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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended September 30, 2008
    OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 1-10042
 
Atmos Energy Corporation
(Exact name of registrant as specified in its charter)
 
     
Texas and Virginia   75-1743247
(State or other jurisdiction of
incorporation or organization)
  (IRS employer
identification no.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas
  75240
(Zip code)
(Address of principal executive offices)    
 
Registrant’s telephone number, including area code:
(972) 934-9227
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
    Name of Each Exchange
Title of Each Class
 
on Which Registered
 
Common stock, No Par Value   New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  þ Accelerated filer  o Non-accelerated filer  o Smaller reporting company  o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ
 
The aggregate market value of the common voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2008, was $2,243,034,264.
 
As of November 12, 2008, the registrant had 91,133,742 shares of common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Definitive Proxy Statement to be filed for the Annual Meeting of Shareholders on February 4, 2009 are incorporated by reference into Part III of this report.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
    3  
 
      Business     4  
      Risk Factors     22  
      Unresolved Staff Comments     27  
      Properties     27  
      Legal Proceedings     28  
      Submission of Matters to a Vote of Security Holders     28  
 
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     30  
      Selected Financial Data     33  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
      Quantitative and Qualitative Disclosures About Market Risk     64  
      Financial Statements and Supplementary Data     66  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     122  
      Controls and Procedures     122  
      Other Information     124  
 
      Directors, Executive Officers and Corporate Governance     124  
      Executive Compensation     124  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     124  
      Certain Relationships and Related Transactions, and Director Independence     124  
      Principal Accountant Fees and Services     124  
 
      Exhibits and Financial Statement Schedules     125  
  EX-10.5(A)
  EX-10.5(B)
  EX-10.8(A)
  EX-10.8(B)
  EX-10.10
  EX-10.12(B)
  EX-10.12(D)
  EX-10.12(E)
  EX-10.12(F)
  EX-12
  EX-21
  EX-23.1
  EX-31
  EX-32


Table of Contents

 
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
ATO
 
Trading symbol for Atmos Energy Corporation common stock on the New York Stock Exchange
Bcf
 
Billion cubic feet
COSO
 
Committee of Sponsoring Organizations of the Treadway Commission
EITF
 
Emerging Issues Task Force
FASB
 
Financial Accounting Standards Board
FERC
 
Federal Energy Regulatory Commission
FIN
 
FASB Interpretation
Fitch
 
Fitch Ratings, Ltd.
FSP
 
FASB Staff Position
GRIP
 
Gas Reliability Infrastructure Program
Heritage
 
Heritage Propane Partners, L.P.
iFERC
 
Inside FERC
KPSC
 
Kentucky Public Service Commission
LPSC
 
Louisiana Public Service Commission
LTIP
 
1998 Long-Term Incentive Plan
Mcf
 
Thousand cubic feet
MDWQ
 
Maximum daily withdrawal quantity
MMcf
 
Million cubic feet
Moody’s
 
Moody’s Investor Services, Inc.
MPSC
 
Mississippi Public Service Commission
NYMEX
 
New York Mercantile Exchange, Inc.
NYSE
 
New York Stock Exchange
RRC
 
Railroad Commission of Texas
RRM
 
Rate Review Mechanism
RSC
 
Rate Stabilization Clause
S&P
 
Standard & Poor’s Corporation
SEC
 
United States Securities and Exchange Commission
Settled Cities
 
Represents 438 of the 439 incorporated cities, or approximately 80 percent of the Mid-Tex Division’s customers, with whom a settlement agreement was reached during the fiscal 2008 second quarter.
SFAS
 
Statement of Financial Accounting Standards
TXU Gas
 
TXU Gas Company, which was acquired on October 1, 2004
USP
 
U.S. Propane, L.P.
VCC
 
Virginia Corporation Commission
WNA
 
Weather Normalization Adjustment


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PART I
 
The terms “we,” “our,” “us” and “Atmos Energy” refer to Atmos Energy Corporation and its subsidiaries, unless the context suggests otherwise.
 
ITEM 1.    Business.
 
Overview and Strategy
 
Atmos Energy Corporation, headquartered in Dallas, Texas, is engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as other nonregulated natural gas businesses. Since our incorporation in Texas in 1983, we have grown primarily through a series of acquisitions, the most recent of which was the acquisition in October 2004 of the natural gas distribution and pipeline operations of TXU Gas Company. We are also incorporated in the state of Virginia.
 
Today, we distribute natural gas through regulated sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers in 12 states located primarily in the South, which makes us one of the country’s largest natural-gas-only distributors based on number of customers. We also operate one of the largest intrastate pipelines in Texas based on miles of pipe.
 
Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers primarily in the Midwest and Southeast and natural gas transportation along with storage services to certain of our natural gas distribution divisions and third parties.
 
Our overall strategy is to:
 
  •  deliver superior shareholder value,
 
  •  improve the quality and consistency of earnings growth, while operating our regulated and nonregulated businesses exceptionally well and
 
  •  enhance and strengthen a culture built on our core values.
 
We have experienced more than 20 consecutive years of increasing dividends and earnings growth after giving effect to our acquisitions. Historically, we achieved this record of growth through acquisitions while efficiently managing our operating and maintenance expenses and leveraging our technology, such as our 24-hour call centers, to achieve more efficient operations. In recent years, we have also achieved growth by implementing rate designs that reduce or eliminate regulatory lag and separate the recovery of our approved margins from customer usage patterns. In addition, we have developed various commercial opportunities within our regulated transmission and storage operations. Finally, we have strengthened our nonregulated businesses by increasing sales volumes and actively pursuing opportunities to increase the amount of storage available to us.
 
Our core values include focusing on our employees and customers while conducting our business with honesty and integrity. We continue to strengthen our culture through ongoing communications with our employees and enhanced employee training.
 
Operating Segments
 
We operate the Company through the following four segments:
 
  •  The natural gas distribution segment , which includes our regulated natural gas distribution and related sales operations.
 
  •  The regulated transmission and storage segment , which includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division.
 
  •  The natural gas marketing segment , which includes a variety of nonregulated natural gas management services.


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  •  The pipeline, storage and other segment , which is comprised of our nonregulated natural gas transmission and storage services.
 
These operating segments are described in greater detail below.
 
Natural Gas Distribution Segment Overview
 
Our natural gas distribution segment consists of the following six regulated divisions, in order of total customers served, covering service areas in 12 states:
 
  •  Atmos Energy Mid-Tex Division,
 
  •  Atmos Energy Kentucky/Mid-States Division,
 
  •  Atmos Energy Louisiana Division,
 
  •  Atmos Energy West Texas Division,
 
  •  Atmos Energy Mississippi Division and
 
  •  Atmos Energy Colorado-Kansas Division
 
Our natural gas distribution business is a seasonal business. Gas sales to residential and commercial customers are greater during the winter months than during the remainder of the year. The volumes of gas sales during the winter months will vary with the temperatures during these months.
 
Revenues in this operating segment are established by regulatory authorities in the states in which we operate. These rates are intended to be sufficient to cover the costs of conducting business and to provide a reasonable return on invested capital. Our primary service areas are located in Colorado, Kansas, Kentucky, Louisiana, Mississippi, Tennessee and Texas. We have more limited service areas in Georgia, Illinois, Iowa, Missouri and Virginia. In addition, we transport natural gas for others through our distribution system.
 
Rates established by regulatory authorities often include cost adjustment mechanisms that (i) are subject to significant price fluctuations compared to our other costs, (ii) represent a large component of our cost of service and (iii) are generally outside our control.
 
Purchased gas mechanisms represent a common form of cost adjustment mechanism. Purchased gas adjustment mechanisms provide natural gas utility companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case because they provide a dollar-for-dollar offset to increases or decreases in natural gas distribution gas costs. Therefore, although substantially all of our natural gas distribution operating revenues fluctuate with the cost of gas that we purchase, natural gas distribution gross profit (which is defined as operating revenues less purchased gas cost) is generally not affected by fluctuations in the cost of gas.
 
Additionally, some jurisdictions have introduced performance-based ratemaking adjustments to provide incentives to natural gas utilities to minimize purchased gas costs through improved storage management and use of financial instruments to lock in gas costs. Under the performance-based ratemaking adjustment, purchased gas costs savings are shared between the utility and its customers.
 
Finally, regulatory authorities for over 90 percent of residential and commercial meters in our service areas have approved weather normalization adjustments (WNA) as a part of our rates. WNA minimizes the effect of weather that is above or below normal by allowing us to increase customers’ bills to offset lower gas usage when weather is warmer than normal and decrease customers’ bills to offset higher gas usage when weather is colder than normal.


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As of September 30, 2008 we had WNA for our residential and commercial meters in the following service areas for the following periods:
 
     
Georgia
  October — May
Kansas
  October — May
Kentucky
  November — April
Louisiana
  December — March
Mississippi
  November — April
Tennessee
  November — April
Texas: Mid-Tex
  November — April
Texas: West Texas
  October — May
Virginia
  January — December
 
In addition to seasonality, financial results for this segment are affected by the cost of natural gas and economic conditions in the areas that we serve. Higher gas costs, which we are generally able to pass through to our customers under purchased gas adjustment clauses, may cause customers to conserve or, in the case of industrial customers, to use alternative energy sources. Higher gas costs may also adversely impact our accounts receivable collections, resulting in higher bad debt expense and may require us to increase borrowings under our credit facilities resulting in higher interest expense.
 
Our supply of natural gas is provided by a variety of suppliers, including independent producers, marketers and pipeline companies and withdrawals of gas from proprietary and contracted storage assets. Additionally, the natural gas supply for our Mid-Tex Division includes peaking and spot purchase agreements.
 
Supply arrangements are contracted from our suppliers on a firm basis with various terms at market prices. The firm supply consists of both base load and swing supply (peaking) quantities. Base load quantities are those that flow at a constant level throughout the month and swing supply quantities provide the flexibility to change daily quantities to match increases or decreases in requirements related to weather conditions.
 
Currently, all of our natural gas distribution divisions, except for our Mid-Tex Division, utilize 37 pipeline transportation companies, both interstate and intrastate, to transport our natural gas. The pipeline transportation agreements are firm and many of them have “pipeline no-notice” storage service, which provides for daily balancing between system requirements and nominated flowing supplies. These agreements have been negotiated with the shortest term necessary while still maintaining our right of first refusal. The natural gas supply for our Mid-Tex Division is delivered by our Atmos Pipeline — Texas Division.
 
Except for local production purchases, we select our natural gas suppliers through a competitive bidding process by requesting proposals from suppliers that have demonstrated that they can provide reliable service. We select these suppliers based on their ability to deliver gas supply to our designated firm pipeline receipt points at the lowest cost. Major suppliers during fiscal 2008 were Anadarko Energy Services, BP Energy Company, Chesapeake Energy Marketing, Inc., ConocoPhillips Company, Devon Gas Services, L.P., Enbridge Marketing (US) L.P., National Fuel Marketing Company, LLC, ONEOK Energy Services Company L.P., Tenaska Marketing and Atmos Energy Marketing, LLC, our natural gas marketing subsidiary.
 
The combination of base load, peaking and spot purchase agreements, coupled with the withdrawal of gas held in storage, allows us the flexibility to adjust to changes in weather, which minimizes our need to enter into long-term firm commitments. We estimate our peak-day availability of natural gas supply to be approximately 4.2 Bcf. The peak-day demand for our natural gas distribution operations in fiscal 2008 was on January 2, 2008, when sales to customers reached approximately 3.1 Bcf.
 
To maintain our deliveries to high priority customers, we have the ability, and have exercised our right, to curtail deliveries to certain customers under the terms of interruptible contracts or applicable state statutes or regulations. Our customers’ demand on our system is not necessarily indicative of our ability to meet current or anticipated market demands or immediate delivery requirements because of factors such as the physical limitations of gathering, storage and transmission systems, the duration and severity of cold weather, the availability of gas reserves from our suppliers, the ability to purchase additional supplies on a short-term basis


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and actions by federal and state regulatory authorities. Curtailment rights provide us the flexibility to meet the human-needs requirements of our customers on a firm basis. Priority allocations imposed by federal and state regulatory agencies, as well as other factors beyond our control, may affect our ability to meet the demands of our customers. We anticipate no problems with obtaining additional gas supply as needed for our customers.
 
The following briefly describes our six natural gas distribution divisions. We operate in our service areas under terms of non-exclusive franchise agreements granted by the various cities and towns that we serve. At September 30, 2008, we held 1,107 franchises having terms generally ranging from five to 35 years. A significant number of our franchises expire each year, which require renewal prior to the end of their terms. We believe that we will be able to renew our franchises as they expire. Additional information concerning our natural gas distribution divisions is presented under the caption “Operating Statistics”.
 
Atmos Energy Mid-Tex Division.   Our Mid-Tex Division serves approximately 550 incorporated and unincorporated communities in the north-central, eastern and western parts of Texas, including the Dallas/Fort Worth Metroplex. The governing body of each municipality we serve has original jurisdiction over all gas distribution rates, operations and services within its city limits, except with respect to sales of natural gas for vehicle fuel and agricultural use. The Railroad Commission of Texas (RRC) has exclusive appellate jurisdiction over all rate and regulatory orders and ordinances of the municipalities and exclusive original jurisdiction over rates and services to customers not located within the limits of a municipality.
 
Prior to fiscal 2008, this division operated under one system-wide rate structure. However, beginning in 2008, we reached a settlement with cities representing approximately 80 percent of this division’s customers (Settled Cities) that will allow us to update rates for customers in these cities through an annual rate review mechanism. Rates for the remaining 20 percent of this division’s customers, including the City of Dallas, continue to be updated through periodic formal rate proceedings and filings made under Texas’ Gas Reliability Infrastructure Program (GRIP). GRIP allows us to include in our rate base annually approved capital costs incurred in the prior calendar year provided that we file a complete rate case at least once every five years.
 
Atmos Energy Kentucky/Mid-States Division.   Our Kentucky/Mid-States Division operates in more than 420 communities across Georgia, Illinois, Iowa, Kentucky, Missouri, Tennessee and Virginia. The service areas in these states are primarily rural; however, this division serves Franklin, Tennessee, and other suburban areas of Nashville. We update our rates in this division through periodic formal rate filings made with each state’s public service commission.
 
Atmos Energy Louisiana Division.   In Louisiana, we serve nearly 300 communities, including the suburban areas of New Orleans, the metropolitan area of Monroe and western Louisiana. Direct sales of natural gas to industrial customers in Louisiana, who use gas for fuel or in manufacturing processes, and sales of natural gas for vehicle fuel are exempt from regulation and are recognized in our natural gas marketing segment. Our rates in this division are updated annually through a stable rate filing without filing a formal rate case.
 
Atmos Energy West Texas Division.   Our West Texas Division serves approximately 80 communities in West Texas, including the Amarillo, Lubbock and Midland areas. Like our Mid-Tex Division, each municipality we serve has original jurisdiction over all gas distribution rates, operations and services within its city limits, with the RRC having exclusive appellate jurisdiction over the municipalities and exclusive original jurisdiction over rates and services provided to customers not located within the limits of a municipality. Prior to fiscal 2008, rates were updated in this division through formal rate proceedings. However, during 2008, the West Texas Division entered into agreements with its Lubbock and West Texas service areas to update rates for customers in these service areas through an annual rate review mechanism. Rates for the division’s Amarillo service area continue to be updated through periodic formal rate proceedings and filings made under GRIP.
 
Atmos Energy Mississippi Division.   In Mississippi, we serve about 110 communities throughout the northern half of the state, including the Jackson metropolitan area. Our rates in the Mississippi Division are updated annually through a stable rate filing without filing a formal rate case.


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Atmos Energy Colorado-Kansas Division.   Our Colorado-Kansas Division serves approximately 170 communities throughout Colorado and Kansas and parts of Missouri, including the cities of Olathe, Kansas, a suburb of Kansas City and Greeley, Colorado, a suburb of Denver. We update our rates in this division through periodic formal rate filings made with each state’s public service commission.
 
The following table provides a jurisdictional rate summary for our regulated operations. This information is for regulatory purposes only and may not be representative of our actual financial position.
 
                         
        Effective
        Authorized
  Authorized
        Date of Last
    Rate Base
  Rate of
  Return on
Division   Jurisdiction   Rate/GRIP Action     (thousands) (1)   Return (1)   Equity (1)
 
Atmos Pipeline — Texas
  Texas     5/24/04     $417,111   8.258%   10.00%
Atmos Pipeline — Texas — GRIP
  Texas     4/15/08     713,351   8.258%   10.00%
Colorado-Kansas
  Colorado     10/1/07     81,208   8.45%   11.25%
    Kansas     5/12/08     (2)   (2)   (2)
Kentucky/Mid-States
  Georgia     9/22/08     66,893   7.75%   10.70%
    Illinois     11/1/00     24,564   9.18%   11.56%
    Iowa     3/1/01     5,000   (2)   11.00%
    Kentucky     8/1/07     (2)   (2)   (2)
    Missouri     3/4/07     (2)   (2)   (2)
    Tennessee     11/4/07     186,506   8.03%   10.48%
    Virginia     9/30/08     33,194   8.46% - 8.96%   9.50% - 10.50%
Louisiana
  Trans LA     4/1/08     96,834   (2)   10.00% - 10.80%
    LGS     7/1/08     221,970   (2)   10.40%
Mid-Tex — Settled Cities
  Texas     11/1/08     1,176,453 (3)   7.79%   9.60%
Mid-Tex — Dallas &
                       
Environs
  Texas     6/24/08     1,127,924 (3)   7.98%   10.00%
Mississippi
  Mississippi     12/28/07     215,117   7.60%   9.89%
West Texas
  Amarillo     9/1/03     36,844   9.88%   12.00%
    Lubbock     3/1/04     43,300   9.15%   11.25%
    West Texas     11/18/08     112,043   7.79%   9.60%
 


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            Bad
          Performance-
       
        Authorized Debt/
  Debt
          Based Rate
    Customer
 
Division   Jurisdiction   Equity Ratio   Rider (4)     WNA     Program (5)     Meters  
 
Atmos Pipeline — Texas
  Texas   50/50     No       N/A       N/A       N/A  
Colorado-Kansas
  Colorado   54/46     No       No       No       111,069  
    Kansas   (2)     Yes       Yes       No       129,048  
Kentucky/Mid-States
  Georgia   55/45     No       Yes       Yes       69,043  
    Illinois   67/33     No       No       No       23,233  
    Iowa   57/43     No       No       No       4,425  
    Kentucky   (2)     No       Yes       Yes       177,393  
    Missouri   (2)     No       No (6)     No       58,703  
    Tennessee   56/44     Yes       Yes       Yes       134,128  
    Virginia   55/45     Yes       Yes       No       23,422  
Louisiana
  Trans LA   52/48     No       Yes       No       78,867  
    LGS   52/48     No       Yes       No       280,403  
Mid-Tex — Settled Cities
  Texas   52/48     Yes       Yes       No       1,225,382  
Mid-Tex — Dallas & Environs
  Texas   52/48     Yes       Yes       No       306,346  
Mississippi
  Mississippi   58/42     No (7)     Yes       No       270,716  
West Texas
  Amarillo   50/50     Yes       Yes       No       70,157  
    Lubbock   50/50     Yes       Yes       No       73,323  
    West Texas   52/48     Yes       Yes       No       156,121  
 
 
(1) The rate base, authorized rate of return and authorized return on equity presented in this table are those from the last rate case or GRIP filing for each jurisdiction. These rate bases, rates of return and returns on equity are not necessarily indicative of current or future rate bases, rates of return or returns on equity.
 
(2) A rate base, rate of return, return on equity or debt/equity ratio was not included in the respective state commission’s final decision.
 
(3) The Mid-Tex Rate Base amounts for the Settled Cities and Dallas & Environs both represent “system-wide”, or 100 percent, of the Mid-Tex Division’s rate base. The difference in rate base amounts is due to two separate test filing periods covered.
 
(4) The bad debt rider allows us to recover from ratepayers the gas cost portion of uncollectible accounts.
 
(5) The performance-based rate program provides incentives to natural gas utility companies to minimize purchased gas costs by allowing the utility company and its customers to share the purchased gas costs savings.
 
(6) The Missouri jurisdiction has a straight-fixed variable rate design which decouples gross profit margin from customer usage patterns.
 
(7) The Company filed to amend its PGA rider to allow inclusion of bad debt costs on October 1, 2008.

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Natural Gas Distribution Sales and Statistical Data
 
                                         
    Fiscal Year Ended September 30  
    2008     2007     2006     2005 (1)     2004  
 
METERS IN SERVICE, end of year
                                       
Residential
    2,911,475       2,893,543       2,886,042       2,862,822       1,506,777  
Commercial
    268,845       272,081       275,577       274,536       151,381  
Industrial
    2,241       2,339       2,661       2,715       2,436  
Public authority and other
    9,218       19,164       16,919       17,767       18,542  
                                         
Total meters
    3,191,779       3,187,127       3,181,199       3,157,840       1,679,136  
                                         
INVENTORY STORAGE BALANCE — Bcf
    58.3       58.0       59.9       54.7       27.4  
                                         
HEATING DEGREE DAYS (2)
                                       
Actual (weighted average)
    2,820       2,879       2,527       2,587       3,271  
Percent of normal
    100 %     100 %     87 %     89 %     96 %
SALES VOLUMES — MMcf (3)
                                       
Gas Sales Volumes
                                       
Residential
    163,229       166,612       144,780       162,016       92,208  
Commercial
    93,953       95,514       87,006       92,401       44,226  
Industrial
    21,734       22,914       26,161       29,434       22,330  
Public authority and other
    13,760       12,287       14,086       12,432       14,455  
                                         
Total gas sales volumes
    292,676       297,327       272,033       296,283       173,219  
Transportation volumes
    141,083       135,109       126,960       122,098       87,746  
                                         
Total throughput
    433,759       432,436       398,993       418,381       260,965  
                                         
OPERATING REVENUES (000’s) (3)
                                       
Gas Sales Revenues
                                       
Residential
  $ 2,131,447     $ 1,982,801     $ 2,068,736     $ 1,791,172     $ 923,773  
Commercial
    1,077,056       970,949       1,061,783       869,722       400,704  
Industrial
    212,531       195,060       276,186       229,649       155,336  
Public authority and other
    137,821       114,298       144,600       114,742       109,029  
                                         
Total gas sales revenues
    3,558,855       3,263,108       3,551,305       3,005,285       1,588,842  
Transportation revenues
    60,504       59,813       62,215       59,996       31,714  
Other gas revenues
    35,771       35,844       37,071       37,859       17,172  
                                         
Total operating revenues
  $ 3,655,130     $ 3,358,765     $ 3,650,591     $ 3,103,140     $ 1,637,728  
                                         
Average transportation revenue per Mcf
  $ 0.43     $ 0.44     $ 0.49     $ 0.49     $ 0.36  
Average cost of gas per Mcf sold
  $ 9.05     $ 8.09     $ 10.02     $ 7.41     $ 6.55  
Employees
    4,558       4,472       4,402       4,327       2,742  
 
See footnotes following these tables.


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Natural Gas Distribution Sales and Statistical Data By Division
 
                                                                 
    Fiscal Year Ended September 30, 2008  
          Kentucky/
          West
          Colorado-
             
    Mid-Tex     Mid-States     Louisiana     Texas     Mississippi     Kansas     Other (4)     Total  
 
METERS IN SERVICE
                                                               
Residential
    1,414,543       431,880       336,211       270,990       240,113       217,738             2,911,475  
Commercial
    117,022       54,538       23,059       25,226       27,219       21,781             268,845  
Industrial
    163       930             497       562       89             2,241  
Public authority and other
          2,563             2,888       2,822       945             9,218  
                                                                 
Total
    1,531,728       489,911       359,270       299,601       270,716       240,553             3,191,779  
                                                                 
HEATING DEGREE DAYS (2)
                                                               
Actual
    2,213       3,799       1,531       3,546       2,741       5,861             2,820  
Percent of normal
    99 %     96 %     99 %     99 %     101 %     105 %           100 %
SALES VOLUMES — MMcf (3)
                                                               
Gas Sales Volumes
                                                               
Residential
    76,296       26,009       12,475       17,190       12,882       18,377             163,229  
Commercial
    50,348       15,731       6,858       7,162       6,590       7,264             93,953  
Industrial
    3,293       7,740             3,876       6,580       245             21,734  
Public authority and other
          1,419             6,933       3,013       2,395             13,760  
                                                                 
Total
    129,937       50,899       19,333       35,161       29,065       28,281             292,676  
Transportation volumes
    49,606       44,796       6,136       26,411       4,219       9,915             141,083  
                                                                 
Total throughput
    179,543       95,695       25,469       61,572       33,284       38,196             433,759  
                                                                 
OPERATING MARGIN (000’s) (3)
  $ 478,622     $ 159,265     $ 110,754     $ 87,344     $ 91,749     $ 78,332     $     $ 1,006,066  
OPERATING EXPENSES (000’s) (3)
                                                               
Operation and maintenance
  $ 167,497     $ 65,161     $ 42,367     $ 36,688     $ 46,024     $ 35,414     $ (3,907 )   $ 389,244  
Depreciation and amortization
  $ 84,202     $ 30,574     $ 21,193     $ 14,781     $ 11,752     $ 14,703     $     $ 177,205  
Taxes, other than income
  $ 111,914     $ 14,799     $ 8,104     $ 22,032     $ 14,003     $ 7,600     $     $ 178,452  
OPERATING INCOME (000’s) (3)
  $ 115,009     $ 48,731     $ 39,090     $ 13,843     $ 19,970     $ 20,615     $ 3,907     $ 261,165  
CAPITAL EXPENDITURES (000’s)
  $ 178,409     $ 59,274     $ 46,674     $ 34,354     $ 22,590     $ 20,331     $ 24,910     $ 386,542  
PROPERTY, PLANT AND EQUIPMENT, NET (000’s)
  $ 1,491,188     $ 689,109     $ 370,751     $ 278,326     $ 254,452     $ 272,121     $ 127,609     $ 3,483,556  
OTHER STATISTICS, at year end
                                                               
Miles of pipe
    28,697       12,104       8,277       14,697       6,537       7,150             77,462  
Employees
    1,506       635       427       342       393       281       974       4,558  
 
See footnotes following these tables.
 


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    Fiscal Year Ended September 30, 2007  
          Kentucky/
          West
          Colorado-
             
    Mid-Tex     Mid-States     Louisiana     Texas     Mississippi     Kansas     Other (4)     Total  
 
METERS IN SERVICE
                                                               
Residential
    1,398,274       434,529       334,467       270,557       240,073       215,643             2,893,543  
Commercial
    119,660       54,964       23,015       25,460       27,461       21,521             272,081  
Industrial
    185       927             521       619       87             2,339  
Public authority and other
          2,623             12,825       2,827       889             19,164  
                                                                 
Total
    1,518,119       493,043       357,482       309,363       270,980       238,140             3,187,127  
                                                                 
HEATING DEGREE DAYS (2)
                                                               
Actual
    2,332       3,831       1,638       3,537       2,759       5,732             2,879  
Percent of normal
    100 %     97 %     105 %     99 %     101 %     104 %           100 %
SALES VOLUMES — MMcf (3)
                                                               
Gas Sales Volumes
                                                               
Residential
    78,140       25,900       13,292       18,882       13,314       17,084             166,612  
Commercial
    50,752       16,137       7,138       7,671       6,859       6,957             95,514  
Industrial
    3,946       7,439             3,521       7,672       336             22,914  
Public authority and other
          1,454             5,376       3,386       2,071             12,287  
                                                                 
Total
    132,838       50,930       20,430       35,450       31,231       26,448             297,327  
Transportation volumes
    49,337       46,852       6,841       21,709       2,072       8,298             135,109  
                                                                 
Total throughput
    182,175       97,782       27,271       57,159       33,303       34,746             432,436  
                                                                 
OPERATING MARGIN (000’s) (3)
  $ 433,279     $ 151,442     $ 108,908     $ 90,285     $ 94,866     $ 73,904     $     $ 952,684  
OPERATING EXPENSES (000’s) (3)
                                                               
Operation and maintenance
  $ 171,416     $ 61,029     $ 34,805     $ 34,187     $ 47,318     $ 30,026     $ 394     $ 379,175  
Depreciation and amortization
  $ 82,524     $ 34,439     $ 20,941     $ 14,026     $ 10,886     $ 14,372     $     $ 177,188  
Taxes, other than income
  $ 107,476     $ 13,813     $ 8,969     $ 21,036     $ 13,437     $ 7,114     $     $ 171,845  
Impairment of long-lived assets
  $ 3,289     $     $     $     $     $     $     $ 3,289  
OPERATING INCOME (000’s) (3)
  $ 68,574     $ 42,161     $ 44,193     $ 21,036     $ 23,225     $ 22,392     $ (394 )   $ 221,187  
CAPITAL EXPENDITURES (000’s)
  $ 140,037     $ 59,641     $ 40,752     $ 27,031     $ 20,643     $ 21,395     $ 17,943     $ 327,442  
PROPERTY, PLANT AND EQUIPMENT, NET (000’s)
  $ 1,356,453     $ 656,920     $ 345,535     $ 258,622     $ 241,796     $ 264,629     $ 127,189     $ 3,251,144  
OTHER STATISTICS, at year end
                                                               
Miles of pipe
    28,324       12,081       8,216       14,603       6,496       6,642             76,362  
Employees
    1,415       633       422       340       409       269       984       4,472  
 
 
Notes to preceding tables:
 
(1) The operational and statistical information includes the operations of the Mid-Tex Division since the October 1, 2004 acquisition date.
 
(2) A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the natural gas industry to measure the relative coldness of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on National Weather Service data for selected locations. 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.
 
(3) Sales volumes, revenues, operating margins, operating expense and operating income reflect segment operations, including intercompany sales and transportation amounts.
 
(4) The Other column represents our shared services function, which provides administrative and other support to the Company. Certain costs incurred by this function are not allocated.

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Regulated Transmission and Storage Segment Overview
 
Our regulated transmission and storage segment consists of the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division. This division transports natural gas to our Mid-Tex Division, transports natural gas for third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary in the pipeline industry including parking arrangements, lending and sales of inventory on hand. Parking arrangements provide short-term interruptible storage of gas on our pipeline. Lending services provide short-term interruptible loans of natural gas from our pipeline to meet market demands. These operations represent one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas-producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Texas Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins located in Texas are believed to contain a substantial portion of the nation’s remaining onshore natural gas reserves. This pipeline system provides access to all of these basins. Gross profit earned from our Mid-Tex Division and through certain other transportation and storage services is subject to traditional ratemaking governed by the RRC. However, Atmos Pipeline — Texas’ existing regulatory mechanisms allow certain transportation and storage services to be provided under market-based rates with minimal regulation.
 
Regulated Transmission and Storage Sales and Statistical Data
 
                                         
    Fiscal Year Ended September 30  
    2008     2007     2006     2005     2004 (1)  
 
CUSTOMERS, end of year
                                       
Industrial
    62       65       67       66        
Other
    189       196       178       191        
                                         
Total
    251       261       245       257        
                                         
PIPELINE TRANSPORTATION VOLUMES — MMcf (2)
    782,876       699,006       581,272       554,452        
OPERATING REVENUES (000’s) (2)
  $ 195,917     $ 163,229     $ 141,133     $ 142,952        
Employees, at year end
    60       54       85       78        
 
 
(1) Atmos Pipeline — Texas was acquired on October 1, 2004, the first day of our 2005 fiscal year.
 
(2) Transportation volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.
 
Natural Gas Marketing Segment Overview
 
Our natural gas marketing activities are conducted through Atmos Energy Marketing (AEM), which is wholly-owned by Atmos Energy Holdings, Inc. (AEH). AEH is a wholly-owned subsidiary of AEC and operates primarily in the Midwest and Southeast areas of the United States. AEM aggregates and purchases gas supply, arranges transportation and storage logistics and ultimately delivers gas to customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide various services our customers request, including furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of financial instruments. As a result, our revenues arise from the types of commercial transactions we have structured with our customers and include the value we extract by optimizing the storage and transportation capacity we own or control as well as revenues for services we deliver.
 
Our asset optimization activities seek to maximize the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We


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purchase physical natural gas and then sell financial instruments at advantageous prices to lock in a gross profit margin. We also seek to participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve our customers by identifying the lowest cost alternative within the natural gas supplies, transportation and markets to which we have access. Through the use of transportation and storage services and financial instruments, we are able to capture gross profit margin through the arbitrage of pricing differences in various locations and by recognizing pricing differences that occur over time.
 
AEM’s management of natural gas requirements involves the sale of natural gas and the management of storage and transportation supplies under contracts with customers generally having one to two year terms. AEM also sells natural gas to some of its industrial customers on a delivered burner tip basis under contract terms ranging from 30 days to two years.
 
Natural Gas Marketing Sales and Statistical Data
 
                                         
    Fiscal Year Ended September 30  
    2008     2007     2006     2005     2004  
 
CUSTOMERS, end of year
                                       
Industrial
    624       677       679       559       638  
Municipal
    55       68       73       69       80  
Other
    312       281       289       211       237  
                                         
Total
    991       1,026       1,041       839       955  
                                         
INVENTORY STORAGE BALANCE — Bcf
    11.0       19.3       15.3       8.2       5.2  
NATURAL GAS MARKETING SALES VOLUMES — MMcf (1)
    457,952       423,895       336,516       273,201       265,090  
OPERATING REVENUES (000’s) (1)
  $ 4,287,862     $ 3,151,330     $ 3,156,524     $ 2,106,278     $ 1,618,602  
 
 
(1) Sales volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.
 
Pipeline, Storage and Other Segment Overview
 
Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., which are each wholly-owned by AEH.
 
APS owns and operates a 21 mile pipeline located in New Orleans, Louisiana. This pipeline is primarily used to aggregate gas supply for our regulated natural gas distribution division in Louisiana and for AEM. However, it also provides limited third party transportation services. APS also owns or has an interest in underground storage fields in Kentucky and Louisiana. We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Finally, beginning in fiscal 2006, APS initiated activities in the natural gas gathering business. As of September 30, 2008, these activities were limited in nature.
 
APS also engages in limited asset optimization activities whereby it seeks to maximize the economic value associated with the storage and transportation capacity it owns or controls. Most of these arrangements are with regulated affiliates of the Company and have been approved by applicable state regulatory commissions. Generally, these arrangements require APS to share with our regulated customers a portion of the profits earned from these arrangements.
 
AES, through December 31, 2006, provided natural gas management services to our natural gas distribution operations, other than the Mid-Tex Division. These services included aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to our natural gas distribution service areas at competitive prices. Effective January 1, 2007, our shared services function began


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providing these services to our natural gas distribution operations. AES continues to provide limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services.
 
Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles.
 
Pipeline, Storage and Other Sales and Statistical Data
 
                                         
    Fiscal Year Ended September 30  
    2008     2007     2006     2005     2004  
 
OPERATING REVENUES (000’s) (1)
  $ 31,709     $ 33,400     $ 25,574     $ 15,639     $ 23,151  
PIPELINE TRANSPORTATION VOLUMES — MMcf (1)
    5,492       7,710       9,712       7,593       9,395  
INVENTORY STORAGE BALANCE — Bcf
    1.4       2.0       2.6       1.8       2.3  
 
 
(1) Transportation volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.
 
Ratemaking Activity
 
Overview
 
The method of determining regulated rates varies among the states in which our natural gas distribution divisions operate. The regulatory authorities have the responsibility of ensuring that utilities in their jurisdictions operate in the best interests of customers while providing utility companies the opportunity to earn a reasonable return on their investment. Generally, each regulatory authority reviews rate requests and establishes a rate structure intended to generate revenue sufficient to cover the costs of conducting business and to provide a reasonable return on invested capital.
 
Our current rate strategy is to focus on reducing or eliminating regulatory lag, obtaining adequate returns and providing stable, predictable margins. Atmos Energy has annual ratemaking mechanisms in place in three states that provide for an annual rate review and adjustment to rates for approximately 65 percent of our customers. Additionally, we have WNA mechanisms in eight states. These mechanisms work in tandem to provide insulation from volatile margins, both for the Company and our customers.
 
We will also continue to address various rate design changes, including the recovery of bad debt gas costs, inclusion of other taxes in gas costs and stratification of rates to benefit low income households in future rate filings. These design changes would address cost variations that are related to pass-through energy costs beyond our control.
 
Improving rate design is a long-term process. In the interim, we are addressing regulatory lag issues by directing discretionary capital spending to jurisdictions where recovery rules minimize the regulatory lag, which helps us to keep actual returns more closely aligned with allowed returns.


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Recent Ratemaking Activity
 
Approximately 97 percent of our natural gas distribution revenues in the fiscal years ended September 30, 2008, 2007 and 2006 were derived from sales at rates set by or subject to approval by local or state authorities. Net annual revenue increases resulting from ratemaking activity totaling $34.5 million, $40.1 million, and $39.0 million became effective in fiscal 2008, 2007 and 2006 as summarized below:
 
                         
    Increase (Decrease) to Revenue
 
    For the Fiscal Year Ended September 30  
Rate Action   2008     2007     2006  
          (In thousands)        
 
Rate case filings
  $ 22,240     $ 4,221     $ (191 )
GRIP filings
    8,101       25,624       34,320  
Annual rate filing mechanisms
    3,775       11,628       3,326  
Other rate activity
    334       (1,359 )     1,565  
                         
    $ 34,450     $ 40,114     $ 39,020  
                         
 
Additionally, the following ratemaking efforts were initiated during fiscal 2008 but had not been completed as of September 30, 2008:
 
                 
Division   Rate Action   Jurisdiction   Revenue Requested  
            (In thousands)  
 
Mid-Tex (1)
  RRM   Settled Cities   $ 26,650  
Mid-Tex (2)
  GRIP   Dallas & Environs     1,837  
West Texas (3)
  RRM   West Texas     9,503  
Mississippi
  Stable Rate Filing   Mississippi     3,493  
West Texas
  CCVP   City of Lubbock     131  
                 
            $ 41,614  
                 
 
 
(1) In April 2008, the Mid-Tex Division filed its first RRM that will adjust rates for the 438 incorporated cities in the division who settled with the Company (the Settled Cities). The filing requested an increase in rates of $33.3 million on a system-wide basis, of which $26.7 million applied to the Settled Cities. The Company reached an agreement with representatives of the Settled Cities to increase rates $20.0 million on a system-wide basis beginning in November 2008. The impact to the Mid-Tex Division for the Settled Cities is approximately $16.0 million.
 
(2) The 2007 Mid-Tex GRIP filing seeks a $10.3 million increase on a system-wide basis. However, this filing was only made for the City of Dallas and the Mid-Tex environs and seeks a $1.8 million increase for customers in those service areas only.
 
(3) The Company reached an agreement with representatives of the West Texas Cities to increase rates a total of $3.9 million. The $3.9 million will be collected through the true-up portion of the RRM tariff rates over a 9 1 / 2 month period beginning in November 2008.


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Our recent ratemaking activity is discussed in greater detail below.
 
Rate Case Filings
 
A rate case is a formal request from Atmos Energy to a regulatory authority to increase rates that are charged to customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a “show cause” action. Adequate rates are intended to provide for recovery of the Company’s costs as well as a fair rate of return to our shareholders and ensure that we continue to deliver reliable, reasonably priced natural gas service to our customers. The following table summarizes our recent rate cases:
 
                     
        Increase (Decrease) in
    Effective
 
Division   State   Annual Revenue     Date  
    (In thousands)  
 
2008 Rate Case Filings:
                   
Kentucky/Mid-States
  Virginia   $ 869       9/30/08  
Kentucky/Mid-States
  Georgia     3,351       9/22/08  
Mid-Tex (1)
  Texas     3,930       6/24/08  
Colorado-Kansas
  Kansas     2,100       5/12/08  
Mid-Tex (2)
  Texas     8,000       4/1/08  
Kentucky/Mid-States
  Tennessee     3,990       11/4/07  
                     
Total 2008 Rate Case Filings
      $ 22,240          
                     
2007 Rate Case Filings:
                   
Kentucky/Mid-States
  Kentucky (3)   $ 5,500       8/1/07  
Mid-Tex
  Texas (4)     4,793       4/1/07  
Kentucky/Mid-States
  Missouri (5)           3/4/07  
Kentucky/Mid-States
  Tennessee     (6,072 )     12/15/06  
                     
Total 2007 Rate Case Filings
      $ 4,221          
                     
2006 Rate Case Filings:
                   
Kentucky/Mid-States
  Georgia   $ 409       11/22/05  
Mississippi
  Mississippi     (600 )     10/1/05  
                     
Total 2006 Rate Case Filings
      $ (191 )        
                     
 
 
(1) In June 2008, the RRC issued an order, which increased the Mid-Tex Division’s annual revenues by $19.6 million on a system-wide basis beginning in July 2008. However, as the increase only relates to the City of Dallas and the unincorporated areas of the Mid-Tex Division, the net annual impact of the implementation is approximately $3.9 million.
 
(2) In April 2008, the Mid-Tex Division implemented new rates based on a settlement reached with the Mid-Tex Settled Cities, which stipulated a $10.0 million increase based on a system-wide basis. However, as the increase only relates to the Settled Cities, the net annual impact of the implementation is approximately $8.0 million.
 
(3) 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. In June 2007, the KPSC issued an order dismissing the case. In December 2006, the Company filed a rate application for an increase in base rates. 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. In July 2007, the KPSC approved a settlement we had reached with the Attorney General for an increase in annual revenues of $5.5 million effective August 1, 2007.
 
(4) In March 2007, the RRC issued an order, which increased the Mid-Tex Division’s annual revenues by approximately $4.8 million beginning April 2007 and established a permanent WNA based on 10-year average weather effective for the months of November through April of each year. The RRC also approved


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a cost allocation method that eliminated a subsidy received from industrial and transportation customers and increased the revenue responsibility for residential and commercial customers. However, the order also required an immediate refund of amounts collected from our 2003 — 2005 GRIP filings of approximately $2.9 million and reduced our total return to 7.903 percent from 8.258 percent, based on a capital structure of 48.1 percent equity and 51.9 percent debt with a return on equity of 10 percent.
 
(5) The Missouri Commission issued an order in March 2007 approving a settlement with rate design changes, including revenue decoupling through the recovery of all non-gas cost revenues through fixed monthly charges and no rate increase.
 
GRIP Filings
 
As discussed above in “Natural Gas Distribution Segment Overview,” GRIP allows natural gas utility companies the opportunity to include in their rate base annually approved capital costs incurred in the prior calendar year. The following table summarizes our GRIP filings with effective dates during the fiscal years ended September 30, 2008, 2007 and 2006:
 
                         
        Incremental Net
    Additional
     
        Utility Plant
    Annual
    Effective
Division   Calendar Year   Investment     Revenue     Date
        (In thousands)     (In thousands)      
 
2008 GRIP:
                       
Atmos Pipeline — Texas
  2007   $ 46,648     $ 6,970     4/15/08
West Texas
  2006     7,022       1,131     12/17/07
                         
Total 2008 GRIP
      $ 53,670     $ 8,101      
                         
2007 GRIP:
                       
Atmos Pipeline — Texas
  2006   $ 88,938     $ 13,202     9/14/07
Mid-Tex
  2006     62,375       12,422     9/14/07
                         
Total 2007 GRIP
      $ 151,313     $ 25,624      
                         
2006 GRIP:
                       
Mid-Tex (1)
  2005   $ 62,156     $ 11,891     9/1/06
West Texas
  2005     3,802           9/1/06
Atmos Pipeline — Texas
  2005     21,486       3,286     8/1/06
West Texas
  2004     22,597       3,802     5/4/06
Mid-Tex (1)
  2004     28,903       6,731     2/1/06
Atmos Pipeline — Texas
  2004     10,640       1,919     1/1/06
Mid-Tex (1)
  2003     32,518       6,691     10/1/05
                         
Total 2006 GRIP
      $ 182,102     $ 34,320      
                         
 
 
(1) The order issued by the RRC in the Mid-Tex rate case required an immediate refund of amounts collected from the Mid-Tex Division’s 2003-2005 GRIP filings of approximately $2.9 million. This refund is not reflected in the amounts shown in the table above.
 
Annual Rate Filing Mechanisms
 
As an instrument to reduce regulatory lag, annual rate filing mechanisms allow us to refresh our rates on a periodic basis without filing a formal rate case. However, these filings still involve discovery by the appropriate regulatory authorities prior to the final determination of rates under these mechanisms. As discussed above in “Natural Gas Distribution Segment Overview,” we currently have annual rate filing mechanisms in our Louisiana and Mississippi divisions and in significant portions of our Mid-Tex and West Texas divisions. These mechanisms are referred to as rate review mechanisms in our Mid-Tex and West Texas


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Divisions and stable rate filings in our Louisiana and Mississippi divisions. The following table summarizes filings made under our various annual rate filing mechanisms:
 
                             
              Additional
       
              Annual
    Effective
 
Division   Jurisdiction   Test Year Ended     Revenue     Date  
              (In thousands)        
 
2008 Filings:
                           
Louisiana
  LGS     12/31/07     $ 1,709       7/1/08  
Louisiana
  Transla     9/30/07       2,066       4/1/08  
                             
Total 2008 Filings
              $ 3,775          
                             
2007 Filings:
                           
Mississippi
  Mississippi     6/30/07     $       11/1/07  
Louisiana
  LGS     12/31/06       665       7/1/07  
Louisiana
  Transla     9/30/06       1,445       4/1/07  
Louisiana
  LGS     12/31/05       9,518       8/1/06  
                             
Total 2007 Filings
              $ 11,628          
                             
2006 Filings:
                           
Mississippi
  Mississippi     6/30/06     $       11/1/06  
Louisiana
  LGS     12/31/03       3,326       2/1/06  
                             
Total 2006 Filings
              $ 3,326          
                             
 
The rate review mechanism in the Mid-Tex Division was entered into as a result of a settlement in the September 20, 2007 Statement of Intent case filed with all Mid-Tex Division cities. Of the 439 incorporated cities served by the Mid-Tex Division, 438 of these cities are part of the rate review mechanism process. The West Texas rate review mechanism was entered into in August 2008 as a result of a settlement with the West Texas Coalition of Cities. The Lubbock Customer Conservation Value Plan (CCVP) was entered into in May 2008 as a result of a settlement to resolve ongoing rate issues. All three mechanisms have been implemented under a three year trial basis, beginning in fiscal 2009, based upon calendar 2007 financial information.
 
Other Ratemaking Activity
 
The following table summarizes other ratemaking activity during the fiscal years ended September 30, 2008, 2007 and 2006:
 
                     
            Increase
     
            (Decrease)
    Effective
Division   Jurisdiction   Rate Activity   in Revenue     Date
            (In thousands)      
 
2008 Other Rate Activity:
                   
Colorado-Kansas
  Kansas   Ad Valorem Tax (1)   $ 1,434     1/1/08
        Earnings            
Colorado-Kansas
  Colorado   Agreement (2)     (1,100 )   11/20/07
                     
Total 2008 Other Rate Activity
          $ 334      
                     
2007 Other Rate Activity:
                   
Mid-Tex
  Texas   GRIP Refund   $ (2,887 )   4/1/07
Colorado-Kansas
  Kansas   Ad Valorem Tax (1)     1,528     1/1/07
                     
Total 2007 Other Rate Activity
          $ (1,359 )    
                     
2006 Other Rate Activity:
                   
Colorado-Kansas
  Kansas   Ad Valorem Tax (1)   $ 1,565     1/1/06
                     
Total 2006 Other Rate Activity
          $ 1,565      
                     
 
See footnotes on the following page.


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(1) In the state of Kansas, ad valorem tax represents a general tax on all real and personal property determined based on the value of the property. This tax is assessed to the Company and recovered from our customers through our rates.
 
(2) In November 2007, the Colorado Public Utilities Commission approved an earnings agreement entered into jointly between the Colorado-Kansas Division, the Commission Staff and the Office of Consumer Counsel. The agreement called for a one-time refund to customers of $1.1 million made in January 2008.
 
In addition to the activity above, in December 2006, the Louisiana Public Service Commission issued a staff report allowing the deferral of $4.3 million in operating and maintenance expenses in our Louisiana Division to allow recovery of all incremental operation and maintenance expense incurred in fiscal 2005 and 2006 in connection with our Hurricane Katrina recovery efforts.
 
In September 2006, our Mid-Tex Division filed its annual gas cost reconciliation with the RRC. The filing reflects approximately $24 million in refunds of amounts that were overcollected from customers between July 2005 and June 2006. The Mid-Tex Division received approval to refund these amounts over a six-month period, which began in November 2006. The ruling had no impact on the gross profit for the Mid-Tex Division.
 
In May 2007, our Mid-Tex Division filed a 36-month gas contract review filing. This filing is mandated by prior RRC orders and relates to the prudency of gas purchases made from November 2003 through October 2006, which total approximately $2.7 billion. An agreed-upon procedural schedule was filed with the RRC, which established a hearing schedule beginning in December 2007. In July 2008, the City of Dallas filed testimony recommending a disallowance of approximately $58 million and the ACSC Coalition of Cities filed testimony recommending a disallowance of approximately $89 million. However, the Mid-Tex Division has historically been able to settle similar gas contract reviews for significantly less than the requested disallowance amounts. A hearing was held at the RRC in September 2008, and initial and reply briefs were filed by all parties in mid-October 2008. A proposal for decision on this matter is expected by the end of March 2009.
 
Other Regulation
 
Each of our natural gas distribution divisions is regulated by various state or local public utility authorities. We are also subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of our gas distribution facilities. In addition, our distribution operations are also subject to various state and federal laws regulating environmental matters. From time to time we receive inquiries regarding various environmental matters. We believe that our properties and operations substantially comply with and are operated in substantial conformity with applicable safety and environmental statutes and regulations. There are no administrative or judicial proceedings arising under environmental quality statutes pending or known to be contemplated by governmental agencies which would have a material adverse effect on us or our operations. Our environmental claims have arisen primarily from former manufactured gas plant sites in Tennessee, Iowa and Missouri.
 
The Federal Energy Regulatory Commission (FERC) allows, pursuant to Section 311 of the Natural Gas Policy Act, gas transportation services through our Atmos Pipeline — Texas assets “on behalf of” interstate pipelines or local distribution companies served by interstate pipelines, without subjecting these assets to the jurisdiction of the FERC.
 
The RRC has issued a final rule requiring the replacement of known compression couplings at pre-bent gas meter risers by November 2009. This rule affects the operations of the Mid-Tex Division but is presently not anticipated to have a significant impact on our West Texas Division. This rule requires us to expend significant amounts of capital in the Mid-Tex Division, but these prudent and mandatory expenditures should be recoverable through our rates.


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Competition
 
Although our natural gas distribution operations are not currently in significant direct competition with any other distributors of natural gas to residential and commercial customers within our service areas, we do compete with other natural gas suppliers and suppliers of alternative fuels for sales to industrial customers. We compete in all aspects of our business with alternative energy sources, including, in particular, electricity. Electric utilities offer electricity as a rival energy source and compete for the space heating, water heating and cooking markets. Promotional incentives, improved equipment efficiencies and promotional rates all contribute to the acceptability of electrical equipment. The principal means to compete against alternative fuels is lower prices, and natural gas historically has maintained its price advantage in the residential, commercial and industrial markets. However, higher gas prices, coupled with the electric utilities’ marketing efforts, have increased competition for residential and commercial customers. In addition, AEM competes with other natural gas marketers to provide natural gas management and other related services to customers.
 
Our regulated transmission and storage operations currently face limited competition from other existing intrastate pipelines and gas marketers seeking to provide or arrange transportation, storage and other services for customers.
 
Employees
 
At September 30, 2008, we had 4,750 employees, consisting of 4,618 employees in our regulated operations and 132 employees in our nonregulated operations.
 
Available Information
 
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports, and amendments to those reports, and other forms that we file with or furnish to the Securities and Exchange Commission (SEC) are available free of charge at our website, www.atmosenergy.com , under “Publications and Filings” under the “Investors” tab, as soon as reasonably practicable, after we electronically file these reports with, or furnish these reports to, the SEC. We will also provide copies of these reports free of charge upon request to Shareholder Relations at the address and telephone number appearing below:
 
Shareholder Relations
Atmos Energy Corporation
P.O. Box 650205
Dallas, Texas 75265-0205
972-855-3729
 
Corporate Governance
 
In accordance with and pursuant to relevant related rules and regulations of the SEC as well as corporate governance-related listing standards of the New York Stock Exchange (NYSE), the Board of Directors of the Company has established and periodically updated our Corporate Governance Guidelines and Code of Conduct, which is applicable to all directors, officers and employees of the Company. In addition, in accordance with and pursuant to such NYSE listing standards, our Chief Executive Officer, Robert W. Best, has certified to the New York Stock Exchange that he was not aware of any violation by the Company of NYSE corporate governance listing standards. The Board of Directors also annually reviews and updates, if necessary, the charters for each of its Audit, Human Resources and Nominating and Corporate Governance Committees. All of the foregoing documents are posted on the Corporate Governance page of our website. We will also provide copies of all corporate governance documents free of charge upon request to Shareholder Relations at the address listed above.


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ITEM 1A.    Risk Factors.
 
