	47,917	$	(918,278	)	$	5,719,547

CAPITALIZATION AND LIABILITIES
Shareholders’ equity	$	1,648,098	$	139,863		$	107,640	$	33,640	$	(281,143	)	$	1,648,098
Long-term debt		2,176,473		—			—		3,889		—			2,180,362

Total capitalization		3,824,571		139,863			107,640		37,529		(281,143	)		3,828,460
Current liabilities
Current maturities of long-term debt		1,250		—			—		1,936		—			3,186
Short-term debt		382,416		—			—		—		—			382,416
Liabilities from risk management activities		27,209		22,500			531		—		(19,571	)		30,669
Other current liabilities		473,101		183,077			61,458		—		(14,746	)		702,890
Intercompany payables		—		75,665			525,895		1,249		(602,809	)		—

Total current liabilities		883,976		281,242			587,884		3,185		(637,126	)		1,119,161
Deferred income taxes		297,821		(25,777	)		31,927		2,201		—			306,172
Noncurrent liabilities from risk management activities		—		280			5		—		(9	)		276
Regulatory cost of removal obligation		261,376		—			—		—		—			261,376
Deferred credits and other liabilities		194,557		434			4,109		5,002		—			204,102

	$	5,462,301	$	396,042		$	731,565	$	47,917	$	(918,278	)	$	5,719,547