Our financial and operating results are subject to a number of risk factors, many of which are not within our control. Although we have tried to discuss key risk factors below, please be aware that other or new risks may prove to be important in the future. Investors should carefully consider the following discussion of risk factors as well as other information appearing in this report. These factors include the following:
 
The continuation of the unprecedented disruptions in the credit markets could limit our ability to access capital and increase our costs of capital.
 
We rely upon access to both short-term and long-term credit markets to satisfy our liquidity requirements. The global credit markets have been experiencing significant disruption and volatility in recent months, to a greater degree than has been seen in decades. In some cases, the ability or willingness of traditional sources of capital to provide financing has been reduced.
 
Historically, we have accessed the commercial paper markets to finance our short-term working capital needs. However, the disruptions in the credit markets since mid-September 2008 have limited our access to the commercial paper markets. Consequently, we have borrowed directly under our primary credit facility that backstops our commercial paper program to provide much of our working capital. This credit facility provides up to $600 million in committed financing through its expiration in December 2011; however, one lender with a 5.55% share of the commitments has ceased funding, effectively reducing the facility’s size to $567 million. Our borrowings under this facility, along with our commercial paper, have been used primarily to purchase natural gas supply for the upcoming winter heating season. The amount of our working capital requirements in the near-term will depend primarily on the market price of natural gas. Higher natural gas prices may adversely impact our accounts receivable collections and may require us to increase borrowings under our credit facilities to fund our operations. The cost of both our borrowings under the primary credit facility and our commercial paper has increased significantly since mid-September 2008. We have historically supplemented our commercial paper program with a short-term committed credit facility that must be renewed annually. No borrowings are currently outstanding under this $212.5 million facility, which matures at the end of October 2009.
 
Our long-term debt is currently rated as “investment grade” by Standard & Poor’s Corporation, Moody’s Investors Services, Inc. and Fitch Ratings, Ltd. If continuing adverse credit conditions cause a significant limitation on our access to the private and public credit markets, we could see a reduction in our liquidity. A significant reduction in our liquidity could in turn trigger a negative change in our ratings outlook or even a reduction in our credit ratings by one or more of the three credit rating agencies. If we were to lose our investment-grade rating from any of the three credit rating agencies, we would lose our ability to issue unsecured long-term debt in the capital markets without further regulatory approval due to restrictions imposed by one of the state regulatory commissions that regulates our natural gas distribution business. Additionally, such a downgrade could even further limit our access to private credit markets and increase the costs of borrowing under credit lines that could be available.
 
Further, if our credit ratings were downgraded, we could be required to provide additional liquidity to our natural gas marketing segment because the commodity financial instruments markets could become unavailable to us. Our natural gas marketing segment depends primarily upon an uncommitted demand $580 million credit facility to finance its working capital needs, which it uses primarily to issue standby letters of credit to its natural gas suppliers. Although the availability of credit under this facility has not yet been affected, the continuation of current market conditions could adversely affect such availability. A significant reduction in such availability could require us to provide extra liquidity to support its operations or reduce some of the activities of our natural gas marketing segment. Our ability to provide extra liquidity is limited by the terms of our existing lending arrangements with AEH, which are subject to annual approval by one state regulatory commission.
 
A continuation of the recent deterioration in credit markets could also adversely impact our plans to refinance debt that matures at the beginning of fiscal 2010. We financed our TXU Gas acquisition in October 2004 in part with the proceeds of our 4% senior notes due 2009. The $400 million principal amount of these


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notes matures in October 2009 and we plan to access the capital markets to refinance this debt prior to maturity. A continuation of current market conditions could adversely affect the cost or other terms of such refinancing.
 
While we believe we can meet our capital requirements from our operations and the sources of financing available to us, we can provide no assurance that we will continue to be able to do so in the future, especially if the market price of natural gas increases significantly in the near-term. The future effects on our business, liquidity and financial results of a continuation of current market conditions could be material and adverse to us, both in the ways described above or in other ways that we do not currently anticipate.
 
The continuation of recent economic conditions could adversely affect our customers and negatively impact our financial results.
 
The slowdown in the U.S. economy, together with increased mortgage defaults and significant decreases in the values of homes and investment assets, has adversely affected the financial resources of many domestic households. It is unclear whether the administrative and legislative responses to these conditions will be successful in avoiding a recession or in lessening the severity or duration of a recession. As a result, our customers may seek to use less gas in upcoming heating seasons and it may become more difficult for them to pay their gas bills. This may slow collections and lead to higher than normal levels of accounts receivable. This in turn could increase our financing requirements and bad debt expense.
 
The costs of providing pension and postretirement health care benefits and related funding requirements are subject to changes in pension fund values, changing demographics and fluctuating actuarial assumptions and may have a material adverse effect on our financial results.
 
We provide a cash-balance pension plan and postretirement healthcare benefits to eligible full-time employees. Our costs of providing such benefits and related funding requirements are subject to changes in the market value of the assets funding our pension and postretirement healthcare plans. The recent significant decline in the value of investments that fund our pension and postretirement healthcare plans may significantly differ from or alter the values and actuarial assumptions we use to calculate our future pension plan expense and postretirement healthcare costs. A continuation or further decline in the value of these investments could increase the expenses of our pension and postretirement healthcare plans and related funding requirements in the future. Our costs of providing such benefits and related funding requirements are also subject to changing demographics, including longer life expectancy of beneficiaries and an expected increase in the number of eligible former employees over the next five to ten years, as well as various actuarial calculations and assumptions, which may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates and interest rates and other factors.
 
Our operations are exposed to market risks that are beyond our control which could adversely affect our financial results and capital requirements.
 
Our risk management operations are subject to market risks beyond our control, including market liquidity, commodity price volatility and counterparty creditworthiness. Although we maintain a risk management policy, we may not be able to completely offset the price risk associated with volatile gas prices or the risk in our natural gas marketing and pipeline, storage and other segments, which could lead to volatility in our earnings. Physical trading also introduces price risk on any net open positions at the end of each trading day, as well as volatility resulting from intra-day fluctuations of gas prices and the potential for daily price movements between the time natural gas is purchased or sold for future delivery and the time the related purchase or sale is hedged. Although we manage our business to maintain no open positions, there are times when limited net open positions related to our physical storage may occur on a short-term basis. The determination of our net open position as of the end of any particular trading day 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 such day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Net open positions may increase volatility in our financial condition or results of


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operations if market prices move in a significantly favorable or unfavorable manner because the timing of the recognition of profits or losses on the hedges for financial accounting purposes usually do not match up with the timing of the economic profits or losses on the item being hedged. This volatility may occur with a resulting increase or decrease in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were consummated. Further, if the local physical markets in which we trade do not move consistently with the NYMEX futures market, we could experience increased volatility in the financial results of our natural gas marketing and pipeline, storage and other segments.
 
Our natural gas marketing and pipeline, storage and other segments manage margins and limit risk exposure on the sale of natural gas inventory or the offsetting fixed-price purchase or sale commitments for physical quantities of natural gas through the use of a variety of financial instruments. However, contractual limitations could adversely affect our ability to withdraw gas from storage, which could cause us to purchase gas at spot prices in a rising market to obtain sufficient volumes to fulfill customer contracts. We could also realize financial losses on our efforts to limit risk as a result of volatility in the market prices of the underlying commodities or if a counterparty fails to perform under a contract. A continued tightening of the credit market could cause more of our counterparties to fail to perform than expected and reserved. In addition, adverse changes in the creditworthiness of our counterparties could limit the level of trading activities with these parties and increase the risk that these parties may not perform under a contract. These circumstances could also increase our capital requirements.
 
We are also subject to interest rate risk on our borrowings. In recent years, we have been operating in a relatively low interest-rate environment with both short and long-term interest rates being relatively low compared to historical interest rates. However, increases in interest rates could adversely affect our future financial results.
 
We are subject to state and local regulations that affect our operations and financial results.
 
Our natural gas distribution and regulated transmission and storage segments are subject to various regulated returns on our rate base in each jurisdiction in which we operate. We monitor the allowed rates of return and our effectiveness in earning such rates and initiate rate proceedings or operating changes as we believe are needed. In addition, in the normal course of business in the regulatory environment, assets may be placed in service and historical test periods established before rate cases can be filed that could result in an adjustment of our returns. Once rate cases are filed, regulatory bodies have the authority to suspend implementation of the new rates while studying the cases. Because of this process, we must suffer the negative financial effects of having placed assets in service without the benefit of rate relief, which is commonly referred to as “regulatory lag”. Rate cases also involve a risk of rate reduction, because once rates have been approved, they are still subject to challenge for their reasonableness by appropriate regulatory authorities. In addition, regulators may review our purchases of natural gas and can adjust the amount of our gas costs that we pass through to our customers. Finally, our debt and equity financings are also subject to approval by regulatory bodies in several states, which could limit our ability to access or take advantage of changes in the capital markets.
 
Some of our operations are subject to increased federal regulatory oversight that could affect our operations and financial results.
 
FERC has regulatory authority that affects some of our operations, including sales of natural gas in the wholesale gas market and the use and release of interstate pipeline and storage capacity. Under legislation passed by Congress in 2005, FERC has adopted rules designed to prevent market power abuse and market manipulation and to promote compliance with FERC’s other rules, policies and orders by companies engaged in the sale, purchase, transportation or storage of natural gas in interstate commerce. These rules carry increased penalties for violations. We are currently under investigation by FERC for possible violations of FERC’s posting and competitive bidding regulations for pre-arranged released firm capacity on interstate natural gas pipelines. Although we are currently taking action to structure current and future transactions to comply with applicable FERC regulations, we are unable to predict the impact that these rules or any future regulatory activities of FERC and other federal agencies will have on our operations or financial results. Changes in regulations or their interpretation or additional regulations could adversely affect our business or financial results.


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We are subject to environmental regulations which could adversely affect our operations or financial results.
 
We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local governmental authorities relating to protection of the environment and health and safety matters, including those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and waste, the clean-up of contaminated sites, groundwater quality and availability, plant and wildlife protection, as well as work practices related to employee health and safety. Environmental legislation also requires that our facilities, sites and other properties associated with our operations be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Failure to comply with these laws, regulations, permits and licenses may expose us to fines, penalties or interruptions in our operations that could be significant to our financial results. In addition, existing environmental regulations may be revised or our operations may become subject to new regulations. In addition, there are a number of new federal and state legislative and regulatory initiatives being proposed and adopted in an attempt to control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide. Such revised or new regulations could result in increased compliance costs or additional operating restrictions which could adversely affect our business, financial condition or financial results.
 
The concentration of our distribution, pipeline and storage operations in the State of Texas exposes our operations and financial results to economic conditions and regulatory decisions in Texas.
 
As a result of our acquisition of the distribution, pipeline and storage operations of TXU Gas in October 2004, over 50 percent of our natural gas distribution customers and most of our pipeline and storage assets and operations are located in the State of Texas. This concentration of our business in Texas means that our operations and financial results may be significantly affected by changes in the Texas economy in general and regulatory decisions by state and local regulatory authorities in Texas.
 
Adverse weather conditions could affect our operations or financial results.
 
Since the 2006-2007 winter heating season, we have had weather-normalized rates for over 90 percent of our residential and commercial meters, which has substantially mitigated the adverse effects of warmer-than-normal weather for meters in those service areas. However, there is no assurance that we will continue to receive such regulatory protection from adverse weather in our rates in the future. The loss of such weather — normalized rates could have an adverse effect on our operations and financial results. In addition, our natural gas distribution and regulated transmission and storage operating results may continue to vary somewhat with the actual temperatures during the winter heating season. Sustained cold weather could adversely affect our natural gas marketing operations as we may be required to purchase gas at spot rates in a rising market to obtain sufficient volumes to fulfill some customer contracts.
 
Inflation and increased gas costs could adversely impact our customer base and customer collections and increase our level of indebtedness.
 
Inflation has caused increases in some of our operating expenses and has required assets to be replaced at higher costs. We have a process in place to continually review the adequacy of our natural gas distribution gas rates in relation to the increasing cost of providing service and the inherent regulatory lag in adjusting those gas rates. Historically, we have been able to budget and control operating expenses and investments within the amounts authorized to be collected in rates and intend to continue to do so. However, the ability to control expenses is an important factor that could impact future financial results.
 
Rapid increases in the costs of purchased gas, which has occurred in recent years, cause us to experience a significant increase in short-term debt. We must pay suppliers for gas when it is purchased, which can be significantly in advance of when these costs may be recovered through the collection of monthly customer bills for gas delivered. Increases in purchased gas costs also slow our natural gas distribution collection efforts as customers are more likely to delay the payment of their gas bills, leading to higher than normal accounts


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receivable. This could result in higher short-term debt levels, greater collection efforts and increased bad debt expense.
 
Our growth in the future may be limited by the nature of our business, which requires extensive capital spending.
 
We must continually build additional capacity in our natural gas distribution system to maintain the growth in the number of our customers. The cost of adding this capacity may be affected by a number of factors, including the general state of the economy and weather. Our cash flows from operations generally are sufficient to supply funding for all our capital expenditures, including the financing of the costs of new construction along with capital expenditures necessary to maintain our existing natural gas system. Due to the timing of these cash flows and capital expenditures, we often must fund at least a portion of these costs through borrowing funds from third party lenders, the cost and availability of which is dependent on the liquidity of the credit markets, interest rates and other market conditions. This in turn may limit our ability to connect new customers to our system due to constraints on the amount of funds we can invest in our infrastructure.
 
Our operations are subject to increased competition.
 
In residential and commercial customer markets, our natural gas distribution operations compete with other energy products, such as electricity and propane. Our primary product competition is with electricity for heating, water heating and cooking. Increases in the price of natural gas could negatively impact our competitive position by decreasing the price benefits of natural gas to the consumer. This could adversely impact our business if, as a result, our customer growth slows, reducing our ability to make capital expenditures, or if our customers further conserve their use of gas, resulting in reduced gas purchases and customer billings.
 
In the case of industrial customers, such as manufacturing plants, adverse economic conditions, including higher gas costs, could cause these customers to use alternative sources of energy, such as electricity, or bypass our systems in favor of special competitive contracts with lower per-unit costs. Our regulated transmission and storage segment currently faces limited competition from other existing intrastate pipelines and gas marketers seeking to provide or arrange transportation, storage and other services for customers. However, competition may increase if new intrastate pipelines are constructed near our existing facilities.
 
Distributing and storing natural gas involve risks that may result in accidents and additional operating costs.
 
Our natural gas distribution business involves a number of hazards and operating risks that cannot be completely avoided, such as leaks, accidents and operational problems, which could cause loss of human life, as well as substantial financial losses resulting from property damage, damage to the environment and to our operations. We do have liability and property insurance coverage in place for many of these hazards and risks. However, because our pipeline, storage and distribution facilities are near or are in populated areas, any loss of human life or adverse financial results resulting from such events could be large. If these events were not fully covered by insurance, our operations or financial results could be adversely affected.
 
Natural disasters, terrorist activities or other significant events could adversely affect our operations or financial results.
 
Natural disasters are always a threat to our assets and operations. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could affect our operations. Also, companies in our industry may face a heightened risk of exposure to actual acts of terrorism, which could subject our operations to increased risks. As a result, the availability of insurance covering such risks may be more limited, which could increase the risk that an event could adversely affect our operations or financial results.


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ITEM 1B.    Unresolved Staff Comments.
 
Not applicable.
 
ITEM 2.    Properties.
 
Distribution, transmission and related assets
 
At September 30, 2008, our natural gas distribution segment owned an aggregate of 77,462 miles of underground distribution and transmission mains throughout our gas distribution systems. These mains are located on easements or rights-of-way which generally provide for perpetual use. We maintain our mains through a program of continuous inspection and repair and believe that our system of mains is in good condition. Our regulated transmission and storage segment owned 6,069 miles of gas transmission and gathering lines and our pipeline, storage and other segment owned 114 miles of gas transmission and gathering lines.
 
Storage Assets
 
We own underground gas storage facilities in several states to supplement the supply of natural gas in periods of peak demand. The following table summarizes certain information regarding our underground gas storage facilities:
 
                                 
                      Maximum
 
                      Daily
 
          Cushion
    Total
    Delivery
 
    Usable Capacity
    Gas
    Capacity
    Capability
 
State   (Mcf)     (Mcf) (1)     (Mcf)     (Mcf)  
 
Natural Gas Distribution Segment
                               
Kentucky
    4,442,696       6,322,283       10,764,979       109,100  
Kansas
    3,239,000       2,300,000       5,539,000       45,000  
Mississippi
    2,211,894       2,442,917       4,654,811       48,000  
Georgia
    450,000       50,000       500,000       30,000  
                                 
Total
    10,343,590       11,115,200       21,458,790       232,100  
Regulated Transmission and Storage Segment — Texas
    39,243,226       13,128,025       52,371,251       1,235,000  
Pipeline, Storage and Other Segment
                               
Kentucky
    3,492,900       3,295,000       6,787,900       71,000  
Louisiana
    438,583       300,973       739,556       56,000  
                                 
Total
    3,931,483       3,595,973       7,527,456       127,000  
                                 
Total
    53,518,299       27,839,198       81,357,497       1,594,100  
                                 
 
 
(1) Cushion gas represents the volume of gas that must be retained in a facility to maintain reservoir pressure.


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Additionally, we contract for storage service in underground storage facilities on many of the interstate pipelines serving us to supplement our proprietary storage capacity. The following table summarizes our contracted storage capacity:
 
                     
              Maximum
 
        Maximum
    Daily
 
        Storage
    Withdrawal
 
        Quantity
    Quantity
 
Segment   Division/Company   (MMBtu)     (MMBtu) (1)  
 
Natural Gas Distribution Segment
                   
    Colorado-Kansas Division     4,237,243       108,232  
    Kentucky/Mid-States Division     15,301,017       287,798  
    Louisiana Division     2,574,479       158,731  
    Mississippi Division     4,033,649       168,039  
    West Texas Division     1,225,000       56,000  
                     
Total
    27,371,388       778,800  
Natural Gas Marketing Segment
  Atmos Energy Marketing, LLC     7,879,724       202,586  
Pipeline, Storage and Other Segment
  Trans Louisiana Gas Pipeline, Inc.     1,200,000       55,720  
                     
Total Contracted Storage Capacity
    36,451,112       1,037,106  
                 
 
 
(1) Maximum daily withdrawal quantity (MDWQ) amounts will fluctuate depending upon the season and the month. Unless otherwise noted, MDWQ amounts represent the MDWQ amounts as of November 1, which is the beginning of the winter heating season.
 
Other facilities
 
Our natural gas distribution segment owns and operates one propane peak shaving plant with a total capacity of approximately 180,000 gallons that can produce an equivalent of approximately 3,300 Mcf daily.
 
Offices
 
Our administrative offices and corporate headquarters are consolidated in a leased facility in Dallas, Texas. We also maintain field offices throughout our distribution system, the majority of which are located in leased facilities. Our nonregulated operations are headquartered in Houston, Texas, with offices in Houston and other locations, primarily in leased facilities.
 
ITEM 3.    Legal Proceedings.
 
See Note 12 to the consolidated financial statements.
 
ITEM 4.    Submission of Matters to a Vote of Security Holders.
 
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.


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EXECUTIVE OFFICERS OF THE REGISTRANT
 
The following table sets forth certain information as of September 30, 2008, regarding the executive officers of the Company. It is followed by a brief description of the business experience of each executive officer.
 
                     
        Years of
   
Name
 
Age
 
Service
 
Office Currently Held
 
Robert W. Best
    61       11     Chairman, President and Chief Executive Officer
Kim R. Cocklin
    57       2     Senior Vice President, Regulated Operations
Louis P. Gregory
    53       8     Senior Vice President and General Counsel
Michael E. Haefner
    48           Senior Vice President
Mark H. Johnson
    49       7     Senior Vice President, Nonregulated Operations and President, Atmos Energy Marketing, LLC
Wynn D. McGregor
    55       20     Senior Vice President, Human Resources
John P. Reddy
    55       10     Senior Vice President and Chief Financial Officer
 
Robert W. Best was named Chairman of the Board, President and Chief Executive Officer in March 1997. Effective October 1, 2008, Mr. Best continues to serve the Company as Chairman of the Board and Chief Executive Officer.
 
Kim R. Cocklin joined the Company in June 2006 as Senior Vice President, Regulated Operations. On October 1, 2008, Mr. Cocklin was named President and Chief Operating Officer. Prior to joining the Company, Mr. Cocklin served as Senior Vice President, General Counsel and Chief Compliance Officer of Piedmont Natural Gas Company from February 2003 to May 2006.
 
Louis P. Gregory was named Senior Vice President and General Counsel in September 2000.
 
Michael E. Haefner joined the Company in June 2008 as Senior Vice President to succeed Wynn D. McGregor, who retired from the Company on October 1, 2008. Prior to joining the Company, Mr. Haefner was a self-employed consultant and founder and president of Perform for Life, LLC from May 2007 to May 2008. Mr. Haefner previously served for 10 years as the Senior Vice President, Human Resources, of Sabre Holding Corporation, the parent company of Sabre Airline Solutions, Sabre Travel Network and Travelocity.
 
Mark H. Johnson was named Senior Vice President, Nonregulated Operations in April 2006 and President of Atmos Energy Holdings, Inc., and Atmos Energy Marketing, LLC, in April 2005. Mr. Johnson previously served the Company as Vice President, Nonutility Operations from October 2005 to March 2006 and as Executive Vice President of Atmos Energy Marketing from October 2003 to March 2005.
 
Wynn D. McGregor was named Senior Vice President, Human Resources in October 2005. He previously served the Company as Vice President, Human Resources from January 1994 to September 2005. Mr. McGregor retired from the Company on October 1, 2008.
 
John P. Reddy was named Senior Vice President and Chief Financial Officer in September 2000.


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PART II
 
ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our stock trades on the New York Stock Exchange under the trading symbol “ATO.” The high and low sale prices and dividends paid per share of our common stock for fiscal 2008 and 2007 are listed below. The high and low prices listed are the closing NYSE quotes, as reported on the NYSE composite tape, for shares of our common stock:
 
                                                 
    2008     2007  
                Dividends
                Dividends
 
    High     Low     paid     High     Low     paid  
 
Quarter Ended:
                                               
December 31
  $ 29.46     $ 26.11     $ .325     $ 33.01     $ 28.45     $ .320  
March 31
    28.96       25.09       .325       33.00       30.63       .320  
June 30
    28.54       25.81       .325       33.11       29.38       .320  
September 30
    28.25       25.49       .325       30.66       26.47       .320  
                                                 
                    $ 1.30                     $ 1.28  
                                                 
 
Dividends are payable at the discretion of our Board of Directors out of legally available funds. The Board of Directors typically declares dividends in the same fiscal quarter in which they are paid. The number of record holders of our common stock on October 31, 2008 was 21,825. Future payments of dividends, and the amounts of these dividends, will depend on our financial condition, results of operations, capital requirements and other factors. We sold no securities during fiscal 2008 that were not registered under the Securities Act of 1933, as amended.


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Performance Graph
 
The performance graph and table below compares the yearly percentage change in our total return to shareholders for the last five fiscal years with the total return of the Standard and Poor’s 500 Stock Index and the cumulative total return of two different customized peer company groups, the New Comparison Company Index and the Old Comparison Company Index. The New Comparison Company Index includes Integrys Energy Group, Inc. because the Board of Directors determined that Integrys Energy Group, Inc. fits the profile of the companies in the peer group, which is comprised of natural gas distribution companies with similar revenues, market capitalizations and asset bases to that of the Company. The graph and table below assume that $100.00 was invested on September 30, 2003 in our common stock, the S&P 500 Index and in the common stock of the companies in the New and Old Comparison Company Indexes, as well as a reinvestment of dividends paid on such investments throughout the period.
 
Comparison of Five-Year Cumulative Total Return
among Atmos Energy Corporation, S&P 500 Index
and Comparison Company Indices
 
(PERFORMANCE GRAPH)
 
                                                 
    Cumulative Total Return
    9/30/03   9/30/04   9/30/05   9/30/06   9/30/07   9/30/08
 
Atmos Energy Corporation
    100.00       110.52       129.67       137.30       141.91       139.94  
S&P 500 Index
    100.00       113.87       127.82       141.62       164.90       128.66  
New Comparison Company Index
    100.00       121.05       170.07       165.67       194.83       168.42  
Old Comparison Company Index
    100.00       121.42       171.06       167.35       197.75       168.15  
 
The New Comparison Company Index contains a hybrid group of utility companies, primarily natural gas distribution companies, recommended by a global management consulting firm and approved by the Board of Directors. The companies included in the index are AGL Resources Inc., CenterPoint Energy Resources Corporation, CMS Energy Corporation, Equitable Resources, Inc., Integrys Energy Group, Inc., Nicor Inc., NiSource Inc., ONEOK Inc., Piedmont Natural Gas Company, Inc., Questar Corporation, Vectren Corporation and WGL Holdings, Inc. The Old Comparison Company Index includes the companies listed above in the New Comparison Company Index with the exception of Integrys Energy Group, Inc., which was added to the Company’s peer group in the current year for the reasons discussed above.


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The following table sets forth the number of securities authorized for issuance under our equity compensation plans at September 30, 2008.
 
                         
    Number of
          Number of Securities Remaining
 
    Securities to be Issued
    Weighted-Average
    Available For Future Issuance
 
    Upon Exercise of
    Exercise Price of
    Under Equity Compensation
 
    Outstanding Options,
    Outstanding Options,
    Plans (Excluding Securities
 
    Warrants and Rights     Warrants and Rights     Reflected in Column (a))  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders:
                       
Long-Term Incentive Plan
    913,841     $ 22.54       2,122,776  
                         
Total equity compensation plans approved by security holders
    913,841       22.54       2,122,776  
Equity compensation plans not approved by security holders
                 
                         
Total
    913,841     $ 22.54       2,122,776  
                         


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ITEM 6.    Selected Financial Data.
 
The following table sets forth selected financial data of the Company and should be read in conjunction with the consolidated financial statements included herein.
 
                                         
    Fiscal Year Ended September 30  
    2008     2007 (1)     2006 (1)     2005 (2)     2004 (3)  
    (In thousands, except per share data and ratios)  
 
Results of Operations
                                       
Operating revenues
  $ 7,221,305     $ 5,898,431     $ 6,152,363     $ 4,961,873     $ 2,920,037  
Gross profit
    1,321,326       1,250,082       1,216,570       1,117,637       562,191  
Operating expenses (1)
    893,431       851,446       833,954       768,982       368,496  
Operating income
    427,895       398,636       382,616       348,655       193,695  
Miscellaneous income (3)
    2,731       9,184       881       2,021       9,507  
Interest charges
    137,922       145,236       146,607       132,658       65,437  
Income before income taxes
    292,704       262,584       236,890       218,018       137,765  
Income tax expense
    112,373       94,092       89,153       82,233       51,538  
Net income
  $ 180,331     $ 168,492     $ 147,737     $ 135,785     $ 86,227  
Weighted average diluted shares outstanding
    90,272       87,745       81,390       79,012       54,416  
Diluted net income per share
  $ 2.00     $ 1.92     $ 1.82     $ 1.72     $ 1.58  
Cash flows from operations
    370,933       547,095       311,449       386,944       270,734  
Cash dividends paid per share
  $ 1.30     $ 1.28     $ 1.26     $ 1.24     $ 1.22  
Total natural gas distribution throughput (MMcf)
    429,354       427,869       393,995       411,134       246,033  
Total regulated transmission and storage transportation volumes (MMcf)
    595,542       505,493       410,505       373,879        
Total natural gas marketing sales volumes (MMcf)
    389,392       370,668       283,962       238,097       222,572  
Financial Condition
                                       
Net property, plant and equipment
  $ 4,136,859     $ 3,836,836     $ 3,629,156     $ 3,374,367     $ 1,722,521  
Working capital
    78,017       149,217       (1,616 )     151,675       283,310  
Total assets
    6,386,699       5,895,197       5,719,547       5,610,547       2,902,658  
Short-term debt, inclusive of current maturities of long-term debt
    351,327       154,430       385,602       148,073       5,908  
Capitalization:
                                       
Shareholders’ equity
    2,052,492       1,965,754       1,648,098       1,602,422       1,133,459  
Long-term debt (excluding current maturities)
    2,119,792       2,126,315       2,180,362       2,183,104       861,311  
                                         
Total capitalization
    4,172,284       4,092,069       3,828,460       3,785,526       1,994,770  
Capital expenditures
    472,273       392,435       425,324       333,183       190,285  
Financial Ratios
                                       
Capitalization ratio (4)
    45.4 %     46.3 %     39.1 %     40.7 %     56.7 %
Return on average shareholders’ equity (5)
    8.8 %     8.8 %     8.9 %     9.0 %     9.1 %
 
 
(1) Financial results for 2007 and 2006 include a $6.3 million and a $22.9 million pre-tax loss for the impairment of certain assets.
 
(2) Financial results for 2005 include the results of the Mid-Tex Division and the Atmos Pipeline — Texas Division from October 1, 2004, the date of acquisition.
 
(3) Financial results for 2004 include a $5.9 million pre-tax gain on the sale of our interest in U.S. Propane, L.P. and Heritage Propane Partners, L.P.
 
(4) The capitalization ratio is calculated by dividing shareholders’ equity by the sum of total capitalization and short-term debt, inclusive of current maturities of long-term debt.
 
(5) The return on average shareholders’ equity is calculated by dividing current year net income by the average of shareholders’ equity for the previous five quarters.


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ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
INTRODUCTION
 
This section provides management’s discussion of the financial condition, changes in financial condition and results of operations of Atmos Energy Corporation and its consolidated subsidiaries with specific information on results of operations and liquidity and capital resources. It includes management’s interpretation of our financial results, the factors affecting these results, the major factors expected to affect future operating results and future investment and financing plans. This discussion should be read in conjunction with our consolidated financial statements and notes thereto.
 
Several factors exist that could influence our future financial performance, some of which are described in Item 1A above, “Risk Factors”. They should be considered in connection with evaluating forward-looking statements contained in this report or otherwise made by or on behalf of us since these factors could cause actual results and conditions to differ materially from those set out in such forward-looking statements.
 
Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995
 
The statements contained in this Annual Report on Form 10-K 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: our ability to continue to access the credit markets to satisfy our liquidity requirements; the impact of recent economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the inherent hazards and risks involved in operating our gas distribution business, natural disasters, terrorist activities or other events, and other risks and uncertainties discussed herein, especially those discussed in Item 1A above, all of which are difficult to predict and many of which are beyond our control. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our 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


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accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Our critical accounting policies are reviewed by the Audit Committee quarterly. Actual results may differ from estimates.
 
Regulation — Our natural gas distribution and regulated transmission and storage operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. Our regulated operations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) 71, Accounting for the Effects of Certain Types of Regulation . This statement requires cost-based, rate-regulated entities that meet certain criteria to reflect the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions in their financial statements. We record regulatory assets for costs that have been deferred for which 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. As a result, certain costs that would normally be expensed under accounting principles generally accepted in the United States are permitted to be capitalized or deferred on the balance sheet because they can be recovered through rates. Discontinuing the application of SFAS 71 could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations. The impact of regulation on our natural gas distribution operations may be affected by decisions of the regulatory authorities or the issuance of new regulations.
 
Revenue recognition — Sales of natural gas to our natural gas distribution customers are billed on a monthly basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for natural gas distribution segment revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.
 
On occasion, we are permitted to implement new rates that have not been formally approved by our regulatory authorities, which are subject to refund. As permitted by SFAS No. 71, we recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented.
 
Rates established by regulatory authorities are adjusted for increases and decreases in our purchased gas costs through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide gas utility companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case to address all of the utility company’s non-gas costs. These mechanisms are commonly utilized when regulatory authorities recognize a particular type of cost, such as purchased gas costs, that (i) is subject to significant price fluctuations compared to the utility company’s other costs, (ii) represents a large component of the utility company’s cost of service and (iii) is generally outside the control of the gas utility company. There is no gross profit generated through purchased gas adjustments, but they provide a dollar-for-dollar offset to increases or decreases in utility gas costs. Although substantially all natural gas distribution sales to our customers fluctuate with the cost of gas that we purchase, our gross profit is generally not affected by fluctuations in the cost of gas as a result of the purchased gas adjustment mechanism. The effects of these purchased gas adjustment mechanisms are recorded as deferred gas costs on our balance sheet.
 
Operating revenues for our regulated transmission and storage and pipeline, storage and other segments are recognized in the period in which actual volumes are transported and storage services are provided.
 
Operating revenues for our natural gas marketing segment and the associated carrying value of natural gas inventory (inclusive of storage costs) are recognized when we sell the gas and physically deliver it to our customers. Operating revenues include realized gains and losses arising from the settlement of financial instruments used in our natural gas marketing activities and unrealized gains and losses arising from changes


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in the fair value of natural gas inventory designated as a hedged item in a fair value hedge and the associated financial instruments.
 
Allowance for doubtful accounts — Accounts receivable consist of natural gas sales to residential, commercial, industrial, municipal and other customers. For the majority of our receivables, we establish an allowance for doubtful accounts based on our collections experience. On certain other receivables where we are aware of a specific customer’s inability or reluctance to pay, we record an allowance for doubtful accounts against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect. However, if circumstances change, our estimate of the recoverability of accounts receivable could be affected. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible.
 
Financial instruments and hedging activities — We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically use financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to meet the needs of our regulated and nonregulated businesses.
 
We record all of our financial instruments on the balance sheet at fair value as required by SFAS 133, Accounting for Derivatives and Hedging Activities, with changes in fair value ultimately recorded in the income statement. We determine fair values primarily through prices actively quoted on national exchanges, which we believe correspond to the market in which transactions involving these financial instruments are executed. We utilize models and other valuation methods to determine fair value in those limited circumstances where external sources are not available. Values are adjusted accordingly to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then current market conditions. Amounts reported at fair value are subject to potentially significant volatility based upon changes in market prices, the valuation of the portfolio of our contracts, maturity and settlement of these contracts and newly originated transactions, each of which directly affect the estimated fair value of our financial instruments. We believe the market prices and models used to value these financial instruments represent the best information available with respect to closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. Values are adjusted to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then current market conditions.
 
Fair value estimates also consider the creditworthiness of our counterparties. Our counterparties consist primarily of financial institutions and major energy companies. This concentration of counterparties may materially impact our exposure to credit risk resulting from market, economic or regulatory conditions. Recent adverse developments in the global financial and credit markets have made it more difficult and more expensive for companies to access the short-term capital markets, which may negatively impact the creditworthiness of our counterparties. We seek to minimize counterparty credit risk through an evaluation of their financial condition and credit ratings and collateral requirements under certain circumstances, including the use of master netting agreements in our natural gas marketing segment.
 
The timing of when changes in fair value of our financial instruments are recorded in the income statement depends on whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment. Changes in fair value for financial instruments that do not meet one of these criteria are recognized in the income statement as they occur.
 
Financial Instruments Associated with Commodity Price Risk
 
In our natural gas distribution segment, our customers are exposed to the effect of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season. The costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk in this segment are included in our purchased gas adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a


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component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with SFAS 71. Accordingly, there is no earnings impact to our natural gas distribution segment as a result of the use of financial instruments.
 
Our natural gas marketing segment aggregates and purchases gas supply, arranges transportation and/or storage logistics and ultimately delivers gas to our customers at competitive prices. We also perform asset optimization activities in both our natural gas marketing segment and pipeline, storage and other segment. As a result of these activities, our nonregulated operations are exposed to risks associated with changes in the market price of natural gas. We manage our exposure to the risk of natural gas price changes through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties.
 
In our natural gas marketing and pipeline, storage and other segments, we have designated the natural gas inventory held by these operating segments as the hedged item in a fair-value hedge. This inventory is marked to market at the end of each month based on the Gas Daily index, with changes in fair value recognized as unrealized gains or losses in revenue in the period of change. The financial instruments associated with this natural gas inventory have been designated as fair-value hedges and are marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains or losses in revenue in the period of change. Changes in the spreads between the forward natural gas prices used to value the financial instruments designated against our physical inventory (NYMEX) and the market (spot) prices used to value our physical storage (Gas Daily) result in unrealized margins until the underlying physical gas is withdrawn and the related financial instruments are settled. The difference in the spot price used to value our physical inventory and the forward price used to value the related financial instruments can result in volatility in our reported income as a component of unrealized margins. We have elected to exclude this spot/forward differential for purposes of assessing the effectiveness of these fair-value hedges. Once the gas is withdrawn and the financial instruments are settled, the previously unrealized margins associated with these net positions are realized. Over time, we expect gains and losses on the sale of storage gas inventory to be offset by gains and losses on the fair-value hedges, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.
 
We have elected to treat fixed-price forward contracts used in our natural gas marketing segment to deliver gas as normal purchases and normal sales. As such, these deliveries are recorded on an accrual basis in accordance with our revenue recognition policy. Financial instruments used to mitigate the commodity price risk associated with these contracts have been designated as cash flow hedges of anticipated purchases and sales at indexed prices. Accordingly, unrealized gains and losses on open financial instruments are 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. Hedge ineffectiveness, to the extent incurred, is reported as a component of revenue.
 
We also use storage swaps and futures to capture additional storage arbitrage opportunities in our natural gas marketing segment that arise after the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges in accordance with SFAS 133.
 
Financial Instruments Associated with Interest Rate Risk
 
We periodically manage interest rate risk, typically when we issue new or refinance existing long-term debt. Currently, we do not have any financial instruments in place to manage interest rate risk. However, in prior years, we entered into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings. We designated these Treasury lock agreements as a cash flow hedge of an anticipated transaction at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the Treasury lock agreements were recorded as a component of accumulated other comprehensive income (loss). The realized gain or loss recognized upon settlement of each Treasury lock agreement was


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initially recorded as a component of accumulated other comprehensive income (loss) and is recognized as a component of interest expense over the life of the related financing arrangement.
 
Impairment assessments — We perform impairment assessments of our goodwill, intangible assets subject to amortization and long-lived assets. We currently have no indefinite-lived intangible assets.
 
We annually evaluate our goodwill balances for impairment during our second fiscal quarter or as impairment indicators arise. We use a present value technique based on discounted cash flows to estimate the fair value of our reporting units. We have determined our reporting units to be each of our natural gas distribution divisions and wholly-owned subsidiaries and goodwill is allocated to the reporting units responsible for the acquisition that gave rise to the goodwill. The discounted cash flow calculations used to assess goodwill impairment are dependent on several subjective factors including the timing of future cash flows, future growth rates and the discount rate. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.
 
We annually assess whether the cost of our intangible assets subject to amortization or other long-lived assets is recoverable or that the remaining useful lives may warrant revision. We perform this assessment more frequently when specific events or circumstances have occurred that suggest the recoverability of the cost of the intangible and other long-lived assets is at risk.
 
When such events or circumstances are present, we assess the recoverability of these assets by determining whether the carrying value will be recovered through expected future cash flows from the operating division or subsidiary to which these assets relate. These cash flow projections consider various factors such as the timing of the future cash flows and the discount rate and are based upon the best information available at the time the estimate is made. Changes in these factors could materially affect the cash flow projections and result in the recognition of an impairment charge. An impairment charge is recognized as the difference between the carrying amount and the fair value if the sum of the undiscounted cash flows is less than the carrying value of the related asset.
 
Pension and other postretirement plans  — Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. Through fiscal 2008, we reviewed the estimates and assumptions underlying our pension and other postretirement plan costs and liabilities annually based upon a June 30 measurement date. Effective October 1, 2008, we changed our measurement date to September 30. The assumed discount rate and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.
 
The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligations and net pension and postretirement costs. When establishing our discount rate, we consider high quality corporate bond rates based on Moody’s Aa bond index, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with a high quality corporate bond spot rate curve.
 
The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of our annual pension and postretirement plan costs. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension or postretirement plan costs are not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years.


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We estimate the assumed health care cost trend rate used in determining our postretirement net expense based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon our annual review of our participant census information as of the measurement date.
 
Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets could have a material effect on the amount of pension costs ultimately recognized. A 0.25 percent change in our discount rate would impact our pension and postretirement costs by approximately $0.9 million. A 0.25 percent change in our expected rate of return would impact our pension and postretirement costs by approximately $0.9 million.
 
RESULTS OF OPERATIONS
 
Overview
 
Atmos Energy Corporation is involved in the distribution, marketing and transportation of natural gas. Accordingly, our results of operations are impacted by the demand for natural gas, particularly during the winter heating season, and the volatility of the natural gas markets. This generally results in higher operating revenues and net income during the period from October through March of each fiscal year and lower operating revenues and either lower net income or net losses during the period from April through September of each fiscal year. As a result of the seasonality of the natural gas industry, our second fiscal quarter has historically been our most critical earnings quarter with an average of approximately 62 percent of our consolidated net income having been earned in the second quarter during the three most recently completed fiscal years.
 
Additionally, the seasonality of our business impacts our working capital differently at various times during the year. Typically, our accounts receivable, accounts payable and short-term debt balances peak by the end of January and then start to decline, as customers begin to pay their winter heating bills. Gas stored underground, particularly in our natural gas distribution segment, typically peaks in November and declines as we utilize storage gas to serve our customers.
 
During the current year, prices for several world energy commodities rose to historic levels, most significantly seen in unprecedented oil prices. While natural gas prices did not reach historic levels, they were impacted by financial speculators and large hedge fund trading, particularly during the summer months. As a result, our natural gas distribution segment’s cost of natural gas per Mcf sold increased 12 percent to $9.05 for the current fiscal year compared with $8.09 in the prior fiscal year. Despite these higher prices, we experienced lower price volatility, which reduced our natural gas marketing segment’s opportunity to earn arbitrage gains.
 
Although gas costs do not directly impact our natural gas distribution gross profit margin, higher natural gas prices could cause our natural gas distribution customers and customers served by our other operating segments to conserve, or in the case of industrial customers, switch to less expensive fuel sources. Further, higher natural gas prices may adversely impact our accounts receivable collections, resulting in higher bad debt expense, and may require us to increase borrowings under our credit facilities resulting in higher interest expense.
 
We normally access the commercial paper markets to finance our working capital needs and growth. However, recent adverse developments in global financial and credit markets have made it more difficult and more expensive for the Company to access the short-term capital markets, including the commercial paper market, to satisfy our liquidity requirements. Despite these conditions, we believe the amounts available to us under our credit facilities coupled with our operating cash flows will provide the necessary liquidity to fund our working capital needs for fiscal year 2009.


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Consolidated Results
 
The following table presents our consolidated financial highlights for the fiscal years ended September 30, 2008, 2007 and 2006.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands, except per share data)  
 
Operating revenues
  $ 7,221,305     $ 5,898,431     $ 6,152,363  
Gross profit
    1,321,326       1,250,082       1,216,570  
Operating expenses
    893,431       851,446       833,954  
Operating income
    427,895       398,636       382,616  
Miscellaneous income
    2,731       9,184       881  
Interest charges
    137,922       145,236       146,607  
Income before income taxes
    292,704       262,584       236,890  
Income tax expense
    112,373       94,092       89,153  
Net income
  $ 180,331     $ 168,492     $ 147,737  
Earnings per diluted share
  $ 2.00     $ 1.92     $ 1.82  
 
Historically, our regulated operations arising from our natural gas distribution and regulated transmission and storage operations contributed 65 to 85 percent of our consolidated net income. Regulated operations contributed 74 percent, 64 percent and 54 percent to our consolidated net income for fiscal years 2008, 2007, and 2006. Our consolidated net income during the last three fiscal years was earned across our business segments as follows:
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands)  
 
Natural gas distribution segment
  $ 92,648     $ 73,283     $ 53,002  
Regulated transmission and storage segment
    41,425       34,590       26,547  
Natural gas marketing segment
    29,989       45,769       58,566  
Pipeline, storage and other segment
    16,269       14,850       9,622  
                         
Net income
  $ 180,331     $ 168,492     $ 147,737  
                         
 
The following table segregates our consolidated net income and diluted earnings per share between our regulated and nonregulated operations:
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands, except per share data)  
 
Regulated operations
  $ 134,073     $ 107,873     $ 79,549  
Nonregulated operations
    46,258       60,619       68,188  
                         
Consolidated net income
  $ 180,331     $ 168,492     $ 147,737  
                         
Diluted EPS from regulated operations
  $ 1.49     $ 1.23     $ 0.98  
Diluted EPS from nonregulated operations
    0.51       0.69       0.84  
                         
Consolidated diluted EPS
  $ 2.00     $ 1.92     $ 1.82  
                         
 
Year-over-year, net income during fiscal 2008 increased seven percent. Net income from our regulated operations increased 24 percent during fiscal 2008. The increase primarily reflects a net $53.8 million increase in gross profit resulting from our ratemaking efforts, coupled with higher per-unit transportation margins and an 18 percent increase in consolidated throughput in our Atmos Pipeline — Texas Division. These increases were partially offset by a four percent increase in operating expenses. Net income in our nonregulated


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operations experienced a 24 percent decline as less volatile natural gas market conditions significantly reduced our asset optimization margins. However, higher delivered gas margins in our natural gas marketing segment and unrealized margins partially offset this decrease.
 
The 14 percent year-over-year increase in net income during fiscal 2007 reflects improvements across all business segments. Results from our regulated operations reflect the net favorable impact of various ratemaking rulings in our natural gas distribution segment, including the implementation of WNA in our Mid-Tex and Louisiana Divisions coupled with increased throughput and incremental gross profit margins from our North Side Loop project and other pipeline compression projects completed in fiscal 2006. The decrease in net income from our nonregulated operations primarily reflects the impact of a less volatile natural gas market, which reduced delivered gas margins despite a 31 percent increase in sales volumes. However, our nonregulated operations benefited from higher asset optimization margins, primarily in the pipeline, storage and other segment.
 
Other key financial and significant events for the fiscal year ended September 30, 2008 include the following:
 
  •  For the fiscal year ended September 30, 2008, we generated $370.9 million in operating cash flow compared with $547.1 million for the fiscal year ended September 30, 2007, primarily reflecting the unfavorable timing of gas cost collections from our customers and cash payments to collateralize our risk management liabilities.
 
  •  Capital expenditures increased to $472.3 million during the fiscal year ended September 30, 2008 from $392.4 million in the prior year. The increase primarily reflects an increase in compliance spending and main replacements in our Mid-Tex Division, spending in the natural gas distribution segment for our new automated meter reading initiative and spending for two nonregulated growth projects.
 
  •  We repaid $10.3 million of long-term debt during the fiscal year ended September 30, 2008 compared with a net reduction of long-term debt of $56.0 million during the prior year. The decreased payments during the current year reflect regularly scheduled maturity payments compared with the prior fiscal year, which reflect the repayment of $303.2 million of unsecured floating rate senior notes with $247.2 million of net proceeds received from the issuance of ten year senior notes.
 
  •  We maintained our capitalization ratio within our targeted range of 50 to 55 percent despite higher short-term borrowings under our existing 5-year credit facility to fund seasonal natural gas purchases at higher prices.
 
See the following discussion regarding the results of operations for each of our business operating segments.
 
Fiscal year ended September 30, 2008 compared with fiscal year ended September 30, 2007
 
Natural Gas Distribution Segment
 
The primary factors that impact the results of our natural gas distribution operations are our ability to earn our authorized rates of return, the cost of natural gas, competitive factors in the energy industry and economic conditions in our service areas.
 
Our ability to earn our authorized rates is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and, ultimately, separating the recovery of our approved margins from customer usage patterns. Improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions. The “Ratemaking Activity” section of this Form 10-K describes our current rate strategy and recent ratemaking initiatives in more detail.
 
Our natural gas distribution operations are also affected by the cost of natural gas. The cost of gas is passed through to our customers without markup. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe gross profit is a better indicator of our financial performance than revenues. However, gross profit in our Texas and Mississippi service areas include franchise


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fees and gross receipts taxes, which are calculated as a percentage of revenue (inclusive of gas costs). Therefore, the amount of these taxes included in revenues is influenced by the cost of gas and the level of gas sales volumes. We record the tax expense as a component of taxes, other than income. Although changes in revenue-related taxes arising from changes in gas costs affect gross profit, over time the impact is offset within operating income. Timing differences exist between the recognition of revenue for franchise fees collected from our customers and the recognition of expense of franchise taxes. The effect of these timing differences can be significant in periods of volatile gas prices, particularly in our Mid-Tex Division. These timing differences may favorably or unfavorably affect net income; however, these amounts should offset over time with no permanent impact on net income.
 
Higher gas costs may also adversely impact our accounts receivable collections, resulting in higher bad debt expense, and may require us to increase borrowings under our credit facilities resulting in higher interest expense. Finally, higher gas costs, as well as competitive factors in the industry and general economic conditions may cause customers to conserve or use alternative energy sources.
 
Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas distribution segment for the fiscal years ended September 30, 2008 and 2007 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 1,006,066     $ 952,684     $ 53,382  
Operating expenses
    744,901       731,497       13,404  
                         
Operating income
    261,165       221,187       39,978  
Miscellaneous income
    9,689       8,945       744  
Interest charges
    117,933       121,626       (3,693 )
                         
Income before income taxes
    152,921       108,506       44,415  
Income tax expense
    60,273       35,223       25,050  
                         
Net income
  $ 92,648     $ 73,283     $ 19,365  
                         
Consolidated natural gas distribution sales volumes — MMcf
    292,676       297,327       (4,651 )
Consolidated natural gas distribution transportation volumes — MMcf
    136,678       130,542       6,136  
                         
Total consolidated natural gas distribution throughput — MMcf
    429,354       427,869       1,485  
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.44     $ 0.45     $ (0.01 )
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 9.05     $ 8.09     $ 0.96  


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The following table shows our operating income by natural gas distribution division for the fiscal years ended September 30, 2008 and 2007. The presentation of our natural gas distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     Change  
    (In thousands)  
 
Mid-Tex
  $ 115,009     $ 68,574     $ 46,435  
Kentucky/Mid-States
    48,731       42,161       6,570  
Louisiana
    39,090       44,193       (5,103 )
West Texas
    13,843       21,036       (7,193 )
Mississippi
    19,970       23,225       (3,255 )
Colorado-Kansas
    20,615       22,392       (1,777 )
Other
    3,907       (394 )     4,301  
                         
Total
  $ 261,165     $ 221,187     $ 39,978  
                         
 
The $53.4 million increase in natural gas distribution gross profit primarily reflects a $40.7 million net increase in rates. The net increase in rates primarily was attributable to the Mid-Tex Division which increased $29.2 million as a result of its 2006 GRIP filing, the previous and current year Mid-Tex rate cases and the absence of a one time GRIP refund that occurred in the prior year. The current year also reflects $14.4 million in rate increases in our Kansas, Kentucky, Louisiana, Tennessee and West Texas service areas. In addition, the prior year includes a $7.5 million accrual for estimated unrecoverable gas costs that did not recur in the current year.
 
Gross profit also increased approximately $8.6 million from revenue-related taxes primarily due to higher revenues, on which the tax is calculated, in the current year compared to the prior year. This increase, partially offset by a $7.2 million period-over-period increase in the associated franchise and state gross receipts tax expense recorded as a component of taxes other than income, resulted in a $1.4 million increase in operating income, when compared with the prior year.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes, other than income, increased by a net $13.4 million.
 
The net increase was primarily reflected in our operation and maintenance expense, excluding the provision for doubtful accounts, which increased $13.3 million compared with the prior year. The increase principally reflects higher employee and administrative costs in addition to increased natural gas odorization and fuel costs attributable to higher commodity prices. The increase in operation and maintenance expense also reflects the absence in the current-year period of a nonrecurring $4.3 million deferral of hurricane-related operation and maintenance expenses in the prior year.
 
The provision for doubtful accounts decreased $3.2 million to $16.6 million for the fiscal year ended September 30, 2008, which reflects our continued effective collection efforts, despite a 12 percent rise in our average cost of gas per Mcf sold. As a result of these efforts, our provision for doubtful accounts as a percentage of revenue decreased from 0.61 percent in fiscal 2007 to 0.47 percent in fiscal 2008.
 
Operating expenses for the prior year also include a $3.3 million noncash charge associated with the write-off of software costs.
 
The decrease in operating expenses attributable to the lower provision for doubtful accounts and the absence of the prior year charge were offset by the aforementioned increase in franchise and gross receipt taxes.
 
Miscellaneous Income
 
The increase in miscellaneous income primarily reflects the recognition of a $1.2 million gain on the sale of irrigation assets in our West Texas Division during the fiscal 2008 second quarter.


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Interest charges
 
Interest charges allocated to the natural gas distribution segment decreased $3.7 million due to lower average outstanding short-term debt balances in the current year compared with the prior year.
 
Regulated Transmission and Storage Segment
 
Our regulated transmission and storage segment consists of the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division. The Atmos Pipeline — Texas Division transports natural gas to our Mid-Tex Division and third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary in the pipeline industry including parking arrangements, lending and sales of inventory on hand.
 
Similar to our natural gas distribution segment, our regulated transmission and storage segment is impacted by seasonal weather patterns, competitive factors in the energy industry and economic conditions in our service areas. Natural gas prices do not directly impact the results of this segment as revenues are derived from the transportation of natural gas. However, natural gas prices could influence the level of drilling activity in the markets that we serve, which may influence the level of throughput we may be able to transport on our pipeline. Further, as the Atmos Pipeline — Texas Division operations supply all of the natural gas for our Mid-Tex Division, the results of this segment are highly dependent upon the natural gas requirements of the Mid-Tex Division. Finally, as a regulated pipeline, the operations of the Atmos Pipeline — Texas Division may be impacted by the timing of when costs and expenses are incurred and when these costs and expenses are recovered through its tariffs.
 
Review of Financial and Operating Results
 
Financial and operational highlights for our regulated transmission and storage segment for the fiscal years ended September 30, 2008 and 2007 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Mid-Tex Division transportation
  $ 86,665     $ 77,090     $ 9,575  
Third-party transportation
    85,256       65,158       20,098  
Storage and park and lend services
    9,746       9,374       372  
Other
    14,250       11,607       2,643  
                         
Gross profit
    195,917       163,229       32,688  
Operating expenses
    106,172       83,399       22,773  
                         
Operating income
    89,745       79,830       9,915  
Miscellaneous income
    1,354       2,105       (751 )
Interest charges
    27,049       27,917       (868 )
                         
Income before income taxes
    64,050       54,018       10,032  
Income tax expense
    22,625       19,428       3,197  
                         
Net income
  $ 41,425     $ 34,590     $ 6,835  
                         
Gross pipeline transportation volumes — MMcf
    782,876       699,006       83,870  
                         
Consolidated pipeline transportation volumes — MMcf
    595,542       505,493       90,049  
                         
 
The $32.7 million increase in gross profit primarily was attributable to a $13.1 million increase from rate adjustments resulting from our 2006 and 2007 GRIP filings and an $8.3 million increase from transportation volumes. Consolidated throughput increased 18 percent primarily due to increased transportation in the Barnett Shale region of Texas. The improvement in gross profit also reflects increased service fees and per-unit transportation margins due to favorable market conditions which contributed $8.0 million. New compression


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contracts and transportation capacity enhancements also contributed $1.5 million. In addition, sales of excess gas increased $1.3 million compared to the prior year.
 
Operating expenses increased $22.8 million primarily due to increased pipeline integrity and maintenance costs.
 
Natural Gas Marketing Segment
 
Our natural gas marketing activities are conducted through AEM, which aggregates and purchases gas supply, arranges transportation and/or storage logistics and ultimately delivers gas to our customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers request, including furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of financial instruments. As a result, our revenues arise from the types of commercial transactions we have structured with our customers and include the value we extract by optimizing the storage and transportation capacity we own or control as well as revenues for services we deliver.
 
Our asset optimization activities seek to maximize the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We purchase physical natural gas and then sell financial instruments at advantageous prices to lock in a gross profit margin. We also seek to participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve our customers by identifying the lowest cost alternative within the natural gas supplies, transportation and markets to which we have access. Through the use of transportation and storage services and financial instruments, we also seek to capture gross profit margin through the arbitrage of pricing differences that exist in various locations and by recognizing pricing differences that occur over time.
 
AEM continually manages its net physical position to attempt to increase the future economic profit that was created when the original transaction was executed. Therefore, AEM may subsequently change its originally scheduled storage injection and withdrawal plans from one time period to another based on market conditions and recognize any associated gains or losses at that time. If AEM elects to accelerate the withdrawal of physical gas, it will execute new financial instruments to hedge the original financial instruments. If AEM elects to defer the withdrawal of gas, it will reset its financial instruments to correspond to the revised withdrawal schedule and execute new financial instruments to offset the original financial instruments.
 
We use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our natural gas marketing storage activities. These financial instruments are marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains and losses in the period of change. The hedged natural gas inventory is marked to market at the end of each month based on the Gas Daily index with changes in fair value recognized as unrealized gains and losses in the period of change. Changes in the spreads between the forward natural gas prices used to value the financial hedges designated against our physical inventory and the market (spot) prices used to value our physical storage result in unrealized margins until the underlying physical gas is withdrawn and the related financial instruments are settled. Once the gas is withdrawn and the financial instruments are settled, the previously unrealized margins associated with these net positions are realized.
 
AEM also uses financial instruments to capture additional storage arbitrage opportunities that may arise after the original physical inventory hedge and to attempt to insulate and protect the economic value within its asset optimization activities. Changes in fair value associated with these financial instruments are recognized as a component of unrealized margins until they are settled.


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Due to the nature of these operations, natural gas prices have a significant impact on our natural gas marketing operations. Within our delivered gas activities, higher natural gas prices may adversely impact our accounts receivable collections, resulting in higher bad debt expense, and may require us to increase borrowings under our credit facilities resulting in higher interest expense. Higher gas prices, as well as competitive factors in the industry and general economic conditions may also cause customers to conserve or use alternative energy sources. Within our asset optimization activities, higher gas prices could also lead to increased borrowings under our credit facilities resulting in higher interest expense.
 
Volatility in natural gas prices also has a significant impact on our natural gas marketing segment. Increased price volatility often has a significant impact on the spreads between the market (spot) prices and forward natural gas prices, which creates opportunities to earn higher arbitrage spreads within our asset optimization activities. However, increased volatility impacts the amounts of unrealized margins recorded in our gross profit and could impact the amount of cash required to collateralize our risk management liabilities.
 
Review of Financial and Operating Results
 
Financial and operational highlights for our natural gas marketing segment for the fiscal years ended September 30, 2008 and 2007 are presented below. Gross profit margin consists primarily of margins earned from the delivery of gas and related services requested by our customers and margins earned from asset optimization activities, which are derived from the utilization of our proprietary and managed third party storage and transportation assets to capture favorable arbitrage spreads through natural gas trading activities.
 
Unrealized margins represent the unrealized gains or losses on our net physical position and the related financial instruments used to manage commodity price risk as described above. These margins fluctuate based upon changes in the spreads between the physical and forward natural gas prices. Generally, if the physical/financial spread narrows, we will record unrealized gains or lower unrealized losses. If the physical/financial spread widens, we will record unrealized losses or lower unrealized gains. The magnitude of the unrealized gains and losses is also dependent upon the levels of our net physical position at the end of the reporting period.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     Change  
    (In thousands, unless otherwise noted)  
 
Realized margins
                       
Delivered gas
  $ 73,627     $ 57,054     $ 16,573  
Asset optimization
    (6,135 )     28,827       (34,962 )
                         
      67,492       85,881       (18,389 )
Unrealized margins
    25,529       18,430       7,099  
                         
Gross profit
    93,021       104,311       (11,290 )
Operating expenses
    36,629       29,271       7,358  
                         
Operating income
    56,392       75,040       (18,648 )
Miscellaneous income
    2,022       6,434       (4,412 )
Interest charges
    9,036       5,767       3,269  
                         
Income before income taxes
    49,378       75,707       (26,329 )
Income tax expense
    19,389       29,938       (10,549 )
                         
Net income
  $ 29,989     $ 45,769     $ (15,780 )
                         
Gross natural gas marketing sales volumes — MMcf
    457,952       423,895       34,057  
                         
Consolidated natural gas marketing sales volumes — MMcf
    389,392       370,668       18,724  
                         
Net physical position (Bcf)
    8.0       12.3       (4.3 )
                         
 
The $11.3 million decrease in our natural gas marketing segment’s gross profit primarily reflects a $35.0 million decrease in realized asset optimization margins. As a result of less volatile natural gas market conditions experienced during the current year, AEM regularly deferred storage withdrawals and reset the


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associated financial instruments to increase the potential gross profit it could realize from its asset optimization activities in future periods. As a result, AEM recognized settlement losses without corresponding storage withdrawal gains during the current year. Additionally, AEM experienced increased storage fees charged by third parties during the current year. In the prior year, AEM was able to recognize arbitrage gains as changes in its originally scheduled storage injection and withdrawal plans had a significantly smaller impact than in the current year.
 
The decrease in realized asset optimization margins was partially offset by a $16.6 million increase in realized delivered gas margins. The increase reflects both increased sales volumes and increased per-unit margins. Gross sales volumes increased eight percent compared with the prior year. The increase in sales volumes reflects the successful execution of our marketing strategies. Our per-unit margin increased 19 percent, which reflects increased basis gains on certain contracts coupled with improved marketing efforts. Excluding the impact of these basis gains, our per-unit margins increased seven percent in the current year.
 
Gross profit margin was also favorably impacted by a $7.1 million increase in unrealized margins attributable to a narrowing of the spreads between current cash prices and forward natural gas prices. The change in unrealized margins also reflects the recognition of previously unrealized margins as a component of realized margins as a result of injecting and withdrawing gas and settling financial instruments as a part of AEM’s asset optimization activities.
 
Operating expenses increased $7.4 million primarily reflecting a $2.4 million increase associated with property taxes coupled with a $5.0 million increase in other administrative costs.
 
Economic Gross Profit
 
AEM monitors the impact of its asset optimization efforts by estimating the gross profit, before associated storage fees, that it captured through the purchase and sale of physical natural gas and the execution of the associated financial instruments. This economic gross profit, combined with the effect of the future reversal of unrealized gains or losses currently recognized in the income statement is referred to as the potential gross profit. (1) The following table presents AEM’s economic gross profit and its potential gross profit at September 30, 2008, 2007 and 2006.
 
                                 
                Associated Net
       
    Net Physical
    Economic Gross
    Unrealized Gain
    Potential Gross
 
Period Ending
  Position     Profit     (Loss)     Profit  
    (Bcf)     (In millions)     (In millions)     (In millions)  
 
September 30, 2008
    8.0     $ 48.5     $ 36.4     $ 12.1  
September 30, 2007
    12.3     $ 40.8     $ 10.8     $ 30.0  
September 30, 2006
    14.5     $ 60.0     $ (16.0 )   $ 76.0  
 
 
(1) Potential gross profit represents the increase in AEM’s gross profit in future periods if its optimization efforts are executed as planned. This amount does not include storage and other operating expenses and increased income taxes that will be incurred to realize this amount. Therefore, it does not represent an estimated increase in future net income. There is no assurance that the economic gross profit or the potential gross profit will be fully realized in the future. We consider this measure a non-GAAP financial measure as it is calculated using both forward-looking storage injection/withdrawal and hedge settlement estimates and historical financial information. This measure is presented because we believe it provides a more comprehensive view to investors of our asset optimization efforts and thus a better understanding of these activities than would be presented by GAAP measures alone.
 
As of September 30, 2008, based upon AEM’s planned inventory withdrawal schedule and associated planned settlement of financial instruments, the economic gross profit was $48.5 million. This amount will be reduced by $36.4 million of net unrealized gains recorded in the financial statements as of September 30, 2008 that will reverse when the inventory is withdrawn and the accompanying financial instruments are settled. Therefore, the potential gross profit was $12.1 million at September 30, 2008.


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The economic gross profit is based upon planned storage injection and withdrawal schedules and its realization is contingent upon the execution of this plan, weather and other execution factors. Since AEM actively manages and optimizes its portfolio to attempt to enhance the future profitability of its storage position, it may change its scheduled storage injection and withdrawal plans from one time period to another based on market conditions. Therefore, we cannot ensure that the economic gross profit or the potential gross profit calculated as of September 30, 2008 will be fully realized in the future nor can we predict in what time periods such realization may occur. Further, if we experience operational or other issues which limit our ability to optimally manage our stored gas positions, our earnings could be adversely impacted. Assuming AEM fully executes its plan in place on September 30, 2008, without encountering operational or other issues, we anticipate the majority of the potential gross profit as of September 30, 2008 will be recognized during the first quarter of fiscal 2009 with the remainder recognized over the remaining months in fiscal 2009.
 
Pipeline, Storage and Other Segment
 
Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., which are each wholly-owned by AEH.
 
APS owns and operates a 21 mile pipeline located in New Orleans, Louisiana. This pipeline is primarily used to aggregate gas supply for our regulated natural gas distribution division in Louisiana and for AEM. However, it also provides limited third party transportation services. APS also owns or has an interest in underground storage fields in Kentucky and Louisiana. We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Finally, beginning in fiscal 2006, APS initiated activities in the natural gas gathering business. As of September 30, 2008, these activities were limited in nature.
 
APS also engages in limited asset optimization activities whereby it seeks to maximize the economic value associated with the storage and transportation capacity it owns or controls. Most of these arrangements are with regulated affiliates of the Company and have been approved by applicable state regulatory commissions. Generally, these arrangements require APS to share with our regulated customers a portion of the profits earned from these arrangements.
 
AES, through December 31, 2006, provided natural gas management services to our natural gas distribution operations, other than the Mid-Tex Division. These services included aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to our natural gas distribution service areas at competitive prices. Effective January 1, 2007, our shared services function began providing these services to our natural gas distribution operations. AES continues to provide limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services.
 
Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles.
 
Results for this segment are primarily impacted by seasonal weather patterns and, similar to our natural gas marketing segment, volatility in the natural gas markets. Additionally, this segment’s results include an unrealized component as APS hedges its risk associated with its asset optimization activities.


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Review of Financial and Operating Results
 
Financial and operational highlights for our pipeline, storage and other segment for the fiscal years ended September 30, 2008 and 2007 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     Change  
    (In thousands)  
 
Storage and transportation services
  $ 13,469     $ 13,532     $ (63 )
Asset optimization
    5,178       11,868       (6,690 )
Other
    4,961       5,111       (150 )
Unrealized margins
    4,705       2,097       2,608  
                         
Gross profit
    28,313       32,608       (4,295 )
Operating expenses
    8,064       10,373       (2,309 )
                         
Operating income
    20,249       22,235       (1,986 )
Miscellaneous income
    8,428       8,173       255  
Interest charges
    2,322       6,055       (3,733 )
                         
Income before income taxes
    26,355       24,353       2,002  
Income tax expense
    10,086       9,503       583  
                         
Net income
  $ 16,269     $ 14,850     $ 1,419  
                         
 
Pipeline, storage and other gross profit decreased $4.3 million primarily due to a $6.7 million decrease in asset optimization margins as a result of a less volatile natural gas market. The decrease in asset optimization margins was partially offset by an increase of $2.6 million in unrealized margins associated with asset optimization activities.
 
Operating expenses decreased $2.3 million primarily due to the absence in the current year of a $3.0 million noncash charge recorded in the prior year related to the write-off of costs associated with a natural gas gathering project.


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Fiscal year ended September 30, 2007 compared with fiscal year ended September 30, 2006
 
Natural Gas Distribution Segment
 
Financial and operational highlights for our natural gas distribution segment for the fiscal years ended September 30, 2007 and 2006 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2007     2006     Change  
    (In thousands, unless otherwise noted)  
 
Gross profit
  $ 952,684     $ 925,057     $ 27,627  
Operating expenses
    731,497       723,163       8,334  
                         
Operating income
    221,187       201,894       19,293  
Miscellaneous income
    8,945       9,506       (561 )
Interest charges
    121,626       126,489       (4,863 )
                         
Income before income taxes
    108,506       84,911       23,595  
Income tax expense
    35,223       31,909       3,314  
                         
Net income
  $ 73,283     $ 53,002     $ 20,281  
                         
Consolidated natural gas distribution sales volumes — MMcf
    297,327       272,033       25,294  
Consolidated natural gas distribution transportation volumes — MMcf
    130,542       121,962       8,580  
                         
Total consolidated natural gas distribution throughput — MMcf
    427,869       393,995       33,874  
                         
Consolidated natural gas distribution average transportation revenue per Mcf
  $ 0.45     $ 0.50     $ (0.05 )
Consolidated natural gas distribution average cost of gas per Mcf sold
  $ 8.09     $ 10.02     $ (1.93 )
 
The following table shows our operating income by natural gas distribution division for the fiscal years ended September 30, 2007 and 2006. The presentation of our natural gas distribution operating income is included for financial reporting purposes and may not be appropriate for ratemaking purposes.
 
                                 
    2007     2006  
          Heating Degree
          Heating Degree
 
    Operating
    Days Percent
    Operating
    Days Percent
 
    Income     of Normal (1)     Income     of Normal (1)  
    (In thousands, except degree day information)  
 
Mid-Tex
  $ 68,574       100 %   $ 71,703       72 %
Kentucky/Mid-States
    42,161       97 %     49,893       98 %
Louisiana
    44,193       105 %     27,772       78 %
West Texas
    21,036       99 %     2,215       100 %
Mississippi
    23,225       101 %     23,276       102 %
Colorado-Kansas
    22,392       104 %     22,524       99 %
Other
    (394 )           4,511        
                                 
Total
  $ 221,187       100 %   $ 201,894       87 %
                                 
 
 
(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 $27.6 million increase in natural gas distribution gross profit primarily reflects a nine percent increase in throughput and the impact of having WNA coverage for more than 90 percent of our residential


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and commercial customers, partially offset by an accrual for estimated unrecoverable gas costs and lower irrigation margins discussed below. The impact of higher throughput and greater WNA coverage increased gross profit by $38.6 million. Included in this amount was a $10.8 million increase associated with the implementation of WNA in our Mid-Tex and Louisiana Divisions beginning with the 2006-2007 winter heating season.
 
As a result of the Mid-Tex rate case, our gas distribution gross profit increased by $5.4 million compared to the prior year. This increase was partially offset by a decrease in Mid-Tex transportation revenue as the rate case reduced the transportation rates for certain customer classes. The Mid-Tex rate case also required the refund of $2.9 million collected under GRIP, which reduced gross profit in the current year.
 
Favorable regulatory activity in the current year increased gross profit by $24.4 million, primarily due to an $11.8 million increase in GRIP-related recoveries and a $10.2 million increase from our Rate Stabilization Clause (RSC) filings in our Louisiana service areas. These increases were partially offset by an $11.6 million decrease in gross profit associated with regulatory rulings in our Tennessee, Louisiana and Virginia jurisdictions.
 
Offsetting these increases in gross profit was a reduction in revenue-related taxes. Due to a significant decline in the cost of gas in the current-year period compared with the prior-year period, franchise and state gross receipts taxes included in gross profit decreased approximately $2.7 million; however, franchise and state gross receipts tax expense recorded as a component of taxes, other than income decreased $5.4 million, which resulted in a $2.7 million increase in operating income when compared with the prior-year period.
 
Natural gas distribution gross profit also reflects a $7.5 million accrual for estimated unrecoverable gas costs. The remaining decrease in gross profit primarily is attributable to lower irrigation margins and a reduction in pass-through surcharges used to recover various costs as these costs were fully recovered by the end of fiscal 2006 and during fiscal 2007.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense, taxes, other than income, and impairment of long-lived assets, increased to $731.5 million for the fiscal year ended September 30, 2007 from $723.2 million for the fiscal year ended September 30, 2006.
 
Operation and maintenance expense, excluding the provision for doubtful accounts, increased $22.4 million, primarily due to increased employee and other administrative costs. These increases include the personnel and other operating costs associated with the transfer of our gas supply function from our pipeline, storage and other segment to our natural gas distribution segment effective January 1, 2007. Partially offsetting these increases was the deferral of $4.3 million of operation and maintenance expense in our Louisiana Division resulting from the Louisiana Public Service Commission’s ruling to allow recovery of all incremental operation and maintenance expense incurred in fiscal 2005 and 2006 in connection with our Hurricane Katrina recovery efforts.
 
The provision for doubtful accounts decreased $0.8 million to $19.8 million for the fiscal year ended September 30, 2007. The decrease primarily was attributable to reduced collection risk as a result of lower natural gas prices. In the natural gas distribution segment, the average cost of natural gas for the fiscal year ended September 30, 2007 was $8.09 per Mcf, compared with $10.02 per Mcf for the year ended September 30, 2006.
 
Depreciation and amortization expense increased $12.7 million for the fiscal year ended September 30, 2007 compared with the prior-year period. The increase was primarily attributable to increases in assets placed in service during fiscal 2007. Additionally, the increase was partially attributable to the absence in the current-year period of a $2.8 million reduction in depreciation expense recorded in the prior-year period arising from the Mississippi Public Service Commission’s decision to allow certain deferred costs in our rate base.
 
Operating expenses for the fiscal year ended September 30, 2007 included a $3.3 million noncash charge associated with the write-off of costs for software that will no longer be used. Fiscal 2006 results included a $22.9 million noncash charge to impair the West Texas Division irrigation properties.


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Interest charges
 
Interest charges allocated to the natural gas distribution segment for the fiscal year ended September 30, 2007 decreased to $121.6 million from $126.5 million for the fiscal year ended September 30, 2006. The decrease primarily was attributable to lower average outstanding short-term debt balances in the current-year period compared with the prior-year period.
 
Regulated Transmission and Storage Segment
 
Financial and operational highlights for our regulated transmission and storage segment for the fiscal years ended September 30, 2007 and 2006 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2007     2006     Change  
    (In thousands, unless otherwise noted)  
 
Mid-Tex Division transportation
  $ 77,090     $ 69,925     $ 7,165  
Third-party transportation
    65,158       56,813       8,345  
Storage and park and lend services
    9,374       8,047       1,327  
Other
    11,607       6,348       5,259  
                         
Gross profit
    163,229       141,133       22,096  
Operating expenses
    83,399       77,807       5,592  
                         
Operating income
    79,830       63,326       16,504  
Miscellaneous income (expense)
    2,105       (153 )     2,258  
Interest charges
    27,917       22,787       5,130  
                         
Income before income taxes
    54,018       40,386       13,632  
Income tax expense
    19,428       13,839       5,589  
                         
Net income
  $ 34,590     $ 26,547     $ 8,043  
                         
Gross pipeline transportation volumes — MMcf
    699,006       581,272       117,734  
                         
Consolidated pipeline transportation volumes — MMcf
    505,493       410,505       94,988  
                         
 
The $22.1 million increase in gross profit primarily is attributable to a 23 percent increase in throughput due to colder weather in the current year and incremental volumes from the North Side Loop and other compression projects. These activities increased gross profit by $16.2 million, of which, $10.8 million was associated with our North Side Loop and other compression projects completed in fiscal 2006. Increases in gross profit also include a $3.1 million increase from rate adjustments resulting from our 2005 GRIP filing, a $2.1 million increase from the sale of excess gas inventory and a $2.0 million increase from new or renegotiated blending and capacity enhancement contracts.
 
Operating expenses increased to $83.4 million for the fiscal year ended September 30, 2007 from $77.8 million for the fiscal year ended September 30, 2006 due to higher administrative and other operating costs primarily associated with the North Side Loop and other compression projects that were completed in fiscal 2006.
 
Interest charges
 
Interest charges allocated to the pipeline and storage segment for the fiscal year ended September 30, 2007 increased to $27.9 million from $22.8 million for the fiscal year ended September 30, 2006. The increase was attributable to the use of updated allocation factors for fiscal 2007. These factors are reviewed and updated on an annual basis.


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Natural Gas Marketing Segment
 
Financial and operational highlights for our natural gas marketing segment for the fiscal years ended September 30, 2007 and 2006 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2007     2006     Change  
    (In thousands, unless otherwise noted)  
 
Realized margins
                       
Delivered gas
  $ 57,054     $ 87,236     $ (30,182 )
Asset optimization
    28,827       26,225       2,602  
                         
      85,881       113,461       (27,580 )
Unrealized margins
    18,430       17,166       1,264  
                         
Gross profit
    104,311       130,627       (26,316 )
Operating expenses
    29,271       28,392       879  
                         
Operating income
    75,040       102,235       (27,195 )
Miscellaneous income
    6,434       2,598       3,836  
Interest charges
    5,767       8,510       (2,743 )
                         
Income before income taxes
    75,707       96,323       (20,616 )
Income tax expense
    29,938       37,757       (7,819 )
                         
Net income
  $ 45,769     $ 58,566     $ (12,797 )
                         
Gross natural gas marketing sales volumes — MMcf
    423,895       336,516       87,379  
                         
Consolidated natural gas marketing sales volumes — MMcf
    370,668       283,962       86,706  
                         
Net physical position (Bcf)
    12.3       14.5       (2.2 )
                         
 
The $26.3 million decrease in our natural gas marketing segment’s gross profit primarily reflects a $30.2 million decrease in delivered gas margins. This decrease reflects the impact of a less volatile market, which reduced opportunities to take advantage of pricing differences between hubs, partially offset by a 31 percent increase in sales volumes attributable to successful execution of our marketing strategies and colder weather in the 2007 fiscal year compared with the 2006 fiscal year.
 
Asset optimization margins increased $2.6 million compared with the 2006 fiscal year. The increase reflects greater cycled storage volumes as a result of accelerating storage withdrawals scheduled in future periods to capture greater arbitrage gains during the current-year period, partially offset by an increase in storage fees and park and loan fees which reduced the arbitrage spreads available.
 
Gross profit margin was also favorably impacted by a $1.3 million increase in unrealized margins attributable to a narrowing of the spreads between current cash prices and forward natural gas prices. The change in unrealized margins also reflects the recognition of previously unrealized margins as a component of realized margins as a result of injecting and withdrawing gas and settling financial instruments as a part of AEM’s asset optimization activities.
 
Operating expenses, which include operation and maintenance expense, provision for doubtful accounts, depreciation and amortization expense and taxes other than income taxes, increased to $29.3 million for the fiscal year ended September 30, 2007 from $28.4 million for the fiscal year ended September 30, 2006. The increase in operating expense primarily was attributable to an increase in employee and other administrative costs.
 
Miscellaneous income
 
Miscellaneous income increased to $6.4 million for the fiscal year ended September 30, 2007 from $2.6 million for the fiscal year ended September 30, 2006. The increase primarily was attributable to increased investment income earned on overnight investments during the current-year period combined with increased


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interest income earned on our margin account associated with increased margin requirements during the current year.
 
Interest charges
 
Interest charges for the fiscal year ended September 30, 2007 decreased to $5.8 million from $8.5 million for the fiscal year ended September 30, 2006. The decrease was attributable to lower borrowing requirements during the current-year period.
 
Pipeline, Storage and Other Segment
 
Financial and operational highlights for our pipeline, storage and other segment for the fiscal years ended September 30, 2007 and 2006 are presented below.
 
                         
    For the Fiscal Year Ended September 30  
    2007     2006     Change  
    (In thousands)  
 
Storage and transportation services
  $ 13,532     $ 8,683     $ 4,849  
Asset optimization
    11,868       4,874       6,994  
Other
    5,111       7,587       (2,476 )
Unrealized margins
    2,097       3,350       (1,253 )
                         
Gross profit
    32,608       24,494       8,114  
Operating expenses
    10,373       9,570       803  
                         
Operating income
    22,235       14,924       7,311  
Miscellaneous income
    8,173       6,858       1,315  
Interest charges
    6,055       6,512       (457 )
                         
Income before income taxes
    24,353       15,270       9,083  
Income tax expense
    9,503       5,648       3,855  
                         
Net income
  $ 14,850     $ 9,622     $ 5,228  
                         
 
Gross profit increased $8.1 million primarily due to APS’ ability to capture more favorable arbitrage spreads from its asset optimization activities, an increase in asset optimization contracts and increased transportation margins.
 
Operating expenses increased to $10.4 million for the fiscal year ended September 30, 2007 from $9.6 million for the fiscal year ended September 30, 2006 primarily due to a $3.0 million noncash charge associated with the write-off of costs associated with a natural gas gathering project. This increase was partially offset by a decrease in employee and other administrative costs associated with the transfer of gas supply operations from the pipeline, storage and other segment to our natural gas distribution segment effective January 1, 2007.
 
Miscellaneous income
 
Miscellaneous income increased to $8.2 million for the fiscal year ended September 30, 2007 from $6.9 million for the fiscal year ended September 30, 2006. The increase was primarily attributable to $2.1 million received from leasing certain mineral interests coupled with an increase in interest income recorded in the pipeline, storage and other segment.
 
Interest charges
 
Interest charges allocated to the pipeline, storage and other segment for the fiscal year ended September 30, 2007 decreased to $6.1 million from $6.5 million for the fiscal year ended September 30, 2006.


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The decrease was attributable to the use of updated allocation factors for fiscal 2007. These factors are reviewed and updated on an annual basis.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our internally generated funds and borrowings under our credit facilities and commercial paper program generally provide the liquidity needed to fund our working capital, capital expenditures and other cash needs. Additionally, from time to time, we raise funds from the public debt and equity capital markets to fund our liquidity needs.
 
We normally access the commercial paper markets to finance our working capital needs and growth. However, recent adverse developments in global financial and credit markets, including the recent failure of a major investment bank and the bailout of or merger between several large financial institutions, have made it more difficult and more expensive for the Company to access the short-term capital markets, including the commercial paper market, to satisfy our liquidity requirements.
 
Consequently, as of September 30, 2008, we had borrowed $330.5 million directly under our five-year committed credit facility that backstops our commercial paper program to fund most of our working capital. Until recently, our five-year committed credit facility allowed us to borrow up to $600 million. However, one lender with a 5.55% share of the commitments has ceased funding under the facility. This has effectively limited the amount that we can borrow to approximately $567 million. The amounts borrowed under the credit facility have been primarily used to purchase large volumes of natural gas in preparation for the upcoming winter heating season. Although our natural gas marketing operations have not been impacted directly in a significant manner yet, continued disruptions in the capital markets could adversely affect the availability of the uncommitted demand credit facility on which such operations substantially relies to conduct its business. A significant reduction in such availability would mean that the Company would need to provide extra liquidity to support the activities of our natural gas marketing business and other nonregulated businesses. Our ability to provide extra liquidity is limited by the terms of our existing lending arrangements with AEH.
 
We have historically supplemented our commercial paper program with a short-term $300 million committed credit facility that must be renewed annually. There were no borrowings under this facility as of September 30, 2008. In October 2008, we replaced this facility upon its termination with a new facility that will allow borrowings up to $212.5 million and expires in October 2009. Additionally, as more fully described in Note 5, the borrowing costs under the new facility will be significantly higher than under the prior facility.
 
We believe the amounts available to us under our existing and new credit facilities coupled with operating cash flow will provide the necessary liquidity to fund our working capital needs, capital expenditures and other expenditures for fiscal year 2009.
 
Cash Flows
 
Our internally generated funds may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, the price for our services, the demand for our services, margin requirements resulting from significant changes in commodity prices, operational risks and other factors.
 
Cash flows from operating activities
 
Year-over-year changes in our operating cash flows primarily are attributable to changes in net income, working capital changes, particularly within our natural gas distribution segment resulting from the price of natural gas and the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries.
 
For the fiscal year ended September 30, 2008, we generated operating cash flow of $370.9 million compared with $547.1 million in fiscal 2007 and $311.4 million in fiscal 2006. The significant factors impacting our operating cash flow for the last three fiscal years are summarized below.


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Fiscal Year ended September 30, 2008
 
Operating cash flows were $176.2 million lower in fiscal 2008 compared to fiscal 2007. The decrease primarily reflects an increase in cash required to collateralize risk management liabilities in our natural gas marketing segment, which reduced operating cash flow by $95.7 million and the unfavorable timing of gas cost collections in our natural gas distribution segment, which reduced operating cash flow by $92.6 million.
 
Fiscal Year ended September 30, 2007
 
Fiscal 2007 operating cash flows reflect the favorable timing of payments for accounts payable and accrued liabilities, which increased operating cash flow by $107.6 million. Additionally, improved management of our deferred gas costs balances increased operating cash flow by $125.2 million. Finally, increased net income and other favorable working capital changes contributed to the increase in operating cash flow. Partially offsetting these increases in operating cash flow was a decrease in customer collections of $84.8 million due to the decrease in the price of natural gas during the fiscal year.
 
Fiscal Year ended September 30, 2006
 
Fiscal 2006 operating cash flows reflect the adverse impact of significantly higher natural gas prices. Year-over-year, unfavorable timing of payments for accounts payable and other accrued liabilities reduced operating cash flow by $523.0 million. Partially offsetting these outflows were higher customer collections ($245.1 million) and reduced payments for natural gas inventories ($102.1 million). Additionally, favorable movements in the market indices used to value our natural gas marketing segment risk management assets and liabilities reduced the amount that we were required to deposit in margin accounts and therefore favorably affected operating cash flow by $126.3 million.
 
Cash flows from investing activities
 
In recent fiscal years, a substantial portion of our cash resources has been used to fund acquisitions and growth projects, our ongoing construction program and improvements to information systems. Our ongoing construction program enables us to provide natural gas distribution services to our existing customer base, expand our natural gas distribution services into new markets, enhance the integrity of our pipelines and, more recently, expand our intrastate pipeline network. In executing our current rate strategy, we are directing discretionary capital spending to jurisdictions that permit us to earn a timely return on our investment. Currently, our Mid-Tex, Louisiana, Mississippi and West Texas natural gas distribution divisions and our Atmos Pipeline — Texas Division have rate designs that provide the opportunity to include in their rate base approved capital costs on a periodic basis without being required to file a rate case.
 
For the fiscal year ended September 30, 2008, we incurred $472.3 million for capital expenditures compared with $392.4 million for the fiscal year ended September 30, 2007 and $425.3 million for the fiscal year ended September 30, 2006. The increase in fiscal 2008 primarily reflects an increase in compliance spending and main replacements in our Mid-Tex Division, spending in the natural gas distribution segment for our new automated meter reading initiative and spending for two nonregulated growth projects. The decrease in capital expenditures in fiscal 2007 primarily reflects the absence of capital expenditures associated with our North Side Loop and other pipeline compression projects, which were completed during the fiscal 2006 third quarter.
 
Cash flows from financing activities
 
For the fiscal years ended September 30, 2008 and 2006, our financing activities provided $98.1 million and $155.3 million in cash compared with cash of $159.3 million used for the fiscal year ended September 30, 2007. Our significant financing activities for the fiscal years ended September 30, 2008, 2007 and 2006 are summarized as follows:
 
  •  During the fiscal years ended September 30, 2008 and 2006, we increased our borrowings under our short-term facilities by $200.2 million and $237.6 million whereas during the fiscal year ended


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  September 30, 2007 we repaid a net $213.2 million under our short-term facilities. Net borrowings under our short-term facilities during fiscal 2008 and 2006 reflect the impact of seasonal natural gas purchases and the effect of higher natural gas prices.
 
  •  We repaid $10.3 million of long-term debt during the fiscal year ended September 30, 2008, compared with $303.2 million during the fiscal year ended September 30, 2007 and $3.3 million during the fiscal year ended September 30, 2006. The increased payments during fiscal 2007 reflect the repayment of our $300 million unsecured floating rate senior notes discussed below.
 
  •  In June 2007, we issued $250 million of 6.35% Senior Notes due 2017. The effective interest rate of this offering, inclusive of all debt issue costs, was 6.45 percent. After giving effect to the settlement of our $100 million Treasury lock agreement in June 2007, the effective rate on these senior notes was reduced to 6.26 percent. We used the net proceeds of $247 million, together with $53 million of available cash, to repay our $300 million unsecured floating rate senior notes, which were redeemed on July 15, 2007.
 
  •  In December 2006, we sold 6.3 million shares of common stock in an offering, including the underwriters’ exercise of their overallotment option of 0.8 million shares, generating net proceeds of approximately $192 million. The net proceeds from this issuance were used to reduce our short-term debt.
 
  •  During the fiscal year ended September 30, 2008, we paid $117.3 million in cash dividends compared with dividend payments of $111.7 million and $102.3 million for the fiscal years ended September 30, 2007 and 2006. The increase in dividends paid over the prior-year reflects the increase in our dividend rate from $1.28 per share during fiscal 2007 to $1.30 per share during fiscal 2008, combined with a 1.5 million increase in shares outstanding due to new share issuances under our various equity plans.
 
  •  During the fiscal year ended September 30, 2008 we issued 1.0 million shares of common stock which generated net proceeds of $25.5 million. In addition, we granted 0.5 million shares of common stock under our 1998 Long-Term Incentive Plan to directors, officers and other participants in the plan.
 
The following table shows the number of shares issued for the fiscal years ended September 30, 2008, 2007 and 2006:
 
                         
    For the Fiscal Year Ended September 30  
    2008     2007     2006  
 
Shares issued:
                       
Direct stock purchase plan
    388,485       325,338       387,833  
Retirement savings plan
    558,014       422,646       442,635  
1998 Long-term incentive plan
    538,450       511,584       366,905  
Long-term stock plan for Mid-States Division
                300  
Outside directors stock-for-fee plan
    3,197       2,453       2,442  
December 2006 equity offering
          6,325,000        
                         
Total shares issued
    1,488,146       7,587,021       1,200,115  
                         
 
Credit Facilities
 
As of September 30, 2008, we had three committed credit facilities totaling $918 million. These facilities included (1) a five-year $600 million unsecured facility expiring December 2011, (2) a $300 million unsecured 364-day facility expiring October 2008, and (3) an $18 million unsecured facility expiring March 2009. However, one lender with a 5.55% share of the commitments under our $600 million and $300 million facilities has ceased funding under these facilities. Further, in October 2008, we replaced our $300 million facility at its termination with a new $212.5 million unsecured 364-day facility. After giving effect to these changes, the amount available to us under our committed credit facilities was $797.2 million. As of September 30, 2008, we had no outstanding letters of credit under these facilities.


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AEM has an uncommitted credit facility that can provide up to $580 million. As of September 30, 2008, the amount available to us under this credit facility, net of outstanding letters of credit, was $212.1 million. Borrowings under our uncommitted credit facilities are made on a when-and-as-needed basis at the discretion of the banks. Our credit capacity and the amount of unused borrowing capacity are affected by the seasonal nature of the natural gas business and our short-term borrowing requirements, which are typically highest during colder winter months.
 
Our working capital needs can vary significantly due to changes in the price of natural gas charged by suppliers and the increased gas supplies required to meet customers’ needs during periods of cold weather. However, we believe these credit facilities, combined with our operating cash flows will be sufficient to fund our working capital needs, our fiscal 2009 capital expenditure program and our common stock dividends. These facilities are described in further detail in Note 5 to the consolidated financial statements.
 
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. As of September 30, 2008, we had approximately $450 million available for issuance under the registration statement. Due to certain restrictions imposed by one state regulatory commission on our ability to issue securities under the registration statement, we are permitted to issue a total of approximately $200 million of equity securities and $250 million of senior debt securities. In addition, due to restrictions imposed by another state regulatory commission, if the credit ratings on our senior unsecured debt were to fall below investment grade from either Standard & Poor’s Corporation (BBB-), Moody’s Investors Services, Inc. (Baa3) or Fitch Ratings, Ltd. (BBB-), our ability to issue any type of debt securities under the registration statement would be suspended until an investment grade rating from all three credit rating agencies was achieved.
 
Credit Ratings
 
Our credit ratings directly affect our ability to obtain short-term and long-term financing, in addition to the cost of such financing. In determining our credit ratings, the rating agencies consider a number of quantitative factors, including debt to total capitalization, operating cash flow relative to outstanding debt, operating cash flow coverage of interest and pension liabilities and funding status. In addition, the rating agencies consider qualitative factors such as consistency of our earnings over time, the quality of our management and business strategy, the risks associated with our regulated and nonregulated businesses and the regulatory structures that govern our rates in the states where we operate.
 
Our debt is rated by three rating agencies: Standard & Poor’s Corporation (S&P), Moody’s Investors Services, Inc. (Moody’s) and Fitch Ratings, Ltd. (Fitch). Our current debt ratings are all considered investment grade and are as follows:
 
                         
    S&P     Moody’s     Fitch  
 
Unsecured senior long-term debt
    BBB       Baa3       BBB+  
Commercial paper
    A-2       P-3       F-2  
 
Currently, with respect to our unsecured senior long-term debt, S&P maintains its positive outlook and Fitch maintains its stable outlook. Moody’s recently reaffirmed its stable outlook. None of our ratings are currently under review. However, a significant reduction in our liquidity caused by more limited access to the private and public credit markets as a result of the recent adverse global financial and credit conditions could trigger a negative change in our ratings outlook or even a reduction in our credit ratings by the three credit rating agencies. This would mean even more limited access to the private and public credit markets and an increase in the costs of such borrowings.
 
A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating for S&P is AAA, Moody’s is Aaa and Fitch is AAA. The lowest investment grade credit rating for S&P is BBB-, Moody’s is Baa3 and Fitch is BBB-. Our credit ratings may be revised or withdrawn at any time by the rating agencies, and each rating should be evaluated independent of any other rating. There can be


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no assurance that a rating will remain in effect for any given period of time or that a rating will not be lowered, or withdrawn entirely, by a rating agency if, in its judgment, circumstances so warrant.
 
Debt Covenants
 
We were in compliance with all of our debt covenants as of September 30, 2008. Our debt covenants are described in Note 5 to the consolidated financial statements.
 
Capitalization
 
The following table presents our capitalization as of September 30, 2008 and 2007:
 
                                 
    September 30  
    2008     2007  
    (In thousands, except percentages)  
 
Short-term debt
  $ 350,542       7.7 %   $ 150,599       3.5 %
Long-term debt
    2,120,577       46.9 %     2,130,146       50.2 %
Shareholders’ equity
    2,052,492       45.4 %     1,965,754       46.3 %
                                 
Total capitalization, including short-term debt
  $ 4,523,611       100.0 %   $ 4,246,499       100.0 %
                                 
 
Total debt as a percentage of total capitalization, including short-term debt, was 54.6 percent and 53.7 percent at September 30, 2008 and 2007. The increase in the debt to capitalization ratio primarily reflects an increase in natural gas prices as of September 30, 2008 compared to the prior year. Our ratio of total debt to capitalization is typically greater during the winter heating season as we make additional short-term borrowings to fund natural gas purchases and meet our working capital requirements. We intend to maintain our capitalization ratio in a target range of 50 to 55 percent through cash flow generated from operations, continued issuance of new common stock under our Direct Stock Purchase Plan and Retirement Savings Plan and access to the equity capital markets.


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Contractual Obligations and Commercial Commitments
 
The following table provides information about contractual obligations and commercial commitments at September 30, 2008.
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In thousands)  
 
Contractual Obligations
                                       
Long-term debt (1)
  $ 2,123,612     $ 785     $ 760,262     $ 252,565     $ 1,110,000  
Short-term debt (1)
    350,542       350,542                    
Interest charges (2)
    939,048       118,858       196,040       143,226       480,924  
Gas purchase commitments (3)
    550,029       418,949       109,454       18,648       2,978  
Capital lease obligations (4)
    1,752       186       372       372       822  
Operating leases (4)
    180,317       18,374       33,925       30,924       97,094  
Demand fees for contracted storage (5)
    33,411       11,511       14,315       6,698       887  
Demand fees for contracted transportation (6)
    104,202       35,522       40,864       14,763       13,053  
Financial instrument obligations (7)
    64,283       58,914       5,369              
Postretirement benefit plan contributions (8)
    163,089       12,703       22,083       28,111       100,192  
Uncertain tax positions (including interest) (9)
    6,731             6,731              
                                         
Total contractual obligations
  $ 4,517,016     $ 1,026,344     $ 1,189,415     $ 495,307     $ 1,805,950  
                                         
 
 
(1) See Note 5 to the consolidated financial statements.
 
(2) Interest charges were calculated using the stated rate for each debt issuance.
 
(3) Gas purchase commitments were determined based upon contractually determined volumes at prices estimated based upon the index specified in the contract, adjusted for estimated basis differentials and contractual discounts as of September 30, 2008.
 
(4) See Note 13 to the consolidated financial statements.
 
(5) Represents third party contractual demand fees for contracted storage in our natural gas marketing and pipeline, storage and other segments. Contractual demand fees for contracted storage for our natural gas distribution segment are excluded as these costs are fully recoverable through our purchase gas adjustment mechanisms.
 
(6) Represents third party contractual demand fees for transportation in our natural gas marketing segment.
 
(7) Represents liabilities for natural gas commodity financial instruments that were valued as of September 30, 2008. The ultimate settlement amounts of these remaining liabilities are unknown because they are subject to continuing market risk until the financial instruments are settled.
 
(8) Represents expected contributions to our postretirement benefit plans.
 
(9) Represents liabilities associated with uncertain tax positions claimed or expected to be claimed on tax returns.
 
AEM has commitments to purchase physical quantities of natural gas under contracts indexed to the forward NYMEX strip or fixed price contracts. At September 30, 2008, AEM was committed to purchase 55.8 Bcf within one year, 35.6 Bcf within one to three years and 0.5 Bcf after three years under indexed contracts. AEM was committed to purchase 1.5 Bcf within one year and less than 0.1 Bcf within one to three years under fixed price contracts with prices ranging from $3.58 to $13.20 per Mcf.


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With the exception of our Mid-Tex Division, our natural gas distribution segment maintains supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract. Our Mid-Tex Division maintains long-term supply contracts to ensure a reliable source of gas for our customers in its service area which obligate it to purchase specified volumes at market prices. The estimated commitments under these contract terms as of September 30, 2008 are reflected in the table above.
 
Risk Management Activities
 
We conduct risk management activities through our natural gas distribution, natural gas marketing and pipeline, storage and other segments. In our natural gas distribution segment, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to reduce our exposure to unusually large winter-period gas price increases. In our natural gas marketing and pipeline, storage and other segments, we manage our exposure to the risk of natural gas price changes and lock in our gross profit margin through a combination of storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. To the extent our inventory cost and actual sales and actual purchases do not correlate with the changes in the market indices we use in our hedges, we could experience ineffectiveness or the hedges may no longer meet the accounting requirements for hedge accounting, resulting in the financial instruments being treated as mark to market instruments through earnings.
 
We record our financial instruments as a component of risk management assets and liabilities, which are classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. Substantially all of our financial instruments are valued using external market quotes and indices.
 
The following table shows the components of the change in fair value of our natural gas distribution segment’s financial instruments for the fiscal year ended September 30, 2008 (in thousands):
 
         
Fair value of contracts at September 30, 2007
  $ (21,053 )
Contracts realized/settled
    (27,580 )
Fair value of new contracts
    (28,308 )
Other changes in value
    13,264  
         
Fair value of contracts at September 30, 2008
  $ (63,677 )
         
 
The fair value of our natural gas distribution segment’s financial instruments at September 30, 2008, is presented below by time period and fair value source:
 
                                         
    Fair Value of Contracts at September 30, 2008  
    Maturity in Years        
    Less
                Greater
    Total Fair
 
Source of Fair Value
  Than 1     1-3     4-5     Than 5     Value  
    (In thousands)  
 
Prices actively quoted
  $ (58,566 )   $ (5,111 )   $     $     $ (63,677 )
Prices based on models and other valuation methods
                             
                                         
Total Fair Value
  $ (58,566 )   $ (5,111 )   $     $     $ (63,677 )
                                         


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The following table shows the components of the change in fair value of our natural gas marketing segment’s financial instruments for the fiscal year ended September 30, 2008 (in thousands):
 
         
Fair value of contracts at September 30, 2007
  $ 26,808  
Contracts realized/settled
    20,363  
Fair value of new contracts
     
Other changes in value
    (30,629 )
         
Fair value of contracts at September 30, 2008
    16,542  
Netting of cash collateral
    56,616  
         
Cash collateral and fair value of contracts at September 30, 2008
  $ 73,158  
         
 
The fair value of our natural gas marketing segment’s financial instruments at September 30, 2008, is presented below by time period and fair value source.
 
                                         
    Fair Value of Contracts at September 30, 2008  
    Maturity in Years        
    Less
                Greater
    Total Fair
 
Source of Fair Value
  Than 1     1-3     4-5     Than 5     Value  
    (In thousands)  
 
Prices actively quoted
  $ 12,356     $ 5,566     $     $     $ 17,922  
Prices based on models and other valuation methods
    (1,029 )     (351 )                 (1,380 )
                                         
Total Fair Value
  $ 11,327     $ 5,215     $     $     $ 16,542  
                                         
 
Pension and Postretirement Benefits Obligations
 
Net Periodic Pension and Postretirement Benefit Costs
 
For the fiscal year ended September 30, 2008, our total net periodic pension and other benefits costs was $47.9 million, compared with $48.6 million and $50.0 million for the fiscal years ended September 30, 2007 and 2006. These costs relating to our natural gas distribution operations are recoverable through our gas distribution rates; however, a portion of these costs is capitalized into our gas distribution rate base. The remaining costs are recorded as a component of operation and maintenance expense.
 
Our total net periodic pension and other benefit costs remained relatively unchanged during the current-year period when compared with the prior-year period as the assumptions we made during our annual pension plan valuation completed June 30, 2007 were consistent with the prior year. 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. At our June 30, 2007 measurement date, the interest rates were consistent with rates at our prior-year measurement date, which resulted in no change to our 6.30 percent discount rate used to determine our fiscal 2008 net periodic and post-retirement cost. In addition, our expected return on our pension plan assets remained constant at 8.25 percent.
 
The decrease in total net periodic pension and other benefits costs during fiscal 2007 compared with fiscal 2006 primarily reflects changes in assumptions we made during our annual pension plan valuation completed June 30, 2006. 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. In the period leading up to our June 30, 2006 measurement date, these interest rates were increasing, which resulted in a 130 basis point increase in our discount rate used to determine our fiscal 2007 net periodic and post-retirement cost to 6.30 percent. This increase had the effect of decreasing the present value of our plan liabilities and associated expenses. This favorable impact was partially offset by the unfavorable impact of reducing the expected return on our pension plan assets by 25 basis points to 8.25 percent, which has the effect of increasing our pension and postretirement benefit costs.


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Pension and Postretirement Plan Funding
 
Generally, our funding policy is to contribute annually an amount that will at least equal the minimum amount required to comply with the Employee Retirement Income Security Act of 1974. However, additional voluntary contributions are made from time to time as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
 
During fiscal 2008 and fiscal 2006, we voluntarily contributed $2.3 million and $2.9 million to the Atmos Energy Corporation Retirement Plan for Mississippi Valley Gas Union Employees. These contributions achieved a desired level of funding for this plan for plan years 2007 and 2005. During fiscal 2007, we did not contribute to our pension plans.
 
We contributed $9.6 million, $11.8 million and $10.9 million to our postretirement benefits plans for the fiscal years ended September 30, 2008, 2007 and 2006. The contributions represent the portion of the postretirement costs we are responsible for under the terms of our plan and minimum funding required by state regulatory commissions.
 
Outlook for Fiscal 2009
 
Effective October 1, 2008, the Company adopted the requirement under SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), that the measurement date used to determine our projected benefit and postretirement obligations and net periodic pension and postretirement costs must correspond to a fiscal year end. In accordance with the transition rules, the fiscal 2009 expense will be based upon market conditions as of September 30, 2008.
 
As of September 30, 2008, interest and corporate bond rates utilized to determine our discount rates, which will impact our fiscal 2009 net periodic pension and postretirement costs, were significantly higher than the interest and corporate bond rates as of June 30, 2007, the measurement date for our fiscal 2008 net periodic cost. Accordingly, we increased our discount rate used to determine our fiscal 2009 pension and benefit costs to 7.57%. We maintained the expected return on our pension plan assets at 8.25 percent, despite the recent decline in the financial markets as we believe this rate reflects the average rate of expected earnings on plan assets that will fund our projected benefit obligation. Although the fair value of our plan assets has declined as the financial markets have declined, the impact of this decline is mitigated by the fact that assets are smoothed for purposes of determining net periodic pension cost. Accordingly, asset gains and losses are recognized over time as a component of net periodic pension and benefit costs for our Pension Account Plan, our largest funded plan. Accordingly, we expect our fiscal 2009 pension and postretirement medical costs to be materially the same as in fiscal 2008.
 
Despite the recent decline in the fair value of the plans’ assets, we were not required to make a minimum funding contribution to our pension plans during fiscal 2008. However, based upon market conditions subsequent to September 30, 2008, the current funded position of the plans and the new funding requirements under the Pension Protection Act (PPA), we believe it is reasonably possible that we will be required to contribute to the plans in fiscal 2009. Further, we will consider whether an additional voluntary contribution is prudent to maintain certain PPA funding thresholds. However, we cannot anticipate with certainty whether such contributions will be made and the amount of such contributions. With respect to our postretirement medical plans, we anticipate contributing approximately $3.8 million during fiscal 2009.
 
The projected pension liability, future funding requirements and the amount of pension expense or income recognized for the Plan are subject to change, depending upon the actuarial value of plan assets and the determination of future benefit obligations as of each subsequent actuarial calculation date. These amounts are impacted by actual investment returns, changes in interest rates and changes in the demographic composition of the participants in the plan.


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RECENT ACCOUNTING DEVELOPMENTS
 
Recent accounting developments and their impact on our financial position, results of operations and cash flows are described in Note 2 to the consolidated financial statements.
 
ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk.
 
We are exposed to risks associated with commodity prices and interest rates. Commodity price risk is the potential loss that we may incur as a result of changes in the fair value of a particular instrument or commodity. Interest-rate risk results from our portfolio of debt and equity instruments that we issue to provide financing and liquidity for our business activities.
 
We conduct risk management activities through both our natural gas distribution and natural gas marketing segments. In our natural gas distribution segment, we use a combination of physical storage, fixed physical contracts and fixed financial contracts to protect us and our customers against unusually large winter period gas price increases. In our natural gas marketing segment, we manage our exposure to the risk of natural gas price changes and lock in our gross profit margin through a combination of storage and financial instruments including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Our risk management activities and related accounting treatment are described in further detail in Note 4 to the consolidated financial statements. Additionally, our earnings are affected by changes in short-term interest rates as a result of our issuance of short-term commercial paper and our other short-term borrowings.
 
Commodity Price Risk
 
Natural gas distribution segment
 
We purchase natural gas for our natural gas distribution operations. Substantially all of the costs of gas purchased for natural gas distribution operations are recovered from our customers through purchased gas adjustment mechanisms. Therefore, our natural gas distribution operations have limited commodity price risk exposure.
 
Natural gas marketing and pipeline, storage and other segments
 
Our natural gas marketing segment is also exposed to risks associated with changes in the market price of natural gas. For our natural gas marketing segment, we use a sensitivity analysis to estimate commodity price risk. For purposes of this analysis, we estimate commodity price risk by applying a $0.50 change in the forward NYMEX price to our net open position (including existing storage and related financial contracts) at the end of each period. Based on AEH’s net open position (including existing storage and related financial contracts) at September 30, 2008 of 0.5 Bcf, a $0.50 change in the forward NYMEX price would have had a $0.3 million impact on our consolidated net income.
 
Changes in the difference between the indices used to mark to market our physical inventory (Gas Daily) and the related fair-value hedge (NYMEX) can result in volatility in our reported net income; but, over time, gains and losses on the sale of storage gas inventory will be offset by gains and losses on the fair-value hedges. Based upon our net physical position at September 30, 2008 and assuming our hedges would still qualify as highly effective, a $0.50 change in the difference between the Gas Daily and NYMEX indices would impact our reported net income by approximately $2.8 million.
 
Additionally, these changes could cause us to recognize a risk management liability, which would require us to place cash into an escrow account to collateralize this liability position. This, in turn, would reduce the amount of cash we would have on hand to fund our working capital needs.
 
Interest Rate Risk
 
Our earnings are exposed to changes in short-term interest rates associated with our short-term commercial paper program and other short-term borrowings. We use a sensitivity analysis to estimate our short-term


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interest rate risk. For purposes of this analysis, we estimate our short- term interest rate risk as the difference between our actual interest expense for the period and estimated interest expense for the period assuming a hypothetical average one percent increase in the interest rates associated with our short-term borrowings. Had interest rates associated with our short-term borrowings increased by an average of one percent, our interest expense would have increased by approximately $2.1 million during 2008.
 
We also assess market risk for our fixed rate long-term obligations. We estimate market risk for our long-term obligations as the potential increase in fair value resulting from a hypothetical one percent decrease in interest rates associated with these debt instruments. Fair value is estimated using a discounted cash flow analysis. Assuming this one percent hypothetical decrease, the fair value of our long-term obligations would have increased by approximately $144.2 million.
 
As of September 30, 2008, we were not engaged in other activities that would cause exposure to the risk of material earnings or cash flow loss due to changes in interest rates or market commodity prices.


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ITEM 8.    Financial Statements and Supplementary Data.
 
Index to financial statements and financial statement schedule:
 
         
    Page
 
    67  
Financial statements and supplementary data:
       
    68  
    69  
    70  
    71  
    72  
    121  
Financial statement schedule for the years ended September 30, 2008, 2007 and 2006
       
    129  
 
All other financial statement schedules are omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and accompanying notes thereto.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS
 
The Board of Directors and Shareholders of
Atmos Energy Corporation
 
We have audited the accompanying consolidated balance sheets of Atmos Energy Corporation as of September 30, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atmos Energy Corporation at September 30, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the financial information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Atmos Energy Corporation’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 18, 2008 expressed an unqualified opinion thereon.
 
/s/ ERNST & YOUNG LLP
 
Dallas, Texas
November 18, 2008


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ATMOS ENERGY CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
                 
    September 30  
    2008     2007  
    (In thousands,
 
    except share data)  
 
ASSETS
Property, plant and equipment
  $ 5,650,096     $ 5,326,621  
Construction in progress
    80,060       69,449  
                 
      5,730,156       5,396,070  
Less accumulated depreciation and amortization
    1,593,297       1,559,234  
                 
Net property, plant and equipment
    4,136,859       3,836,836  
Current assets
               
Cash and cash equivalents
    46,717       60,725  
Accounts receivable, less allowance for doubtful accounts of
$15,301 in 2008 and $16,160 in 2007
    477,151       380,133  
Gas stored underground
    576,617       515,128  
Other current assets
    184,619       111,189  
                 
Total current assets
    1,285,104       1,067,175  
Goodwill and intangible assets
    739,086       737,692  
Deferred charges and other assets
    225,650       253,494  
                 
    $ 6,386,699     $ 5,895,197  
                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
               
Common stock, no par value (stated at $.005 per share);
200,000,000 shares authorized; issued and outstanding:
               
2008 — 90,814,683 shares, 2007 — 89,326,537 shares
  $ 454     $ 447  
Additional paid-in capital
    1,744,384       1,700,378  
Accumulated other comprehensive loss
    (35,947 )     (16,198 )
Retained earnings
    343,601       281,127  
                 
Shareholders’ equity
    2,052,492       1,965,754  
Long-term debt
    2,119,792       2,126,315  
                 
Total capitalization
    4,172,284       4,092,069  
Commitments and contingencies
               
Current liabilities
               
Accounts payable and accrued liabilities
    395,388       355,255  
Other current liabilities
    460,372       408,273  
Short-term debt
    350,542       150,599  
Current maturities of long-term debt
    785       3,831  
                 
Total current liabilities
    1,207,087       917,958  
Deferred income taxes
    441,302       370,569  
Regulatory cost of removal obligation
    298,645       271,059  
Deferred credits and other liabilities
    267,381       243,542  
                 
    $ 6,386,699     $ 5,895,197  
                 
 
See accompanying notes to consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Year Ended September 30  
    2008     2007     2006  
    (In thousands, except per share data)  
 
Operating revenues
                       
Natural gas distribution segment
  $ 3,655,130     $ 3,358,765     $ 3,650,591  
Regulated transmission and storage segment
    195,917       163,229       141,133  
Natural gas marketing segment
    4,287,862       3,151,330       3,156,524  
Pipeline, storage and other segment
    31,709       33,400       25,574  
Intersegment eliminations
    (949,313 )     (808,293 )     (821,459 )
                         
      7,221,305       5,898,431       6,152,363  
Purchased gas cost
                       
Natural gas distribution segment
    2,649,064       2,406,081       2,725,534  
Regulated transmission and storage segment
                 
Natural gas marketing segment
    4,194,841       3,047,019       3,025,897  
Pipeline, storage and other segment
    3,396       792       1,080  
Intersegment eliminations
    (947,322 )     (805,543 )     (816,718 )
                         
      5,899,979       4,648,349       4,935,793  
                         
Gross profit
    1,321,326       1,250,082       1,216,570  
Operating expenses
                       
Operation and maintenance
    500,234       463,373       433,418  
Depreciation and amortization
    200,442       198,863       185,596  
Taxes, other than income
    192,755       182,866       191,993  
Impairment of long-lived assets
          6,344       22,947  
                         
Total operating expenses
    893,431       851,446       833,954  
                         
Operating income
    427,895       398,636       382,616  
Miscellaneous income, net
    2,731       9,184       881  
Interest charges
    137,922       145,236       146,607  
                         
Income before income taxes
    292,704       262,584       236,890  
Income tax expense
    112,373       94,092       89,153  
                         
Net income
  $ 180,331     $ 168,492     $ 147,737  
                         
Per share data
                       
Basic net income per share
  $ 2.02     $ 1.94     $ 1.83  
                         
Diluted net income per share
  $ 2.00     $ 1.92     $ 1.82  
                         
Weighted average shares outstanding:
                       
Basic
    89,385       86,975       80,731  
                         
Diluted
    90,272       87,745       81,390  
                         
 
See accompanying notes to consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                 
                      Accumulated
             
    Common Stock     Additional
    Other
             
    Number of
    Stated
    Paid-in
    Comprehensive
    Retained
       
    Shares     Value     Capital     Loss     Earnings     Total  
    (In thousands, except share data)  
 
Balance, September 30, 2005
    80,539,401     $ 403     $ 1,426,523     $ (3,341 )   $ 178,837     $ 1,602,422  
Comprehensive income:
                                               
Net income
                            147,737       147,737  
Unrealized holding gains on investments, net
                      882             882  
Treasury lock agreements, net
                      3,442             3,442  
Cash flow hedges, net
                      (44,833 )           (44,833 )
                                                 
Total comprehensive income
                                            107,228  
Cash dividends ($1.26 per share)
                            (102,275 )     (102,275 )
Common stock issued:
                                               
Direct stock purchase plan
    387,833       2       10,391                   10,393  
Retirement savings plan
    442,635       2       11,918                   11,920  
1998 Long-term incentive plan
    366,905       2       8,976                   8,978  
Long-term stock plan for Mid-States Division
    300             5                   5  
Employee stock-based compensation
                9,361                   9,361  
Outside directors stock-for-fee plan
    2,442             66                   66  
                                                 
Balance, September 30, 2006
    81,739,516       409       1,467,240       (43,850 )     224,299       1,648,098  
Comprehensive income:
                                               
Net income
                            168,492       168,492  
Unrealized holding gains on investments, net
                      1,241             1,241  
Treasury lock agreements, net
                      6,288             6,288  
Cash flow hedges, net
                      20,123             20,123  
                                                 
Total comprehensive income
                                            196,144  
Cash dividends ($1.28 per share)
                            (111,664 )     (111,664 )
Common stock issued:
                                               
Public offering
    6,325,000       32       191,881                   191,913  
Direct stock purchase plan
    325,338       2       9,866                   9,868  
Retirement savings plan
    422,646       2       12,929                   12,931  
1998 Long-term incentive plan
    511,584       2       7,547                   7,549  
Employee stock-based compensation
                10,841                   10,841  
Outside directors stock-for-fee plan
    2,453             74                   74  
                                                 
Balance, September 30, 2007
    89,326,537       447       1,700,378       (16,198 )     281,127       1,965,754  
Comprehensive income:
                                               
Net income
                            180,331       180,331  
Unrealized holding losses on investments, net
                      (1,897 )           (1,897 )
Treasury lock agreements, net
                      3,148             3,148  
Cash flow hedges, net
                      (21,000 )           (21,000 )
                                                 
Total comprehensive income
                                            160,582  
Adoption of FIN 48
                            (569 )     (569 )
Cash dividends ($1.30 per share)
                            (117,288 )     (117,288 )
Common stock issued:
                                               
Direct stock purchase plan
    388,485       2       10,333                   10,335  
Retirement savings plan
    558,014       3       15,116                   15,119  
1998 Long-term incentive plan
    538,450       2       5,592                   5,594  
Employee stock-based compensation
                12,878                   12,878  
Outside directors stock-for-fee plan
    3,197             87                   87  
                                                 
Balance, September 30, 2008
    90,814,683     $ 454     $ 1,744,384     $ (35,947 )   $ 343,601     $ 2,052,492  
                                                 
 
See accompanying notes to consolidated financial statements


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ATMOS ENERGY CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended September 30  
    2008     2007     2006  
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
Net income
  $ 180,331     $ 168,492     $ 147,737  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Impairment of long-lived assets
          6,344       22,947  
Depreciation and amortization:
                       
Charged to depreciation and amortization
    200,442       198,863       185,596  
Charged to other accounts
    147       192       371  
Deferred income taxes
    97,940       62,121       86,178  
Stock-based compensation
    14,032       11,934       10,234  
Debt financing costs
    10,665       10,852       11,117  
Other
    (5,492 )     (1,516 )     (2,871 )
Changes in assets and liabilities:
                       
Decrease in cash held on deposit in margin account
                9,762  
(Increase) decrease in accounts receivable
    (97,018 )     (6,407 )     78,407  
Increase in gas stored underground
    (61,489 )     (53,626 )     (10,695 )
(Increase) decrease in other current assets
    (114,119 )     112,588       (59,882 )
Decrease in deferred charges and other assets
    22,476       23,506       28,614  
Increase (decrease) in accounts payable and accrued liabilities
    39,902       (8,428 )     (116,060 )
Increase (decrease) in other current liabilities
    60,026       11,661       (70,997 )
Increase (decrease) in deferred credits and other liabilities
    23,090       10,519       (9,009 )
                         
Net cash provided by operating activities
    370,933       547,095       311,449  
CASH FLOWS USED IN INVESTING ACTIVITIES
                       
Capital expenditures
    (472,273 )     (392,435 )     (425,324 )
Other, net
    (10,736 )     (10,436 )     (5,767 )
                         
Net cash used in investing activities
    (483,009 )     (402,871 )     (431,091 )
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Net increase (decrease) in short-term debt
    200,174       (213,242 )     237,607  
Net proceeds from issuance of long-term debt
          247,217        
Settlement of Treasury lock agreement
          4,750        
Repayment of long-term debt
    (10,284 )     (303,185 )     (3,264 )
Cash dividends paid
    (117,288 )     (111,664 )     (102,275 )
Issuance of common stock
    25,466       24,897       23,273  
Net proceeds from equity offering
          191,913        
                         
Net cash provided by (used in) financing activities
    98,068       (159,314 )     155,341  
                         
Net increase (decrease) in cash and cash equivalents
    (14,008 )     (15,090 )     35,699  
Cash and cash equivalents at beginning of year
    60,725       75,815       40,116  
                         
Cash and cash equivalents at end of year
  $ 46,717     $ 60,725     $ 75,815  
                         
 
See accompanying notes to consolidated financial statements


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Nature of Business
 
Atmos Energy Corporation (“Atmos Energy” or the “Company”) and our subsidiaries are engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as certain other nonregulated businesses. Through our natural gas distribution business, we deliver natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public-authority and industrial customers through our six regulated natural gas distribution divisions in the service areas described below:
 
     
Division   Service Area
 
Atmos Energy Colorado-Kansas Division
  Colorado, Kansas, Missouri (1)
Atmos Energy Kentucky/Mid-States Division
  Georgia (1) , Illinois (1) , Iowa (1) ,
    Kentucky, Missouri (1) , Tennessee, Virginia (1)
Atmos Energy Louisiana Division
  Louisiana
Atmos Energy Mid-Tex Division
  Texas, including the Dallas/Fort Worth metropolitan area
Atmos Energy Mississippi Division
  Mississippi
Atmos Energy West Texas Division
  West Texas
 
 
(1) Denotes locations where we have more limited service areas.
 
In addition, we transport natural gas for others through our distribution system. Our natural gas distribution business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which our natural gas distribution divisions operate. Our corporate headquarters and shared-services function are located in Dallas, Texas, and our customer support centers are located in Amarillo and Waco, Texas.
 
Our regulated transmission and storage business consists of the regulated operations of our Atmos Pipeline — Texas Division, a division of the Company. This division transports natural gas to our Mid-Tex Division, transports natural gas for third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary to the pipeline industry including parking arrangements, lending and sales of inventory on hand. Parking arrangements provide short-term interruptible storage of gas on our pipeline. Lending services provide short-term interruptible loans of natural gas from our pipeline to meet market demands.
 
Our nonregulated businesses operate primarily in the Midwest and Southeast and include our natural gas marketing operations and our pipeline, storage and other operations. These businesses are operated through various wholly-owned subsidiaries of Atmos Energy Holdings, Inc. (AEH), which is wholly-owned by the Company and based in Houston, Texas.
 
Our natural gas marketing operations are managed by Atmos Energy Marketing, LLC (AEM), which is wholly-owned by AEH. AEM provides a variety of natural gas management services to municipalities, natural gas utility systems and industrial natural gas customers, primarily in the southeastern and midwestern states and to our Colorado-Kansas, Kentucky/Mid-States and Louisiana divisions. These services consist primarily of furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of financial instruments.
 
Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., each of which are wholly-owned by AEH. APS owns or has an interest in underground storage fields in Kentucky and Louisiana.


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We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Additionally, APS manages our natural gas gathering operations, which were limited in nature as of September 30, 2008. AES provides limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services. Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles in the United States.
 
2.   Summary of Significant Accounting Policies
 
Principles of consolidation — The accompanying consolidated financial statements include the accounts of Atmos Energy Corporation and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated.
 
Use of estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates include the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes, asset retirement obligations, impairment of long-lived assets, risk management and trading activities and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results could differ from those estimates.
 
Regulation — Our natural gas distribution and regulated transmission and storage operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. Our accounting policies recognize the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions. Regulated operations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation . This statement requires cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates.


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We record regulatory assets as a component of other current assets and deferred charges and other assets for costs that have been deferred for which future recovery through customer rates is considered probable. Regulatory liabilities are recorded either on the face of the balance sheet or as a component of current liabilities, deferred income taxes or deferred credits and other liabilities when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. Significant regulatory assets and liabilities as of September 30, 2008 and 2007 included the following:
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Regulatory assets:
               
Pension and postretirement benefit costs
  $ 100,563     $ 59,022  
Merger and integration costs, net
    7,586       7,996  
Deferred gas costs
    55,103       14,797  
Environmental costs
    980       1,303  
Rate case costs
    12,885       10,989  
Deferred franchise fees
    651       796  
Deferred income taxes, net
    343        
Other
    8,120       10,719  
                 
    $ 186,231     $ 105,622  
                 
Regulatory liabilities:
               
Deferred gas costs
  $ 76,979     $ 84,043  
Regulatory cost of removal obligation
    317,273       295,241  
Deferred income taxes, net
          165  
Other
    5,639       7,503  
                 
    $ 399,891     $ 386,952  
                 
 
Currently 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. During the fiscal years ended September 30, 2008, 2007 and 2006, we recognized $0.4 million, $0.3 million and $0.5 million in amortization expense related to these costs.
 
Revenue recognition — Sales of natural gas to our natural gas distribution customers are billed on a monthly basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for natural gas distribution segment revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.
 
On occasion, we are permitted to implement new rates that have not been formally approved by our state regulatory commissions, which are subject to refund. As permitted by SFAS No. 71, we recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented.
 
Rates established by regulatory authorities are adjusted for increases and decreases in our purchased gas costs through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide gas utility


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companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case to address all of the utility company’s non-gas costs. There is no gross profit generated through purchased gas adjustments, but they provide a dollar-for-dollar offset to increases or decreases in our natural gas distribution segment’s gas costs. The effects of these purchased gas adjustment mechanisms are recorded as deferred gas costs on our balance sheet.
 
Operating revenues for our natural gas marketing segment and the associated carrying value of natural gas inventory (inclusive of storage costs) are recognized when we sell the gas and physically deliver it to our customers. Operating revenues include realized gains and losses arising from the settlement of financial instruments used in our natural gas marketing activities and unrealized gains and losses arising from changes in the fair value of natural gas inventory designated as a hedged item in a fair value hedge and the associated financial instruments. For the fiscal years ended September 30, 2008, 2007 and 2006, we included unrealized gains on open contracts of $25.5 million, $18.4 million and $17.2 million as a component of natural gas marketing revenues.
 
Operating revenues for our regulated transmission and storage and pipeline, storage and other segments are recognized in the period in which actual volumes are transported and storage services are provided.
 
Cash and cash equivalents — We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
Accounts receivable and allowance for doubtful accounts — Accounts receivable consist of natural gas sales to residential, commercial, industrial, municipal and other customers. For the majority of our receivables, we establish an allowance for doubtful accounts based on our collection experience. On certain other receivables where we are aware of a specific customer’s inability or reluctance to pay, we record an allowance for doubtful accounts against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect. However, if circumstances change, our estimate of the recoverability of accounts receivable could be affected. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible.
 
Gas stored underground — Our gas stored underground is comprised of natural gas injected into storage to support the winter season withdrawals for our natural gas distribution operations and natural gas held by our natural gas marketing and other nonregulated subsidiaries to conduct their operations. The average cost method is used for all our natural gas distribution divisions, except for certain jurisdictions in the Kentucky/Mid-States Division, where it is valued on the first-in first-out method basis, in accordance with regulatory requirements. The average gas cost method is also used for our regulated transmission and storage segment. Our natural gas marketing and pipeline, storage and other segments utilize the average cost method; however, most of this inventory is hedged and is therefore reported at fair value at the end of each month. Gas in storage that is retained as cushion gas to maintain reservoir pressure is classified as property, plant and equipment and is valued at cost.
 
Regulated property, plant and equipment — Regulated property, plant and equipment is stated at original cost, net of contributions in aid of construction. The cost of additions includes direct construction costs, payroll related costs (taxes, pensions and other fringe benefits), administrative and general costs and an allowance for funds used during construction. The allowance for funds used during construction represents the estimated cost of funds used to finance the construction of major projects and are capitalized in the rate base for ratemaking purposes when the completed projects are placed in service. Interest expense of $2.9 million, $3.0 million and $3.6 million was capitalized in 2008, 2007 and 2006.
 
Major renewals, including replacement pipe, and betterments that are recoverable under our regulatory rate base are capitalized while the costs of maintenance and repairs that are not recoverable through rates are charged to expense as incurred. The costs of large projects are accumulated in construction in progress until


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the project is completed. When the project is completed, tested and placed in service, the balance is transferred to the regulated plant in service account included in the rate base and depreciation begins.
 
Regulated property, plant and equipment is depreciated at various rates on a straight-line basis. These rates are approved by our regulatory commissions and are comprised of two components: one based on average service life and one based on cost of removal. Accordingly, we recognize our cost of removal expense as a component of depreciation expense. The related cost of removal accrual is reflected as a regulatory liability on the consolidated balance sheet. At the time property, plant and equipment is retired, removal expenses less salvage, are charged to the regulatory cost of removal accrual. The composite depreciation rate was 3.7 percent, 3.9 percent and 3.9 percent for the fiscal years ended September 30, 2008, 2007 and 2006.
 
Nonregulated property, plant and equipment — Nonregulated property, plant and equipment is stated at cost. Depreciation is generally computed on the straight-line method for financial reporting purposes based upon estimated useful lives ranging from three to 35 years.
 
Asset retirement obligations — SFAS 143, Accounting for Asset Retirement Obligations and FIN 47, Accounting for Conditional Asset Retirement Obligations require that we record a liability at fair value for an asset retirement obligation when the legal obligation to retire the asset has been incurred with an offsetting increase to the carrying value of the related asset. Accretion of the asset retirement obligation due to the passage of time is recorded as an operating expense.
 
As of September 30, 2008 and 2007, we had recorded asset retirement obligations of $5.9 million and $9.0 million. Additionally, we recorded $1.3 million and $2.9 million of asset retirement costs as a component of property, plant and equipment that will be depreciated over the remaining life of the underlying associated assets.
 
We believe we have a legal obligation to retire our storage wells. However, we have not recognized an asset retirement obligation associated with our storage wells because there is not sufficient industry history to reasonably estimate the fair value of this obligation.
 
Impairment of long-lived assets — We periodically evaluate whether events or circumstances have occurred that indicate that other long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
 
During fiscal 2007, we recorded a $6.3 million charge associated with the write-off of approximately $3.0 million of costs related to a nonregulated natural gas gathering project and approximately $3.3 million of obsolete software costs. During the fourth quarter of fiscal 2006, we determined that, as a result of declining irrigation sales primarily associated with our agricultural customers’ shift from gas-powered pumps to electric pumps, the West Texas Division’s irrigation assets would not be able to generate sufficient future cash flows from operations to recover the net investment in these assets. Therefore, we recorded a $22.9 million charge to impairment to write off the entire net book value.
 
Goodwill and intangible assets — We annually evaluate our goodwill balances for impairment during our second fiscal quarter or more frequently as impairment indicators arise. We use a present value technique based on discounted cash flows to estimate the fair value of our reporting units. These calculations are dependent on several subjective factors including the timing of future cash flows, future growth rates and the discount rate. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Intangible assets are amortized over their useful lives of 10 years. These assets are reviewed for impairment as impairment indicators arise. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. No impairment has been recognized.
 
Marketable securities — As of September 30, 2008 and 2007, all of our marketable securities were classified as available-for-sale based upon the criteria of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities . In accordance with that standard, these securities are reported at market value with unrealized gains and losses shown as a component of accumulated other comprehensive income (loss). We regularly evaluate the performance of these investments on a fund by fund basis for impairment, taking into consideration the fund’s purpose, volatility and current returns. If a determination is made that a decline in fair value is other than temporary, the related fund is written down to its estimated fair value.
 
Financial instruments and hedging activities — We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically use financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored for our regulated and nonregulated businesses. Currently, we utilize financial instruments in our natural gas distribution, natural gas marketing and pipeline, storage and other segments. The objectives and strategies for the use of financial instruments are discussed in Note 4.
 
We record all of our financial instruments on the balance sheet at fair value as required by SFAS 133, Accounting for Derivatives and Hedging Activities, with changes in fair value ultimately recorded in the income statement. These financial instruments are reported as risk management assets and liabilities and are classified as current or noncurrent other assets or liabilities based upon the anticipated settlement date of the underlying financial instrument.
 
The timing of when changes in fair value of our financial instruments are recorded in the income statement depends on whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment. Changes in fair value for financial instruments that do not meet one of these criteria are recognized in the income statement as they occur.
 
Financial Instruments Associated with Commodity Price Risk
 
In our natural gas distribution segment, the costs associated with and the gains and losses arising from the use of financial instruments to mitigate commodity price risk are included in our purchased gas adjustment mechanisms in accordance with regulatory requirements. Therefore, changes in the fair value of these financial instruments are initially recorded as a component of deferred gas costs and recognized in the consolidated statement of income as a component of purchased gas cost when the related costs are recovered through our rates and recognized in revenue in accordance with SFAS 71. Accordingly, there is no earnings impact to our natural gas distribution segment as a result of the use of financial instruments.
 
In our natural gas marketing and pipeline, storage and other segments, we have designated the natural gas inventory held by these operating segments as the hedged item in a fair-value hedge. This inventory is marked to market at the end of each month based on the Gas Daily index, with changes in fair value recognized as unrealized gains or losses in revenue in the period of change. The financial instruments associated with this natural gas inventory have been designated as fair-value hedges and are marked to market each month based upon the NYMEX price with changes in fair value recognized as unrealized gains or losses in revenue in the period of change. Changes in the spreads between the forward natural gas prices used to value the financial hedges designated against our physical inventory (NYMEX) and the market (spot) prices used to value our physical storage (Gas Daily) result in unrealized margins until the underlying physical gas is withdrawn and


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the related financial instruments are settled. Once the gas is withdrawn and the financial instruments are settled, the previously unrealized margins associated with these net positions are realized. We have elected to exclude this spot/forward differential for purposes of assessing the effectiveness of these fair-value hedges. Over time, we expect gains and losses on the sale of storage gas inventory to be offset by gains and losses on the fair-value hedges, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.
 
In our natural gas marketing segment, we have elected to treat fixed-price forward contracts to deliver natural gas as normal purchases and normal sales. As such, these deliveries are recorded on an accrual basis in accordance with our revenue recognition policy. Financial instruments used to mitigate the commodity price risk associated with these contracts have been designated as cash flow hedges of anticipated purchases and sales at indexed prices. Accordingly, unrealized gains and losses on these open financial instruments are 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. Hedge ineffectiveness, to the extent incurred, is reported as a component of revenue.
 
Gains and losses from hedge ineffectiveness are 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 financial instruments is referred to as basis ineffectiveness. Ineffectiveness arising from changes in the fair value of the fair value hedges due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity are referred to as timing ineffectiveness.
 
In our natural gas marketing segment, the following summarizes the gains and losses recognized in the income statement for the fiscal years ended September 30, 2008, 2007 and 2006.
 
                         
    For the Fiscal Year Ended
 
    September 30  
    2008     2007     2006  
    (In thousands)  
 
Basis ineffectiveness:
                       
Fair-value basis ineffectiveness
  $ (2,841 )   $ 783     $ 15,476  
Cash flow basis ineffectiveness
    3,720       2,330       7,392  
                         
Total basis ineffectiveness
    879       3,113       22,868  
Timing ineffectiveness:
                       
Fair-value timing ineffectiveness
    39,695       89,207       (17,832 )
                         
Total hedge ineffectiveness
  $ 40,574     $ 92,320     $ 5,036  
                         
 
In our pipeline, storage and other segment, actual hedge ineffectiveness arising from the timing of settlement of physical contracts and the settlement of the financial instruments resulted in a gain of approximately $5.4 million and $8.4 million for the fiscal years ended September 30, 2008 and 2007 and a loss of approximately $7.0 million for the fiscal year ended September 30, 2006.
 
Prices actively quoted on national exchanges are used to determine the fair value of most of our financial instruments. Values derived from these sources reflect the market in which transactions involving these financial instruments are executed. We utilize models and other valuation methods to determine fair value when external sources are not available. Values are adjusted accordingly to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under then-current market conditions. We believe the market prices and models used to value these financial instruments represent the best information


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available with respect to closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts.
 
Fair-value estimates also consider the creditworthiness of our counterparties. Our counterparties consist primarily of financial institutions and major energy companies. This concentration of counterparties may materially impact our exposure to credit risk resulting from market, economic or regulatory conditions. Recent adverse developments in the global financial and credit markets have made it more difficult and more expensive for companies to access the short-term capital markets, which may negatively impact the creditworthiness of our counterparties. A continued tightening of the credit market could cause more of our counterparties to fail to perform than expected and reserved. We seek to minimize counterparty credit risk through an evaluation of their financial condition and credit ratings and the use of collateral requirements under certain circumstances.
 
In our natural gas marketing segment, we also utilize master netting agreements with significant counterparties that allow us to offset gains and losses arising from financial instruments that may be settled in cash with gains and losses arising from financial instruments that may be settled with the physical commodity. Assets and liabilities from risk management activities, as well as accounts receivable and payable, reflect the master netting agreements in place.
 
In April 2007, the Financial Accounting Standards Board (FASB) issued FSP FIN 39-1, Amendment of FASB Interpretation No. 39 . This FSP requires that, to the extent we utilize master netting agreements to offset gains and losses arising from financial instruments, we must include the fair value of cash collateral or the obligation to return cash in the amounts that have been netted. This FSP is applicable to the Company effective October 1, 2008 and early adoption is permitted. We have elected to adopt this FSP as of September 30, 2008. As a result of adopting this FSP, the Company netted $56.6 million of cash held in margin accounts into its current risk management assets and liabilities as of September 30, 2008. The adoption of this interpretation also required a reclassification as of September 30, 2007 of a $1.7 million obligation to return cash from other current liabilities to risk management assets. This requirement to net this cash position against risk management assets and liabilities did not have a material impact on our financial position or working capital.
 
Financial Instruments Associated with Interest Rate Risk
 
We periodically manage interest rate risk, typically when we issue new or refinance existing long-term debt. Currently, we do not have any financial instruments in place to manage interest rate risk. However, in prior years, we entered into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings. We designated these Treasury lock agreements as a cash flow hedge of an anticipated transaction at the time the agreements were executed. Accordingly, unrealized gains and losses associated with the Treasury lock agreements were recorded as a component of accumulated other comprehensive income (loss). When the Treasury locks were settled, the realized gain or loss was recorded as a component of accumulated other comprehensive income (loss) and is being recognized as a component of interest expense over the life of the related financing arrangement.
 
Pension and other postretirement plans  — Pension and other postretirement plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and current demographic and actuarial mortality data. Through fiscal 2008, we reviewed the estimates and assumptions underlying our pension and other postretirement plan costs and liabilities annually based upon a June 30 measurement date. To comply with the new measurement date requirements of SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) , effective October 1, 2008, we changed our measurement date from June 30 to our fiscal year end, September 30. This change is more fully discussed in Note 8. The assumed discount rate


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and the expected return are the assumptions that generally have the most significant impact on our pension costs and liabilities. The assumed discount rate, the assumed health care cost trend rate and assumed rates of retirement generally have the most significant impact on our postretirement plan costs and liabilities.
 
The discount rate is utilized principally in calculating the actuarial present value of our pension and postretirement obligation and net pension and postretirement cost. When establishing our discount rate, we consider high quality corporate bond rates based on Moody’s Aa bond index, changes in those rates from the prior year and the implied discount rate that is derived from matching our projected benefit disbursements with a high quality corporate bond spot rate curve.
 
The expected long-term rate of return on assets is utilized in calculating the expected return on plan assets component of the annual pension and postretirement plan cost. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical performance. We also consider the guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension or postretirement plan cost is not affected. Rather, this gain or loss reduces or increases future pension or postretirement plan costs over a period of approximately ten to twelve years.
 
We estimate the assumed health care cost trend rate used in determining our annual postretirement net cost based upon our actual health care cost experience, the effects of recently enacted legislation and general economic conditions. Our assumed rate of retirement is estimated based upon the annual review of our participant census information as of the measurement date.
 
Income taxes — Income taxes are provided based on the liability method, which results in income tax assets and liabilities arising from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The liability method requires the effect of tax rate changes on current and accumulated deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
 
Stock-based compensation plans — We maintain the 1998 Long-Term Incentive Plan that provides for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, performance-based restricted stock units and stock units to officers, division presidents and other key employees. Non-employee directors are also eligible to receive stock-based compensation under the 1998 Long-Term Incentive Plan. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire our common stock.
 
Accumulated other comprehensive loss — Accumulated other comprehensive loss, net of tax, as of September 30, 2008 and 2007 consisted of the following unrealized gains (losses):
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Unrealized holding gains on investments
  $ 910     $ 2,807  
Treasury lock agreements
    (11,104 )     (14,252 )
Cash flow hedges
    (25,753 )     (4,753 )
                 
    $ (35,947 )   $ (16,198 )
                 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Recent accounting pronouncements — In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 . SFAS 161 expands the disclosure requirements for derivative instruments and for hedging activities. This statement requires specific disclosures regarding how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. Although the provisions of this standard will be effective for us beginning January 1, 2009, we adopted this standard effective October 1, 2008. Since SFAS 161 only requires additional disclosures concerning derivatives and hedging activities, this standard is not expected to have a material impact on our financial position, results of operations or cash flows.
 
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements . SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosure on fair value measurements required under other accounting pronouncements but does not change existing guidance as to whether or not an instrument is carried at fair value. We will be required to apply the provisions of SFAS 157 beginning October 1, 2008. We believe this standard will not materially impact our financial position, results of operations or cash flows. However, it will significantly expand our disclosure concerning the fair value measurements reflected in our financial statements.
 
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 . This new standard permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of the standard is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis. The fair value option is irrevocable, unless a new election date occurs. The provisions of this standard will be effective October 1, 2008. We do not anticipate this standard will materially impact our financial position, results of operations or cash flows.
 
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations . SFAS 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. SFAS 141(R) significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under SFAS 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we may complete after October 1, 2009.
 
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No. 51 . SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of the standard will be effective for us beginning October 1, 2009. This standard is not expected to have a material impact on our financial position, results of operations or cash flows.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
3.   Goodwill and Intangible Assets
 
Goodwill and intangible assets were comprised of the following as of September 30, 2008 and 2007.
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Goodwill
  $ 736,998     $ 734,976  
Intangible assets
    2,088       2,716  
                 
Total
  $ 739,086     $ 737,692  
                 
 
The following presents our goodwill balance allocated by segment and changes in the balance for the fiscal year ended September 30, 2008:
 
                                         
          Regulated
          Pipeline,
       
    Natural Gas
    Transmission
    Natural Gas
    Storage
       
    Distribution
    and Storage
    Marketing
    and Other
       
    Segment     Segment     Segment     Segment     Total  
    (In thousands)  
 
Balance as of September 30, 2007
  $ 567,775     $ 132,490     $ 24,282     $ 10,429     $ 734,976  
Deferred tax adjustments on prior acquisitions (1)
    2,145       (123 )                 2,022  
                                         
Balance as of September 30, 2008
  $ 569,920     $ 132,367     $ 24,282     $ 10,429     $ 736,998  
                                         
 
 
(1) During the preparation of the fiscal 2008 tax provision, we adjusted certain deferred taxes recorded in connection with acquisitions completed in fiscal 2001 and fiscal 2004, which resulted in an increase to goodwill and net deferred tax liabilities of $2.0 million.
 
Information regarding our intangible assets is reflected in the following table. As of September 30, 2008 and 2007, we had no intangible assets with indefinite lives.
 
                                                         
          September 30, 2008     September 30, 2007  
    Useful
    Gross
                Gross
             
    Life
    Carrying
    Accumulated
          Carrying
    Accumulated
       
    (Years)     Amount     Amortization     Net     Amount     Amortization     Net  
    (In thousands)  
 
Customer contracts
    10     $ 6,926     $ (4,838 )   $ 2,088     $ 6,926     $ (4,210 )   $ 2,716  
 
The following table presents actual amortization expense recognized during 2008 and an estimate of future amortization expense based upon our intangible assets at September 30, 2008.
 
         
Amortization expense (in thousands):
       
Actual for the fiscal year ending September 30, 2008
  $ 628  
Estimated for the fiscal year ending:
       
September 30, 2009
    627  
September 30, 2010
    627  
September 30, 2011
    627  
September 30, 2012
    43  
September 30, 2013
    43  
 
4.   Financial Instruments and Hedging Activities
 
We currently use financial instruments to mitigate commodity price risk. Additionally, we periodically utilize financial instruments to manage interest rate risk. The objectives and strategies for using financial instruments have been tailored to our regulated and nonregulated businesses. Currently, we utilize financial instruments in our natural gas distribution, natural gas marketing and pipeline, storage and other segments.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
However, our pipeline, storage and other segment uses financial instruments acquired from AEM on the same terms that AEM received from an independent counterparty. On a consolidated basis, these financial instruments are reported in the natural gas marketing segment.
 
As discussed in Note 2, we report our financial instruments as risk management assets and liabilities, each of which is classified as current or noncurrent based upon the anticipated settlement date of the underlying financial instrument. The following table shows the fair values of our risk management assets and liabilities by segment at September 30, 2008 and 2007:
 
                         
    Natural Gas
    Natural Gas
       
    Distribution     Marketing     Total  
    (In thousands)  
 
September 30, 2008:
                       
Assets from risk management activities, current (1)
  $     $ 68,291     $ 68,291  
Assets from risk management activities, noncurrent
          5,473       5,473  
Liabilities from risk management activities, current (1)
    (58,566 )     (348 )     (58,914 )
Liabilities from risk management activities, noncurrent
    (5,111 )     (258 )     (5,369 )
                         
Net assets (liabilities)
  $ (63,677 )   $ 73,158     $ 9,481  
                         
September 30, 2007:
                       
Assets from risk management activities, current (2)
  $     $ 20,129     $ 20,129  
Assets from risk management activities, noncurrent
          5,535       5,535  
Liabilities from risk management activities, current
    (21,053 )     (286 )     (21,339 )
Liabilities from risk management activities, noncurrent
          (290 )     (290 )
                         
Net assets (liabilities)
  $ (21,053 )   $ 25,088     $ 4,035  
                         
 
 
(1) Includes $56.6 million of cash held on deposit in margin accounts to collateralize certain financial instruments. Of this amount, $29.8 million was used to offset current risk management liabilities under master netting agreements and the remaining $26.8 million is classified as current risk management assets.
 
(2) Includes a $1.7 million obligation to return cash collateral, which was used to offset current risk management assets under master netting agreements.
 
Regulated Commodity Risk Management Activities
 
Although our purchased gas adjustment mechanisms essentially insulate our natural gas distribution segment from commodity price risk, our natural gas distribution customers are exposed to the effect of volatile natural gas prices. We manage this exposure through a combination of physical storage, fixed-price forward contracts and financial instruments, primarily over-the-counter swap and option contracts, in an effort to minimize the impact of natural gas price volatility on our customers during the winter heating season.
 
Our natural gas distribution gas supply department is responsible for executing this segment’s commodity risk management activities in conformity with regulatory requirements. In jurisdictions where we are permitted to mitigate commodity price risk through financial instruments, the relevant regulatory authorities may establish the level of heating season gas purchases that can be hedged. If the regulatory authority does not establish this level, we seek to hedge between 25 and 50 percent of anticipated heating season gas purchases using financial instruments. For the 2007-2008 heating season, we hedged approximately 45 percent of our anticipated winter flowing gas requirements at a weighted average cost of approximately $7.61 per Mcf.
 
We currently do not manage commodity price risk with financial instruments in our regulated transmission and storage segment.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Nonregulated Commodity Risk Management Activities
 
Our natural gas marketing segment, through AEM, aggregates and purchases gas supply, arranges transportation and/or storage logistics and ultimately delivers gas to our customers at competitive prices. To facilitate this process, we utilize proprietary and customer-owned transportation and storage assets to provide the various services our customers request.
 
We also perform asset optimization activities in both our natural gas marketing segment and pipeline, storage and other segment. Through asset optimization activities, we seek to maximize the economic value associated with the storage and transportation capacity we own or control. We attempt to meet this objective by engaging in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We purchase physical natural gas and then sell financial instruments at advantageous prices to lock in a gross profit margin. We also seek to participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve our customers by identifying the lowest cost alternative within the natural gas supplies, transportation and markets to which we have access. Through the use of transportation and storage services and financial instruments, we also seek to capture gross profit margin through the arbitrage of pricing differences that exist in various locations and by recognizing pricing differences that occur over time. Over time, gains and losses on the sale of storage gas inventory will be offset by gains and losses on the financial instruments, resulting in the realization of the economic gross profit margin we anticipated at the time we structured the original transaction.
 
As a result of these activities, our nonregulated operations are exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks through a combination of physical storage and financial instruments, including futures, over-the-counter and exchange-traded options and swap contracts with counterparties. Future contracts provide the right to buy or sell the commodity at a fixed price in the future. Option contracts provide the right, but not the requirement, to buy or sell the commodity at a fixed price. Swap contracts require receipt of payment for the commodity based on the difference between a fixed price and the market price on the settlement date.
 
We use financial instruments, designated as cash flow hedges of anticipated purchases and sales at index prices, to mitigate the commodity price risk in our natural gas marketing segment associated with deliveries under fixed-priced forward contracts to deliver gas to customers, and we use financial instruments, designated as fair value hedges, to hedge our natural gas inventory used in our asset optimization activities in our natural gas marketing and pipeline, storage and other segments.
 
Also, in our natural gas marketing segment, we use storage swaps and futures to capture additional storage arbitrage opportunities that arise subsequent to the execution of the original fair value hedge associated with our physical natural gas inventory, basis swaps to insulate and protect the economic value of our fixed price and storage books and various over-the-counter and exchange-traded options. These financial instruments have not been designated as hedges pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities .
 
Our nonregulated risk management activities are controlled through various risk management policies and procedures. Our Audit Committee has oversight responsibility for our nonregulated risk management limits and policies. Our risk management committee, comprised of corporate and business unit officers, is responsible for establishing and enforcing our nonregulated risk management policies and procedures.
 
Under our risk management policies, we seek to match our financial instrument positions to our physical storage positions as well as our expected current and future sales and purchase obligations to maintain no open positions at the end of each trading day. The determination of our net open position as of any day, however, requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of each day may increase if the assumptions are not realized, we review these assumptions


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 September 30, 2008, AEH had a net open position (including existing storage) of 0.5 Bcf.
 
Interest Rate Risk Management Activities
 
Currently, we are not managing interest rate risk with financial instruments. However, in prior years, we periodically managed interest rate risk by entering into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings.
 
In fiscal 2004, we entered into four Treasury lock agreements to fix the Treasury yield component of the interest cost of financing associated with the-then anticipated issuance of $875 million of long-term debt issued in October 2004 in connection with the permanent financing for our TXU Gas acquisition. These Treasury lock agreements were settled in October 2004 with a net $43.8 million payment to the counterparties.
 
In March 2007, we entered into a Treasury lock agreement to fix the Treasury yield component of the interest cost associated with $100 million of our $250 million 6.35% Senior Notes issued in June 2007. This Treasury lock agreement was settled in June 2007, which resulted in the receipt of $2.9 million from the counterparties.
 
The gains and losses realized upon settlement were recorded as a component of accumulated other comprehensive income (loss) and are being recognized as a component of interest expense over the life of the associated notes from the date of settlement.
 
Cash Flow Hedging Information
 
As of September 30, 2008 and 2007, deferred amounts associated with our natural gas marketing forward commodity contracts and our Treasury lock agreements were included in other comprehensive income (loss). The following table presents the amount of other comprehensive income (loss), net of taxes, associated with these financial instruments during the fiscal years ended September 30, 2008 and 2007.
 
                 
    Fiscal Year Ended September 30  
    2008     2007  
    (In thousands)  
 
Increase (decrease) in fair value:
               
Treasury lock agreements
  $     $ 2,945  
Forward commodity contracts
    (13,213 )     (10,861 )
Recognition of (gains) losses in earnings due to settlements:
               
Treasury lock agreements
    3,148       3,343  
Forward commodity contracts
    (7,787 )     30,984  
                 
Total other comprehensive income (loss) from hedging, net of tax (1)
  $ (17,852 )   $ 26,411  
                 
 
 
(1) Utilizing an income tax rate of approximately 38 percent comprised of the effective rates in each taxing jurisdiction.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The following amounts, net of deferred taxes, represent the expected recognition in earnings of the deferred amounts associated with our financial instruments, based upon the fair values of these financial instruments as of September 30, 2008:
 
                         
    Treasury
    Forward
       
    Lock
    Commodity
       
    Agreements     Contracts     Total  
    (In thousands)  
 
2009
  $ (3,147 )   $ (24,878 )   $ (28,025 )
2010
    (1,828 )     (885 )     (2,713 )
2011
    (1,709 )     58       (1,651 )
2012
    (1,709 )     (58 )     (1,767 )
2013
    (1,709 )     10       (1,699 )
Thereafter
    (1,002 )           (1,002 )
                         
Total
  $ (11,104 )   $ (25,753 )   $ (36,857 )
                         
 
5.   Debt
 
Long-term debt
 
Long-term debt at September 30, 2008 and 2007 consisted of the following:
 
                 
    2008     2007  
    (In thousands)  
 
Unsecured 4.00% Senior Notes, due October 2009
  $ 400,000     $ 400,000  
Unsecured 7.375% Senior Notes, due 2011
    350,000       350,000  
Unsecured 10% Notes, due 2011
    2,303       2,303  
Unsecured 5.125% Senior Notes, due 2013
    250,000       250,000  
Unsecured 4.95% Senior Notes, due 2014
    500,000       500,000  
Unsecured 6.35% Senior Notes, due 2017
    250,000       250,000  
Unsecured 5.95% Senior Notes, due 2034
    200,000       200,000  
Medium term notes
               
Series A, 1995-2, 6.27%, due 2010
    10,000       10,000  
Series A, 1995-1, 6.67%, due 2025
    10,000       10,000  
Unsecured 6.75% Debentures, due 2028
    150,000       150,000  
First Mortgage Bonds Series P, 10.43% due 2013
          7,500  
Rental property, propane and other term notes due in installments through 2013
    1,309       3,890  
                 
Total long-term debt
    2,123,612       2,133,693  
Less:
               
Original issue discount on unsecured senior notes and debentures
    (3,035 )     (3,547 )
Current maturities
    (785 )     (3,831 )
                 
    $ 2,119,792     $ 2,126,315  
                 
 
Short-term debt
 
At September 30, 2008, we had $350.5 million of short-term debt outstanding comprised of $330.5 million outstanding under our bank credit facilities and $20.0 million outstanding under our commercial paper


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
program. At September 30, 2007 we had $150.6 million outstanding under our commercial paper program. There were no amounts outstanding under our bank credit facilities at September 30, 2007. As of September 30, 2008, our commercial paper had maturities of less than three months, with an interest rate of 3.35 percent.
 
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. As of September 30, 2008, we had approximately $450 million of availability remaining under the registration statement. Due to certain restrictions placed by one state regulatory commission on our ability to issue securities under the registration statement, we are permitted to issue a total of approximately $200 million of equity securities and $250 million of senior debt securities. In addition, due to restrictions imposed by another state regulatory commission, if the credit ratings on our senior unsecured debt were to fall below investment grade from either Standard & Poor’s Corporation (BBB-), Moody’s Investors Services, Inc. (Baa3) or Fitch Ratings, Ltd. (BBB-), our ability to issue any type of debt securities under the registration statement would be suspended until we received an investment grade rating from all of the three credit rating agencies.
 
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 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 September 30, 2008, we had three committed revolving credit facilities totaling $918 million. The first facility is a five-year unsecured facility, expiring December 2011, that bears interest at a base rate or at the LIBOR rate for the applicable interest period, plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. This credit facility serves as a backup liquidity facility for our commercial paper program. At the time this credit facility was established, the limit on borrowings under the facility was $600 million. However, in September 2008, the limit on borrowings was effectively reduced to approximately $567 million after one lender with a 5.55% share of the commitments ceased funding under the facility. At September 30, 2008, there was $216.2 million available under the credit facility.
 
The second facility is a $300 million unsecured 364-day facility expiring October 2008, that bears interest at a base rate or the LIBOR rate for the applicable interest period, plus from 0.30 percent to 0.75 percent, based on the Company’s credit ratings. In September 2008, the limit on borrowings was reduced to approximately $283 million after one lender with a 5.55% share of the commitments ceased funding under the facility. At September 30, 2008, there were no borrowings under this facility. In October 2008, this facility was replaced upon its termination by a $212.5 million unsecured 364-day facility that bears interest at a base rate or the LIBOR rate for the applicable interest period, plus from 1.25 percent to 2.50 percent, based on the Company’s credit ratings.
 
The third facility is an $18 million unsecured facility that bears interest at a daily negotiated rate, generally based on the Federal Funds rate plus a variable margin. This facility expired on March 31, 2008 and was renewed effective April 1, 2008 for one year with no material changes to the terms and pricing. At September 30, 2008, there were no borrowings under this facility.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The availability of funds under our credit facilities is subject to conditions specified in the respective credit agreements, all of which we currently satisfy. These conditions include our compliance with financial covenants and the continued accuracy of representations and warranties contained in these agreements. We are required by the financial covenants in our revolving credit facilities to maintain, at the end of each fiscal quarter, a ratio of total debt to total capitalization of no greater than 70 percent. At September 30, 2008, our total-debt-to-total-capitalization ratio, as defined, was 57 percent. In addition, both the interest margin over the Eurodollar rate and the fee that we pay on unused amounts under each of our revolving credit facilities are subject to adjustment depending upon our credit ratings. The revolving credit facilities each contain the same limitation with respect to our total-debt to-total capitalization ratio.
 
Uncommitted credit facilities
 
AEM has a $580 million uncommitted demand working capital credit facility. On March 31, 2008, AEM and the participating banks amended the facility, primarily to extend it to March 31, 2009. In addition, the amendment removed the financial covenant relating to the amount of cumulative losses that could be incurred by AEM and its subsidiaries over a specific period of time and included provisions permitting the participating banks, or their affiliates, to participate in physical commodity transactions with AEM.
 
Borrowings under the credit facility can be made either as revolving loans or offshore rate loans. Revolving loan borrowings will bear interest at a floating rate equal to a base rate defined as the higher of (i) 0.50 percent per annum above the Federal Funds rate or (ii) the lender’s prime rate plus 0.25 percent. Offshore rate loan borrowings will bear interest at a floating rate equal to a base rate based upon LIBOR for the applicable interest period plus an applicable margin, ranging from 1.25 percent to 1.625 percent per annum, depending on the excess tangible net worth of AEM, as defined in the credit facility. Borrowings drawn down under letters of credit issued by the banks will bear interest at a floating rate equal to the base rate, as defined above, plus an applicable margin, which will range from 1.00 percent to 1.875 percent per annum, depending on the excess tangible net worth of AEM and whether the letters of credit are swap-related standby letters of credit.
 
AEM is required by the financial covenants in the credit facility not to exceed a maximum ratio of total liabilities to tangible net worth of 5 to 1. At September 30, 2008, AEM’s ratio of total liabilities to tangible net worth, as defined, was 1.58 to 1. Additionally, AEM must maintain minimum levels of net working capital ranging from $20 million to $120 million and a minimum tangible net worth ranging from $21 million to $121 million. As defined in the financial covenants, at September 30, 2008, AEM’s net working capital was $218.8 million and its tangible net worth was $232.5 million.
 
At September 30, 2008, there were no borrowings outstanding under this credit facility. However, at September 30, 2008, AEM letters of credit totaling $87.9 million had been issued under the facility, which reduced the amount available by a corresponding amount. The amount available under this credit facility is also limited by various covenants, including covenants based on working capital. Under the most restrictive covenant, the amount available to AEM under this credit facility was $212.1 million at September 30, 2008. This line of credit is collateralized by substantially all of the assets of AEM and is guaranteed by AEH.
 
The Company has a $200 million intercompany uncommitted revolving credit facility with AEH. This facility bears interest at the lower of (i) the one-month LIBOR rate plus 0.20 percent or (ii) the marginal borrowing rate available to the Company on any such date under its commercial paper program. Applicable state regulatory commissions have approved this facility through December 31, 2008. The Company has applied for renewal of these approvals through December 31, 2009. At September 30, 2008, there were no borrowings outstanding under this facility.
 
AEH has a $200 million intercompany uncommitted demand credit facility with the Company, which bears interest at the rate of AEM’s $580 million uncommitted demand working capital credit facility plus


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
0.75 percent. Applicable state regulatory commissions have approved this facility through December 31, 2008. The Company has applied for renewal of these approvals through December 31, 2009. At September 30, 2008, there was $35.1 million outstanding under this facility.
 
In addition, to supplement its $580 million credit facility, AEM has a $200 million intercompany uncommitted demand credit facility with AEH, which bears interest at the rate of AEM’s $580 million uncommitted demand working capital credit facility plus 0.75 percent. Any outstanding amounts under this facility are subordinated to AEM’s $580 million uncommitted demand credit facility. At September 30, 2008, there was $6.5 million outstanding under this facility.
 
Debt Covenants
 
In addition to the covenants described above, our Series P First Mortgage Bonds contained provisions that allowed us to prepay the outstanding balance in whole at any time, subject to a prepayment premium. The First Mortgage Bonds provided for certain cash flow requirements and restrictions on the incurrence of additional indebtedness, sales of assets and payments of dividends. In May 2008, we redeemed our Series P First Mortgage Bonds which were scheduled to mature in November 2013. Since the bonds have been redeemed and the related indenture has been discharged, the debt covenants described above no longer apply.
 
We were in compliance with all of our debt covenants as of September 30, 2008. 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 public debt indentures relating to our senior notes and debentures, as well as our revolving credit agreements, each contain a default provision that is triggered if outstanding indebtedness arising out of any other credit agreements in amounts ranging from in excess of $15 million to in excess of $100 million becomes due by acceleration or is not paid at maturity. In addition, AEM’s credit agreement contains a cross-default provision whereby AEM would be in default if it defaults on other indebtedness, as defined, by at least $250 thousand in the aggregate. Additionally, this agreement contains a provision that would limit the amount of credit available if the Company 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.
 
Based on the borrowing rates currently available to us for debt with similar terms and remaining average maturities, the fair value of long-term debt at September 30, 2008 and 2007 is estimated, using discounted cash flow analysis, to be $1,955.5 million and $2,026.6 million.
 
Maturities of long-term debt at September 30, 2008 were as follows (in thousands):
 
         
2009
  $ 785  
2010
    400,131  
2011
    360,131  
2012
    2,434  
2013
    250,131  
Thereafter
    1,110,000  
         
    $ 2,123,612  
         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
6.   Shareholders’ Equity
 
Stock Issuances
 
During the fiscal years ended September 30, 2008, 2007 and 2006 we issued 1,488,146, 7,587,021 and 1,200,115 shares of common stock.
 
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 per share and generated net proceeds of approximately $192 million. We used the net proceeds from this offering to reduce short-term debt.
 
Shareholder Rights Plan
 
In November 1997, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to shareholders of record at the close of business on May 10, 1998, the description and terms of which were set forth in a rights agreement between us and the rights agent dated May 10, 1998. From that time until the expiration of the rights agreement on May 10, 2008, when all rights terminated, each share of common stock we issued included a right that entitled the holder to purchase from us a one-tenth share of our common stock at a purchase price of $8.00 per share, subject to adjustment.
 
7.   Stock and Other Compensation Plans
 
Stock-Based Compensation Plans
 
Total stock-based compensation expense was $14.0 million, $11.9 million and $10.2 million for the fiscal years ended September 30, 2008, 2007 and 2006, primarily related to restricted stock costs.
 
1998 Long-Term Incentive Plan
 
In August 1998, the Board of Directors approved and adopted the 1998 Long-Term Incentive Plan (LTIP), which became effective in October 1998 after approval by our shareholders. The LTIP is a comprehensive, long-term incentive compensation plan providing for discretionary awards of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, time-lapse restricted stock, performance-based restricted stock units and stock units to certain employees and non-employee directors of the Company and our subsidiaries. The objectives of this plan 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. We are authorized to grant awards for up to a maximum of 6.5 million shares of common stock under this plan subject to certain adjustment provisions. As of September 30, 2008, non-qualified stock options, bonus stock, time-lapse restricted stock, performance-based restricted stock units and stock units had been issued under this plan, and 2,122,776 shares were available for future issuance. The option price of the stock options issued under this plan is equal to the market price of our stock at the date of grant. These stock options expire 10 years from the date of the grant and vest annually over a service period ranging from one to three years. However, no stock options have been granted under this plan since fiscal 2003, except for a limited number of options that were converted from bonuses paid under our Annual Incentive Plan, the last of which occurred in fiscal 2006.
 
Restricted Stock Plans
 
As noted above, the LTIP provides for discretionary awards of restricted stock to help attract, retain and reward employees of Atmos Energy and its subsidiaries. Certain of these awards vest based upon the passage of time and other awards vest based upon the passage of time and the achievement of specified performance targets. The associated expense is recognized ratably over the vesting period. The following summarizes


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
information regarding the restricted stock issued under the plan during the fiscal years ended September 30, 2008, 2007 and 2006:
 
                                                 
    2008     2007     2006  
          Weighted
          Weighted
          Weighted
 
          Average
          Average
          Average
 
    Number of
    Grant-
    Number of
    Grant-
    Number of
    Grant-
 
    Restricted
    Date Fair
    Restricted
    Date Fair
    Restricted
    Date Fair
 
    Shares     Value     Shares     Value     Shares     Value  
 
Nonvested at beginning of year
    948,717     $ 28.95       746,776     $ 26.49       592,490     $ 25.32  
Granted
    547,845       27.90       485,260       30.85       440,016       26.80  
Vested
    (380,895 )     27.17       (271,075 )     26.12       (265,546 )     24.42  
Forfeited
    (18,897 )     29.32       (12,244 )     28.51       (20,184 )     26.95  
                                                 
Nonvested at end of year
    1,096,770     $ 29.04       948,717     $ 28.95       746,776     $ 26.49  
                                                 
 
As of September 30, 2008, there was $16.3 million of total unrecognized compensation cost related to nonvested restricted shares granted under the LTIP. That cost is expected to be recognized over a weighted-average period of 1.5 years. The fair value of restricted stock vested during the fiscal years ended September 30, 2008, 2007 and 2006 was $10.3 million, $7.1 million and $6.5 million.
 
Stock Option Plan
 
We used the Black-Scholes pricing model to estimate the fair value of each option granted with the following weighted average assumptions for fiscal year 2006. No stock options were granted in fiscal years 2007 and 2008.
 
         
    Fiscal Year Ended
 
    September 30,
 
    2006  
 
Valuation Assumptions
       
Expected Life (years) (1)
    7  
Interest rate (2)
    4.6 %
Volatility (3)
    20.3 %
Dividend yield
    4.8 %
 
 
(1) The expected life of stock options is estimated based on historical experience.
 
(2) The interest rate is based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.
 
(3) The volatility is estimated based on historical and current stock data for the Company.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
A summary of activity for grants of stock options under the LTIP follows:
 
                                                 
    2008     2007     2006  
          Weighted
          Weighted
          Weighted
 
          Average
          Average
          Average
 
    Number of
    Exercise
    Number of
    Exercise
    Number of
    Exercise
 
    Options     Price     Options     Price     Options     Price  
 
Outstanding at beginning of year
    920,841     $ 22.54       1,017,152     $ 22.57       964,704     $ 22.20  
Granted
                            93,196       26.19  
Exercised
    (7,000 )     21.90       (92,071 )     22.84       (40,582 )     22.21  
Forfeited
                (4,240 )     23.11       (166 )     21.23  
                                                 
Outstanding at end of year (1)
    913,841     $ 22.54       920,841     $ 22.54       1,017,152     $ 22.57  
                                                 
Exercisable at end of year (2)
    911,492     $ 22.53       908,332     $ 22.49       991,778     $ 22.48  
                                                 
 
 
(1) The weighted-average remaining contractual life for outstanding options was 3.4 years, 4.4 years, and 5.4 years for fiscal years 2008, 2007 and 2006. The aggregate intrinsic value of outstanding options was $3.3 million, $3.3 million and $3.7 million for fiscal years 2008, 2007 and 2006.
 
(2) The weighted-average remaining contractual life for exercisable options was 3.4 years, 4.3 years, and 5.3 years for fiscal years 2008, 2007 and 2006. The aggregate intrinsic value of exercisable options was $3.3 million, $3.3 million and $3.6 million for fiscal years 2008, 2007 and 2006.
 
Information about outstanding and exercisable options under the LTIP, as of September 30, 2008, is reflected in the following tables:
 
                                         
    Options Outstanding              
          Weighted
          Options Exercisable  
          Average
    Weighted
          Weighted
 
          Remaining
    Average
          Average
 
    Number of
    Contractual
    Exercise
    Number of
    Exercise
 
Range of Exercise Prices
  Options     Life (In Years)     Price     Options     Price  
 
$15.65 to $20.24
    61,833       1.4     $ 15.66       61,833     $ 15.66  
$20.25 to $22.99
    493,525       3.8     $ 21.86       493,525     $ 21.86  
$23.00 to $26.19
    358,483       3.2     $ 24.66       356,134     $ 24.65  
                                         
$15.65 to $26.19
    913,841       3.4     $ 22.54       911,492     $ 22.53  
                                         
 
                         
    Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands, except per share data)  
 
Grant date weighted average fair value per share
              $ 3.74  
Net cash proceeds from stock option exercises
  $ 153     $ 2,103     $ 901  
Income tax benefit from stock option exercises
  $ 12     $ 296     $ 78  
Total intrinsic value of options exercised
  $ 26     $ 347     $ 143  
 
As of September 30, 2008, there was less than $0.1 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 0.1 years.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Other Plans
 
Direct Stock Purchase Plan
 
We maintain a Direct Stock Purchase Plan, open to all investors, which allows participants to have all or part of their cash dividends paid quarterly in additional shares of our common stock. The minimum initial investment required to join the plan is $1,250. Direct Stock Purchase Plan participants may purchase additional shares of our common stock as often as weekly with voluntary cash payments of at least $25, up to an annual maximum of $100,000.
 
Outside Directors Stock-For-Fee Plan
 
In November 1994, the Board adopted the Outside Directors Stock-for-Fee Plan which was approved by our shareholders in February 1995 and was amended and restated in November 1997. The plan permits non-employee directors to receive all or part of their annual retainer and meeting fees in stock rather than in cash.
 
Equity Incentive and Deferred Compensation Plan for Non-Employee Directors
 
In November 1998, the Board of Directors adopted the Equity Incentive and Deferred Compensation Plan for Non-Employee Directors which was approved by our shareholders in February 1999. This plan amended the Atmos Energy Corporation Deferred Compensation Plan for Outside Directors adopted by the Company in May 1990 and replaced the pension payable under our Retirement Plan for Non-Employee Directors. The plan provides non-employee directors of Atmos Energy with the opportunity to defer receipt, until retirement, of compensation for services rendered to the Company, invest deferred compensation into either a cash account or a stock account and to receive an annual grant of share units for each year of service on the Board.
 
Other Discretionary Compensation Plans
 
We adopted the Variable Pay Plan in fiscal 1999 for our regulated segments’ employees to give each employee an opportunity to share in our financial success based on the achievement of key performance measures considered critical to achieving business objectives for a given year and has minimum and maximum thresholds. The plan must meet the minimum threshold in order for the plan to be funded and distributed to employees. These performance measures may include earnings growth objectives, improved cash flow objectives or crucial customer satisfaction and safety results. We monitor progress towards the achievement of the performance measures throughout the year and record accruals based upon the expected payout using the best estimates available at the time the accrual is recorded. During the last several fiscal years, we have used earnings per share as our sole performance measure.
 
We adopted our Annual Incentive Plan in October 2001 to give the employees in our nonregulated segments an opportunity to share in the success of the nonregulated operations. The plan is based upon the net earnings of the nonregulated operations and has minimum and maximum thresholds. The plan must meet the minimum threshold in order for the plan to be funded and distributed to employees. We monitor the progress toward the achievement of the thresholds throughout the year and record accruals based upon the expected payout using the best estimates available at the time the accrual is recorded.
 
8.   Retirement and Post-Retirement Employee Benefit Plans
 
We have both funded and unfunded noncontributory defined benefit plans that together cover substantially all of our employees. We also maintain post-retirement plans that provide health care benefits to retired employees. Finally, we sponsor defined contribution plans which cover substantially all employees. These plans are discussed in further detail below.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Effective September 30, 2007, we adopted the provisions of 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 made 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 required that our measurement date correspond to the fiscal year end balance sheet date by as late as fiscal 2009 for the Company. Effective October 1, 2008, the Company adopted the measurement date requirement of SFAS 158 using the remeasurement approach. Under this approach, the Company remeasured its projected benefit obligation, fair value of plan assets and its fiscal 2009 net periodic cost. In accordance with the transition rules of SFAS 158, the impact of changing the measurement date will decrease retained earnings by $7.8 million, net of tax, decrease the unrecognized actuarial loss by $9.0 million and increase our postretirement liabilities by $3.5 million as of October 1, 2008.
 
As a rate regulated entity, we generally recover our pension costs in our rates over a period of up to 15 years. Therefore, the decrease in the unrecognized actuarial loss that would have been recorded as a component of accumulated other comprehensive loss, net of tax, will be recorded as a reduction to a regulatory asset as a component of deferred charges and other assets in fiscal 2009. The change in the measurement date will not materially impact the level of net periodic pension cost we will record in fiscal 2009.
 
The amounts that have not yet been recognized in net periodic pension cost that have been recorded as regulatory assets are as follows:
 
                                 
          Supplemental
             
    Defined
    Executive
    Postretirement
       
    Benefits Plans     Retirement Plans     Plans     Total  
    (In thousands)  
 
September 30, 2008
                               
Unrecognized transition obligation
  $     $     $ 8,131     $ 8,131  
Unrecognized prior service cost
    (2,984 )     452             (2,532 )
Unrecognized actuarial loss
    64,815       17,308       12,841       94,964  
                                 
    $ 61,831     $ 17,760     $ 20,972     $ 100,563  
                                 
September 30, 2007
                               
Unrecognized transition obligation
  $     $     $ 9,642     $ 9,642  
Unrecognized prior service cost
    (4,142 )     664             (3,478 )
Unrecognized actuarial loss
    31,022       22,164       (328 )     52,858  
                                 
    $ 26,880     $ 22,828     $ 9,314     $ 59,022  
                                 
 
Defined Benefit Plans
 
Employee Pension Plans
 
As of September 30, 2008, we maintained two defined benefit plans: the Atmos Energy Corporation Pension Account Plan (the Plan) and the Atmos Energy Corporation Retirement Plan for Mississippi Valley Gas Union Employees (the Union Plan) (collectively referred to as the Plans). The assets of the Plans are held within the Atmos Energy Corporation Master Retirement Trust (the Master Trust).
 
The Plan is a cash balance pension plan, that was established effective January 1999 and covers substantially all employees of Atmos Energy’s regulated operations. Opening account balances were established for participants as of January 1999 equal to the present value of their respective accrued benefits under the pension plans which were previously in effect as of December 31, 1998. The Plan credits an allocation to


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
each participant’s account at the end of each year according to a formula based on the participant’s age, service and total pay (excluding incentive pay).
 
The Plan also provides for an additional annual allocation based upon a participant’s age as of January 1, 1999 for those participants who were participants in the prior pension plans. The Plan will credit this additional allocation each year through December 31, 2008. In addition, at the end of each year, a participant’s account will be credited with interest on the employee’s prior year account balance. A special grandfather benefit also applies through December 31, 2008, for participants who were at least age 50 as of January 1, 1999, and who were participants in one of the prior plans on December 31, 1998. Participants fully vest in their account balances after three years of service and may choose to receive their account balances as a lump sum or an annuity.
 
The Union Plan is a defined benefit plan that covers substantially all full-time union employees in our Mississippi Division. Under this plan, benefits are based upon years of benefit service and average final earnings. Participants vest in the plan after five years and will receive their benefit in an annuity.
 
Generally, our funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974, including the funding requirements under the Pension Protection Act of 2006 (PPA). However, additional voluntary contributions are made from time to time as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
 
During fiscal 2008 and fiscal 2006, we voluntarily contributed $2.3 million and $2.9 million to the Union Plan. These contributions achieved a desired level of funding for this plan for the plan years 2007 and 2005. During fiscal 2007, we did not make any contributions to the Plans. However, based upon market conditions subsequent to September 30, 2008, the current funded position of the plans and the new funding requirements under the PPA, we believe it is reasonably possible that we will be required to contribute to the Plans in fiscal 2009. Further, we will consider whether an additional voluntary contribution is prudent to maintain certain PPA funding thresholds. However, we cannot anticipate with certainty whether such contributions will be made and the amount of such contributions.
 
We manage the Master Trust’s assets with the objective of achieving a rate of return net of inflation of approximately four percent per year. We make investment decisions and evaluate performance on a medium term horizon of at least three to five years. We also consider our current financial status when making recommendations and decisions regarding the Master Trust’s assets. Finally, we strive to ensure the Master Trust’s assets are appropriately invested to maintain an acceptable level of risk and meet the Master Trust’s long-term asset investment policy adopted by the Board of Directors.
 
To achieve these objectives, we invest the Master Trust’s assets in equity securities, fixed income securities, interests in commingled pension trust funds, other investment assets and cash and cash equivalents. Investments in equity securities are diversified among the market’s various subsectors in an effort to diversify risk and maximize returns. Fixed income securities are invested in investment grade securities. Cash equivalents are invested in securities that either are short term (less than 180 days) or readily convertible to cash with modest risk.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents asset allocation information for the Master Trust as of September 30, 2008 and 2007.
 
                     
        Actual Allocation
 
    Targeted
  September 30  
Security Class
  Allocation Range   2008     2007  
 
Domestic equities
  35%-55%     42.0 %     44.9 %
International equities
  10%-20%     11.0 %     15.2 %
Fixed income
  10%-30%     24.2 %     20.1 %
Company stock
  0%-10%     10.2 %     8.5 %
Other assets
  5%-15%     10.2 %     9.6 %
Cash and equivalents
  0%-10%     2.4 %     1.7 %
 
At September 30, 2008 and 2007, the Plan held 1,169,700 shares of our common stock, which represented 10.2 percent and 8.5 percent of total Master Trust assets. These shares generated dividend income for the Plan of approximately $1.5 million during fiscal 2008 and 2007.
 
Our employee pension plan expenses and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates including the market value of plan assets, estimates of the expected return on plan assets and assumed discount rates and demographic data. We review the estimates and assumptions underlying our employee pension plans annually based upon a June 30 measurement date. The development of our assumptions is fully described in our significant accounting policies in Note 2. The actuarial assumptions used to determine the pension liability for the Plans were determined as of June 30, 2008 and 2007 and the actuarial assumptions used to determine the net periodic pension cost for the Plans were determined as of June 30, 2007, 2006 and 2005. These assumptions are presented in the following table:
 
                                         
    Pension Liability     Pension Cost  
    2008     2007     2008     2007     2006  
 
Discount rate
    6.68 %     6.30 %     6.30 %     6.30 %     5.00 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %     4.00 %
Expected return on plan assets
    8.25 %     8.25 %     8.25 %     8.25 %     8.50 %


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents the Plans’ accumulated benefit obligation, projected benefit obligation and funded status as of September 30, 2008 and 2007 based upon a June 30, 2008 and 2007 measurement date.
 
                 
    2008     2007  
    (In thousands)  
 
Accumulated benefit obligation
  $ 329,023     $ 325,574  
                 
Change in projected benefit obligation:
               
Benefit obligation at beginning of year
  $ 335,581     $ 326,464  
Service cost
    13,329       13,090  
Interest cost
    21,129       20,396  
Actuarial loss (gain)
    (6,939 )     4,034  
Benefits paid
    (25,721 )     (28,403 )
Plan amendments
    261        
                 
Benefit obligation at end of year
    337,640       335,581  
Change in plan assets:
               
Fair value of plan assets at beginning of year
    389,073       362,714  
Actual return on plan assets
    (21,972 )     54,762  
Employer contributions (1)
           
Benefits paid
    (25,721 )     (28,403 )
                 
Fair value of plan assets at end of year
    341,380       389,073  
                 
Reconciliation:
               
Funded status
    3,740       53,492  
Unrecognized prior service cost
           
Unrecognized net loss
           
                 
Net amount recognized
  $ 3,740     $ 53,492  
                 
 
 
(1) During the fourth quarter of fiscal 2008, we voluntarily contributed $2.3 million to the Union Plan. However, this contribution is not reflected in this table because it occurred after the June 30, 2008 measurement date.
 
Net periodic pension cost for the Plans for fiscal 2008, 2007 and 2006 is recorded as operating expense and included the following components:
 
                         
    Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands)  
 
Components of net periodic pension cost:
                       
Service cost
  $ 13,329     $ 13,090     $ 13,465  
Interest cost
    21,129       20,396       17,932  
Expected return on assets
    (25,242 )     (24,357 )     (25,598 )
Amortization of prior service cost
    (897 )     (838 )     (959 )
Recognized actuarial loss
    6,482       8,253       10,469  
                         
Net periodic pension cost
  $ 14,801     $ 16,544     $ 15,309  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Supplemental Executive Benefits Plans
 
We have a nonqualified Supplemental Executive Benefits Plan which provides additional pension, disability and death benefits to our officers, division presidents and certain other employees of the Company who were employed on or before August 12, 1998. In addition, in August 1998, we adopted the Supplemental Executive Retirement Plan (formerly known as the Performance-Based Supplemental Executive Benefits Plan), which covers all employees who become officers or division presidents after August 12, 1998 or any other employees selected by our Board of Directors at its discretion.
 
Similar to our employee pension plans, we review the estimates and assumptions underlying our supplemental executive benefit plans annually based upon a June 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for the supplemental plans were determined as of June 30, 2008 and 2007 and the actuarial assumptions used to determine the net periodic pension cost for the supplemental plans were determined as of June 30, 2007, 2006 and 2005. These assumptions are presented in the following table:
 
                                         
    Pension Liability     Pension Cost  
    2008     2007     2008     2007     2006  
 
Discount rate
    6.68 %     6.30 %     6.30 %     6.30 %     5.00 %
Rate of compensation increase
    4.00 %     4.00 %     4.00 %     4.00 %     4.00 %
 
The following table presents the supplemental plans’ accumulated benefit obligation, projected benefit obligation and funded status as of September 30, 2008 and 2007, based upon a June 30, 2008 and 2007 measurement date.
 
                 
    2008     2007  
    (In thousands)  
 
Accumulated benefit obligation
  $ 83,871     $ 86,976  
                 
Change in projected benefit obligation:
               
Benefit obligation at beginning of year
  $ 92,350     $ 87,499  
Service cost
    2,184       2,981  
Interest cost
    5,816       5,585  
Actuarial loss (gain)
    (3,634 )     719  
Benefits paid
    (4,730 )     (4,434 )
                 
Benefit obligation at end of year
    91,986       92,350  
Change in plan assets:
               
Fair value of plan assets at beginning of year
           
Employer contribution
    4,730       4,434  
Benefits paid
    (4,730 )     (4,434 )
                 
Fair value of plan assets at end of year
           
                 
Reconciliation:
               
Funded status
    (91,986 )     (92,350 )
Unrecognized prior service cost
           
Unrecognized net loss
           
                 
Accrued pension cost
  $ (91,986 )   $ (92,350 )
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Assets for the supplemental plans are held in separate rabbi trusts and comprise the following:
 
                         
          Unrealized
       
          Holding
    Market
 
    Cost     Gain     Value  
    (In thousands)  
 
As of September 30, 2008:
                       
Domestic equity mutual funds
  $ 31,041     $ 1,231     $ 32,272  
Foreign equity mutual funds
    5,309       359       5,668  
                         
    $ 36,350     $ 1,590     $ 37,940  
                         
As of September 30, 2007:
                       
Domestic equity mutual funds
  $ 32,781     $ 2,793     $ 35,574  
Foreign equity mutual funds
    4,618       1,855       6,473  
                         
    $ 37,399     $ 4,648     $ 42,047  
                         
 
At September 30, 2008, we maintained an investment in one domestic equity mutual fund that was in an unrealized loss position as of September 30, 2008. Information concerning unrealized losses for our supplemental plan assets follows:
 
                                 
    Less Than 12 Months     12 Months or More  
          Unrealized
          Unrealized
 
    Fair Value     Loss     Fair Value     Loss  
    (In thousands)  
 
Domestic equity mutual fund
  $ 4,406     $ (394 )   $     $  
                                 
 
Because this fund is only used to fund the supplemental plans, we evaluate investment performance over a long-term horizon. Based upon our intent and ability to hold this investment, our ability to direct the source of the payments in order to maximize the life of the portfolio, the short-term nature of the decline in fair value and the fact that this fund continues to receive good ratings from mutual fund rating companies, we do not consider this impairment to be other-than-temporary as of September 30, 2008.
 
Net periodic pension cost for the supplemental plans for fiscal 2008, 2007 and 2006 is recorded as operating expense and included the following components:
 
                         
    Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands)  
 
Components of net periodic pension cost:
                       
Service cost
  $ 2,184     $ 2,981     $ 3,001  
Interest cost
    5,816       5,585       4,955  
Amortization of transition asset
                 
Amortization of prior service cost
    212       1,020       1,022  
Recognized actuarial loss
    1,222       1,482       2,789  
                         
Net periodic pension cost
  $ 9,434     $ 11,068     $ 11,767  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Supplemental Disclosures for Defined Benefit Plans with Accumulated Benefit Obligations in Excess of Plan Assets
 
The following summarizes key information for our defined benefit plans with accumulated benefit obligations in excess of plan assets. For fiscal 2008 and 2007 the accumulated benefit obligation for our supplemental plans exceeded the fair value of plan assets.
 
                 
    Supplemental Plans  
    2008     2007  
    (In thousands)  
 
Projected Benefit Obligation
  $ 91,986     $ 92,350  
Accumulated Benefit Obligation
    83,871       86,976  
Fair Value of Plan Assets
           
 
Estimated Future Benefit Payments
 
The following benefit payments for our defined benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the following fiscal years:
 
                 
    Pension
    Supplemental
 
    Plans     Plans  
    (In thousands)  
 
2009
  $ 29,146     $ 8,047  
2010
    29,688       4,975  
2011
    29,896       5,913  
2012
    30,266       5,872  
2013
    30,845       5,974  
2014-2018
    164,866       33,971  
 
Postretirement Benefits
 
We sponsor the Retiree Medical Plan for Retirees and Disabled Employees of Atmos Energy Corporation (the Atmos Retiree Medical Plan). This plan provides medical and prescription drug protection to all qualified participants based on their date of retirement. The Atmos Retiree Medical Plan provides different levels of benefits depending on the level of coverage chosen by the participants and the terms of predecessor plans; however, we generally pay 80 percent of the projected net claims and administrative costs and participants pay the remaining 20 percent of this cost.
 
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 annually as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. We expect to contribute $12.7 million to our postretirement benefits plan during fiscal 2009.
 
We maintain a formal investment policy with respect to the assets in our postretirement benefits plan to ensure the assets funding the postretirement benefit plan are appropriately invested to maintain an acceptable level of risk. We also consider our current financial status when making recommendations and decisions regarding the postretirement benefits plan.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We currently invest the assets funding our postretirement benefit plan in diversified investment funds which consist of common stocks, preferred stocks and fixed income securities. The diversified investment funds may invest up to 75 percent of assets in common stocks and convertible securities. The following table presents asset allocation information for the postretirement benefit plan assets as of September 30, 2008 and 2007.
 
                 
    Actual Allocation
 
    September 30  
Security Class
  2008     2007  
 
Diversified investment funds
    98.1 %     98.4 %
Cash and cash equivalents
    1.9 %     1.6 %
 
Similar to our employee pension and supplemental plans, we review the estimates and assumptions underlying our postretirement benefit plan annually based upon a June 30 measurement date using the same techniques as our employee pension plans. The actuarial assumptions used to determine the pension liability for our postretirement plan were determined as of June 30, 2008 and 2007 and the actuarial assumptions used to determine the net periodic pension cost for the postretirement plan were determined as of June 30, 2007, 2006 and 2005. The assumptions are presented in the following table:
 
                                         
    Postretirement Liability     Postretirement Cost  
    2008     2007     2008     2007     2006  
 
Discount rate
    6.68 %     6.30 %     6.30 %     6.30 %     5.00 %
Expected return on plan assets
    5.00 %     5.00 %     5.00 %     5.20 %     5.30 %
Initial trend rate
    8.00 %     8.00 %     8.00 %     8.00 %     9.00 %
Ultimate trend rate
    5.00 %     5.00 %     5.00 %     5.00 %     5.00 %
Ultimate trend reached in
    2014       2010       2011       2010       2010  


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents the postretirement plan’s benefit obligation and funded status as of September 30, 2008 and 2007, based upon a June 30, 2008 and 2007 measurement date.
 
                 
    2008     2007  
    (In thousands)  
 
Change in benefit obligation:
               
Benefit obligation at beginning of year
  $ 175,585     $ 160,901  
Service cost
    13,367       11,228  
Interest cost
    11,648       10,561  
Plan participants’ contributions
    2,879       3,605  
Actuarial loss (gain)
    1,401       470  
Benefits paid
    (11,008 )     (11,305 )
Subsidy payments
    125       125  
                 
Benefit obligation at end of year
    193,997       175,585  
Change in plan assets:
               
Fair value of plan assets at beginning of year
    55,370       44,800  
Actual return on plan assets
    (8,782 )     6,371  
Employer contributions
    9,613       11,899  
Plan participants’ contributions
    2,879       3,605  
Benefits paid
    (11,008 )     (11,305 )
                 
Fair value of plan assets at end of year
    48,072       55,370  
                 
Reconciliation:
               
Funded status
    (145,925 )     (120,215 )
Unrecognized transition obligation
           
Unrecognized prior service cost
           
Unrecognized net loss
           
                 
Accrued postretirement cost
  $ (145,925 )   $ (120,215 )
                 
 
Net periodic postretirement cost for fiscal 2008, 2007 and 2006 is recorded as operating expense and included the components presented below.
 
                         
    Fiscal Year Ended September 30  
    2008     2007     2006  
    (In thousands)  
 
Components of net periodic postretirement cost:
                       
Service cost
  $ 13,367     $ 11,228     $ 13,083  
Interest cost
    11,648       10,561       8,840  
Expected return on assets
    (2,861 )     (2,388 )     (2,187 )
Amortization of transition obligation
    1,511       1,512       1,511  
Amortization of prior service cost
          33       361  
Recognized actuarial loss
                1,280  
                         
Net periodic postretirement cost
  $ 23,665     $ 20,946     $ 22,888  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Assumed health care cost trend rates have a significant effect on the amounts reported for the plan. A one-percentage point change in assumed health care cost trend rates would have the following effects on the latest actuarial calculations:
 
                 
    1-Percentage
    1-Percentage
 
    Point Increase     Point Decrease  
    (In thousands)  
 
Effect on total service and interest cost components
  $ 3,980     $ (3,301 )
Effect on postretirement benefit obligation
  $ 22,620     $ (19,115 )
 
We are currently recovering other postretirement benefits costs through our regulated rates under SFAS 106 accrual accounting in substantially all of our service areas. Other postretirement benefits costs have been specifically addressed in rate orders in each jurisdiction served by our Kentucky/Mid-States Division and our Mississippi Division or have been included in a rate case and not disallowed. Management believes that accrual accounting in accordance with SFAS 106 is appropriate and will continue to seek rate recovery of accrual-based expenses in its ratemaking jurisdictions that have not yet approved the recovery of these expenses.
 
Estimated Future Benefit Payments
 
The following benefit payments paid by us, retirees and prescription drug subsidy payments for our postretirement benefit plans, which reflect expected future service, as appropriate, are expected to be paid in the following fiscal years:
 
                                 
                      Total
 
    Company
    Retiree
    Subsidy
    Postretirement
 
    Payments     Payments     Payments     Benefits  
    (In thousands)  
 
2009
  $ 12,703     $ 2,805     $ 149     $ 15,657  
2010
    10,262       3,199       77       13,538  
2011
    11,821       3,637             15,458  
2012
    13,352       4,092             17,444  
2013
    14,759       4,537             19,296  
2014-2018
    100,192       30,408             130,600  
 
Defined Contribution Plans
 
As of September 30, 2008, we maintained three defined contribution benefit plans: the Atmos Energy Corporation Retirement Savings Plan and Trust (the Retirement Savings Plan), the Atmos Energy Corporation Savings Plan for MVG Union Employees (the Union 401K Plan) and the Atmos Energy Marketing, LLC 401K Profit-Sharing Plan (the AEM 401K Profit-Sharing Plan).
 
The Retirement Savings Plan covers substantially all employees in our regulated operations and is subject to the provisions of Section 401(k) of the Internal Revenue Code. Effective January 1, 2007, employees automatically became participants of the Retirement Savings Plan on the date of employment. Participants may elect a salary reduction ranging from a minimum of one percent up to a maximum of 65 percent of eligible compensation, as defined by the Plan, not to exceed the maximum allowed by the Internal Revenue Service. New participants are automatically enrolled in the Plan at a salary reduction amount of four percent of eligible compensation, from which they may opt out. We match 100 percent of a participant’s contributions, limited to four percent of the participant’s salary, in our common stock. However, participants have the option to immediately transfer this matching contribution into other funds held within the plan. Participants are eligible to receive matching contributions after completing one year of service. Participants are also permitted to take out loans against their accounts subject to certain restrictions.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Union 401K Plan covers substantially all Mississippi Division employees who are members of the International Chemical Workers Union Council, United Food and Commercial Workers Union International (the Union) and is subject to the provisions of Section 401(k) of the Internal Revenue Code. Employees of the Union automatically become participants of the Union 401K plan on the date of union membership. We match 50 percent of a participant’s contribution in cash, limited to six percent of the participant’s eligible contribution. Participants are also permitted to take out loans against their accounts subject to certain restrictions.
 
Matching contributions to the Retirement Savings Plan and the Union 401K Plan are expensed as incurred and amounted to $8.9 million, $8.3 million, and $7.0 million for fiscal years 2008, 2007 and 2006. The Board of Directors may also approve discretionary contributions, subject to the provisions of the Internal Revenue Code of 1986 and applicable regulations of the Internal Revenue Service. No discretionary contributions were made for fiscal years 2008, 2007 or 2006. At September 30, 2008 and 2007, the Retirement Savings Plan held 3.4 percent and 3.1 percent of our outstanding common stock.
 
The AEM 401K Profit-Sharing Plan covers substantially all AEM employees and is subject to the provisions of Section 401(k) of the Internal Revenue Code. Participants may elect a salary reduction ranging from a minimum of one percent up to a maximum of 65 percent of eligible compensation, as defined by the Plan, not to exceed the maximum allowed by the Internal Revenue Service. The Company may elect to make safe harbor contributions up to three percent of the employee’s salary which vest immediately. The Company may also make discretionary profit sharing contributions to the AEM 401K Profit-Sharing Plan. Participants become fully vested in the discretionary profit-sharing contributions after three years of service. Participants are also permitted to take out loans against their accounts subject to certain restrictions. Discretionary contributions to the AEM 401K Profit-Sharing Plan are expensed as incurred and amounted to $0.5 million, $0.8 million and $0.8 million for fiscal years 2008, 2007 and 2006.
 
9.   Details of Selected Consolidated Balance Sheet Captions
 
The following tables provide additional information regarding the composition of certain of our balance sheet captions.
 
Accounts receivable
 
Accounts receivable was comprised of the following at September 30, 2008 and 2007:
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Billed accounts receivable
  $ 411,225     $ 325,721  
Unbilled revenue
    49,496       44,913  
Other accounts receivable
    31,731       25,659  
                 
Total accounts receivable
    492,452       396,293  
Less: allowance for doubtful accounts
    (15,301 )     (16,160 )
                 
Net accounts receivable
  $ 477,151     $ 380,133  
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Other current assets
 
Other current assets as of September 30, 2008 and 2007 were comprised of the following accounts.
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Assets from risk management activities
  $ 68,291     $ 20,129  
Deferred gas costs
    55,103       14,797  
Taxes receivable
    22,052       33,002  
Current deferred tax asset
          4,664  
Prepaid expenses
    16,738       16,510  
Current portion of leased assets receivable
    2,973       2,973  
Materials and supplies
    4,304       5,563  
Other
    15,158       13,551  
                 
Total
  $ 184,619     $ 111,189  
                 
 
Property, plant and equipment
 
Property, plant and equipment was comprised of the following as of September 30, 2008 and 2007:
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Production plant
  $ 21,958     $ 12,578  
Storage plant
    150,984       149,164  
Transmission plant
    942,169       909,582  
Distribution plant
    3,870,606       3,627,729  
General plant
    597,460       560,400  
Intangible plant
    66,919       67,168  
                 
      5,650,096       5,326,621  
Construction in progress
    80,060       69,449  
                 
      5,730,156       5,396,070  
Less: accumulated depreciation and amortization
    (1,593,297 )     (1,559,234 )
                 
Net property, plant and equipment
  $ 4,136,859     $ 3,836,836  
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred charges and other assets
 
Deferred charges and other assets as of September 30, 2008 and 2007 were comprised of the following accounts.
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Pension plan assets in excess of plan obligations
  $ 7,997     $ 55,785  
Marketable securities
    37,940       42,047  
Regulatory assets
    130,785       90,825  
Deferred financing costs
    35,378       39,866  
Assets from risk management activities
    5,473       5,535  
Other
    8,077       19,436  
                 
Total
  $ 225,650     $ 253,494  
                 
 
Other current liabilities
 
Other current liabilities as of September 30, 2008 and 2007 were comprised of the following accounts.
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Customer deposits
  $ 75,297     $ 83,833  
Accrued employee costs
    42,956       35,188  
Deferred gas costs
    76,979       84,043  
Accrued interest
    52,366       51,523  
Liabilities from risk management activities
    58,914       21,339  
Taxes payable
    53,639       50,288  
Pension and postretirement obligations
    16,950       13,250  
Regulatory cost of removal accrual
    18,628       24,182  
Current deferred tax liability
    1,833        
Other
    62,810       44,627  
                 
Total
  $ 460,372     $ 408,273  
                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred credits and other liabilities
 
Deferred credits and other liabilities as of September 30, 2008 and 2007 were comprised of the following accounts.
 
                 
    September 30  
    2008     2007  
    (In thousands)  
 
Postretirement obligations
  $ 137,075     $ 111,365  
Retirement plan obligations
    88,143       90,243  
Customer advances for construction
    17,814       18,173  
Regulatory liabilities
    5,639       7,503  
Asset retirement obligation
    5,883       8,966  
Uncertain tax positions
    6,731        
Liabilities from risk management activities
    5,369       290  
Other
    727       7,002  
                 
Total
  $ 267,381     $ 243,542  
                 
 
10.   Earnings Per Share
 
Basic and diluted earnings per share for the fiscal years ended September 30 are calculated as follows:
 
                         
    2008     2007     2006  
    (In thousands, except per share data)  
 
Net income
  $ 180,331     $ 168,492     $ 147,737  
                         
Denominator for basic income per share — weighted average common shares
    89,385       86,975       80,731  
Effect of dilutive securities:
                       
Restricted and other shares
    790       620       551  
Stock options
    97       150       108  
                         
Denominator for diluted income per share — weighted average common shares
    90,272       87,745       81,390  
                         
Net income per share — basic
  $ 2.02     $ 1.94     $ 1.83  
                         
Net income per share — diluted
  $ 2.00     $ 1.92     $ 1.82  
                         
 
There were no out-of-the-money options excluded from the computation of diluted earnings per share for the fiscal year ended September 30, 2008, 2007 and 2006.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.   Income Taxes
 
The components of income tax expense from continuing operations for 2008, 2007 and 2006 were as follows:
 
                         
    2008     2007     2006  
    (In thousands)  
 
Current
                       
Federal
  $ 7,161     $ 22,616     $ 838  
State
    7,696       9,810       2,623  
Deferred
                       
Federal
    85,573       56,349       77,154  
State
    12,367       5,772       9,024  
Investment tax credits
    (424 )     (455 )     (486 )
                         
    $ 112,373     $ 94,092     $ 89,153  
                         
 
Reconciliations of the provision for income taxes computed at the statutory rate to the reported provisions for income taxes from continuing operations for 2008, 2007 and 2006 are set forth below:
 
                         
    2008     2007     2006  
    (In thousands)  
 
Tax at statutory rate of 35%
  $ 102,446     $ 91,904     $ 82,912  
Common stock dividends deductible for tax reporting
    (1,363 )     (1,233 )     (1,180 )
Depreciation/amortization
          (4,727 )      
Tax exempt income
          (1,890 )      
State taxes (net of federal benefit)
    12,523       10,253       7,570  
Other, net
    (1,233 )     (215 )     (149 )
                         
Income tax expense
  $ 112,373     $ 94,092     $ 89,153  
                         


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred income taxes reflect the tax effect of differences between the basis of assets and liabilities for book and tax purposes. The tax effect of temporary differences that gave rise to significant components of the deferred tax liabilities and deferred tax assets at September 30, 2008 and 2007 are presented below:
 
                 
    2008     2007  
    (In thousands)  
 
Deferred tax assets:
               
Costs expensed for book purposes and capitalized for tax purposes
  $ 16,305     $ 15,047  
Accruals not currently deductible for tax purposes
    11,627       11,097  
Customer advances
    6,769       6,906  
Nonqualified benefit plans
    39,632       33,111  
Postretirement benefits
    46,319       40,984  
Treasury lock agreement
    6,806       8,735  
Unamortized investment tax credit
    345       506  
Regulatory liabilities
    911       966  
Tax net operating loss and credit carryforwards
    616       2,505  
Other, net
    543       3,976  
                 
Total deferred tax assets
    129,873       123,833  
Deferred tax liabilities:
               
Difference in net book value and net tax value of assets
    (534,607 )     (426,772 )
Pension funding
    (25,777 )     (30,557 )
Gas cost adjustments
    (5,362 )     (12,547 )
Regulatory assets
    (568 )     (1,131 )
Cost capitalized for book purposes and expensed for tax purposes
          (5,184 )
Difference between book and tax on mark to market accounting
    (6,694 )     (11,766 )
Other, net
          (1,781 )
                 
Total deferred tax liabilities
    (573,008 )     (489,738 )
                 
Net deferred tax liabilities
  $ (443,135 )   $ (365,905 )
                 
SFAS No. 109 deferred credits for rate regulated entities
  $ 2,397     $ 2,541  
                 
 
We have tax carryforwards relating to state net operating losses amounting to $0.6 million. Depending on the jurisdiction in which the net operating loss was generated, the state net operating losses will begin to expire between 2013 and 2027.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 . FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
We adopted the provisions of FIN 48 on October 1, 2007. As a result of adopting FIN 48, we determined that we had $6.1 million of liabilities associated with uncertain tax positions. Of this amount, $0.5 million was recognized as a result of adopting FIN 48 with an offsetting reduction to retained earnings.
 
Prior to October 1, 2007, the $5.6 million liability previously recorded for uncertain tax positions was reflected on the consolidated balance sheet as a component of deferred income taxes. As a result of adopting FIN 48, we recorded a $3.7 million liability as a component of other current liabilities and $2.4 million as a component of deferred credits and other liabilities, with offsetting decreases to the deferred income tax liability.
 
As of September 30, 2008, we had recorded liabilities associated with uncertain tax positions totaling $6.7 million. The realization of all of these tax benefits would reduce our income tax expense by approximately $6.7 million.
 
The following table presents the changes in unrecognized tax benefits for the fiscal year ended September 30, 2008 (in thousands):
 
         
Total unrecognized tax benefits at October 1, 2007
  $ 6,156  
Gross increases for current year’s tax positions
     
Gross increases for prior years’ tax positions
    5,081  
Gross decreases for prior years’ tax positions
    (528 )
Settlements
    (3,978 )
         
Total unrecognized tax benefits at September 30, 2008
  $ 6,731  
         
 
We recognize accrued interest related to unrecognized tax benefits as a component of interest expense. We recognize penalties related to unrecognized tax benefits as a component of miscellaneous income (expense) in accordance with regulatory requirements. We recognized a tax benefit of $1.2 million related to penalty and interest expenses during the fiscal year ended September 30, 2008.
 
We file income tax returns in the U.S. federal jurisdiction as well as in various states where we have operations. We have concluded substantially all U.S. federal income tax matters through fiscal year 2004.
 
12.   Commitments and Contingencies
 
Litigation
 
Colorado-Kansas Division
 
We are a defendant in a lawsuit originally filed by Quinque Operating Company, Tom Boles and Robert Ditto in September 1999 in the District Court of Stevens County, Kansas against more than 200 companies in the natural gas industry. The plaintiffs, who purport to represent a class of royalty owners, allege that the defendants have underpaid royalties on gas taken from wells situated on non-federal and non-Indian lands in Kansas, predicated upon allegations that the defendants’ gas measurements were inaccurate. The plaintiffs have not specifically alleged an amount of damages. We are also a defendant, along with over 50 other companies in the natural gas industry, in another proposed class action lawsuit filed in the same court by Will Price, Tom Boles and The Cooper Clarke Foundation in May 2003 involving similar allegations. We believe that the plaintiffs’ claims are lacking in merit and we intend to vigorously defend these actions. While the results cannot be predicted with certainty, we believe the final outcome of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows. We are also a defendant in another lawsuit entitled In Re Natural Gas Royalties Qui Tam Litigation , involving similar allegations filed in June 1997 in the United States District Court for the District of Colorado, which was later transferred to the United States District Court for the District of Wyoming, where it was consolidated with approximately 50


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
additional lawsuits in October 1999. In October 2006, the District Court granted the defendants’ motion to dismiss this lawsuit for lack of subject matter jurisdiction. The plaintiffs have appealed this dismissal order on which oral arguments were heard by the United States Court of Appeals for the Tenth Circuit in September 2008. The appeal has yet to be ruled on by the Tenth Circuit.
 
We are a party to other litigation and claims that have arisen in the ordinary course of our business. While the results of such litigation and claims cannot be predicted with certainty, we believe the final outcome of such litigation and claims will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
Environmental Matters
 
Former Manufactured Gas Plant Sites
 
We are the owner or previous owner of former manufactured gas plant sites in Johnson City and Bristol, Tennessee, Keokuk, Iowa, Hannibal, Missouri, and Owensboro, Kentucky, which were used to supply gas prior to the availability of natural gas. The gas manufacturing process resulted in certain byproducts and residual materials, including coal tar. The manufacturing process used by our predecessors was an acceptable and satisfactory process at the time such operations were being conducted. Under current environmental protection laws and regulations, we may be responsible for response actions with respect to such materials if response actions are necessary. We have taken removal actions with respect to the sites that have been approved by the applicable regulatory authorities in Tennessee, Iowa, Missouri, Kentucky and the United States Environmental Protection Agency.
 
We are a party to other environmental matters and claims that have arisen in the ordinary course of our business. While the ultimate results of response actions to these environmental matters and claims cannot be predicted with certainty, we believe the final outcome of such response actions will not have a material adverse effect on our financial condition, results of operations or cash flows because we believe that the expenditures related to such response actions will either be recovered through rates, shared with other parties or are adequately covered by insurance.
 
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 September 30, 2008, AEM was committed to purchase 55.8 Bcf within one year, 35.6 Bcf within one to three years and 0.5 Bcf after three years under indexed contracts. AEM is committed to purchase 1.5 Bcf within one year and less than 0.1 Bcf within one to three years under fixed price contracts with prices ranging from $3.58 to $13.20 per Mcf. Purchases under these contracts totaled $3,075.0 million, $2,065.1 million and $2,124.3 million for 2008, 2007 and 2006.
 
Our natural gas distribution divisions, except for our Mid-Tex Division, maintain supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated base gas volumes are established under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month in accordance with the terms of the individual contract.


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NOTES TO 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 and fixed prices. The estimated commitments under these contracts as of September 30, 2008 are as follows (in thousands):
 
         
2009
  $ 418,949  
2010
    99,885  
2011
    9,569  
2012
    9,580  
2013
    9,068  
Thereafter
    2,978  
         
    $ 550,029  
         
 
Other Contingencies
 
In December 2007, the Company received data requests from the Division of Investigations of the Office of Enforcement of the Federal Energy Regulatory Commission (the “Commission”) in connection with its investigation into possible violations of the Commission’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines. We have responded timely to two sets of data requests received from the Commission and are fully cooperating with the Commission during this investigation.
 
Subsequent to responding to the second set of data requests, the Commission agreed to allow the Company to conduct our own internal investigation into compliance with the Commission’s rules, and we will provide the results of this internal investigation to the Commission upon its completion. We currently are unable to predict the final outcome of this investigation or the potential impact it could have on our financial position, results of operations or cash flows.
 
On September 1, 2008, a Texas Railroad Commission rule, which is applicable to all natural gas distribution companies operating in Texas, became effective concerning the replacement of known compression couplings at pre-bent gas meter risers. Compliance with this rule should not have a significant impact on our West Texas Division but will require us to spend significant amounts of capital in our Mid-Tex Division. The completion date required by the Railroad Commission of Texas for the replacement of known compression couplings at pre-bent gas meter risers is November 2009 and the Mid-Tex Division is on target to meet this requirement. Compliance with this rule will require us to expend significant amounts of capital but these prudent and mandatory expenditures should be recoverable through our rates in the Mid-Tex Division. As a result, we anticipate no long-term adverse impact on our financial position, results of operations or cash flows.
 
13.   Leases
 
Leasing Operations
 
Atmos Power Systems, Inc. has constructed electric peaking power-generating plants and associated facilities and entered into agreements to either lease or sell these plants. We completed a sales-type lease transaction for one distributed electric generation plant in 2001 and a second sales-type lease transaction in 2003. In connection with these lease transactions, as of September 30, 2008 and 2007, we had receivables of $13.8 million and $16.4 million and recognized income of $1.3 million, $1.5 million and $1.7 million for


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
fiscal years 2008, 2007 and 2006. The future minimum lease payments to be received for each of the five succeeding fiscal years are as follows:
 
         
    Minimum
 
    Lease
 
    Receipts  
    (In thousands)  
 
2009
  $ 3,030  
2010
    2,973  
2011
    2,973  
2012
    2,973  
2013
    1,824  
Thereafter
     
         
Total minimum lease receipts
  $ 13,773  
         
 
Capital and Operating Leases
 
We have entered into non-cancelable operating leases for office and warehouse space used in our operations. The remaining lease terms range from one to 20 years and generally provide for the payment of taxes, insurance and maintenance by the lessee. Renewal options exist for certain of these leases. We have also entered into capital leases for division offices and operating facilities. Property, plant and equipment included amounts for capital leases of $1.3 million and $4.6 million at September 30, 2008 and 2007. Accumulated depreciation for these capital leases totaled $0.7 million and $3.2 million at September 30, 2008 and 2007. Depreciation expense for these assets is included in consolidated depreciation expense on the consolidated statement of income.
 
The related future minimum lease payments at September 30, 2008 were as follows:
 
                 
    Capital
    Operating
 
    Leases     Leases  
    (In thousands)  
 
2009
  $ 186     $ 18,374  
2010
    186       17,496  
2011
    186       16,429  
2012
    186       15,789  
2013
    186       15,135  
Thereafter
    822       97,094  
                 
Total minimum lease payments
    1,752     $ 180,317  
                 
Less amount representing interest
    746          
                 
Present value of net minimum lease payments
  $ 1,006          
                 
 
Consolidated lease and rental expense amounted to $14.2 million, $11.3 million and $11.4 million for fiscal 2008, 2007 and 2006.
 
14.   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


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
with trade accounts receivable for the natural gas distribution segment is mitigated by the large number of individual customers and diversity in our customer base. The credit risk for our other segments is not significant.
 
Customer diversification also helps mitigate AEM’s exposure to credit risk. 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, primarily consisting of letters of credit, 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.
 
AEM maintains a provision for credit losses based upon factors surrounding the credit risk of customers, historical trends, consideration of the current credit environment and other information. We believe, based on our credit policies and our provisions for credit losses as of September 30, 2008, that our financial position, results of operations and cash flows will not be materially affected as a result of nonperformance by any single counterparty.
 
AEM’s estimated credit exposure is monitored in terms of the percentage of its customers, including affiliate 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 AEM’s credit department, but are primarily based on external ratings provided by Moody’s Investors Service Inc. (Moody’s) and/or Standard & Poor’s Corporation (S&P). 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 following table shows the percentages related to the investment ratings as of September 30, 2008 and 2007.
 
                 
    September 30,
    September 30,
 
    2008     2007  
 
Investment grade
    52 %     53 %
Non-investment grade
    48 %     47 %
                 
Total
    100 %     100 %
                 
 
The following table presents our financial instrument counterparty credit exposure by operating segment based upon the unrealized fair value of our financial instruments that represent assets as of September 30, 2008. Investment grade counterparties have minimum credit ratings of BBB-, assigned by S&P; or Baa3, assigned by Moody’s. 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.
 
                         
    Natural Gas
    Natural Gas
       
    Distribution
    Marketing
       
    Segment (1)     Segment     Consolidated  
    (In thousands)  
 
Investment grade counterparties
  $     $ 42,220     $ 42,220  
Non-investment grade counterparties
          4,696       4,696  
                         
    $     $ 46,916     $ 46,916  
                         
 
 
(1) Counterparty risk for our natural gas distribution segment is minimized because hedging gains and losses are passed through to our customers.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
15.   Supplemental Cash Flow Disclosures
 
Supplemental disclosures of cash flow information for fiscal 2008, 2007 and 2006 are presented below.
 
                         
    2008     2007     2006  
    (In thousands)  
 
Cash paid for interest
  $ 139,958     $ 151,616     $ 149,031  
Cash paid for income taxes
  $ 3,483     $ 8,939     $ 77,265  
 
There were no significant noncash investing and financing transactions during fiscal 2008, 2007 and 2006. All cash flows and noncash activities related to our commodity financial instruments are considered as operating activities.
 
16.   Segment Information
 
Atmos Energy Corporation and its subsidiaries are engaged primarily in the regulated natural gas distribution, transmission and storage business as well as other nonregulated businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system.
 
Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local distribution companies and industrial customers primarily in the Midwest and Southeast. Additionally, we provide natural gas transportation and storage services to certain of our natural gas distribution operations and to third parties.
 
We operate the Company through the following four segments:
 
  •  The natural gas distribution segment, which includes our regulated natural gas distribution and related sales operations.
 
  •  The regulated transmission and storage segment, which includes the regulated pipeline and storage operations of the Atmos Pipeline — Texas Division.
 
  •  The natural gas marketing segment, which includes a variety of nonregulated natural gas management services.
 
  •  The pipeline, storage and other segment, which includes our nonregulated natural gas transmission and storage services.
 
Our determination of reportable segments considers the strategic operating units under which we manage sales of various products and services to customers in differing regulatory environments. Although our natural gas distribution segment operations are geographically dispersed, they are reported as a single segment as each natural gas distribution division has similar economic characteristics. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on net income or loss of the respective operating units. Interest expense is allocated pro rata to each segment based upon our net investment in each segment. Income taxes are allocated to each segment as if each segment’s taxes were calculated on a separate return basis.


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Summarized income statements and capital expenditures by segment are shown in the following tables.
 
                                                 
    Year Ended September 30, 2008  
          Regulated
          Pipeline,
             
    Natural Gas
    Transmission
    Natural Gas
    Storage
             
    Distribution     and Storage     Marketing     and Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 3,654,338     $ 108,116     $ 3,436,563     $ 22,288     $     $ 7,221,305  
Intersegment revenues
    792       87,801       851,299       9,421       (949,313 )      
                                                 
      3,655,130       195,917       4,287,862       31,709       (949,313 )     7,221,305  
Purchased gas cost
    2,649,064             4,194,841       3,396       (947,322 )     5,899,979  
                                                 
Gross profit
    1,006,066       195,917       93,021       28,313       (1,991 )     1,321,326  
Operating expenses
                                               
Operation and maintenance
    389,244       77,439       30,903       4,983       (2,335 )     500,234  
Depreciation and amortization
    177,205       19,899       1,546       1,792             200,442  
Taxes, other than income
    178,452       8,834       4,180       1,289             192,755  
                                                 
Total operating expenses
    744,901       106,172       36,629       8,064       (2,335 )     893,431  
                                                 
Operating income
    261,165       89,745       56,392       20,249       344       427,895  
Miscellaneous income
    9,689       1,354       2,022       8,428       (18,762 )     2,731  
Interest charges
    117,933       27,049       9,036       2,322       (18,418 )     137,922  
                                                 
Income before income taxes
    152,921       64,050       49,378       26,355             292,704  
Income tax expense
    60,273       22,625       19,389       10,086             112,373  
                                                 
Net income
  $ 92,648     $ 41,425     $ 29,989     $ 16,269     $     $ 180,331  
                                                 
Capital expenditures
  $ 386,542     $ 75,071     $ 340     $ 10,320     $     $ 472,273  
                                                 
 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Year Ended September 30, 2007  
          Regulated
          Pipeline,
             
    Natural Gas
    Transmission
    Natural Gas
    Storage
             
    Distribution     and Storage     Marketing     and Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 3,358,147     $ 84,344     $ 2,432,280     $ 23,660     $     $ 5,898,431  
Intersegment revenues
    618       78,885       719,050       9,740       (808,293 )      
                                                 
      3,358,765       163,229       3,151,330       33,400       (808,293 )     5,898,431  
Purchased gas cost
    2,406,081             3,047,019       792       (805,543 )     4,648,349  
                                                 
Gross profit
    952,684       163,229       104,311       32,608       (2,750 )     1,250,082  
Operating expenses
                                               
Operation and maintenance
    379,175       56,231       26,480       4,581       (3,094 )     463,373  
Depreciation and amortization
    177,188       18,565       1,536       1,574             198,863  
Taxes, other than income
    171,845       8,603       1,255       1,163             182,866  
Impairment of long-lived assets
    3,289                   3,055             6,344  
                                                 
Total operating expenses
    731,497       83,399       29,271       10,373       (3,094 )     851,446  
                                                 
Operating income
    221,187       79,830       75,040       22,235       344       398,636  
Miscellaneous income
    8,945       2,105       6,434       8,173       (16,473 )     9,184  
Interest charges
    121,626       27,917       5,767       6,055       (16,129 )     145,236  
                                                 
Income before income taxes
    108,506       54,018       75,707       24,353             262,584  
Income tax expense
    35,223       19,428       29,938       9,503             94,092  
                                                 
Net income
  $ 73,283     $ 34,590     $ 45,769     $ 14,850     $     $ 168,492  
                                                 
Capital expenditures
  $ 327,442     $ 59,276     $ 1,069     $ 4,648     $     $ 392,435  
                                                 
 

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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Year Ended September 30, 2006  
          Regulated
          Pipeline,
             
    Natural Gas
    Transmission
    Natural Gas
    Storage
             
    Distribution     and Storage     Marketing     and Other     Eliminations     Consolidated  
    (In thousands)  
 
Operating revenues from external parties
  $ 3,649,851     $ 69,582     $ 2,418,856     $ 14,074     $     $ 6,152,363  
Intersegment revenues
    740       71,551       737,668       11,500       (821,459 )      
                                                 
      3,650,591       141,133       3,156,524       25,574       (821,459 )     6,152,363  
Purchased gas cost
    2,725,534             3,025,897       1,080       (816,718 )     4,935,793  
                                                 
Gross profit
    925,057       141,133       130,627       24,494       (4,741 )     1,216,570  
Operating expenses
                                               
Operation and maintenance
    357,519       51,577       22,223       7,077       (4,978 )     433,418  
Depreciation and amortization
    164,493       18,012       1,834       1,257             185,596  
Taxes, other than income
    178,204       8,218       4,335       1,236             191,993  
Impairment of long-lived assets
    22,947                               22,947  
                                                 
Total operating expenses
    723,163       77,807       28,392       9,570       (4,978 )     833,954  
                                                 
Operating income
    201,894       63,326       102,235       14,924       237       382,616  
Miscellaneous income (expense)
    9,506       (153 )     2,598       6,858       (17,928 )     881  
Interest charges
    126,489       22,787       8,510       6,512       (17,691 )     146,607  
                                                 
Income before income taxes
    84,911       40,386       96,323       15,270             236,890  
Income tax expense
    31,909       13,839       37,757       5,648             89,153  
                                                 
Net income
  $ 53,002     $ 26,547     $ 58,566     $ 9,622     $     $ 147,737  
                                                 
Capital expenditures
  $ 307,742     $ 114,873     $ 909     $ 1,800     $     $ 425,324  
                                                 
 
The following table summarizes our revenues by products and services for the fiscal year ended September 30.
 
                         
    2008     2007     2006  
    (In thousands)  
 
Natural gas distribution revenues:
                       
Gas sales revenues:
                       
Residential
  $ 2,131,447     $ 1,982,801     $ 2,068,736  
Commercial
    1,077,056       970,949       1,061,783  
Industrial
    212,531       195,060       276,186  
Public authority and other
    137,821       114,298       144,600  
                         
Total gas sales revenues
    3,558,855       3,263,108       3,551,305  
Transportation revenues
    59,712       59,195       61,475  
Other gas revenues
    35,771       35,844       37,071  
                         
Total natural gas distribution revenues
    3,654,338       3,358,147       3,649,851  
Regulated transmission and storage revenues
    108,116       84,344       69,582  
Natural gas marketing revenues
    3,436,563       2,432,280       2,418,856  
Pipeline, storage and other revenues
    22,288       23,660       14,074  
                         
Total operating revenues
  $ 7,221,305     $ 5,898,431     $ 6,152,363  
                         

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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Balance sheet information at September 30, 2008 and 2007 by segment is presented in the following tables:
 
                                                 
    September 30, 2008  
          Regulated
          Pipeline,
             
    Natural Gas
    Transmission
    Natural Gas
    Storage
             
    Distribution     and Storage     Marketing     and Other     Eliminations     Consolidated  
    (In thousands)  
 
ASSETS
Property, plant and equipment, net
  $ 3,483,556     $ 585,160     $ 7,520     $ 60,623     $     $ 4,136,859  
Investment in subsidiaries
    463,158             (2,096 )           (461,062 )      
Current assets
                                               
Cash and cash equivalents
    30,878             9,120       6,719             46,717  
Assets from risk management activities
                69,008       20,239       (20,956 )     68,291  
Other current assets
    774,933       18,396       411,648       56,791       (91,672 )     1,170,096  
Intercompany receivables
    578,833                   135,795       (714,628 )      
                                                 
Total current assets
    1,384,644       18,396       489,776       219,544       (827,256 )     1,285,104  
Intangible assets
                2,088                   2,088  
Goodwill
    569,920       132,367       24,282       10,429             736,998  
Noncurrent assets from risk management activities
                5,473                   5,473  
Deferred charges and other assets
    195,985       11,212       1,182       11,798             220,177  
                                                 
    $ 6,097,263     $ 747,135     $ 528,225     $ 302,394     $ (1,288,318 )   $ 6,386,699  
                                                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
  $ 2,052,492     $ 130,144     $ 114,559     $ 218,455     $ (463,158 )   $ 2,052,492  
Long-term debt
    2,119,267                   525             2,119,792  
                                                 
Total capitalization
    4,171,759       130,144       114,559       218,980       (463,158 )     4,172,284  
Current liabilities
                                               
Current maturities of long-term debt
                      785             785  
Short-term debt
    385,592             6,500             (41,550 )     350,542  
Liabilities from risk management activities
    58,566             20,688       616       (20,956 )     58,914  
Other current liabilities
    538,777       7,053       236,217       62,796       (47,997 )     796,846  
Intercompany payables
          543,384       171,244             (714,628 )      
                                                 
Total current liabilities
    982,935       550,437       434,649       64,197       (825,131 )     1,207,087  
Deferred income taxes
    384,860       62,720       (21,936 )     15,687       (29 )     441,302  
Noncurrent liabilities from risk management activities
    5,111             258                   5,369  
Regulatory cost of removal obligation
    298,645                               298,645  
Deferred credits and other liabilities
    253,953       3,834       695       3,530             262,012  
                                                 
    $ 6,097,263     $ 747,135     $ 528,225     $ 302,394     $ (1,288,318 )   $ 6,386,699  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    September 30, 2007  
          Regulated
          Pipeline,
             
    Natural Gas
    Transmission
    Natural Gas
    Storage
             
    Distribution     and Storage     Marketing     and Other     Eliminations     Consolidated  
    (In thousands)  
 
ASSETS
Property, plant and equipment, net
  $ 3,251,144     $ 531,921     $ 7,850     $ 45,921     $     $ 3,836,836  
Investment in subsidiaries
    396,474             (2,096 )           (394,378 )      
Current assets
                                               
Cash and cash equivalents
    28,881             31,703       141             60,725  
Assets from risk management activities
                25,063       12,947       (17,881 )     20,129  
Other current assets
    643,353       20,065       337,169       76,731       (90,997 )     986,321  
Intercompany receivables
    536,985                   114,300       (651,285 )      
                                                 
Total current assets
    1,209,219       20,065       393,935       204,119       (760,163 )     1,067,175  
Intangible assets
                2,716                   2,716  
Goodwill
    567,775       132,490       24,282       10,429             734,976  
Noncurrent assets from risk management activities
                5,535                   5,535  
Deferred charges and other assets
    227,869       4,898       1,279       13,913             247,959  
                                                 
    $ 5,652,481     $ 689,374     $ 433,501     $ 274,382     $ (1,154,541 )   $ 5,895,197  
                                                 
 
CAPITALIZATION AND LIABILITIES
Shareholders’ equity
  $ 1,965,754     $ 88,719     $ 107,090     $ 200,665     $ (396,474 )   $ 1,965,754  
Long-term debt
    2,125,007                   1,308             2,126,315  
                                                 
Total capitalization
    4,090,761       88,719       107,090       201,973       (396,474 )     4,092,069  
Current liabilities
                                               
Current maturities of long-term debt
    1,250                   2,581             3,831  
Short-term debt
    187,284             30,000             (66,685 )     150,599  
Liabilities from risk management activities
    21,053             18,167             (17,881 )     21,339  
Other current liabilities
    519,642       6,394       185,072       53,297       (22,216 )     742,189  
Intercompany payables
          550,184       101,101             (651,285 )      
                                                 
Total current liabilities
    729,229       556,578       334,340       55,878       (758,067 )     917,958  
Deferred income taxes
    326,518       40,565       (8,925 )     12,411             370,569  
Noncurrent liabilities from risk management activities
                290                   290  
Regulatory cost of removal obligation
    271,059                               271,059  
Deferred credits and other liabilities
    234,914       3,512       706       4,120             243,252  
                                                 
    $ 5,652,481     $ 689,374     $ 433,501     $ 274,382     $ (1,154,541 )   $ 5,895,197  
                                                 


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ATMOS ENERGY CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
17.   Selected Quarterly Financial Data (Unaudited)
 
Summarized unaudited quarterly financial data is presented below. The sum of net income per share by quarter may not equal the net income per share for the fiscal year due to variations in the weighted average shares outstanding used in computing such amounts. Our businesses are seasonal due to weather conditions in our service areas. For further information on its effects on quarterly results, see the “Results of Operations” discussion included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein.
 
                                 
    Quarter Ended  
    December 31     March 31     June 30     September 30  
    (In thousands, except per share data)  
 
Fiscal year 2008:
                               
Operating revenues
                               
Natural gas distribution
  $ 928,177     $ 1,521,856     $ 676,639     $ 528,458  
Regulated transmission and storage
    45,046       51,440       46,286       53,145  
Natural gas marketing
    840,717       1,128,653       1,189,722       1,128,770  
Pipeline, storage and other
    6,727       10,022       3,880       11,080  
Intersegment eliminations
    (163,157 )     (227,986 )     (277,382 )     (280,788 )
                                 
      1,657,510       2,483,985       1,639,145       1,440,665  
Gross profit
    369,638       434,394       246,222       271,072  
Operating income
    158,509       211,143       20,709       37,534  
Net income (loss)
    73,803       111,534       (6,588 )     1,582  
Net income (loss) per basic share
  $ 0.83     $ 1.25     $ (0.07 )   $ 0.02  
Net income (loss) per diluted share
  $ 0.82     $ 1.24     $ (0.07 )   $ 0.02  
Fiscal year 2007:
                               
Operating revenues
                               
Natural gas distribution
  $ 964,244     $ 1,461,033     $ 548,251     $ 385,237  
Regulated transmission and storage
    39,872       46,068       36,707       40,582  
Natural gas marketing
    711,694       795,041       854,167       790,428  
Pipeline, storage and other
    11,333       14,077       2,073       5,917  
Intersegment eliminations
    (124,510 )     (240,637 )     (223,046 )     (220,100 )
                                 
      1,602,633       2,075,582       1,218,152       1,002,064  
Gross profit
    375,592       428,686       228,016       217,788  
Operating income
    171,160       209,012       7,731       10,733  
Net income (loss)
    81,261       106,505       (13,360 )     (5,914 )
Net income (loss) per basic share
  $ 0.98     $ 1.21     $ (0.15 )   $ (0.07 )
Net income (loss) per diluted share
  $ 0.97     $ 1.20     $ (0.15 )   $ (0.07 )


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ITEM 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None.
 
ITEM 9A.    Controls and Procedures.
 
Management’s Evaluation of Disclosure Controls and Procedures
 
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed by us, including our consolidated entities, in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, including a reasonable level of assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control-Integrated Framework issued by COSO and applicable Securities and Exchange Commission rules, our management concluded that our internal control over financial reporting was effective as of September 30, 2008, in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Ernst & Young LLP has issued its report on the effectiveness of the Company’s internal control over financial reporting. That report appears below.
 
     
/s/   ROBERT W. BEST

 
/s/   JOHN P. REDDY
Robert W. Best   John P. Reddy
Chairman and Chief Executive Officer   Senior Vice President and Chief Financial Officer
 
November 18, 2008


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders of
Atmos Energy Corporation
 
We have audited Atmos Energy Corporation’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Atmos Energy Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Atmos Energy Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of September 30, 2008 and 2007, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008 of Atmos Energy Corporation and our report dated November 18, 2008 expressed an unqualified opinion thereon.
 
/s/ ERNST & YOUNG LLP
 
Dallas, Texas
November 18, 2008


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Changes in Internal Control over Financial Reporting
 
We did not make any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Act) during the fourth quarter of the fiscal year ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.    Other Information.
 
Not applicable.
 
PART III
 
ITEM 10.    Directors, Executive Officers and Corporate Governance.
 
Information regarding directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009. Information regarding executive officers is included in Part I of this Annual Report on Form 10-K.
 
Identification of the members of the Audit Committee of the Board of Directors as well as the Board of Directors’ determination as to whether one or more audit committee financial experts are serving on the Audit Committee of the Board of Directors is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009.
 
The Company has adopted a code of ethics for its principal executive officer, principal financial officer and principal accounting officer. Such code of ethics is represented by the Company’s Code of Conduct, which is applicable to all directors, officers and employees of the Company, including the Company’s principal executive officer, principal financial officer and principal accounting officer. A copy of the Company’s Code of Conduct is posted on the Company’s website at www.atmosenergy.com under “Corporate Governance”. In addition, any amendment to or waiver granted from a provision of the Company’s Code of Conduct will be posted on the Company’s website under “Corporate Governance”.
 
ITEM 11.    Executive Compensation.
 
Information on executive compensation is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009.
 
ITEM 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Security ownership of certain beneficial owners and of management is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009. Information concerning our equity compensation plans is provided in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”, of this Annual Report on Form 10-K.
 
ITEM 13.    Certain Relationships and Related Transactions, and Director Independence.
 
Information on certain relationships and related transactions as well as director independence is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009.
 
ITEM 14.    Principal Accountant Fees and Services.
 
Information on our principal accountant’s fees and services is incorporated herein by reference to the Company’s Definitive Proxy Statement for the Annual Meeting of Shareholders on February 4, 2009.


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PART IV
 
ITEM 15.    Exhibits and Financial Statement Schedules.
 
(a)  1. and 2. Financial statements and financial statement schedules.
 
The financial statements and financial statement schedule listed in the Index to Financial Statements in Item 8 are filed as part of this Form 10-K.
 
3.  Exhibits
 
The exhibits listed in the accompanying Exhibits Index are filed as part of this Form 10-K. The exhibits numbered 10.5(a) through 10.12(f) are management contracts or compensatory plans or arrangements.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ATMOS ENERGY CORPORATION
(Registrant)
 
  By: 
/s/   JOHN P. REDDY
John P. Reddy
Senior Vice President
and Chief Financial Officer
 
Date: November 19, 2008


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POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert W. Best and John P. Reddy, or either of them acting alone or together, as his true and lawful attorney-in-fact and agent with full power to act alone, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
 
             
         
/s/   ROBERT W. BEST

Robert W. Best
  Chairman and Chief Executive Officer   November 19, 2008
         
/s/   JOHN P. REDDY

John P. Reddy
  Senior Vice President and Chief Financial Officer   November 19, 2008
         
/s/   F.E. MEISENHEIMER

F.E. Meisenheimer
  Vice President and Controller (Principal Accounting Officer)   November 19, 2008
         
/s/   TRAVIS W. BAIN, II

Travis W. Bain, II
  Director   November 19, 2008
         
/s/   DAN BUSBEE

Dan Busbee
  Director   November 19, 2008
         
/s/   RICHARD W. CARDIN

Richard W. Cardin
  Director   November 19, 2008
         
/s/   RICHARD W. DOUGLAS

Richard W. Douglas
  Director   November 19, 2008
         
/s/   RUBEN E. ESQUIVEL

Ruben E. Esquivel
  Director   November 19, 2008
         
/s/   THOMAS J. GARLAND

Thomas J. Garland
  Director   November 19, 2008
         
/s/   RICHARD K. GORDON

Richard K. Gordon
  Director   November 19, 2008
         
/s/   THOMAS C. MEREDITH

Thomas C. Meredith
  Director   November 19, 2008
         
/s/   PHILLIP E. NICHOL

Phillip E. Nichol
  Director   November 19, 2008
         
/s/   NANCY K. QUINN

Nancy K. Quinn
  Director   November 19, 2008


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/s/   STEPHEN R. SPRINGER

Stephen R. Springer
  Director   November 19, 2008
         
/s/   CHARLES K. VAUGHAN

Charles K. Vaughan
  Director   November 19, 2008
         
/s/   RICHARD WARE II

Richard Ware II
  Director   November 19, 2008


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Schedule II
 
ATMOS ENERGY CORPORATION
 
Valuation and Qualifying Accounts
Three Years Ended September 30, 2008
 
                                         
          Additions              
    Balance at
    Charged to
    Charged to
          Balance
 
    Beginning
    Cost &
    Other
          at End
 
    of Period     Expenses     Accounts     Deductions     of Period  
    (In thousands)  
 
2008
                                       
Allowance for doubtful accounts
  $ 16,160     $ 15,655     $     $ 16,514 (1)   $ 15,301  
2007
                                       
Allowance for doubtful accounts
  $ 13,686     $ 19,718     $     $ 17,244 (1)   $ 16,160  
2006
                                       
Allowance for doubtful accounts
  $ 15,613     $ 21,819     $     $ 23,746 (1)   $ 13,686  
 
 
(1) Uncollectible accounts written off.


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EXHIBITS INDEX
Item 14.(a)(3)
 
             
        Page Number or
Exhibit
      Incorporation by
Number
 
Description
 
Reference to
 
        Articles of Incorporation and Bylaws    
  3 .1   Amended and Restated Articles of Incorporation of Atmos Energy Corporation (as of February 9, 2005)   Exhibit 3(I) to Form 10-Q dated March 31, 2005 (File No. 1-10042)
  3 .2   Amended and Restated Bylaws of Atmos Energy Corporation (as of May 2, 2007)   Exhibit 3.1 to Form 8-K dated May 2, 2007 (File No. 1-10042)
        Instruments Defining Rights of Security Holders    
  4 .1   Specimen Common Stock Certificate (Atmos Energy Corporation)   Exhibit (4)(b) to Form 10-K for fiscal year ended September 30, 1988 (File No. 1-10042)
  4 .2(a)   Indenture dated as of November 15, 1995 between United Cities Gas Company and Bank of America Illinois, Trustee   Exhibit 4.11(a) to Form S-3 dated August 31, 2004 (File No. 333-118706)
  4 .2(b)   First Supplemental Indenture dated as of July 29, 1997 between Atmos Energy Corporation and First Trust National Association, as successor to Bank of America Illinois, Trustee   Exhibit 4.11(b) to Form S-3 dated August 31, 2004 (File No. 333-118706)
  4 .3   Indenture dated as of July 15, 1998 between Atmos Energy Corporation and U.S. Bank Trust National Association, Trustee   Exhibit 4.8 to Form S-3 dated August 31, 2004 (File No. 333-118706)
  4 .4   Indenture dated as of May 22, 2001 between Atmos Energy Corporation and SunTrust Bank, Trustee   Exhibit 99.3 to Form 8-K dated May 15, 2001 (File No. 1-10042)
  4 .5   Indenture dated as of June 14, 2007, between Atmos Energy Corporation and U.S. Bank National Association, Trustee   Exhibit 4.1 to Form 8-K dated June 11, 2007 (File No. 1-10042)
  4 .6(a)   Debenture Certificate for the 6 3 / 4 % Debentures due 2028   Exhibit 99.2 to Form 8-K dated July 22, 1998 (File No. 1-10042)
  4 .6(b)   Global Security for the 7 3 / 8 % Senior Notes due 2011   Exhibit 99.2 to Form 8-K dated May 15, 2001 (File No. 1-10042)
  4 .6(c)   Global Security for the 5 1 / 8 % Senior Notes due 2013   Exhibit 10(2)(c) to Form 10-K for the fiscal year ended September 30, 2004 (File No. 1-10042)
  4 .6(d)   Global Security for the 4.00% Senior Notes due 2009   Exhibit 10(2)(e) to Form 10-K for the fiscal year ended September 30, 2004 (File No. 1-10042)
  4 .6(e)   Global Security for the 4.95% Senior Notes due 2014   Exhibit 10(2)(f) to Form 10-K for the fiscal year ended September 30, 2004 (File No. 1-10042)
  4 .6(f)   Global Security for the 5.95% Senior Notes due 2034   Exhibit 10(2)(g) to Form 10-K for the fiscal year ended September 30, 2004 (File No. 1-10042)
  4 .6(g)   Global Security for the 6.35% Senior Notes due 2017   Exhibit 4.2 to Form 8-K dated June 11, 2007 (File No. 1-10042)


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Table of Contents

             
        Page Number or
Exhibit
      Incorporation by
Number
 
Description
 
Reference to
 
        Material Contracts    
  10 .1   Pipeline Construction and Operating Agreement, dated November 30, 2005, by and between Atmos-Pipeline Texas, a division of Atmos Energy Corporation, a Texas and Virginia corporation and Energy Transfer Fuel, LP, a Delaware limited partnership   Exhibit 10.1 to Form 8-K dated November 30, 2005 (File No. 1-10042)
  10 .2   Revolving Credit Agreement (5 Year Facility), dated as of December 15, 2006, among Atmos Energy Corporation, SunTrust Bank, as Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and Bank of America, N.A., JPMorgan Chase Bank, N.A., and the Royal Bank of Scotland plc as Co-Documentation Agents, and the lenders from time to time parties thereto   Exhibit 10.1 to Form 8-K dated December 15, 2006 (File No. 1-10042)
  10 .3   Revolving Credit Agreement (364 Day Facility), dated as of October 29, 2008, among Atmos Energy Corporation, SunTrust Bank, as Administrative Agent, Bank of America, N.A., as Syndication Agent, U.S. Bank National Association as Documentation Agent and Wells Fargo Bank, N.A. as Managing Agent, and the lenders from time to time parties thereto   Exhibit 10.1 to Form 8-K dated October 29, 2008 (File No. 1-10042)
  10 .4(a)   Uncommitted Second Amended and Restated Credit Agreement, dated to be effective March 30, 2005, among Atmos Energy Marketing, LLC, Fortis Capital Corp., BNP Paribas and the other financial institutions which may become parties thereto   Exhibit 10.1 to Form 8-K dated March 30, 2005 (File No. 1-10042)
  10 .4(b)   First Amendment, dated as of November 28, 2005, to the Uncommitted Second Amended and Restated Credit Agreement, dated to be effective March 30, 2005, among Atmos Energy Marketing, LLC, Fortis Capital Corp., BNP Paribas, Societe Generale, and the other financial institutions which may become parties thereto   Exhibit 10.1 to Form 8-K dated November 28, 2005 (File No. 1-10042)
  10 .4(c)   Second Amendment, dated as of March 31, 2006, to the Uncommitted Second Amended and Restated Credit Agreement, dated to be effective March 30, 2005, among Atmos Energy Marketing, LLC, Fortis Capital Corp., BNP Paribas, Societe Generale and the other financial institutions which may become parties thereto   Exhibit 10.1 to Form 8-K dated March 31, 2006 (File No. 1-10042)
  10 .4(d)   Third Amendment, dated as of March 30, 2007, to the Uncommitted Second Amended and Restated Credit Agreement, dated as of March 30, 2005, among Atmos Energy Marketing, LLC, Fortis Capital Corp., BNP Paribas, Societe Generale and the other financial institutions which may become parties thereto   Exhibit 10.1 to Form 8-K dated March 30, 2007 (File No. 1-10042)

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Table of Contents

             
        Page Number or
Exhibit
      Incorporation by
Number
 
Description
 
Reference to
 
  10 .4(e)   Fourth Amendment, dated as of March 31, 2008, to the Uncommitted Second Amended and Restated Credit Agreement, dated as of March 30, 2005, among Atmos Energy Marketing, LLC, Fortis Capital Corp., BNP Paribas, Societe Generale and the other financial institutions which may become parties thereto   Exhibit 10.1 to Form 8-K dated March 31, 2008 (File No. 1-10042)
  10 .4(f)   Intercreditor Agreement, dated as of March 31, 2008, among Fortis Capital Corp. and the other financial institutions which may become parties thereto   Exhibit 10.2 to Form 8-K dated March 31, 2008 (File No. 1-10042)
        Executive Compensation Plans and Arrangements    
  10 .5(a)*   Form of Atmos Energy Corporation Change in Control Severance Agreement — Tier I    
  10 .5(b)*   Form of Atmos Energy Corporation Change in Control Severance Agreement — Tier II    
  10 .6(a)*   Atmos Energy Corporation Executive Retiree Life Plan   Exhibit 10.31 to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042)
  10 .6(b)*   Amendment No. 1 to the Atmos Energy Corporation Executive Retiree Life Plan   Exhibit 10.31(a) to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042)
  10 .7(a)*   Description of Financial and Estate Planning Program   Exhibit 10.25(b) to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042)
  10 .7(b)*   Description of Sporting Events Program   Exhibit 10.26(c) to Form 10-K for fiscal year ended September 30, 1993 (File No. 1-10042)
  10 .8(a)*   Atmos Energy Corporation Supplemental Executive Benefits Plan, Amended and Restated in its Entirety August 7, 2007    
  10 .8(b)*   Atmos Energy Corporation Supplemental Executive Retirement Plan, (An Amendment and Restatement of the Performance-Based Supplemental Executive Benefits Plan), Effective Date August 7, 2007    
  10 .8(c)*   Atmos Energy Corporation Performance-Based Supplemental Executive Benefits Plan Trust Agreement, Effective Date December 1, 2000   Exhibit 10.1 to Form 10-Q for quarter ended December 31, 2000 (File No. 1-10042)
  10 .8(d)*   Form of Individual Trust Agreement for the Supplemental Executive Benefits Plan   Exhibit 10.3 to Form 10-Q for quarter ended December 31, 2000 (File No. 1-10042)
  10 .9(a)*   Mini-Med/Dental Benefit Extension Agreement dated October 1, 1994   Exhibit 10.28(f) to Form 10-K for fiscal year ended September 30, 2001 (File No. 1-10042)
  10 .9(b)*   Amendment No. 1 to Mini-Med/Dental Benefit Extension Agreement dated August 14, 2001   Exhibit 10.28(g) to Form 10-K for fiscal year ended September 30, 2001 (File No. 1-10042)
  10 .9(c)*   Amendment No. 2 to Mini-Med/Dental Benefit Extension Agreement dated December 31, 2002   Exhibit 10.1 to Form 10-Q for quarter ended December 31, 2002 (File No. 1-10042)
  10 .10*   Atmos Energy Corporation Equity Incentive and Deferred Compensation Plan for Non-Employee Directors    

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Table of Contents

             
        Page Number or
Exhibit
      Incorporation by
Number
 
Description
 
Reference to
 
  10 .11*   Atmos Energy Corporation Outside Directors Stock-for-Fee Plan (Amended and Restated as of November 12, 1997)   Exhibit 10.28 to Form 10-K for fiscal year ended September 30, 1997 (File No. 1-10042)
  10 .12(a)*   Atmos Energy Corporation 1998 Long-Term Incentive Plan (as amended and restated February 9, 2007)   Exhibit 10.2 to Form 10-Q for quarter ended March 31, 2007 (File No. 1-10042)
  10 .12(b)*   Amendment No. 1 to Atmos Energy Corporation 1998 Long-Term Incentive Plan (as amended and restated February 9, 2007)    
  10 .12(c)*   Form of Non-Qualified Stock Option Agreement under the Atmos Energy Corporation 1998 Long-Term Incentive Plan   Exhibit 10.16(b) to Form 10-K for fiscal year ended September 30, 2005 (File No. 1-10042)
  10 .12(d)*   Form of Award Agreement of Restricted Stock With Time-Lapse Vesting under the Atmos Energy Corporation 1998 Long-Term Incentive Plan    
  10 .12(e)*   Form of Award Agreement of Performance-Based Restricted Stock Units under the Atmos Energy Corporation 1998 Long-Term Incentive Plan    
  10 .12(f)*   Atmos Energy Corporation Annual Incentive Plan for Management (as amended and restated August 8, 2007)    
  12     Statement of computation of ratio of earnings to fixed charges    
        Other Exhibits, as indicated    
  21     Subsidiaries of the registrant    
  23 .1   Consent of independent registered public accounting firm, Ernst & Young LLP    
  24     Power of Attorney   Signature page of Form 10-K for fiscal year ended September 30, 2008
  31     Rule 13a-14(a)/15d-14(a) Certifications    
  32     Section 1350 Certifications**    
 
 
 * This exhibit constitutes a “management contract or compensatory plan, contract, or arrangement.”
 
** These certifications pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer and Chief Financial Officer, furnished as Exhibit 32 to this Annual Report on Form 10-K, will not be deemed to be filed with the Securities and Exchange Commission or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference.

133

Exhibit 10.5(a)
ATMOS ENERGY CORPORATION
CHANGE IN CONTROL SEVERANCE AGREEMENT
TIER I
     THIS AGREEMENT (the “Agreement”) made and entered into as of                                           , by and between ATMOS ENERGY CORPORATION, a Texas and Virginia                     corporation                      (the                      “Company”),                        and                                                                (“Executive”).
WITNESSETH :
     WHEREAS, the Company recognizes that the current business environment makes it difficult to attract and retain highly qualified executives unless a certain degree of security can be offered to such individuals against organizational and personnel changes which frequently follow Changes in Control (as defined below) of a corporation; and
     WHEREAS, even rumors of acquisitions or mergers may cause executives to consider major career changes in an effort to assure financial security for themselves and their families; and
     WHEREAS, the Company desires to assure fair treatment of its key executives in the event of a Change in Control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, thereby increasing their willingness to remain with the Company notwithstanding the outcome of a possible Change in Control transaction; and
     WHEREAS, the Company recognizes that its key executives will be involved in evaluating or negotiating any offers, proposals or other transactions which could result in Changes in Control of the Company and believes that it is in the best interest of the Company and its stockholders for such key executives to be in a position, free from personal financial and employment considerations, to be able to assess objectively and pursue aggressively the interests of the Company and its stockholders in making these evaluations and carrying on such negotiations; and
     WHEREAS, the Board of Directors of the Company (the “Board”) believes it is essential to provide the Executive with compensation arrangements upon a Change in Control which provide the Executive with individual financial security and which are competitive with those of other corporations, and in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
     NOW, THEREFORE, in consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows:

 


 

     1.  TERM . This Agreement shall be effective immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, neither this Agreement nor any of its provisions shall be operative unless and until there has been a Change in Control of the Company, as such term is defined below. The term of this Agreement shall end on the third anniversary of the date of execution of this Agreement; provided , however , that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof is hereinafter referred to as the “Renewal Date”), the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least thirty (30) days prior to the Renewal Date the Company shall give written notice that the term of the Agreement shall not be so extended; and provided , further , that after a Change in Control of the Company during the term of this Agreement, this Agreement shall remain in effect until three years after the Change in Control or until all of the obligations of the parties hereunder are satisfied, whichever occurs later.
     2.  CHANGE IN CONTROL .
          2.1 Change of Control Events . For purposes of this Agreement, a “Change in Control” of the Company occurs upon a change in the Company’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (a) Change in Ownership . A change in ownership of the Company occurs on the date that any “Person” (as defined in Section 2.2(b) below), other than (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the Company’s stock, acquires ownership of the Company’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Company’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Company’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Company through ownership of 30% or more of the total voting power of the Company’s stock, as discussed in paragraph (b) below, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this paragraph (a); or
     (b) Change in Effective Control . Even though the Company may not have undergone a change in ownership under paragraph (a) above, a change in the effective control of the Company occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Company’s stock possessing 30 percent or more of the total

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voting power of the Company’s stock. However, if any Person owns 30% or more of the total voting power of the Company’s stock, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (b)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (c) Change in Ownership of Substantial Portion of Assets. A change in the ownership of a substantial portion of the Company’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Company’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, through a transfer to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (ii) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (iii) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock; or (iv) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock.
          2.2 Definitions . For purposes of Section 2.1 above,
     (a) “Person” shall have the meaning given in Section 7701(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (b) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
          2.3 Compliance with Code Section 409A. The provisions of Sections 2.1 and 2.2 shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), it being the intent of the parties that this Article 2 shall be in compliance with the requirements of said Code Section and said Regulations.

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     3.  TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL . If any of the events described in Section 2.1 constituting a Change in Control of the Company shall have occurred, Executive shall be entitled to the benefits provided in Article 4 upon the subsequent termination of his employment that constitutes a separation from service (as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto) (“Separation from Service”), provided that such termination occurs within three years after a Change in Control of the Company, unless such termination is (a) because of his death, his “Disability,” or “Retirement” (as defined in Section 3.1), (b) by the Company for “Cause” (as defined in Section 3.2), or (c) by Executive other than for “Constructive Termination” (as defined in Section 3.3) (any such termination qualifying for benefits under Article 4 hereof being sometimes referred to herein as “CIC Termination”).
     If Executive’s employment with the Company is terminated by the Company for any reason other than for “Cause” prior to the date on which a Change in Control occurs (whether or not the Change in Control ever occurs), and such termination either (1) was at the request or direction of a person who has entered into an agreement with the Company, the consummation of which would constitute a Change in Control, or (2) was otherwise in connection with or in anticipation of a Change in Control (whether or not the Change in Control ever occurs), then for all purposes hereof, such termination shall be deemed to have occurred immediately following a Change in Control.
          3.1 Disability; Retirement . Executive’s employment shall be terminated due to “Disability” if Executive (i) is qualified for disability benefits under the Atmos Energy Corporation Group Long-Term Disability Plan, as in effect from time to time; or, (ii) if such Long-Term Disability Plan is not then in existence, is eligible for Social Security disability benefits.
          Termination by Executive of his employment based on “Retirement” shall mean termination in accordance with the Company’s retirement policy generally applicable to its salaried employees, or in accordance with any retirement arrangement established with Executive’s consent with respect to him.
          3.2 Cause . For the purposes of this Agreement, the Company shall have “Cause” to terminate Executive’s employment hereunder upon (1) the willful and continued failure by Executive to substantially perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board which specifically identifies the manner in which the Board believes that he has not substantially performed his duties, or (2) the willful engaging by Executive in conduct materially and demonstrably injurious to the Company, monetarily or otherwise. For purposes of this Section 3.2, no act, or failure to act, on Executive’s part shall be considered “willful” if, in Executive’s sole judgment, his action or omission was done, or omitted to be done, in good faith and with a reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less

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than three-quarters (3/4) of the entire authorized membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board Executive was guilty of conduct set forth above in clause (1) or (2) of the first sentence of this Section 3.2, and specifying the particulars thereof in detail.
          3.3 Constructive Termination . For purposes of this Agreement, “Constructive Termination” shall mean:
     (a) Without his express written consent, the assignment to Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to a Change in Control, or a change in his reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of his employment for Cause, death, Disability or Retirement or termination of employment by Executive for reasons other than Constructive Termination;
     (b) A reduction by the Company in Executive’s base salary as in effect on the date of a Change in Control or as the same may be increased from time to time thereafter;
     (c) A reduction by the Company in the bonus payable to Executive in any year below a percentage of Executive’s then base salary equal to the average percentage of Executive’s base salary represented by the bonuses received by Executive for the three (3) years (or, if shorter, the years of Executive’s employment by the Company) immediately preceding the year in which a Change in Control occurs as percentages of his base salaries in each of such three (3) years (or shorter number of years). By way of example, but not in limitation of the provisions of this paragraph (c), assume a Change in Control occurs in 2008, and Executive received bonuses for each of 2005, 2006 and 2007 as follows: 30% of his base salary for 2005; 50% of his base salary for 2006; and 50% of his base salary for 2007. If Executive receives a bonus for 2008 which is less than 43.33% of his 2008 base salary, Executive may terminate his employment for “Constructive Termination” under this Section 3.3. If Executive was only employed during 2006 and 2007, using the same facts as recited herein, Executive may terminate his employment for “Constructive Termination” if his 2008 bonus was less than 50% of his 2008 base salary;
     (d) The Company’s requiring Executive to be based anywhere other than either the Company’s offices at which he was based immediately prior to a Change in Control or the Company’s offices which are no more than seventy-five (75) miles from the offices at which Executive was based immediately prior to a Change in Control, except for required travel on the Company’s business to an extent substantially consistent with his business travel obligations immediately prior to the Change in Control (excluding, however, any travel obligations prior to the Change in Control that are associated with or caused by the Change in Control events or circumstances), or, in the

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event Executive consents to any relocation beyond such seventy-five-mile radius, the failure by the Company to pay (or reimburse Executive) for all reasonable moving expenses incurred by him relating to a change of his principal residence in connection with such relocation and to indemnify Executive against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) his aggregate investment in such residence or (b) the fair market value of such residence as determined by a real estate appraiser designated by Executive and reasonably satisfactory to the Company) realized on the sale of Executive’s principal residence in connection with any such change of residence;
     (e) The failure by the Company to continue in effect any benefit or compensation plan (including but not limited to any stock option plan, pension plan, deferred compensation plan, life insurance plan, health and accident plan or disability plan) in which Executive is participating at the time of a Change in Control of the Company (or plans providing substantially similar benefits), the taking of any action by the Company which would adversely affect Executive’s participation in, payment from, or materially reduce his benefits under any of such plans or deprive him of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by the Company to provide Executive with the number of days of paid time off to which he is then entitled on the basis of years of service with the Company in accordance with the Company’s normal paid time off or vacation policy in effect immediately prior to the Change in Control;
     (f) Any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Article 5;
     (g) Any purported termination of Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.4 (and, if applicable, Section 3.2); and for purposes hereof, no such purported termination shall be effective; or
     (h) The failure of the Company otherwise to honor all the terms and provisions of this Agreement.
For purposes of this Section 3.3, any good faith determination of “Constructive Termination” made by Executive shall be conclusive and binding on the parties.
          3.4 Notice of Termination . Any termination pursuant to the foregoing provisions of this Section (including termination due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto. For purposes hereof, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision herein relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated. In the event that Executive seeks to terminate his employment with the Company pursuant to Section 3.3, he must communicate his written Notice of Termination to the Company

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within sixty (60) days of being notified of such action or actions by the Company which constitute Constructive Termination.
          3.5 Date of Termination . “Date of Termination” shall mean (i) if this Agreement is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30)-day period); (ii) if Executive’s employment is terminated pursuant to Section 3.3, the date specified in the Notice of Termination; and (iii) if Executive’s employment is terminated for any other reason, the date on which a Notice of Termination is given; provided, however, in no event shall such Date of Termination be earlier than the date of the Executive’s Separation from Service.
     4.  COMPENSATION UPON TERMINATION .
          4.1 Termination Without Cause or for Constructive Termination . If Executive suffers a CIC Termination, then, subject to Section 4.2, Executive shall be entitled, if such CIC Termination occurred within three (3) years of a Change in Control, to the following benefits:
     (a) The Company shall pay to Executive as severance pay in one lump sum an amount equal to the product of (i) Executive’s Total Compensation (as defined below) multiplied by (ii) the number two and one-half (2.5). Such severance pay shall be paid not later than the tenth (10th) business day following the Date of Termination, unless Executive is a “specified employee,” as defined in §1.409A-1(i) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto, in which case, such severance pay shall be paid on the date which is six (6) months following the Participant’s Date of Termination (or, if earlier, the date of death of the Participant), provided the six months delay requirements of Code Section 409A otherwise apply to the payments hereunder. All severance pay that is delayed as provided in this paragraph (a) shall accrue interest for the period from the tenth (10th) business day following the Date of Termination until the date such payment is actually made. Said interest shall be equal to the applicable interest rate as defined in Code Section 417(e)(3), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which the participant retires or otherwise becomes entitled to payments without regard to this Section 5.4(c).
For purposes of this Section 4.1(a), Executive’s “Total Compensation” shall mean the annual base salary being paid to Executive at the Date of Termination plus Executive’s “Average Bonus.” Executive’s “Average Bonus” shall mean the greater of (i) the bonus or incentive award pursuant to any annual performance bonus or incentive compensation plan of the Company (the “Bonus”) last paid to or earned by Executive immediately prior to his Date of Termination, or (ii) the average of the highest three Bonuses or incentive awards (whether or not consecutive) paid to or earned by Executive.
     (b)

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     (i) The Company shall continue to provide Executive with all medical, dental, vision, and any other health benefits which qualify for continuation coverage under Code Section 4980B ( “COBRA Coverage”), for a period of 18 months from the Date of Termination. Such benefits shall be equal to or economically equivalent to the benefits in effect for Executive at the time of the Change in Control, and the Company shall provide such benefits at the same cost to Executive as the cost, if any, charged to Executive for those benefits immediately prior to the Date of Termination. Within 10 business days following the end of said 18-month period, Executive shall be paid a lump sum amount equal to the present value of the cost to the Company of providing those benefits to Executive for an additional 18-month period, with such cost being determined on the basis of the monthly cost to the Company of providing such benefits during the 18 th month following Executive’s Date of Termination (net of the monthly cost, if any, charged to Executive for those benefits in said 18 th month).
     (ii) On the date that Executive is paid the severance pay, as provided for in Section 4.1(a), the Company shall pay to Executive a lump sum amount equal to the present value of the cost to the Company of providing Executive, for a period of 36 months from the Executive’s Date of Termination, with accident and life insurance benefits, and disability benefits equal to such benefits in effect for Executive at the time of the Change in Control, with such cost being determined on the basis of the monthly cost to the Company of providing such benefits during the month immediately preceding Executive’s Date of Termination (net of the monthly cost, if any, charged to Executive for those benefits in the month immediately preceding Executive’s Date of Termination).
          4.2 Gross-Up Payment . In the event it shall be determined that any payment, distribution, or benefits of any type by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the “Total Payments”), would be subject to the excise tax imposed by Code Section 4999 or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the “Excise Tax”), then Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including additional excise taxes under said Section 4999, and any interest and penalties imposed with respect to any taxes) imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company shall pay the Gross-Up Payment to Executive within thirty (30) business days after Executive’s termination of employment.
          4.3 Determination By Accountant . All determinations required to be made under this Article 4, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Company on the date of the Change in Control (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the Date of Termination , if applicable, or such earlier time as is requested by the Company. If

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the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 4.4 and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. Notwithstanding the foregoing provisions of this Section 4.3, in no event shall such Underpayment be paid to Executive later than the end of the calendar year next following the calendar year in which Executive remits the related taxes to the Internal Revenue Service.
          4.4 Notification Required . Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall:
     (a) give the Company any information reasonably requested by the Company relating to such claim,
     (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
     (c) cooperate with the Company in good faith in order to effectively contest such claim,
     (d) permit the Company to participate in any proceedings relating to such claim, provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.4, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and

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all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund, or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
          4.5 Repayment .
     (a) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 4.4, Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Section 4.4) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 4.4, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
     (b) Notwithstanding the foregoing provisions of this Section 4.5 and Section 4.4, (i) any payment made to or on behalf of Executive which relates to taxes imposed on Executive shall be made not later than the end of the calendar year next following the calendar year in which such taxes are remitted by or on behalf of Executive , and (ii) any payment made to or on behalf of Executive which relates to reimbursement of expenses incurred due to a tax audit or litigation addressing the existence or amount of a tax liability shall be made by the end of the calendar year following the calendar year in which the taxes that are the subject of the audit or litigation are remitted to the taxing authority, or where as a result of such audit or litigation no taxes are remitted, the end of the calendar year following the calendar year in which the audit is completed or there is a final and non-appealable settlement or other resolution of the litigation, whichever is the last event to occur.

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          4.6 Mitigation or Set-off of Amounts Payable Hereunder . Executive shall not be required to mitigate the amount of any payment provided for in this Article 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Article 4 be reduced by any compensation earned by Executive as the result of employment by another employer after the Date of Termination, or otherwise. The Company’s obligations hereunder also shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive.
     5.  SUCCESSORS; BINDING AGREEMENT .
          5.1 Successors of the Company . The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if there had been a Change in Control but no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach hereof. As used herein, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 5.1 or which otherwise becomes bound by all the terms and provisions hereof by operation of law.
          5.2 Executive’s Heirs, etc . This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable to him hereunder as if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms hereof to his designated beneficiary or, if there be no such designated beneficiary, to his estate.
     6.  NOTICE . For the purposes hereof, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business and to Executive at his address as shown on the records of the Company, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
     7. MISCELLANEOUS . No provisions hereof may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by Executive and such officer as may be specifically designated by the Board (which shall in any event include the Company’s Chief Executive Officer). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision hereof to be performed by such other party shall be deemed a waiver of similar or

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dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly herein.
     8.  VALIDITY . The invalidity or unenforceability of any provisions hereof shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
     9.  NON-EXCLUSIVITY OF RIGHTS . Nothing herein shall prevent or limit Executive’s continuing or future participation in any benefit, bonus, incentive or other plans, practices, policies or programs provided by the Company and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any stock option or other agreements with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, practice, policy or program. Notwithstanding the foregoing provisions of this Article 9, this Agreement contains the entire agreement of the parties regarding the change in control severance benefits provided for herein and shall supersede and replace any change in control severance agreements previously entered into by the parties, and by execution of this Agreement, the parties understand and agree that any other such agreement shall be and become null and void.
     10.  LEGAL EXPENSES . The Company agrees to pay, upon written demand therefor by Executive, all legal fees and expenses which Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision hereof (including as a result of any contest about the amount of any payment pursuant to Section 4.2), plus in each case interest at the “applicable Federal rate” (as defined in Section 1274(d) of the Code). In any such action brought by Executive for damages or to enforce any provisions hereof, he shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company’s obligations hereunder, in his sole discretion. The amount of fees and expenses eligible for reimbursement during a calendar year shall not affect the fees and expenses eligible for reimbursement in any other calendar year. Reimbursement of eligible fees and expenses shall be made on or before the last day of the calendar year following the calendar year in which the fees or expenses were incurred .
     11.  COUNTERPARTS . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
     12.  GOVERNING LAW . This Agreement shall be governed by and construed under the laws of the State of Texas.
     13.  CAPTIONS AND GENDER . The use of captions and Article and Section headings herein is for purposes of convenience only and shall not effect the interpretation or

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substance of any provisions contained herein. Similarly, the use of the masculine gender with respect to pronouns herein is for purposes of convenience and includes either sex who may be a signatory.
     14.  TAX WITHHOLDING . The Company shall have the right to deduct from all amounts paid in cash or other form under this Agreement any Federal, state, local or other taxes required by law to be withheld.
     15.  AMENDMENT . The Company reserves the right, in its sole discretion, to amend this Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A or related Treasury regulations issued thereunder.
     IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written.
         
  ATMOS ENERGY CORPORATION
 
 
  By:      
    Robert W. Best   
    Chairman and Chief Executive Officer   
 
  EXECUTIVE
 
 
     
  Name:      
       
 

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Exhibit 10.5(b)
ATMOS ENERGY CORPORATION
CHANGE IN CONTROL SEVERANCE AGREEMENT
TIER II
     THIS AGREEMENT (the “Agreement”) made and entered into as of                      , by and between ATMOS ENERGY CORPORATION, a Texas and Virginia corporation (the “Company”), and                                                                (“Executive”).
WITNESSETH :
     WHEREAS, the Company recognizes that the current business environment makes it difficult to attract and retain highly qualified executives unless a certain degree of security can be offered to such individuals against organizational and personnel changes which frequently follow Changes in Control (as defined below) of a corporation; and
     WHEREAS, even rumors of acquisitions or mergers may cause executives to consider major career changes in an effort to assure financial security for themselves and their families; and
     WHEREAS, the Company desires to assure fair treatment of its key executives in the event of a Change in Control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, thereby increasing their willingness to remain with the Company notwithstanding the outcome of a possible Change in Control transaction; and
     WHEREAS, the Company recognizes that its key executives will be involved in evaluating or negotiating any offers, proposals or other transactions which could result in Changes in Control of the Company and believes that it is in the best interest of the Company and its stockholders for such key executives to be in a position, free from personal financial and employment considerations, to be able to assess objectively and pursue aggressively the interests of the Company and its stockholders in making these evaluations and carrying on such negotiations; and
     WHEREAS, the Board of Directors of the Company (the “Board”) believes it is essential to provide the Executive with compensation arrangements upon a Change in Control which provide the Executive with individual financial security and which are competitive with those of other corporations, and in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
     NOW, THEREFORE, in consideration of the mutual premises and conditions contained herein, the parties hereto agree as follows:

 


 

     1.  TERM . This Agreement shall be effective immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, neither this Agreement nor any of its provisions shall be operative unless and until there has been a Change in Control of the Company, as such term is defined below. The term of this Agreement shall end on the third anniversary of the date of execution of this Agreement; provided , however , that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof is hereinafter referred to as the “Renewal Date”), the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least thirty (30) days prior to the Renewal Date the Company shall give written notice that the term of the Agreement shall not be so extended; and provided , further , that after a Change in Control of the Company during the term of this Agreement, this Agreement shall remain in effect until three years after the Change in Control or until all of the obligations of the parties hereunder are satisfied, whichever occurs later.
     2.  CHANGE IN CONTROL .
          2.1 Change of Control Events . For purposes of this Agreement, a “Change in Control” of the Company occurs upon a change in the Company’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (a) Change in Ownership . A change in ownership of the Company occurs on the date that any “Person” (as defined in Section 2.2(b) below), other than (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the Company’s stock, acquires ownership of the Company’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Company’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Company’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Company through ownership of 30% or more of the total voting power of the Company’s stock, as discussed in paragraph (b) below, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this paragraph (a); or
     (b) Change in Effective Control . Even though the Company may not have undergone a change in ownership under paragraph (a) above, a change in the effective control of the Company occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Company’s stock possessing 30 percent or more of the total voting power of the Company’s stock. However, if any Person owns 30% or

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more of the total voting power of the Company’s stock, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (b)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (c) Change in Ownership of Substantial Portion of Assets. A change in the ownership of a substantial portion of the Company’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Company’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, through a transfer to (i) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (ii) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (iii) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock; or (iv) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock.
          2.2 Definitions . For purposes of Section 2.1 above,
     (a) “Person” shall have the meaning given in Section 7701(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (b) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
          2.3 Compliance with Code Section 409A. The provisions of Sections 2.1 and 2.2 shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), it being the intent of the parties that this Article 2 shall be in compliance with the requirements of said Code Section and said Regulations.
     3.  TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL . If any of the events described in Section 2.1 constituting a Change in Control of the

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Company shall have occurred, Executive shall be entitled to the benefits provided in Article 4 upon the subsequent termination of his employment that constitutes a separation from service (as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto) (“Separation from Service”), provided that such termination occurs within three years after a Change in Control of the Company, unless such termination is (a) because of his death, his “Disability,” or “Retirement” (as defined in Section 3.1), (b) by the Company for “Cause” (as defined in Section 3.2), or (c) by Executive other than for “Constructive Termination” (as defined in Section 3.3) (any such termination qualifying for benefits under Article 4 hereof being sometimes referred to herein as “CIC Termination”).
     If Executive’s employment with the Company is terminated by the Company for any reason other than for “Cause” prior to the date on which a Change in Control occurs (whether or not the Change in Control ever occurs), and such termination either (1) was at the request or direction of a person who has entered into an agreement with the Company, the consummation of which would constitute a Change in Control, or (2) was otherwise in connection with or in anticipation of a Change in Control (whether or not the Change in Control ever occurs), then for all purposes hereof, such termination shall be deemed to have occurred immediately following a Change in Control.
          3.1 Disability; Retirement . Executive’s employment shall be terminated due to “Disability” if Executive (i) is qualified for disability benefits under the Atmos Energy Corporation Group Long-Term Disability Plan, as in effect from time to time; or, (ii) if such Long-Term Disability Plan is not then in existence, is eligible for Social Security disability benefits.
          Termination by Executive of his employment based on “Retirement” shall mean termination in accordance with the Company’s retirement policy generally applicable to its salaried employees, or in accordance with any retirement arrangement established with Executive’s consent with respect to him.
          3.2 Cause . For the purposes of this Agreement, the Company shall have “Cause” to terminate Executive’s employment hereunder upon (1) the willful and continued failure by Executive to substantially perform his duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to Executive by the Board which specifically identifies the manner in which the Board believes that he has not substantially performed his duties, or (2) the willful engaging by Executive in conduct materially and demonstrably injurious to the Company, monetarily or otherwise. For purposes of this Section 3.2, no act, or failure to act, on Executive’s part shall be considered “willful” if, in Executive’s sole judgment, his action or omission was done, or omitted to be done, in good faith and with a reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire authorized membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith

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opinion of the Board Executive was guilty of conduct set forth above in clause (1) or (2) of the first sentence of this Section 3.2, and specifying the particulars thereof in detail.
          3.3 Constructive Termination . For purposes of this Agreement, “Constructive Termination” shall mean:
     (a) Without his express written consent, the assignment to Executive of any duties inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to a Change in Control, or a change in his reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of his employment for Cause, death, Disability or Retirement or termination of employment by Executive for reasons other than Constructive Termination;
     (b) A reduction by the Company in Executive’s base salary as in effect on the date of a Change in Control or as the same may be increased from time to time thereafter;
     (c) A reduction by the Company in the bonus payable to Executive in any year below a percentage of Executive’s then base salary equal to the average percentage of Executive’s base salary represented by the bonuses received by Executive for the three (3) years (or, if shorter, the years of Executive’s employment by the Company) immediately preceding the year in which a Change in Control occurs as percentages of his base salaries in each of such three (3) years (or shorter number of years). By way of example, but not in limitation of the provisions of this paragraph (c), assume a Change in Control occurs in 2008, and Executive received bonuses for each of 2005, 2006 and 2007 as follows: 30% of his base salary for 2005; 50% of his base salary for 2006; and 50% of his base salary for 2007. If Executive receives a bonus for 2008 which is less than 43.33% of his 2008 base salary, Executive may terminate his employment for “Constructive Termination” under this Section 3.3. If Executive was only employed during 2006 and 2007, using the same facts as recited herein, Executive may terminate his employment for “Constructive Termination” if his 2008 bonus was less than 50% of his 2008 base salary;
     (d) The Company’s requiring Executive to be based anywhere other than either the Company’s offices at which he was based immediately prior to a Change in Control or the Company’s offices which are no more than seventy-five (75) miles from the offices at which Executive was based immediately prior to a Change in Control, except for required travel on the Company’s business to an extent substantially consistent with his business travel obligations immediately prior to the Change in Control (excluding, however, any travel obligations prior to the Change in Control that are associated with or caused by the Change in Control events or circumstances), or, in the event Executive consents to any relocation beyond such seventy-five-mile radius, the failure by the Company to pay (or reimburse Executive) for all reasonable moving expenses incurred by him relating to a change of his principal residence in connection with such relocation and to indemnify Executive against any loss (defined as the

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difference between the actual sale price of such residence and the higher of (a) his aggregate investment in such residence or (b) the fair market value of such residence as determined by a real estate appraiser designated by Executive and reasonably satisfactory to the Company) realized on the sale of Executive’s principal residence in connection with any such change of residence;
     (e) The failure by the Company to continue in effect any benefit or compensation plan (including but not limited to any stock option plan, pension plan, deferred compensation plan, life insurance plan, health and accident plan or disability plan) in which Executive is participating at the time of a Change in Control of the Company (or plans providing substantially similar benefits), the taking of any action by the Company which would adversely affect Executive’s participation in, payment from, or materially reduce his benefits under any of such plans or deprive him of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by the Company to provide Executive with the number of days of paid time off to which he is then entitled on the basis of years of service with the Company in accordance with the Company’s normal paid time off or vacation policy in effect immediately prior to the Change in Control;
     (f) Any failure of the Company to obtain the assumption of, or the agreement to perform, this Agreement by any successor as contemplated in Article 5;
     (g) Any purported termination of Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.4 (and, if applicable, Section 3.2); and for purposes hereof, no such purported termination shall be effective; or
     (h) The failure of the Company otherwise to honor all the terms and provisions of this Agreement.
For purposes of this Section 3.3, any good faith determination of “Constructive Termination” made by Executive shall be conclusive and binding on the parties.
          3.4 Notice of Termination . Any termination pursuant to the foregoing provisions of this Section (including termination due to Executive’s death) shall be communicated by written Notice of Termination to the other party hereto. For purposes hereof, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision herein relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated. In the event that Executive seeks to terminate his employment with the Company pursuant to Section 3.3, he must communicate his written Notice of Termination to the Company within sixty (60) days of being notified of such action or actions by the Company which constitute Constructive Termination.
          3.5 Date of Termination . “Date of Termination” shall mean (i) if this Agreement is terminated for Disability, thirty (30) days after Notice of Termination is given

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(provided that Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30)-day period); (ii) if Executive’s employment is terminated pursuant to Section 3.3, the date specified in the Notice of Termination; and (iii) if Executive’s employment is terminated for any other reason, the date on which a Notice of Termination is given; provided, however, in no event shall such Date of Termination be earlier than the date of the Executive’s Separation from Service.
     4.  COMPENSATION UPON TERMINATION .
          4.1 Termination Without Cause or for Constructive Termination . If Executive suffers a CIC Termination, then, subject to Section 4.2, Executive shall be entitled, if such CIC Termination occurred within three (3) years of a Change in Control, to the following benefits:
     (a) The Company shall pay to Executive as severance pay in one lump sum an amount equal to the product of (i) Executive’s Total Compensation (as defined below) multiplied by (ii) the number one and one-half (1.5). Such severance pay shall be paid not later than the tenth (10th) business day following the Date of Termination, unless Executive is a “specified employee,” as defined in §1.409A-1(i) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto, in which case, such severance pay shall be paid on the date which is six (6) months following the Participant’s Date of Termination (or, if earlier, the date of death of the Participant), provided the six months delay requirements of Code Section 409A otherwise apply to the payments hereunder. All severance pay that is delayed as provided in this paragraph (a) shall accrue interest for the period from the tenth (10th) business day following the Date of Termination until the date such payment is actually made. Said interest shall be equal to the applicable interest rate as defined in Code Section 417(e)(3), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which the participant retires or otherwise becomes entitled to payments without regard to this Section 5.4(c).
For purposes of this Section 4.1(a), Executive’s “Total Compensation” shall mean the annual base salary being paid to Executive at the Date of Termination plus Executive’s “Average Bonus.” Executive’s “Average Bonus” shall mean the greater of (i) the bonus or incentive award pursuant to any annual performance bonus or incentive compensation plan of the Company (the “Bonus”) last paid to or earned by Executive immediately prior to his Date of Termination, or (ii) the average of the highest three Bonuses or incentive awards (whether or not consecutive) paid to or earned by Executive.
     (b)
     (i) The Company shall continue to provide Executive with all medical, dental, vision, and any other health benefits which qualify for continuation coverage under Code Section 4980B ( “COBRA Coverage”), for a period of 18 months from the Date of Termination. Such benefits shall be equal to or economically equivalent to the benefits in effect for Executive at the time of the Change in Control, and the Company shall provide such benefits at the same cost

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to Executive as the cost, if any, charged to Executive for those benefits immediately prior to the Date of Termination.
     (ii) On the date that Executive is paid the severance pay, as provided for in Section 4.1(a), the Company shall pay to Executive a lump sum amount equal to the present value of the cost to the Company of providing Executive, for a period of 18 months from the Executive’s Date of Termination, with accident and life insurance benefits, and disability benefits equal to such benefits in effect for Executive at the time of the Change in Control, with such cost being determined on the basis of the monthly cost to the Company of providing such benefits during the month immediately preceding Executive’s Date of Termination (net of the monthly cost, if any, charged to Executive for those benefits in the month immediately preceding Executive’s Date of Termination).
          4.2 Limitation on Payments .
     (a) Anything in Section 4.1 to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided, by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable or provided pursuant to the terms hereof or otherwise) would constitute a “parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), then the lump sum severance payment payable pursuant to Section 4.1(a) shall be reduced so that the aggregate present value of all payments in the nature of compensation to (or for the benefit of) Executive which are contingent on a change in control (as defined in Code Section 280G(b)(2)(A)) is one dollar ($1.00) less than the amount which Executive could receive without being considered to have received any parachute payment (the amount of this reduction in the lump sum severance payment is referred to herein as the “Excess Amount”). The determination of the amount of any reduction required by this Section 4.2 shall be made by an independent accounting firm (other than the Company’s independent accounting firm) selected by the Company and acceptable to Executive, and such determination shall be conclusive and binding on the parties hereto.
     (b) Notwithstanding the provisions of Section 4.2(a), if it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding which has been finally and conclusively resolved, that an Excess Amount was received by Executive from the Company, then such Excess Amount shall be deemed for all purposes to be a loan to Executive made on the date Executive received the Excess Amount and Executive shall repay the Excess Amount to the Company on demand (but no less than ten (10) days after written demand is received by Executive) together with interest on the Excess Amount at the “applicable Federal rate” (as defined in Section 1274(d) of the Code) from the date of Executive’s receipt of such Excess Amount until the date of such repayment.
          4.3 Mitigation or Set-off of Amounts Payable Hereunder . Executive shall not be required to mitigate the amount of any payment provided for in this Article 4 by seeking other

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employment or otherwise, nor shall the amount of any payment provided for in this Article 4 be reduced by any compensation earned by Executive as the result of employment by another employer after the Date of Termination, or otherwise. The Company’s obligations hereunder also shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive.
     5.  SUCCESSORS; BINDING AGREEMENT .
          5.1 Successors of the Company . The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if there had been a Change in Control but no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach hereof. As used herein, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 5.1 or which otherwise becomes bound by all the terms and provisions hereof by operation of law.
          5.2 Executive’s Heirs, etc . This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable to him hereunder as if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms hereof to his designated beneficiary or, if there be no such designated beneficiary, to his estate.
     6.  NOTICE . For the purposes hereof, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company at its principal place of business and to Executive at his address as shown on the records of the Company, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
     7.  MISCELLANEOUS . No provisions hereof may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by Executive and such officer as may be specifically designated by the Board (which shall in any event include the Company’s Chief Executive Officer). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision hereof to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly herein.

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     8.  VALIDITY . The invalidity or unenforceability of any provisions hereof shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
     9.  NON-EXCLUSIVITY OF RIGHTS . Nothing herein shall prevent or limit Executive’s continuing or future participation in any benefit, bonus, incentive or other plans, practices, policies or programs provided by the Company and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any stock option or other agreements with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, practice, policy or program. Notwithstanding the foregoing provisions of this Article 9, this Agreement contains the entire agreement of the parties regarding the change in control severance benefits provided for herein and shall supersede and replace any change in control severance agreements previously entered into by the parties, and by execution of this Agreement, the parties understand and agree that any other such agreement shall be and become null and void.
     10.  LEGAL EXPENSES . The Company agrees to pay, upon written demand therefor by Executive, all legal fees and expenses which Executive may reasonably incur as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision hereof (including as a result of any contest about the amount of any payment pursuant to Article 4), plus in each case interest at the “applicable Federal rate” (as defined in Section 1274(d) of the Code). In any such action brought by Executive for damages or to enforce any provisions hereof, he shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company’s obligations hereunder, in his sole discretion. The amount of fees and expenses eligible for reimbursement during a calendar year shall not affect the fees and expenses eligible for reimbursement in any other calendar year. Reimbursement of eligible fees and expenses shall be made on or before the last day of the calendar year following the calendar year in which the fees or expenses were incurred .
     11.  COUNTERPARTS . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
     12.  GOVERNING LAW . This Agreement shall be governed by and construed under the laws of the State of Texas.

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     13.  CAPTIONS AND GENDER . The use of captions and Article and Section headings herein is for purposes of convenience only and shall not effect the interpretation or substance of any provisions contained herein. Similarly, the use of the masculine gender with respect to pronouns herein is for purposes of convenience and includes either sex who may be a signatory.
     14.  TAX WITHHOLDING . The Company shall have the right to deduct from all amounts paid in cash or other form under this Agreement any Federal, state, local or other taxes required by law to be withheld.
     15.  AMENDMENT . The Company reserves the right, in its sole discretion, to amend this Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A or related Treasury regulations issued thereunder.
     IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written.
         
  ATMOS ENERGY CORPORATION
 
 
  By:      
    Robert W. Best   
    Chairman and Chief Executive Officer   
 
         
  EXECUTIVE
 
 
     
  Name:      
     
 

11

Exhibit 10.8(a)
ATMOS ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE BENEFITS PLAN
Amended and Restated in its Entirety: August 7, 2007

 


 

TABLE OF CONTENTS
                 
Article           Page  
ARTICLE I   Purpose and Effective Date     1  
 
  Section 1.1.   Purpose     1  
 
  Section 1.2.   Effective Date     1  
 
               
ARTICLE II   Definitions and Construction     1  
 
  Section 2.1.   Definitions     1  
 
  Section 2.2.   Construction     9  
 
  Section 2.3.   Governing Law     9  
 
               
ARTICLE III   Eligibility and Participation     9  
 
  Section 3.1.   Employees Eligible to Participate     9  
 
               
ARTICLE IV   Assets Used for Benefits     9  
 
  Section 4.1.   Amounts Provided by the Employer     9  
 
  Section 4.2.   Funding     10  
 
               
ARTICLE V   Supplemental Pension Benefits     11  
 
  Section 5.1.   Eligibility for Supplemental Pension     11  
 
  Section 5.2.   Amount of Supplemental Pension     12  
 
  Section 5.3.   Form of Payment of Supplemental Pension     13  
 
  Section 5.4.   Commencement of Supplemental Pension     16  
 
  Section 5.5.   Supplemental Pensions After a Change in Control     18  
 
               
ARTICLE VI   Disability Benefits     20  
 
  Section 6.1.   Eligibility For Disability Benefit     20  
 
  Section 6.2.   Amount of Disability Benefit     20  
 
  Section 6.3.   Payment of Disability Benefit     20  
 
  Section 6.4.   Payment of Supplemental Pension to Disabled Participants     20  
 
               
ARTICLE VII   Death Benefits     21  
 
  Section 7.1.   Eligibility For Death Benefit     21  
 
  Section 7.2.   Amount of Death Benefit     22  
 
  Section 7.3.   Form of Payment of Death Benefits     24  
 
  Section 7.4.   Commencement of Death Benefits     25  
 
               
ARTICLE VIII   Administration     26  
 
  Section 8.1.   Plan Administration     26  
 
  Section 8.2.   Powers of Plan Administrator     26  
 
  Section 8.3.   Calculation of Funding Obligations     26  
 
  Section 8.4.   Annual Statements     27  

 


 

                 
Article           Page  
ARTICLE IX   Miscellaneous Provisions     27  
 
  Section 9.1.   Amendment or Termination of the Plan     27  
 
  Section 9.2.   Nonguarantee of Employment     30  
 
  Section 9.3.   Nonalienation of Benefits     30  
 
  Section 9.4.   Liability     30  
 
  Section 9.5.   Participation Agreement     31  
 
  Section 9.6.   Successors to the Employer     31  
 
  Section 9.7.   Tax Withholding     31  
     
Exhibit A-1
  Participation Agreement [For Participants who commenced participation in the Plan prior to November 13, 1996]
 
   
Exhibit A-2
  Participation Agreement [For all Participants who commenced participation in the Plan on and after November 13, 1996]
 
   
Exhibit B
  Minimum Benefit Schedule
 
   
Exhibit C
  Summary of Actuarial Assumptions for Determining Lump Sum Distributions and Optional Annuity Forms
 
   
Exhibit D
  Summary of Actuarial Assumptions and Methods for Determining Annual SEBP Trust Funding Liabilities

 


 

ARTICLE I
Purpose and Effective Date
      Section 1.1. Purpose : The purpose of this Plan is to provide supplemental retirement income, death and disability benefits to certain executive employees of Atmos Energy Corporation. This Plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees so as to be exempt from the requirements of Parts 2, 3 and 4 of Title I of ERISA, and shall be so interpreted.
      Section 1.2. Effective Date : The Plan initially became effective on October 1, 1987, was amended and restated as of November 11, 1992, was amended as of November 8, 1995, was amended as of May 8, 1996, was amended and restated as of November 13, 1996, was amended and restated as of May 14, 1997, was amended and restated as of August 12, 1998, and has been amended and restated as of August 7, 2007. The Plan shall apply generally to any participant in the Prior Plan (as defined below) who did not terminate employment prior to August 7, 2007. Except as otherwise provided herein, any participant in the Prior Plan who terminated employment prior to August 7, 2007, shall be entitled to those benefits, if any, provided by the Prior Plan, as modified to comply with the requirements of Code Section 409A and the guidance issued thereunder as then in effect.
ARTICLE II
Definitions and Construction
      Section 2.1. Definitions : The following words and phrases used in this Plan shall have the respective meanings set forth below, unless the context in which they are used clearly indicates a contrary meaning:

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     (a)  Beneficiary : The individual or individuals described in Section 7.3 of this Plan who are receiving any benefit payments hereunder.
     (b)  Board of Directors : The Board of Directors of the Employer.
     (c)  Cause : The termination of employment by the Employer upon the happening of either (i) or (ii) as follows:
     (i) The willful and continued failure by the Participant to substantially perform his duties with the Employer (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Employer that specifically identifies the manner in which the Employer believes that the Participant has not substantially performed his duties.
     (ii) The Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Employer, monetarily or otherwise.
For purposes of this subparagraph, no act, or failure to act, on the Participant’s part shall be deemed “willful” if done, or omitted to be done, by the Participant in good faith and with a reasonable belief that the action or omission was in the best interests of the Employer. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors of the Employer at a meeting of such Board of Directors called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant’s counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors that the Participant was guilty of conduct set forth above in subparagraph (i) or (ii) and specifying the particulars thereof in detail.
     (d)  Change in Control :
     (i) For periods prior to November 13, 1996, the occurrence of any of the following:
     (A) Any “person” (as defined in subparagraph (ii) below), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Employer, is or becomes the “beneficial owner” (as defined in subparagraph (ii) below), directly or indirectly, of securities of the Employer representing 33-1/3% or more of the combined voting power of the Employer’s then outstanding securities.
     (B) During any period of two consecutive years (the “Period”), individuals who at the beginning of the Period constitute the Board of

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Directors of the Employer and any “new director” (as defined in subparagraph (ii) below) cease for any reason to constitute a majority of the Board of Directors.
     (C) The shareholders of the Employer approve a merger or consolidation of the Employer with any other corporation, except if:
     (1) the merger or consolidation would result in the voting securities of the Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Employer or such surviving entity outstanding immediately after such merger or consolidation; or
     (2) the merger or consolidation occurs in connection with the approval by the shareholders of the Employer of a plan of complete liquidation of the Employer or an agreement for the sale or disposition by the Employer of all or substantially all the Employer’s assets.
     (ii) For purposes of subparagraph (i) above,
     (A) “Person” shall have the meaning provided in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
     (B) “Beneficial owner” shall have the meaning provided in Rule 13d-3 under the Exchange Act.
     (C) “New director” shall mean an individual whose election by the Employer’s Board of Directors or nomination for election by the Employer’s shareholders was approved by a vote of at least 2/3’s of the directors then still in office who either were directors at the beginning of the Period or whose election or nomination for election was previously so approved. However, “new director” shall not include a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in subparagraphs (i)(A) or (B) above.
     (iii) For periods from and after November 13, 1996, except as provided herein, a “Change in Control” of the Employer occurs upon a change in the Employer’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:

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     (A) Change in Ownership . A change in ownership of the Employer occurs on the date that any “Person” (as defined in subparagraph (iv) below), other than (1) the Employer or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Employer or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Employer in substantially the same proportions as their ownership of the Employer’s stock, acquires ownership of the Employer’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Employer’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Employer’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Employer through ownership of 30% or more of the total voting power of the Employer’s stock, as discussed in subparagraph (iii)(B) below, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (iii)(A); or
     (B) Change in Effective Control . Even though the Employer may not have undergone a change in ownership under subparagraph (iii)(A) above, a change in the effective control of the Employer occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Employer’s stock possessing 30 percent or more of the total voting power of the Employer’s stock. However, if any Person owns 30% or more of the total voting power of the Employer’s stock, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (iii)(B)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

4


 

     (C) Change in Ownership of Substantial Portion of Assets . A change in the ownership of a substantial portion of the Employer’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Employer, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Employer’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Employer immediately after the transfer, through a transfer to (1) a shareholder of the Employer (immediately before the asset transfer) in exchange for or with respect to the Employer’s stock; (2) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Employer; (3) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock; or (4) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock.
     (iv) For purposes of subparagraph (iii) above,
     (A) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (B) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (v) The provisions of this Section 2.1(d) shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this Section 2.1(d) shall be in compliance with the requirements of said Code Section and said Regulations.
     (e)  Code : The Internal Revenue Code of 1986, as amended, or any successor thereto.
     (f)  Compensation : Except as otherwise provided in the Participant’s Participation Agreement, the sum of (i) and (ii) as follows:
     (i) The greater of (A) the Participant’s annual base salary with the Employer at the date of his termination of employment, or (B) the average of the Participant’s annual base salary for the highest three (3) calendar years (whether or not consecutive) of the Participant’s employment with the Employer.

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     (ii) The greater of (A) the Participant’s last Performance Award, or (B) the average of the highest three (3) Performance Awards (whether or not consecutive).
     (g)  Covered Employment : The total period of employment with the Employer.
     (h)  Death Benefit : The total benefit provided under this Plan upon the death of a Participant, which benefit is calculated in this Plan on a pre-tax basis.
     (i)  Disability : The termination of a Participant’s active employment with the Employer on account of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, for which the Participant is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer.
     (j)  Disability Benefit : The monthly benefit provided under this Plan to a Participant who suffers a Disability, which benefit is calculated in this Plan on a pre-tax basis.
     (k)  Eligible Employee : An employee who is a Participant in the Plan on August 12, 1998. From and after August 12, 1998, no employee who is not a Participant in the Plan on August 12, 1998 shall be or become an Eligible Employee. From and after January 1, 1999, any Participant who elected in writing to cease his participation in the Plan and to become an eligible employee under the Atmos Energy Corporation Performance-Based Supplemental Executive Benefits Plan as of January 1, 1999 shall no longer be an Eligible Employee (and shall cease to be a Participant).
     (l)  Employer : Atmos Energy Corporation.
     (m)  ERISA : The Employee Retirement Income Security Act of 1974, as amended.
     (n)  Group Long-Term Disability Plan : The Atmos Energy Corporation Group Long-Term Disability Plan, as amended from time to time.
     (o)  Involuntary Termination : The termination of a Participant’s participation in the Plan due to either (i) or (ii) as follows:
     (i) Involuntary termination of the Participant’s employment by the Employer, provided said termination constitutes a Separation from Service and such termination is for any reason other than Cause or Disability.
     (ii) Any reason other than for Cause by the Employer prior to the Participant’s Separation from Service with the Employer.
     (p)  LTD Disability : A disability (i) as determined under the Group Long-Term Disability Plan, as in effect from time to time, or (ii) a determination of total disability for purposes of eligibility for Social Security disability benefits, if such Group Long-Term Disability

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Plan is not then in existence, or the Participant is no longer entitled to benefits under the Group Long-Term Disability Plan because such Participant received a lump sum settlement of disability benefits under that plan. If a Participant’s Disability is based on his eligibility for Social Security disability benefits, such Participant shall not be treated as having suffered an LTD Disability unless he shall provide the Plan Administrator, or a committee which may be established pursuant to Section 8.1, with written proof, in a form and within the time determined by the Plan Administrator, or a committee which may be established pursuant to Section 8.1, to be satisfactory, that such Participant is receiving Social Security disability benefits, and unless such Participant provides written proof of the continuing receipt of Social Security disability benefits six months after commencement of such Social Security disability benefits and every six months thereafter, such Participant’s Disability shall be deemed to have ceased at the time he fails to provide such written proof.
     (q)  Participant : An Eligible Employee of the Employer who meets the requirements to participate in the Plan in accordance with the provisions of Article III hereof.
     (r)  Participation Agreement : The agreement between the Employer and a Participant described in Section 9.5 of this Plan, executed in the form attached hereto as Exhibit A-1 in the case of Participants who commenced participation in the Plan prior to November 13, 1996 and Exhibit A-2 in the case of all other Participants in the Plan, or in such other form as the Board of Directors, in its sole discretion, may establish from time to time.
     (s)  Plan : The Atmos Energy Corporation Supplemental Executive Benefits Plan, as set forth herein and as amended from time to time.
     (t)  Pension Plan : Any defined benefit pension plan adopted, established or maintained by the Employer, whichever is applicable, as amended from time to time. Any amount payable to or with respect to a Participant from any group annuity contract maintained in connection with the Pension Plan shall be deemed part of the benefit applicable to the Participant under the Pension Plan.
     (u)  Performance Awards : Except as otherwise provided in the Participant’s Participation Agreement, any amount paid, or authorized to be paid, to a Participant while a Participant in the Plan pursuant to any annual performance bonus or incentive compensation plan adopted or established by the Employer, or, upon and after a Change in Control, any amount paid, or authorized to be paid, to a Participant as a performance related cash bonus in addition to his base cash compensation.
     (v)  Plan Administrator : The Board of Directors.
     (w)  Plan Year : Each twelve (12) month period beginning on January 1 and ending on December 31.
     (x)  Prior Plan : The Atmos Energy Corporation Supplemental Executive Benefits Plan as in effect at any time prior to the Effective Date and, where applicable, operated in accordance with the interim guidance issued under Code Section 409A.

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     (y)  Retired Participant : A Participant under this Plan who receives benefits upon Retirement.
     (z)  Retirement or Retire : A Participant’s voluntary termination from employment with the Employer that constitutes a Separation from Service after he is vested in his retirement benefits under the Pension Plan and (i) prior to January 1, 1999, has reached the age when he is eligible for the immediate commencement of those benefits from the Pension Plan, or (ii) from and after January 1, 1999, has met the age and service requirements to be eligible to commence an early retirement benefit under the Pension Plan.
     (aa)  Separation from Service : A Participant’s termination from employment with the Employer that constitutes a “separation from service” as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto.
     (bb)  Supplemental Pension : A Participant’s pension benefit provided under this Plan, which benefit is calculated in this Plan on a pre-tax basis.
     (cc) The expressions listed below shall have the meanings stated in the subparagraphs hereof respectively indicated:
     
“Affiliate”
  subparagraph 2.1(d)(iv)(B)
 
   
“Beneficial Owner”
  subparagraph 2.1(d)(ii)(B)
 
   
“Dependent Death Benefit”
  subparagraph 7.2(a)(iii)
 
   
“Exchange Act”
  subparagraph 2.1(d)(ii)(A)
 
   
“Lump Sum Death Benefit”
  subparagraph 7.2(a)(i)
 
   
“Merger”
  subparagraph 2.1(d)(iii)(D)
 
   
“Monthly Death Benefit”
  subparagraph 7.2(a)(ii)
 
   
“New director”
  subparagraph 2.1(d)(ii)(C)
 
   
“Original Payment Date”
  subparagraph 5.4(c)
 
   
“Period”
  subparagraph 2.1(d)(i)(B)
 
   
“Person”
  subparagraph 2.1(d)(ii)(A);
subparagraph 2.1(d)(iv)
 
   
“Specified Employee”
  subparagraph 5.4(c)

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“United Cities”
  subparagraph 2.1(d)(iii)(D)
      Section 2.2. Construction : The masculine gender, whenever appearing in this Plan, shall be deemed to include the feminine gender; the singular may include the plural; and vice versa, unless the context clearly indicates to the contrary.
      Section 2.3. Governing Law : This Plan shall be construed in accordance with and governed by the laws of the State of Texas, except to the extent otherwise preempted by ERISA or any other Federal law.
ARTICLE III
Eligibility and Participation
      Section 3.1. Employees Eligible to Participate : Each participant in the Prior Plan who terminated employment prior to August 7, 2007, shall remain a participant in the Prior Plan; each Participant who is an Eligible Employee on August 7, 2007, shall remain a Participant and shall continue to participate in this Plan. Any Participant who ceases being an Eligible Employee during his employment with the Employer shall immediately cease active participation in this Plan and shall no longer be a Participant, except as otherwise set forth herein.
ARTICLE IV
Assets Used for Benefits
      Section 4.1. Amounts Provided by the Employer : Benefits payable under this Plan shall constitute general obligations of the Employer in accordance with the terms of this Plan. The Employer may, in its sole discretion, establish a trust or other funding arrangement that is subject to the claims of the Employer’s general unsecured creditors for the purpose of funding a Participant’s accrued benefit payable under this Plan. Any such trust or other funding

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arrangement may also provide for the distribution to the Participant of an amount equal to any federal, state, local or other taxes that are incurred by the Participant in the event the establishment of such trust or other funding arrangement constitutes the constructive receipt by the Participant of any benefits payable hereunder prior to the actual receipt of such benefits. The Employer shall make appropriate adjustments to the amount of the Participant’s Supplemental Pension in order to reflect the effect upon such Supplemental Pension of the distribution described in the foregoing sentence. The Employer also may, but shall not be obligated to, purchase one or more life insurance policies or contracts to provide for the payment of the Death Benefits. Any such policies or contracts purchased hereunder shall remain a general asset of the Employer or of any trust established hereunder.
      Section 4.2. Funding : Not later than the time each Participant who elected to receive his Supplemental Pension in the form of a monthly annuity provided for in Section 5.3(a), (b) or (d) Retires or becomes eligible to receive an unreduced Supplemental Pension under this Plan, whichever occurs first, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of such Participant’s accrued Supplemental Pension. The amount required to be funded by this Section 4.2 shall be calculated in accordance with Section 8.3 hereof. Each Participant who elected to receive his Supplemental Pension in a lump sum payment shall not, except as provided below, have any amount contributed to a trust or other funding arrangement on his behalf pursuant to this Section 4.2. Notwithstanding the foregoing, immediately upon a Change in Control, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of all Supplemental Pension benefits (vested and unvested) payable hereunder to each Participant and Retired Participant, regardless of whether any such person is then eligible

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to Retire or to receive an unreduced Supplemental Pension and regardless of the form in which such Supplemental Pension is to be paid. The Employer shall review the funding status of each such trust or other funding arrangement required to be established under this Section 4.2 on an annual basis and shall make such contributions thereto as may be required to maintain the value of the assets thereof at no less than 100% of the then-present value of all such Supplemental Pension benefits. For purposes of this Section 4.2 only, notwithstanding the foregoing, no actions or events related to the Merger, including shareholder approval of the Merger or the consummation of the Merger, shall constitute a Change in Control of the Employer that requires the Employer to make any contributions pursuant to this Section 4.2.
ARTICLE V
Supplemental Pension Benefits
      Section 5.1. Eligibility for Supplemental Pension :
     (a)  Upon Retirement . Except as otherwise provided elsewhere in this Plan or in a Participation Agreement, a Participant who has been an Eligible Employee for at least two years and Retires shall be entitled to receive a Supplemental Pension.
     (b)  Upon Involuntary Termination Prior to a Change in Control . A Participant who suffers an Involuntary Termination prior to a Change in Control shall be entitled to receive a Supplemental Pension, subject to the provisions of Section 5.1(c) of this Plan, so long as he is vested in his retirement benefits under the Pension Plan at the time of his Involuntary Termination and has been an Eligible Employee for at least two years prior to the Involuntary Termination.
     (c)  Upon Voluntary Termination Prior to a Change in Control or Termination For Cause . Except as otherwise provided in Section 5.5(a)(i)(B), a Participant who voluntarily

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resigns from employment with the Employer prior to being eligible for Retirement and prior to a Change in Control or who is terminated from employment with the Employer for Cause shall not be entitled to receive a Supplemental Pension.
     (d)  Upon Disability . A Participant who suffers a Disability shall be entitled to a Supplemental Pension as provided in Section 6.4.
      Section 5.2. Amount of Supplemental Pension :
     (a)  Upon Retirement . Except as otherwise provided in the Participant’s Participation Agreement, the Supplemental Pension payable to a Participant who Retires, and who has been an Eligible Employee for at least two years shall, unless reduced as provided in subparagraph (b) below, and based on the form of payment specified in Section 5.3(a) or (b), depending on the marital status of the Participant at Retirement, equal (i) minus (ii) as follows:
     (i) One-twelfth (1/12 th ) of seventy-five percent (75%) of the Participant’s Compensation, reduced if the Participant has fewer than ten (10) full years of Covered Employment by one-tenth (1/10 th ) for each full year of his Covered Employment less than ten (10) (no credit shall be given for any partial year of Covered Employment);
     (ii) The monthly amount of pension payable to the Participant under the Pension Plan as of the date that his Supplemental Pension commences, assuming payment in the automatic form applicable to him under the Pension Plan;
provided, however, in no event shall the combined annual payment from this Plan and the Pension Plan to any Participant listed on the Minimum Benefit Schedule attached to this Plan as Exhibit B be less than the minimum Annual Amount for such Participant listed on the Minimum Benefit Schedule.
     (b)  Reduction for Early Commencement of Supplemental Pensions . If a Participant’s Supplemental Pension commences, without regard to Section 5.4(c), before the Participant

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attains age 62, the amount determined under subparagraph (a)(i) above shall, unless otherwise provided in Exhibit B or in a Participation Agreement, be reduced for each year (or fraction thereof, based on full months) that such date of commencement precedes age 62. Such reduction shall be 2% per year for the first two years (or fractional years thereof, based on full months) that such date of commencement precedes age 62, and 4% per year for the next five years (or fractional years thereof, based on full months) that such date of commencement precedes age 60.
     (c)  Upon Involuntary Termination Prior to a Change in Control . The Supplemental Pension payable to a Participant who suffers an Involuntary Termination prior to a Change in Control shall be determined in accordance with subparagraph (a) above, but, except as otherwise provided in the Participant’s Participation Agreement, for purposes of subparagraph (a)(i) shall be based upon his Compensation and full years of Covered Employment calculated as of the date of his Involuntary Termination.
      Section 5.3. Form of Payment of Supplemental Pension :
     (a)  Married Participants . Except as otherwise provided in the Participant’s Participation Agreement or in subparagraph (c) or (d) below, if the Participant is married when his Supplemental Pension commences or is scheduled to commence pursuant to Section 5.4(a), without regard to Section 5.4(c), it shall be paid in the form of a joint and 50% survivor annuity, with the Participant’s spouse, on the date payment commences or is scheduled to commence pursuant to Section 5.4(a) without regard to Section 5.4(c), as the joint annuitant. If a Participant’s spouse dies between the date the Supplemental Pension is scheduled to commence and the date the Supplemental Pension actually commences, such Participant shall be treated as unmarried for purposes of this subparagraph (a).

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     (b)  Unmarried Participants . Except as otherwise provided in the Participant’s Participation Agreement or in subparagraph (c) or (d) below, if the Participant is not married when his Supplemental Pension commences or is scheduled to commence pursuant to Section 5.4(a), without regard to Section 5.4(c), it shall be paid in the form of a life annuity, payable monthly, but guaranteed for a period of 120 months, payable to the Participant or the Participant’s named Beneficiary. If an unmarried Participant becomes married between the date the Supplemental Pension is scheduled to commence and the date the Supplemental Pension actually commences, such Participant shall be treated as married for purposes of this subparagraph (b).
     (c)  2007 Transition Election for Certain Participants . Notwithstanding any provisions of the Plan to the contrary, each Participant who has not incurred a Separation from Service and is still an Eligible Employee on October 3, 2007 shall be given an election to change his or her form of payment from the form set forth in subparagraph (a) or (b) above, as the case may be, to a lump sum payment equal to the actuarial equivalent lump sum value of the Supplemental Pension provided for in subparagraph (a) or (b) above, or to one of the actuarial equivalent alternative annuity forms provided for in subparagraph (d) below. The actuarial equivalent lump sum value and the actuarial equivalent alternative annuity forms of Supplemental Pension payments shall be determined in accordance with the actuarial assumptions set forth in Exhibit C hereto. Any election pursuant to this subparagraph (c) shall not permit benefits scheduled to

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be paid in 2007 to be deferred beyond 2007 and shall not permit benefits scheduled to be paid after 2007 to be accelerated and paid in 2007. Any election pursuant to this subparagraph (c) may be changed at any time on and after January 1, 2008 and prior to December 31, 2008, so long as any such election does not permit benefits scheduled to be paid in 2008 to be deferred beyond 2008 and does not permit benefits scheduled to be paid after 2008 to be accelerated and paid in 2008. Elections pursuant to this subparagraph (c) shall be made in accordance with the transition relief regarding changing the time and form of payment on or before December 31, 2008, provided for in the interim guidance issued under Code Section 409A.
     (d)  Change in Annuity Form of Supplemental Pension . Any Participant who has elected, pursuant to subparagraph (c) above, to receive his Supplemental Pension in an annuity form provided for in subparagraph (a) or (b) above or this subparagraph (d) may elect, by submitting a completed election form to the Plan Administrator, or a committee which may be established pursuant to Section 8.1, at least 30 days prior to the date payments under the elected annuity form are to commence or are scheduled to commence pursuant to Section 5.4(a) without regard to Section 5.4(c), to convert the elected annuity form into any of the following actuarially equivalent annuity forms which are otherwise permissible, or the annuity form provided for in subparagraph (a) or (b) above, as applicable:
     (i) Life Annuity , with a monthly amount payable for the life of the Participant;
     (ii) Joint and Survivor Annuity , with a monthly amount payable for the life of the Participant, and an amount payable upon the Participant’s death to the Participant’s surviving spouse which is equal to 100%, 75% or 66.67% of the monthly amount which was payable to the Participant;
     (iii) Life Annuity with Guaranteed Payment Period , with a monthly amount payable for the life of the Participant, and if the Participant dies before either 60 or 120 (as selected by the Participant) monthly payments are made, the remaining monthly payments for the selected period will be paid to the Participant’s surviving spouse or other designated Beneficiary.
If no election pursuant to this subparagraph (d) is on file when benefits commence or are scheduled to commence pursuant to Section 5.4, without regard to Section 5.4(c) below for a

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Participant for whom this subparagraph (d) applies, benefits will be paid in the form applicable under subparagraph (a) or (b) above, as the case may be. The actuarial equivalents provided for in this Section 5.3 will be determined on the basis of the actuarial assumptions used for determining actuarial equivalent optional forms of annuities as set forth in Exhibit C hereto.
      Section 5.4. Commencement of Supplemental Pension :
     (a)  Upon Retirement .
     (i) Except as otherwise provided in subparagraph (c) below, the Supplemental Pension of a Participant, other than a Participant to whom Section 5.3(b) applies, who Retires prior to January 1, 2009, shall be paid or commence at the time he begins receiving retirement benefits from the Pension Plan. However, (A) if a Participant who made the election in 2007 to receive a lump sum payment in accordance with Section 5.3(c) hereof becomes entitled to receive a lump sum payment in 2007, such lump sum cannot be paid prior to January 1, 2008, and except as otherwise provided in subparagraph (c) below, such Participant shall receive the monthly Supplemental Pension annuity payments otherwise provided for in Section 5.3(a) or (b), as the case may be, until January 1, 2008, at which time a lump sum payment of the actuarial equivalent lump sum value of the remaining monthly annuity payments shall be paid to such Participant on or prior to January 15, 2008, and (B) if a Participant who changed his 2007 election in 2008 (1) to receive a lump sum payment in accordance with Section 5.3(c) hereof in lieu of the monthly Supplemental Pension annuity payments provided for in Section 5.3(a), (b) or (d), as the case may be, which such Participant elected in 2007, and such Participant becomes entitled to receive a lump sum payment in 2008, such lump sum cannot be paid prior to January 1, 2009, and except as otherwise provided in subparagraph (c) below, such Participant shall receive the monthly Supplemental Pension annuity payments otherwise elected in 2007 until January 1, 2009, at which time a lump sum payment of the actuarial equivalent lump sum value of the remaining monthly annuity payments shall be paid to such Participant on or prior to January 15, 2009, or (2) to receive monthly annuity payments in lieu of a lump sum payment which such Participant elected in 2007, and such Participant becomes entitled to receive benefits under this Plan in 2008, such 2008 election shall not be valid, and such Participant shall receive the lump sum payment elected in 2007.
     (ii) Except as otherwise provided in subparagraph (c) below, the Supplemental Pension of a Participant who Retires on or after January 1, 2009, shall be paid or commence on the first day of the month following the month in which such Participant Retires.

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     (b)  Upon Involuntary Termination Prior to a Change in Control . The Supplemental Pension of a Participant who suffers an Involuntary Termination prior to a Change in Control shall, except as otherwise provided in subparagraph (c) below, be paid or commence at the later of (i) the first day of the month following the month in which such Participant incurs a Separation from Service with the Employer, or (ii) the first day of the month following the month in which such Participant attains age 55.
     (c)  Six Months Delay in Payment . Notwithstanding the foregoing provisions of this Section 5.4, Section 5.5(c) and Section 9.1(c), from and after January 1, 2009, if a Participant who is entitled to payments under said applicable Section is a “specified employee,” as defined in § 1.409A-1(i) of the Final Regulations under Code Section 409A, and the Supplemental Pension would otherwise be paid or commence (the “Original Payment Date”) before a date which is at least six (6) months following the date of the Participant’s Separation from Service, the Supplemental Pension shall be paid or commence on the date which is six (6) months following the date of the Participant’s Separation from Service (or, if earlier, the date of death of the Participant), provided the six (6) months delay requirements of Code Section 409A otherwise apply to the payments under said applicable Section. All monthly annuity payments which are delayed for six (6) months shall be paid in a lump sum on the date specified in this subparagraph (c) for commencement of such payments. All lump sum or monthly annuity payments which are delayed as provided in this subparagraph (c) shall accrue interest for the period from the Original Payment Date (or, in the case of the monthly annuity payments the first day of the month in which such payment was to be made) until the date such payment is actually made. Said interest shall be equal to the applicable segment rates as defined in Code Section 417(e)(3)(D), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November

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preceding the first day of the calendar year in which the participant retires or otherwise becomes entitled to payments without regard to this Section 5.4(c).
      Section 5.5. Supplemental Pensions After a Change in Control :
     (a)  Eligibility For Supplemental Pension . Notwithstanding anything to the contrary in this Plan, a Participant shall be entitled to a Supplemental Pension, regardless of whether he has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan, if following a Change in Control of the Employer which occurs at a time when he is an Eligible Employee, either (i) or (ii) occurs:
     (i) The Participant incurs a Separation from Service
     (A) on account of LTD Disability;
     (B) if the Change in Control occurred prior to November 13, 1996, either (I) voluntarily by the Participant, or (II) involuntarily by the Employer for any reason other than for Cause; or
     (C) if the Change in Control occurred on or after November 13, 1996, involuntarily by the Employer for any reason other than for Cause.
     (ii) The Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause prior to his Separation from Service with the Employer.
In the case of any employee of the Employer who becomes an Eligible Employee on or after May 14, 1997, other than any such employee who became an Eligible Employee in accordance with the Agreement and Plan of Reorganization, dated as of July 19, 1996, between the Employer and United Cities Gas Company, in order for the provisions of this Section 5.5 to apply, the involuntary Separation from Service referred to in subparagraph (i)(C) above or the termination of participation referred to in subparagraph (ii) above must occur within three (3) years after the Change in Control.

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     From and after May 14, 1997, for purposes of this Section 5.5, if a Participant incurs a Separation from Service involuntarily by the Employer for any reason other than for Cause, or his participation in the Plan is terminated by the Employer for any reason other than for Cause, prior to a Change in Control (whether or not a Change in Control ever occurs) and such Separation either (A) was at the request or direction of a person who has entered into an agreement with the Employer, the consummation of which would constitute a Change in Control, or (B) was otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs), then such Participant’s Separation from Service or termination of participation shall be deemed to have followed a Change in Control of the Employer, and such Participant shall be one who is described in this subparagraph (a).
     (b)  Amount of Supplemental Pension . The Supplemental Pension payable to a Participant described in subparagraph (a) above shall be calculated in the same manner as set forth in Section 9.1(c) for benefits payable in the event of a termination of the Plan, but based on his Compensation as of the date of his Separation from Service or the date his participation in the Plan is terminated, whichever is applicable.
     (c)  Commencement of Supplemental Pension . Except as otherwise provided in Section 5.4(c), the Supplemental Pension payable to a Participant described in subparagraph (a) above shall be paid or commence on the later of (i) the first day of the month following the month in which he incurs a Separation from Service, or (ii) the first day of the month following the month in which such Participant attains age 55.

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ARTICLE VI
Disability Benefits
      Section 6.1. Eligibility For Disability Benefit : A Participant who is an Eligible Employee and otherwise is actively participating in the Plan shall be entitled to a Disability Benefit if he suffers a Disability and an LTD Disability prior to his Retirement.
      Section 6.2. Amount of Disability Benefit : The Disability Benefit payable to an eligible Participant shall equal (a) minus (b) as follows:
     (a) One-twelfth (1/12 th ) of sixty percent (60%) of the Participant’s Compensation calculated as of the date of his Disability.
     (b) The total monthly amount of disability benefit payable to the Participant under the Group Long-Term Disability Plan (before any offsets) as of the date that his employment terminates due to Disability.
      Section 6.3. Payment of Disability Benefit : A Participant’s Disability Benefit shall be paid commencing on the 181 st day following the later of the date of his Disability or the date of his LTD Disability, and shall continue for so long as benefits are paid due to an LTD Disability.
      Section 6.4. Payment of Supplemental Pension to Disabled Participants :
     (a)  Upon Reaching Age 65 . If a Participant who has suffered an LTD Disability reaches age 65 while still receiving a Disability Benefit, such Participant shall be entitled to a Supplemental Pension, to be paid or to commence on the first day of the month following the month in which such Participant attains age 65, regardless of whether the Participant has been an Eligible Employee for at least two years. The Supplemental Pension payable to such Participant shall be in the form provided in Section 5.3 and determined in accordance with Section 5.2(a).

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Upon commencement of a Participant’s Supplemental Pension under this Section 6.4(a), such Participant’s Disability Benefit under Section 6.3 hereof shall cease.
     (b)  Prior to Reaching Age 65 . Notwithstanding the provisions of subparagraph (a) above, a Participant receiving a Disability Benefit shall receive a Supplemental Pension to be paid or to commence on the first day of the month following the month in which occurs the later of (i) such Participant’s 62 nd birthday, or (ii) such Participant’s entitlement to an unreduced Supplemental Pension under Section 5.2(a)(i), if such month occurs prior to such Participant’s 65 th birthday. If a Participant becomes entitled to a Supplemental Pension pursuant to this subparagraph (b), the Participant’s Disability Benefits shall cease, and such Supplemental Pension shall be in the form provided for in Section 5.3, determined in accordance with Sections 5.2(a) and (b) and shall be based on the Participant’s Compensation as of the date that such individual suffered a Disability.
ARTICLE VII
Death Benefits
      Section 7.1. Eligibility For Death Benefit : A Participant’s Beneficiary shall be entitled to a Death Benefit if the Participant meets the requirements of either (a), (b) or (c) as follows:
     (a) He dies before his employment with the Employer terminates or while receiving a Disability Benefit under this Plan.
     (b) He Retires but dies before the commencement of his Supplemental Pension.
     (c) He is entitled to a Supplemental Pension pursuant to the provisions of Section 5.1(b) or Section 5.5(a) of this Plan, but dies before the commencement of his Supplemental Pension.

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      Section 7.2. Amount of Death Benefit :
     (a)  In-Service Death . In the case of a Participant who dies as provided in Section 7.1(a), the Death Benefit will be the total of the following (i), (ii) and (iii):
     (i) A lump sum payment equal to two times the Participant’s Compensation minus any amount payable under the Employer’s Group Basic Life Insurance Plan (the “Lump Sum Death Benefit”).
     (ii) A monthly benefit equal to one-twelfth of an amount equal to fifty percent of the Participant’s Compensation at the time of his death (the “Monthly Death Benefit”).
     (iii) If the Participant leaves a child or children to whom payments are to be made under Section 7.3 hereof, a monthly benefit equal to one-twelfth of an amount equal to twenty-five percent (25%) of the Participant’s Compensation at the time of his death (the “Dependent Death Benefit”).
     (b)  Post-Retirement Death . In the case of a Participant who dies as provided in Section 7.1(b), a Death Benefit will be paid as follows:
     (i) If such Participant was entitled to receive his Supplemental Pension in a form provided for in Section 5.3(a), (b) or (d), a Death Benefit will be paid to the Beneficiary who is so entitled at the time of his death. If such Participant Retires either (A) prior to January 1, 2009, or (B) on or after January 1, 2009 and the six months delay provision of Section 5.4(c) does not apply, such Death Benefit shall be paid in the amount that would have been applicable had the Participant’s Supplemental Pension commenced in the month of his death. If such Participant Retires on or after January 1, 2009 and the six months delay provision of Section 5.4(c) applies, such Death Benefit shall consist of the following: (C) a lump sum payment will be paid to the Beneficiary entitled to receive the Death Benefit pursuant to Section 7.3(a) below in an amount equal to the sum of the monthly annuity payments which would have been payable to the Participant for the months between the month in which his Supplemental Pension would have commenced without regard to Section 5.4(c) and the month in which he died, plus interest through the date of his death as provided for in Section 5.4(c), and (D) the monthly survivor benefit will be paid to the Beneficiary who would have been so entitled on the basis of the form of payment that would have applied to him pursuant to Section 5.3(a), (b) or (d) had the Participant’s Supplemental Pension commenced in the month of his death.

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     (ii) If such Participant was entitled to receive his Supplemental Pension in the form of a lump sum payment, a Death Benefit will be paid to the Beneficiary entitled to receive the Death Benefit pursuant to Section 7.3(a) below. The amount of such Death Benefit shall be equal to the lump sum amount such Participant would have been entitled to receive had the Participant’s Supplemental Pension been paid in the month of his death, plus interest, if applicable, through the date of his death pursuant to Section 5.4(c) as if the date of his death were the end of the six months delay period.
     (c)  Deferred Retirement Death . In the case of a Participant who dies as provided in Section 7.1(c), a Death Benefit will be paid as provided in (i) or (ii) as follows:
     (i) In the case of a Participant who dies prior to reaching age 55, a Death Benefit will be paid to the Beneficiary who would have been so entitled at the time of his death and in the amount determined as follows:
     (A) If such Participant was entitled to receive his Supplemental Pension in the form provided for in Section 5.3(a), (b) or (d), such Death Benefit shall be paid in the form applicable under Section 5.3(a) or (b), based on his marital status at the time of his death, to the Beneficiary who would have been so entitled at the time of his death on the basis of that form, and in the amount that would have been applicable had the Participant lived to age 55, commenced his Supplemental Pension in the month immediately following the month in which he reached age 55 and died immediately after his Supplemental Pension commenced, as reduced actuarially, on the basis of the Beneficiary’s age, to reflect commencement of such Death Benefit pursuant to Section 7.4(b) prior to such Participant reaching age 55.
     (B) If such Participant was entitled to receive his Supplemental Pension in the form of a lump sum payment, such Death Benefit shall be paid as provided in Section 7.3(a) in a lump sum amount equal to the actuarial equivalent lump sum value of the survivor benefit that would have been paid under the form applicable under Section 5.3(a) or (b) had the Participant lived to age 55, commenced his Supplemental Pension in the month immediately following the month in which he reached age 55 and died immediately after his Supplemental Pension commenced, as reduced actuarially, on the basis of the Beneficiary’s age, to reflect commencement of such Death Benefit pursuant to Section 7.4(b) prior to such Participant reaching age 55.

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     (ii) In the case of a Participant who dies after reaching age 55, a Death Benefit will be paid to the Beneficiary in the amount provided for in Section 7.2(b) above.
     (iii) For purposes of this Section 7.2(c), the actuarial equivalent lump sum value and the actuarial equivalent alternative annuity forms of Supplemental Pension payments shall be determined in accordance with the actuarial assumptions set forth in Exhibit C hereto.
      Section 7.3. Form of Payment of Death Benefits :
     (a)  Lump Sum and Monthly Death Benefits . The Lump Sum Death Benefit, the Monthly Death Benefit, the Death Benefit provided for in Section 7.2(b)(i)(C), the Death Benefit provided for in Section 7.2(b)(ii) and the Death Benefit provided for in Section 7.2(c)(i)(B) are payable to the Participant’s designated Beneficiary. In the event that no Beneficiary has been effectively designated as provided with respect to the Death Benefits described in the preceding sentence or the guaranteed monthly payments for the selected period under the annuity form described in Sections 5.3(b) and 5.3(d)(iii), the Participant’s surviving spouse shall be deemed the designated Beneficiary, or if the Participant has no surviving spouse, his children, if any, per stirpes, and if none, the estate of the Participant shall be deemed the designated Beneficiary. If a Beneficiary entitled to receive a Death Benefit that is a survivor annuity payment hereunder (other than the guaranteed monthly payments for the selected period under the annuity form described in Sections 5.3(b) and 5.3(d)(iii)) dies before commencement of payment of that Death Benefit, then that Death Benefit shall not be payable from the Plan. The Monthly Death Benefit shall be a single life annuity, if the Participant’s surviving spouse is the designated Beneficiary, and shall be a 120-month term certain annuity, if someone other than the surviving spouse is the Participant’s designated Beneficiary.
     (b)  Dependent Death Benefit . The Dependent Death Benefit is payable to the Participant’s dependent children in equal shares until there cease to be any dependent children

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remaining. As each child loses his or her dependent status, the child’s share of the Dependent Death Benefit shall be paid to the remaining dependent child or children in equal shares. A child of the Participant is deemed to be a dependent until the child reaches age eighteen or, if a full-time student (i.e. enrolled in twelve hours or more of courses of higher education), age 25, or until the child’s death if earlier. At the discretion of the Plan Administrator, any dependent child’s share of the Dependent Death Benefit may be paid to the Participant’s surviving spouse or other guardian of such child if applicable and shall constitute full settlement of the Plan’s obligation to such child with respect to such payment. If the Participant’s surviving spouse is the designated Beneficiary for the Monthly Death Benefit and dies while receiving the Monthly Death Benefit and while any dependent child or children of the Participant remain, then the Monthly Death Benefit being paid to the surviving spouse shall be added to the Dependent Death Benefit and shall be payable in equal shares to the dependent children in the same manner and for the same time period as the Dependent Death Benefit.
      Section 7.4. Commencement of Death Benefits :
     (a) The Death Benefits payable pursuant to Section 7.2(a) shall be paid, with respect to the Lump Sum Death Benefit, or shall commence, with respect to the Monthly Death Benefit and the Dependent Death Benefit, as of the first day of the month next following the Participant’s death.
     (b) The Death Benefits payable pursuant to Sections 7.2(b) and (c) shall commence as of the first day of the month next following the Participant’s death.

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ARTICLE VIII
Administration
      Section 8.1. Plan Administration : The Plan shall be administered by the Board of Directors. The Board of Directors may, in its sole discretion, establish a committee to carry out the day-to-day administration of the Plan and may delegate any portion of its authority and responsibilities as Plan Administrator to such committee.
      Section 8.2. Powers of Plan Administrator : The Plan Administrator shall have the discretionary power and authority to interpret and administer the Plan according to its terms, including the power to construe and interpret the Plan, to supply any omissions therein, to reconcile and correct any errors or inconsistencies, to decide any questions in the administration and application of the Plan, and to make equitable adjustments for any mistakes or errors in the administration and application of the Plan. The Plan Administrator shall have such additional powers as may be necessary to discharge its duties and responsibilities hereunder.
      Section 8.3. Calculation of Funding Obligations : The Employer shall calculate its funding obligations hereunder solely by using the actuarial assumptions and methodology set forth in Exhibit D hereto. In its discretion, at any time prior to a Change in Control of the Employer, the Employer may amend Exhibit D to change such actuarial assumptions and methodology, provided that such changes are communicated promptly in writing to all Participants, Retired Participants, and Beneficiaries. Upon and after a Change in Control of the Employer, the actuarial assumptions and methodology set forth in Exhibit D may be changed with respect to any Participant, Retired Participant, or Beneficiary who was a Participant, Retired Participant, or Beneficiary at the time of such Change in Control, only with the written consent of such affected Participant, Retired Participant, or Beneficiary. For purposes of this Section 8.3

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only, and notwithstanding the foregoing, no actions or events related to the Merger, including shareholder approval of the Merger or the consummation of the Merger, shall constitute a Change in Control of the Employer that requires any consent be obtained pursuant to this Section 8.3.
      Section 8.4. Annual Statements : As soon as practicable after the end of each Plan Year, the Employer shall deliver to each Participant, Retired Participant, and Beneficiary a statement containing (a) the present value of the Employer’s future benefit obligations to the Participant, Retired Participant, or Beneficiary; (b) the actuarial assumptions used to calculate the present value of the Employer’s future benefit obligations hereunder; and (c) the current value of the assets, if any, held in a trust or other funding arrangement for the benefit of the Participant, Retired Participant, or Beneficiary.
ARTICLE IX
Miscellaneous Provisions
      Section 9.1. Amendment or Termination of the Plan :
     (a)  In General . Subject to the remaining provisions of this Section 9.1, the Board of Directors may by resolution, in its absolute discretion, from time to time, amend, suspend, or terminate any or all of the provisions of the Plan; provided, however, that no amendment, suspension, or termination may apply so as to decrease the payment to any Participant or Beneficiary of any benefit under the Plan that he accrued prior to the effective date of such amendment, suspension, or termination, nor shall such amendment, suspension, or termination change the time and form of payment to be made under the provisions of the Plan as in effect before such amendment, suspension, or termination, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder.

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     (b)  Amendment That Decreases Benefits . If the Board of Directors amends the Plan and such amendment results in a decrease in the Supplemental Pension, Death Benefits or Disability Benefit that otherwise would be paid under this Plan but for the amendment, except as provided in subparagraphs (iii) and (iv) below, the Participant’s Supplemental Pension, Death Benefits or Disability Benefit shall equal the sum of (i) and (ii) as follows:
     (i) The amount derived by multiplying the Participant’s benefit calculated pursuant to the terms of the Plan in effect immediately prior to the amendment and based upon the Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years of Covered Employment the Participant has prior to the effective date of the amendment, and the denominator is the total number of full years of Covered Employment the Participant has; however, neither the numerator nor the denominator shall exceed 10.
     (ii) The amount derived by multiplying the Participant’s benefit as calculated pursuant to the terms of the Plan as amended based upon the Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years that the Participant participated in the Pension Plan after the effective date of the amendment (but this number when added to the numerator of the fraction in subparagraph (i) above, shall not exceed 10) and the denominator is the total number of full years of Covered Employment the Participant has (but this number shall not exceed 10).
     (iii) Notwithstanding the foregoing provisions of this subparagraph (b), if the Plan is so amended before a Participant is vested in his retirement benefits under the Pension Plan, the Participant’s Supplemental Pension, Death Benefit or Disability Benefit shall be calculated solely in accordance with the terms of the Plan as amended.
     (iv) Notwithstanding the foregoing provisions of this subparagraph (b), if any such amendment occurs upon or after a Change in Control, the Participant’s Supplemental Pension shall at least equal the benefits which would be paid under subparagraph (c) below if there was a termination of the Plan at the time of such amendment.
     Notwithstanding the foregoing provisions of this subparagraph (b), the Amendment and Restatement of the Plan effective August 7, 2007 shall not for any purposes be treated as

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resulting in a decrease in the Supplemental Pension, Death Benefit or Disability Benefit otherwise payable under this Plan.
     (c)  Termination of the Plan .
     (i) If the Board of Directors terminates all or any portion of the Plan and such termination adversely affects a Participant’s Supplemental Pension, such Participant shall be entitled to receive a Supplemental Pension whether or not such Participant has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan at the time of such Plan termination.
     (A) It shall be based upon the Participant’s Compensation as of the date of the termination of the Plan;
     (B) If payment of the Supplemental Pension begins before the Participant has ten full years of Covered Employment, the reduction referred to in Section 5.2(a)(i) shall not apply;
     (C) If payment of the Supplemental Pension begins before the Participant attains age 62, the reductions referred to in Section 5.2(b) shall not apply; and
     (D) If the Participant is not otherwise vested under the Pension Plan, the calculation made under Section 5.2(a)(ii) above shall be made as if he were so vested.
Except as otherwise provided in Section 5.4(c), the Supplemental Pension determined under this subparagraph (c) shall be paid or commence on the later of (i) the first day of the month following the month in which such Participant incurs a Separation from Service, or (ii) the first day of the month following the month in which such Participant attains age 55.
     (ii) If the Board of Directors terminates all or any portion of the Plan and such termination adversely affects the Disability Benefits or Death Benefits described in the Plan, a Participant shall continue to be entitled to the Disability Benefits or Death Benefits described in the Plan if he thereafter dies or suffers a Disability. Any such Death Benefit or Disability Benefit, however, shall be calculated as of the date of termination of such benefit or the Plan as if such date of termination was the date the Participant died or suffered a Disability. Payment of any such Death Benefit or Disability Benefit shall be made in accordance with the terms of the Plan as in effect immediately prior to the date of termination of such benefit or the Plan.

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     (d)  Amendments to Comply with Internal Revenue Code Section 409A . Notwithstanding any of the foregoing provisions of this Section 9.1 or any of the terms and conditions of the Participation Agreement to the contrary, the Board of Directors reserves the right, in its sole discretion, to amend the Plan and/or any Participation Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A.
      Section 9.2. Nonguarantee of Employment : Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any employee, as a right of any employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its employees, with or without Cause.
      Section 9.3. Nonalienation of Benefits : To the extent permitted by law, benefits payable under this Plan shall not, without the Plan Administrator’s consent, be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary. Any unauthorized attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, or otherwise dispose of any right to benefits payable hereunder shall be void. No part of the assets of the Employer shall be subject to seizure by legal process resulting from any attempt by creditors of or claimants against any Participant or Beneficiary or any person claiming under or through the foregoing to attach his interest under the Plan.
      Section 9.4. Liability : No director, officer, or employee of the Employer shall be liable for any act or action, whether of commission or omission, taken by any other director, officer, employee, or agent of the Employer under the terms of the Plan or, except in circumstances

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involving his bad faith, for anything done or omitted to be done by him under the terms of the Plan.
      Section 9.5. Participation Agreement : Each Participant shall enter into a Participation Agreement as a condition to his participation in the Plan. Such Participation Agreement shall constitute a separate and enforceable agreement between the Employer and the Participant regarding the Participant’s rights in the Plan.
      Section 9.6. Successors to the Employer : Any successor to the Employer hereunder, which successor continues or acquires any of the business of the Employer, shall be bound by the terms of this Plan in the same manner and to the same extent as the Employer.
      Section 9.7. Tax Withholding : The Employer shall have the right to deduct from all amounts paid in cash or other form under this Agreement any Federal, state, local or other taxes required by law to be withheld.
     IN WITNESS WHEREOF, and as conclusive evidence of its adoption of this Amended and Restated Supplemental Executive Benefits Plan, the Employer has caused this Plan to be duly executed on this 10 th day of September, 2008, to be effective as of the date set forth in Section 1.2 above.
         
  ATMOS ENERGY CORPORATION
 
 
  By:   /s/ ROBERT W. BEST    
    Robert W. Best   
    Chairman, President and
Chief Executive Officer 
 

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[For Participants who commenced participation in the Plan prior to November 13, 1996]
EXHIBIT A-1
PARTICIPATION AGREEMENT
     THIS PARTICIPATION AGREEMENT is entered into as of the                      day of                      , 20     by and between ATMOS ENERGY CORPORATION, a Texas and Virginia corporation (the “Employer”), and                      (“Participant”).
WITNESSETH:
     WHEREAS, the Employer adopted and has been maintaining the Atmos Energy Corporation Supplemental Executive Benefits Plan (the “Plan”), pursuant to which certain executive or management employees of the Employer may receive supplemental retirement, disability, and death benefits; and
     WHEREAS, Participant has been a participant in the Plan since prior to November 13, 1996 and as a result has certain entitlements under the Plan as in effect prior to such date; and
     WHEREAS, effective as of August 7, 2007 (the “Effective Date”), the Employer amended and restated the Plan; and
     WHEREAS, the parties desire to enter into a new participation agreement in order for Participant to continue participation in the amended and restated Plan; and
     WHEREAS, in accordance with Section 9.5 of the Plan, the Employer and Participant have agreed to execute and enter into this Agreement;
     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     1.  Agreement . The Employer hereby agrees to provide to Participant the benefits described in the Plan, including any grandfathered benefits provided to Participant on account of the Change in Control resulting from the Agreement and Plan of Reorganization, dated as of July 19, 1996, between the Employer and United Cities Gas Company, pursuant to the terms and conditions set forth in the Plan, a copy of which has been provided to Participant and is incorporated by reference into this Agreement. The capitalized terms used in the Plan shall have the same meanings in this Agreement as assigned to them in the Plan. Participant acknowledges he or she has received a copy of the Plan.
     2.  Delay in Payment of Supplemental Pension For Certain Participants . If Participant who is a “specified employee,” as defined in § 1.409A-1(i) of the Final Regulations

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under Code Section 409A, and whose Supplemental Pension would otherwise be paid or commence (the “Original Payment Date”) before a date which is at least six (6) months following the date of Participant’s termination of employment that constitutes a “separation from service,” as defined in Code Section 409A and the Final Regulations issued thereunder (“Separation from Service”), the Supplemental Pension shall be paid or commence for such Participant on the date which is six (6) months following the date of Participant’s Separation from Service (or, if earlier, the date of death of Participant), provided such six (6) month delay is required by Code Section 409A. All monthly annuity payments which are delayed for six months shall be paid in a lump sum on the date specified in this paragraph 2 for commencement of such payments. All lump sum or monthly annuity payments which are delayed as provided in this paragraph 2 shall accrue interest for the period from the Original Payment Date (or, in the case of the monthly annuity payments the first day of the month in which such payment was to be made) until the date such payment is actually made. Said interest shall be equal to the applicable segment rates as defined in Code Section 417(e)(3)(D), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which the Participant retires or otherwise becomes entitled to payments without regard to this paragraph 2.
     3.  Amendment or Termination of the Plan; Separation from Service or Termination of Participation Without Cause . The Employer hereby agrees that, if
     (i) the Employer amends or terminates the Plan after May 14, 1997 in such a manner that results in a decrease in the amount of the benefits to be paid under the Plan to Participant,
     (ii) Participant incurs a Separation from Service by reason of Participant’s employment being terminated voluntarily by Participant or involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 3(e) below), or on account of LTD Disability, or
     (iii) Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause prior to the Participant’s Separation from Service with the Employer,
Participant shall have the right to, and the Employer agrees to pay to Participant, any benefits accrued prior to the effective date of such amendment or termination of the Plan or such Participant’s Separation from Service with the Employer or termination of participation in the Plan. Such benefits shall become payable, however, only upon such an event, in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the effective date of such amendment or termination of the Plan or such Participant’s Separation from Service with the Employer or termination of participation in the Plan, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder. The amount of benefits that shall be paid under this paragraph 3 shall be calculated as follows:
     (a) In the event the Employer amends the Plan after May 14, 1997 and such amendment results in a decrease in the amount of the Supplemental Pension,

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Disability Benefit, or Death Benefits that would be paid under the Plan but for the amendment thereof, the amount of Participant’s benefit shall be the sum of:
     (i) The amount derived by multiplying Participant’s benefit calculated pursuant to the terms of the Plan in effect immediately prior to the amendment and based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years of Covered Employment Participant has prior to the effective date of the amendment, and the denominator is the total number of full years of Covered Employment Participant has; however, neither the numerator nor the denominator shall exceed 10; plus
     (ii) The amount derived by multiplying Participant’s benefit as calculated pursuant to the terms of the Plan as amended based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of years that Participant participated in the Pension Plan after the effective date of the amendment (but this number when added to the numerator of the fraction in subparagraph (i) above, shall not exceed 10) and the denominator is the total number of full years of Covered Employment Participant has (but this number shall not exceed 10);
provided , however , that if the Plan is so amended prior to Participant being vested in his retirement benefits under the Pension Plan, Participant’s Supplemental Pension, Death Benefit or Disability Benefit payable hereunder shall be calculated solely in accordance with the terms of the Plan as amended; and provided , further , that, Participant’s Supplemental Pension must at least equal the benefits which would be paid under Section 9.1(c) of the Plan if there was a termination of the Plan at the time of such amendment.
     (b) In the event the Employer terminates the Plan or any portion thereof after August 7, 2007, and such termination adversely affects the Disability Benefit or Death Benefits described in the Plan, Participant’s Disability Benefit and Death Benefits shall be calculated as of the date of termination of such benefit or the Plan as though the date of such termination was the date that Participant became disabled or died. Such Disability Benefit and Death Benefits shall become payable, however, only upon Participant’s disability or death occurring in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the date of its termination, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder.
     (c) In the event the Employer terminates the Plan or any portion thereof after August 7, 2007, and such termination adversely affects Participant’s Supplemental Pension described in the Plan, Participant’s Supplemental Pension

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shall be the amount determined in accordance with Section 5.2 of the Plan except that
     (i) It shall be based upon Participant’s Compensation as of the date of the termination of the Plan;
     (ii) If payment of the Supplemental Pension begins before Participant has ten full years of Covered Employment, the reduction referred to in Section 5.2(a)(i) of the Plan shall not apply;
     (iii) If payment of the Supplemental Pension begins before Participant attains age 62, the reductions referred to in Section 5.2(b) of the Plan shall not apply; and
     (iv) If Participant is not otherwise vested under the Pension Plan, the calculation made under Section 5.2(a)(ii) of the Plan shall be made as if he were so vested.
     (d) If Participant incurs a Separation from Service by reason of Participant’s employment being terminated voluntarily by Participant or involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 3(e) below), or on account of LTD Disability, or if Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause, Participant shall nevertheless be entitled to receive a Supplemental Pension at such time as he becomes entitled to receive a benefit commencing in accordance with the provisions of Section 5.5(c) of the Plan, regardless of whether he has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan. Such Supplemental Pension shall be calculated in the same manner as set forth in subparagraph 3(c) above for benefits payable in the event of a termination of the Plan.
     (e) As used in this Agreement, “Cause” for Separation from Service shall mean termination upon
     (i) the willful and continued failure by Participant to substantially perform his duties with the Employer (other than any such failure resulting from Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Participant by the Employer that specifically identifies the manner in which the Employer believes that Participant has not substantially performed his duties, or
     (ii) Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Employer, monetarily or otherwise.

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For purposes of this subparagraph, no act, or failure to act, on Participant’s part shall be deemed “willful” if done, or omitted to be done, by Participant in good faith and with a reasonable belief that the action or omission was in the best interests of the Employer. Notwithstanding the foregoing, Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors of the Employer at a meeting of such Board of Directors called and held for such purpose (after reasonable notice to Participant and an opportunity for Participant, together with Participant’s counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors that Participant was guilty of conduct set forth above in subparagraph (i) or (ii) and specifying the particulars thereof in detail.
     4.  Limitations . Participant agrees that nothing in this Agreement or the Plan shall entitle him, or be deemed to entitle him, to receive a Supplemental Pension under the Plan if:
     (a) he has not met the requirements for a Supplemental Pension as set forth in the Plan, or
     (b) his employment with the Employer or participation in the Plan is terminated for Cause (as defined in subparagraph 3(e) above).
     5.  Amendment or Termination . No amendment or termination of the Plan by the Employer shall constitute an amendment or termination of this Agreement. This Agreement may be amended or modified only by the written agreement of the parties hereto, and will terminate only upon the occurrence of the earlier of the following events: (a) the execution of a written agreement to terminate this Agreement signed by all of the parties hereto, (b) the satisfaction of all of the Employer’s obligations to Participant under the Plan and this Agreement, or (c) the termination for Cause of Participant’s employment with the Employer or participation in the Plan. Notwithstanding any of the terms and conditions of this Participation Agreement or Section 9.1 of the Plan to the contrary, the Board of Directors reserves the right, in its sole discretion, to amend the Plan and/or this Participation Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A.
     6.  Funding .
     (a) Not later than the time each Participant who elected to receive his Supplemental Pension in the form of a monthly annuity provided for in Section 5.3(a), (b) or (d) of the Plan Retires or becomes eligible to receive an unreduced Supplemental Pension under the Plan, whichever occurs first, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of Participant’s accrued Supplemental Pension. Each Participant who elected or is otherwise entitled to receive his Supplemental

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Pension in a lump sum payment shall not, except as provided below, have any amount contributed to a trust or other funding arrangement on his behalf pursuant to this paragraph 6. Notwithstanding the foregoing, immediately upon a Change in Control, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of all Supplemental Pension benefits (vested and unvested) payable under this Agreement and/or the Plan to Participant, regardless of whether Participant is then eligible to Retire or to receive an unreduced Supplemental Pension and regardless of the form in which such Supplemental Pension is to be paid. The amount required to be funded by this paragraph 6 shall be calculated in accordance with paragraph 7 hereof. The Employer shall review the funding status of the trust or other funding arrangement established under this paragraph 6 on an annual basis and shall make contributions thereto as may be required to maintain the value of the assets thereof at no less than 100% of the then-present value of all such Supplemental Pension benefits.
(b) (i) As used in this paragraph 6 and paragraph 7, except as provided herein, a “Change in Control” of the Employer occurs upon a change in the Employer’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (A) Change in Ownership . A change in ownership of the Employer occurs on the date that any “Person” (as defined in subparagraph (ii) below), other than (1) the Employer or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Employer or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Employer in substantially the same proportions as their ownership of the Employer’s stock, acquires ownership of the Employer’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Employer’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Employer’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Employer through ownership of 30% or more of the total voting power of the Employer’s stock, as discussed in subparagraph (i)(B) below, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(A); or

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     (B) Change in Effective Control . Even though the Employer may not have undergone a change in ownership under subparagraph (i)(A) above, a change in the effective control of the Employer occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Employer’s stock possessing 30 percent or more of the total voting power of the Employer’s stock. However, if any Person owns 30% or more of the total voting power of the Employer’s stock, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(B)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (C) Change in Ownership of Substantial Portion of Assets . A change in the ownership of a substantial portion of the Employer’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Employer, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Employer’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Employer immediately after the transfer, through a transfer to (1) a shareholder of the Employer (immediately before the asset transfer) in exchange for or with respect to the Employer’s stock; (2) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Employer; (3) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock; or (4) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or

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indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock.
Notwithstanding the foregoing provisions of this subparagraph (i), no actions or events related to the Merger, including the consummation of the Merger, shall constitute a Change in Control of the Employer for any of the purposes for which a Change in Control as defined under this subparagraph (i) applies under this Participation Agreement.
     (ii) For purposes of subparagraph (i) above,
     (A) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (B) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (iii) The provisions of this subparagraph 6(b) shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this subparagraph 6(b) shall be in compliance with the requirements of said Code Section and said Regulations.
     7.  Calculation of Funding Obligations . The Employer shall calculate its funding obligations under this Agreement and the Plan solely by using the actuarial assumptions and methodology set forth in Exhibit D to the Plan. Upon and after a Change in Control of the Employer, the actuarial assumptions and methodology set forth in Exhibit D may be changed with respect to Participant or, if applicable, his Beneficiary, only with Participant’s, or, if applicable, his Beneficiary’s, written consent.
     8.  Confidential Information .
     (a) Participant shall not disclose or use at any time, either during employment or thereafter, any Confidential Information (as defined below) of which Participant is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by Participant’s performance in good faith of duties assigned to Participant by the Employer. Participant will take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Participant shall deliver to the Employer at the termination of employment or at any time the Employer may request all memoranda, notes, plans, records, reports, computer tapes and software and other

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documents and data (and copies thereof, including electronic copies) relating to the Confidential Information, work product or the business of the Employer or any of its Subsidiaries which he may then possess or have under his control.
     (b) As used in this Agreement, the term “Confidential Information” means information that is not generally known to the public and that is used, developed or obtained by the Employer in connection with its business, including but not limited to (i) information, observations and data obtained by Participant while employed by the Employer and its predecessors (including information, observations and data obtained prior to the date of this Agreement), concerning the business or affairs of the Employer, (ii) products or services, (iii) fees, costs and pricing structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports, (vii) computer software, including operating systems, applications and program listings, (viii) flow charts, manuals and documentation, (ix) data bases, (x) accounting and business methods, (xi) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xii) customers and clients and customer or client lists (including names of contact persons, purchasing patterns or preferences, past purchase and sale history and other information), (xiii) other copyrightable works, (xiv) all production methods, processes, technology and trade secrets, (xv) business strategies, acquisition plans and candidates, financial or other performance data and personnel lists and data, and (xvi) all similar and related information in whatever form. Confidential Information will not include any information that has been published in a form generally available to the public, or has become otherwise generally known by the public (in each case, through no fault of Participant) prior to the date Participant proposes to disclose or use such information. Participant shall not disclose Confidential Information unless it is required to be disclosed by law, regulation or an order of a court or other governmental entity. In the event that an action is initiated pursuant to which Participant may become legally compelled to disclose all or any portion of the Confidential Information, he shall provide the Employer with prompt notice thereof, so that the Employer may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, Participant shall furnish only that portion of the Confidential Information which is legally required and shall exercise his best efforts to obtain reliable assurances that confidential treatment will be afforded such portion of the Confidential Information. Confidential Information will not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features comprising such information have been published in combination.
     9.  Annual Statements . As soon as practicable after the end of each Plan Year, the Employer shall deliver to Participant or, if applicable, his Beneficiary, a statement containing (a) the present value of the Employer’s future benefit obligations to Participant, or, if applicable, his Beneficiary; (b) the actuarial assumptions used to calculate the present value of the Employer’s

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future benefit obligations under the Plan; and (c) the current value of the assets, if any, held in any trust or other funding arrangement for the benefit of Participant, or, if applicable, his Beneficiary.
     10.  No Guarantee of Employment . Nothing contained in this Agreement shall be construed as a contract of employment between the Employer and Participant, or as a right of Participant to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge Participant with or without cause.
     11.  Legal Fees and Expenses . The Employer agrees to pay any and all legal fees and expenses incurred by Participant in seeking to obtain or enforce any right or benefit provided by this Agreement.
     12.  Capitalized Terms . Each capitalized term used in this Agreement that is not otherwise defined herein shall have the same meaning attributed to it in the Plan.
     13.  Agreement Binding on Successors to the Employer . Any successor to the Employer hereunder, which successor continues or acquires any of the business of the Employer, shall be bound by the terms of this Agreement in the same manner and to the same extent as the Employer.
     14.  Prior Agreements Superseded . The terms of this Agreement supersede the terms of all prior Participation Agreements between Participant and the Employer.
     15.  Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of Texas.
     IN WITNESS WHEREOF, the parties hereto have executed this Participation Agreement as of the date first written above.
           
PARTICIPANT       ATMOS ENERGY CORPORATION
 
 
 
      By:      
       
       
 

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[For all Participants who commenced participation in the Plan on and after November 13, 1996]
EXHIBIT A-2
PARTICIPATION AGREEMENT
     THIS PARTICIPATION AGREEMENT is entered into as of the ___day of                      , 20___ by and between ATMOS ENERGY CORPORATION, a Texas and Virginia corporation (the “Employer”), and                                           (“Participant”).
WITNESSETH:
     WHEREAS, the Employer has adopted the Atmos Energy Corporation Supplemental Executive Benefits Plan (the “Plan”), pursuant to which certain executive or management employees of the Employer may receive supplemental retirement, disability, and death benefits; and
     WHEREAS, Participant commenced participation in the Plan on or after November 13, 1996; and
     WHEREAS, effective as of August 7, 2007 (the “Effective Date”), the Employer amended and restated the Plan; and
     WHEREAS, the parties desire to enter into a new participation agreement in order for Participant to continue participation in the amended and restated Plan; and
     WHEREAS, in accordance with Section 9.5 of the Plan, the Employer and Participant have agreed to execute and enter into this Agreement.
     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     1.  Agreement . The Employer hereby agrees to provide to Participant the benefits described in the Plan pursuant to the terms and conditions set forth in the Plan, a copy of which has been provided to Participant and is incorporated by reference into this Agreement. The capitalized terms used in the Plan shall have the same meanings in this Agreement as assigned to them in the Plan. Participant acknowledges he or she has received a copy of the Plan.
     2.  Delay in Payment of Supplemental Pension For Certain Participants . If Participant is a “specified employee,” as defined in § 1.409A-1(i) of the Final Regulations under Code Section 409A, whose Supplemental Pension would otherwise be paid or commence (the “Original Payment Date”) before a date which is at least six (6) months following the date of Participant’s termination of employment that constitutes a “separation from service,” as defined

1


 

in Code Section 409A and the Final Regulations issued thereunder (“Separation from Service”), the Supplemental Pension shall be paid or commence for Participant on the date which is six (6) months following the date of Participant’s Separation from Service (or, if earlier, the date of death of Participant), provided such six (6) month delay is required by Code Section 409A. All monthly annuity payments which are delayed for six months shall be paid in a lump sum on the date specified in this paragraph 2 for commencement of such payments. All lump sum or monthly annuity payments which are delayed as provided in this paragraph 2 shall accrue interest for the period from the Original Payment Date (or, in the case of the monthly annuity payments the first day of the month in which such payment was to be made) until the date such payment is actually made. Said interest shall be equal to the applicable segment rates as defined in Code Section 417(e)(3)(D), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which Participant retires or otherwise becomes entitled to payments without regard to this paragraph 2.
     3.  Amendment or Termination of the Plan; Separation from Service or Termination of Participation Without Cause . The Employer hereby agrees that, if
     (i) the Employer amends or terminates the Plan in such a manner that results in a decrease in the amount of the benefits to be paid under the Plan to Participant,
     (ii) Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 3(e) below), or on account of LTD Disability, or
     (iii) Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause prior to Participant’s Separation from Service with the Employer,
Participant shall have the right to, and the Employer agrees to pay to Participant, any benefits accrued prior to the effective date of such amendment or termination of the Plan or of such Participant’s Separation from Service with the Employer or termination of participation in the Plan. Such benefits shall become payable, however, only upon such an event, in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the effective date of such amendment or termination of the Plan or such Participant’s Separation from Service with the Employer or termination of participation in the Plan, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder. The amount of benefits that shall be paid under this paragraph 3 shall be calculated as follows:
     (a) In the event the Employer amends the Plan and such amendment results in a decrease in the amount of the Supplemental Pension, Disability Benefit, or Death Benefits that would be paid under the Plan but for the amendment thereof, the amount of Participant’s benefit shall be the sum of:

2


 

     (i) The amount derived by multiplying Participant’s benefit calculated pursuant to the terms of the Plan in effect immediately prior to the amendment and based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years of Covered Employment Participant has prior to the effective date of the amendment, and the denominator is the total number of full years of Covered Employment Participant has; however, neither the numerator nor the denominator shall exceed 10; plus
     (ii) The amount derived by multiplying Participant’s benefit as calculated pursuant to the terms of the Plan as amended based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years that Participant participated in the Pension Plan after the effective date of the amendment (but this number when added to the numerator of the fraction in subparagraph (i) above, shall not exceed 10) and the denominator is the total number of full years of Covered Employment Participant has (but this number shall not exceed 10);
provided , however , that if the Plan is so amended prior to Participant being vested in his retirement benefits under the Pension Plan, Participant’s Supplemental Pension, Death Benefit or Disability Benefit payable hereunder shall be calculated solely in accordance with the terms of the Plan as amended; and provided , further , that, if such amendment occurs upon or after a “Change in Control” (as defined in subparagraph 4(b) below), Participant’s Supplemental Pension must at least equal the benefits which would be paid under Section 9.1(c) of the Plan if there was a termination of the Plan at the time of such amendment.
     (b) In the event the Employer terminates the Plan or any portion thereof after August 7, 2007, and such termination adversely affects the Disability Benefit or Death Benefits described in the Plan, Participant’s Disability Benefit and Death Benefits shall be calculated as of the date of termination of such benefit or the Plan as though the date of such termination was the date that Participant became disabled or died. Such Disability Benefit and Death Benefits shall become payable, however, only upon Participant’s disability or death occurring in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the date of its termination, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder.
     (c) In the event the Employer terminates the Plan or any portion thereof after August 7, 2007, and such termination adversely affects Participant’s Supplemental Pension described in the Plan, Participant’s Supplemental Pension shall be the amount determined in accordance with Section 5.2 of the Plan except that

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     (i) It shall be based upon Participant’s Compensation as of the date of the termination of the Plan;
     (ii) If payment of the Supplemental Pension begins before Participant has ten full years of Covered Employment, the reduction referred to in Section 5.2(a)(i) of the Plan shall not apply;
     (iii) If payment of the Supplemental Pension begins before Participant attains age 62, the reductions referred to in Section 5.2(b) of the Plan shall not apply; and
     (iv) If Participant is not otherwise vested under the Pension Plan, the calculation made under Section 5.2(a)(ii) of the Plan shall be made as if he were so vested.
     (d) If, at any time prior to a “Change in Control” (as defined in subparagraph 4(b) below), Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 3(e) below), or on account of LTD Disability, or if Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause, Participant shall nevertheless be entitled to the benefits under the Plan that have accrued prior to Participant’s Separation from Service or the termination of Plan participation, the amount of such benefits to be calculated in the manner set forth in Section 5.2(c) of the Plan and payable at such time and form as otherwise provided for under the Plan; provided , however , that Participant’s right to a Supplemental Pension shall vest only if Participant has been an Eligible Employee for at least two years and is vested in his retirement benefits under the Pension Plan as of the date of such termination.
     (e) As used in this Agreement, “Cause” for Separation from Service shall mean termination upon
     (i) the willful and continued failure by Participant to substantially perform his duties with the Employer (other than any such failure resulting from Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Participant by the Employer that specifically identifies the manner in which the Employer believes that Participant has not substantially performed his duties, or
     (ii) Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Employer, monetarily or otherwise.

4


 

For purposes of this subparagraph, no act, or failure to act, on Participant’s part shall be deemed “willful” if done, or omitted to be done, by Participant in good faith and with a reasonable belief that the action or omission was in the best interests of the Employer. Notwithstanding the foregoing, Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors of the Employer at a meeting of such Board of Directors called and held for such purpose (after reasonable notice to Participant and an opportunity for Participant, together with Participant’s counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors that Participant was guilty of conduct set forth above in subparagraph (i) or (ii) and specifying the particulars thereof in detail.
     4.  Change in Control .
     (a) Notwithstanding anything expressly or impliedly to the contrary contained in this Agreement or the Plan, if, [to be inserted where appropriate: at any time during the three (3)-year period immediately] following a Change in Control of the Employer, Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 3(e) above), or he is demoted or reassigned to a position that causes him to cease to be an Eligible Employee, for any reason other than for Cause (as defined in subparagraph 3(e) above), Participant shall nevertheless be entitled to receive a Supplemental Pension at such time as he becomes entitled to receive a benefit under the Plan regardless of whether Participant has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan at the time of such termination, demotion, or reassignment. If a Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause, or his participation in the Plan is terminated by the Employer for any reason other than for Cause, prior to a Change in Control (whether or not a Change in Control ever occurs) and such Separation from Service or termination either (i) was at the request or direction of a person who has entered into an agreement with the Employer, the consummation of which would constitute a Change in Control, or (ii) was otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs), then such Participant’s Separation from Service or termination of participation shall be deemed to have followed a Change in Control of the Employer. Such Supplemental Pension shall be calculated in the same manner as set forth in subparagraph 3(c) above for benefits payable in the event of a termination of the Plan.

5


 

(b) (i) As used in this Agreement, except as provided herein, a “Change in Control” of the Employer occurs upon a change in the Employer’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (A) Change in Ownership . A change in ownership of the Employer occurs on the date that any “Person” (as defined in subparagraph (ii) below), other than (1) the Employer or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Employer or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Employer in substantially the same proportions as their ownership of the Employer’s stock, acquires ownership of the Employer’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Employer’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Employer’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Employer through ownership of 30% or more of the total voting power of the Employer’s stock, as discussed in subparagraph (i)(B) below, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(A); or
     (B) Change in Effective Control . Even though the Employer may not have undergone a change in ownership under subparagraph (i)(A) above, a change in the effective control of the Employer occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Employer’s stock possessing 30 percent or more of the total voting power of the Employer’s stock. However, if any Person owns 30% or more of the total voting power of the Employer’s stock, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(B)(1); or

6


 

     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (C) Change in Ownership of Substantial Portion of Assets . A change in the ownership of a substantial portion of the Employer’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Employer, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Employer’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Employer immediately after the transfer, through a transfer to (1) a shareholder of the Employer (immediately before the asset transfer) in exchange for or with respect to the Employer’s stock; (2) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Employer; (3) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock; or (4) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock.
     (ii) For purposes of subparagraph (i) above,
     (A) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (B) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (iii) The provisions of this subparagraph 4(b) shall be interpreted in accordance with the requirements of the Final Treasury

7


 

Regulations under Code Section 409A, it being the intent of the parties that this subparagraph 4(b) shall be in compliance with the requirements of said Code Section and said Regulations.
     5.  Limitations . Except as otherwise provided in paragraph 4 of this Agreement, Participant agrees that nothing in this Agreement or the Plan shall entitle him, or be deemed to entitle him, to receive a Supplemental Pension under the Plan if:
     (a) he has not met the requirements for a Supplemental Pension as set forth in the Plan,
     (b) his employment with the Employer is terminated prior to his reaching the age of eligibility for the immediate commencement of his Pension Plan benefit due to resignation, or
     (c) his employment with the Employer or participation in the Plan is terminated for Cause (as defined in subparagraph 3(e) above).
     6.  Amendment or Termination . No amendment or termination of the Plan by the Employer shall constitute an amendment or termination of this Agreement. This Agreement may be amended or modified only by the written agreement of the parties hereto, and will terminate only upon the occurrence of the earlier of the following events: (a) the execution of a written agreement to terminate this Agreement signed by all of the parties hereto, (b) the satisfaction of all of the Employer’s obligations to Participant under the Plan and this Agreement, (c) the termination by Participant of Participant’s employment with the Employer by resignation effective prior to Participant reaching age 55, unless such resignation occurs after a Change in Control, or (d) the termination for Cause of Participant’s employment with the Employer. Notwithstanding any of the terms and conditions of this Participation Agreement or Section 9.1 of the Plan to the contrary, the Board of Directors reserves the right, in its sole discretion, to amend the Plan and/or this Participation Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A.
     7.  Funding . Not later than the time each Participant who elected to receive his Supplemental Pension in the form of a monthly annuity provided for in Section 5.3(a), (b) or (d) of the Plan Retires or becomes eligible to receive an unreduced Supplemental Pension under the Plan, whichever occurs first, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of Participant’s accrued Supplemental Pension. Each Participant who elected or is otherwise entitled to receive his Supplemental Pension in a lump sum payment shall not, except as provided below, have any amount contributed to a trust or other funding arrangement on his behalf pursuant to this paragraph 7. Notwithstanding the foregoing, immediately upon a Change in Control, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of all Supplemental Pension benefits (vested and unvested) payable under this Agreement and/or the Plan to Participant, regardless of whether Participant is then eligible to Retire or to receive an unreduced Supplemental Pension and regardless of the form in which such Supplemental Pension is to be paid. The amount required to be funded by

8


 

this paragraph 7 shall be calculated in accordance with paragraph 8 hereof. The Employer shall review the funding status of the trust or other funding arrangement established under this paragraph 7 on an annual basis and shall make contributions thereto as may be required to maintain the value of the assets thereof at no less than 100% of the then-present value of all such Supplemental Pension benefits.
     8.  Calculation of Funding Obligations . The Employer shall calculate its funding obligations under this Agreement and the Plan solely by using the actuarial assumptions and methodology set forth in Exhibit D to the Plan. Upon and after a Change in Control of the Employer which occurs at a time when Participant is an Eligible Employee, the actuarial assumptions and methodology set forth in Exhibit D may be changed with respect to Participant or, if applicable, his Beneficiary, only with Participant’s, or, if applicable, his Beneficiary’s, written consent.
     9.  Confidential Information .
     (a) Participant shall not disclose or use at any time, either during employment or thereafter, any Confidential Information (as defined below) of which Participant is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by Participant’s performance in good faith of duties assigned to Participant by the Employer. Participant will take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Participant shall deliver to the Employer at the termination of employment or at any time the Employer may request all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof, including electronic copies) relating to the Confidential Information, work product or the business of the Employer or any of its Subsidiaries which he may then possess or have under his control.
     (b) As used in this Agreement, the term “Confidential Information” means information that is not generally known to the public and that is used, developed or obtained by the Employer in connection with its business, including but not limited to (i) information, observations and data obtained by Participant while employed by the Employer and its predecessors (including information, observations and data obtained prior to the date of this Agreement), concerning the business or affairs of the Employer, (ii) products or services, (iii) fees, costs and pricing structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports, (vii) computer software, including operating systems, applications and program listings, (viii) flow charts, manuals and documentation, (ix) data bases, (x) accounting and business methods, (xi) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xii) customers and clients and customer or client lists (including names of contact persons, purchasing patterns or preferences, past purchase and sale history and other information), (xiii) other copyrightable works,

9


 

(xiv) all production methods, processes, technology and trade secrets, (xv) business strategies, acquisition plans and candidates, financial or other performance data and personnel lists and data, and (xvi) all similar and related information in whatever form. Confidential Information will not include any information that has been published in a form generally available to the public, or has become otherwise generally known by the public (in each case, through no fault of Participant) prior to the date Participant proposes to disclose or use such information. Participant shall not disclose Confidential Information unless it is required to be disclosed by law, regulation or an order of a court or other governmental entity. In the event that an action is initiated pursuant to which Participant may become legally compelled to disclose all or any portion of the Confidential Information, he shall provide the Employer with prompt notice thereof, so that the Employer may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, Participant shall furnish only that portion of the Confidential Information which is legally required and shall exercise his best efforts to obtain reliable assurances that confidential treatment will be afforded such portion of the Confidential Information. Confidential Information will not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features comprising such information have been published in combination.
     10.  Annual Statements . As soon as practicable after the end of each Plan Year, the Employer shall deliver to Participant or, if applicable, his Beneficiary, a statement containing (a) the present value of the Employer’s future benefit obligations to Participant, or, if applicable, his Beneficiary; (b) the actuarial assumptions used to calculate the present value of the Employer’s future benefit obligations under the Plan; and (c) the current value of the assets, if any, held in any trust or other funding arrangement for the benefit of Participant, or, if applicable, his Beneficiary.
     11.  No Guarantee of Employment . Nothing contained in this Agreement shall be construed as a contract of employment between the Employer and Participant, or as a right of Participant to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge Participant with or without cause.
     12.  Legal Fees and Expenses . The Employer agrees to pay any and all legal fees and expenses incurred by Participant in seeking to obtain or enforce any right or benefit provided by this Agreement.
     13.  Capitalized Terms . Each capitalized term used in this Agreement that is not otherwise defined herein shall have the same meaning attributed to it in the Plan.
     14.  Agreement Binding on Successors to the Employer . Any successor to the Employer hereunder, which successor continues or acquires any of the business of the Employer,

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shall be bound by the terms of this Agreement in the same manner and to the same extent as the Employer.
     15.  Prior Agreements Superseded . The terms of this Agreement supersede the terms of all prior Participation Agreements between Participant and the Employer.
     16.  Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of Texas.
     IN WITNESS WHEREOF, the parties hereto have executed this Participation Agreement as of the date first written above.
           
PARTICIPANT     ATMOS ENERGY CORPORATION
 
 
    By:      
         
         

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EXHIBIT B
MINIMUM BENEFIT SCHEDULE
     One twelfth (1/12 th ) of the Annual Amount set forth below for a Participant is the minimum total monthly pension amount payable from this Plan and the Pension Plan to the Participant so long as payment commences no earlier than the specified Earliest Commencement Age. Earlier commencement will result in reduction under Section 5.2 of this Plan, except in the case of Mr. Vaughan, whose benefits under this Plan (including the minimum Annual Amount stated below) are payable upon his retirement at any time after he has reached age fifty-five (55).
                 
            Earliest Commencement
Participant Name   Annual Amount   Age
E. G. Carter
  $ 84,503       62  
J. A. Enloe
    76,924       62  
N. V. Fariss
    84,060       62  
D. E. James
    104,668       62  
W. P. McKee, Jr.
    79,851       62  
H. E. Neel
    100,259       62  
J. F. Purser
    124,625       62  
C. G. Shaffer
    69,499       62  
R. F. Stephens
    143,028       62  
C. K. Vaughan
    277,103       55  

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EXHIBIT C
ATMOS ENERGY CORPORATION
SUMMARY OF ACTUARIAL ASSUMPTIONS
FOR DETERMINING
LUMP SUM DISTRIBUTIONS
AND
OPTIONAL ANNUITY FORMS
Actuarial assumptions for determining lump sums:
  (i) Interest:  The applicable segment rates as defined in Code Section 417(e)(3)(D)) for the November preceding the first day of the calendar year in which the lump sum is paid and without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii).
 
  (ii) Mortality:    The applicable mortality table as defined in Code Section 417(e)(3), and amended by the Pension Protection Act.
Actuarial assumptions for conversion of a life annuity to an optional form of payment other than a lump sum:
  (i) Interest:  6.0% per year.
 
  (ii) Mortality:    1983 Unisex Group Annuity Mortality (50% 1983 Group Annuity Mortality for males, 50% 1983 Group Annuity Mortality for females).

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EXHIBIT D
ATMOS ENERGY CORPORATION
SUMMARY OF ACTUARIAL ASSUMPTIONS AND METHODS
FOR
DETERMINING ANNUAL SEBP TRUST
FUNDING LIABILITIES
     
Actuarial Assumptions        

Discount Rate
 
8%
   
 
Mortality  
 
Prior to Age 62
 
None
After Age 62
 
Code Section 417(e)(3)
   
Applicable Mortality Table*
   
 
Salary Scale  
0%
   
 
Benefit Percentage  
75%
 
*   The table prescribed in Rev. Rul. 2001-62, or such other mortality table which in the future may be specified from time to time as the applicable mortality table for purposes of Code Section 417(e)(3).
Method for Determining Liabilities
The liability determined is the present value as of the valuation date of the projected age 62 SEBP benefit. The projected age 62 benefit is based on SEBP compensation determined as the sum of (1) and (2) as follows:
(1) The greater of (A) the Participant’s annual base salary at the date of his termination of employment, or (B) the average of the Participant’s annual base salary for the highest three (3) calendar years (whether or not consecutive) of the Participant’s employment with the Employer.
(2) The greater of (A) the Participant’s last Performance Award or (B) the average of the highest three (3) Performance Awards (whether or not consecutive).
The qualified plan offset is the projected age 62 qualified plan benefit with no salary scale or wage base projections.

1

Exhibit 10.8(b)
ATMOS ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(AN AMENDMENT AND RESTATEMENT OF THE
PERFORMANCE-BASED
SUPPLEMENTAL EXECUTIVE BENEFITS PLAN)
Effective Date: August 7, 2007

 


 

TABLE OF CONTENTS
                 
Article
      Page  
 
               
ARTICLE I   Purpose and Effective Date     1  
 
  Section 1.1.   Purpose     1  
 
  Section 1.2.   Effective Date     1  
 
               
ARTICLE II   Definitions and Construction     1  
 
  Section 2.1.   Definitions     1  
 
  Section 2.2.   Construction     7  
 
  Section 2.3.   Governing Law     8  
 
               
ARTICLE III   Eligibility and Participation     8  
 
  Section 3.1.   Employees Eligible to Participate     8  
 
               
ARTICLE IV   Assets Used for Benefits     8  
 
  Section 4.1.   Amounts Provided by the Employer     8  
 
  Section 4.2.   Funding     9  
 
               
ARTICLE V   Supplemental Pension Benefits     10  
 
  Section 5.1.   Eligibility for Supplemental Pension     10  
 
  Section 5.2.   Amount of Supplemental Pension     11  
 
  Section 5.3.   Form of Payment of Supplemental Pension     12  
 
  Section 5.4.   Commencement of Supplemental Pension     14  
 
  Section 5.5.   Supplemental Pensions After a Change in Control     16  
 
               
ARTICLE VI   Disability Benefits     18  
 
  Section 6.1.   Eligibility For Disability Benefit     18  
 
  Section 6.2.   Amount of Disability Benefit     18  
 
  Section 6.3.   Payment of Disability Benefit     18  
 
  Section 6.4.   Payment of Supplemental Pension to Disabled Participants     18  
 
               
ARTICLE VII   Death Benefits     19  
 
  Section 7.1.   Eligibility For Death Benefit     19  
 
  Section 7.2.   Amount of Death Benefit     20  
 
  Section 7.3.   Form of Payment of Death Benefits     22  
 
  Section 7.4.   Commencement of Death Benefits     23  
 
               
ARTICLE VIII   Administration     24  
 
  Section 8.1.   Plan Administration     24  
 
  Section 8.2.   Powers of Plan Administrator     24  
 
  Section 8.3.   Calculation of Funding Obligations     24  
 
  Section 8.4.   Annual Statements     25  
 
               
ARTICLE IX   Miscellaneous Provisions     25  
 
  Section 9.1.   Amendment or Termination of the Plan     25  

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Article
      Page  
 
 
  Section 9.2.   Nonguarantee of Employment     28  
 
  Section 9.3.   Nonalienation of Benefits     28  
 
  Section 9.4.   Liability     28  
 
  Section 9.5.   Participation Agreement     29  
 
  Section 9.6.   Successors to the Employer     29  
 
  Section 9.7.   Tax Withholding     29  
     
Exhibit A
  Participation Agreement
 
   
Exhibit B
  Summary of Actuarial Assumptions for Determining Lump Sum Distributions and Optional Annuity Forms
 
   
Exhibit C
  Summary of Actuarial Assumptions and Methods for Determining Supplemental Executive Retirement Plan Trust Annual Funding Liabilities

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ARTICLE I
Purpose and Effective Date
      Section 1.1. Purpose : The purpose of this Plan is to provide supplemental retirement income, death and disability benefits to certain executive employees of Atmos Energy Corporation. This Plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees so as to be exempt from the requirements of Parts 2, 3 and 4 of Title I of ERISA, and shall be so interpreted.
      Section 1.2. Effective Date : The Plan, which is effective as of August 7, 2007, is an amendment and restatement of the Performance-Based Supplemental Executive Benefits Plan which was adopted effective August 12, 1998. The Plan shall apply generally to any participant in the Prior Plan (as defined below) who did not terminate employment prior to August 7, 2007. Except as otherwise provided herein, any Eligible Employee who is a participant in the Prior Plan and who terminated employment prior to August 7, 2007, shall be entitled to those benefits, if any, provided by the Prior Plan, as modified, where appropriate, to comply with the requirements of Code Section 409A and the guidance issued thereunder as then in effect.
ARTICLE II
Definitions and Construction
      Section 2.1. Definitions : The following words and phrases used in this Plan shall have the respective meanings set forth below, unless the context in which they are used clearly indicates a contrary meaning:
     (a) Beneficiary : The individual or individuals described in Section 7.3 of this Plan who are receiving any benefit payments hereunder.
     (b) Board of Directors : The Board of Directors of the Employer.

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     (c) Cause : The termination of employment by the Employer upon the happening of either (i) or (ii) as follows:
     (i) The willful and continued failure by the Participant to substantially perform his duties with the Employer (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Employer that specifically identifies the manner in which the Employer believes that the Participant has not substantially performed his duties.
     (ii) The Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Employer, monetarily or otherwise.
For purposes of this paragraph, no act, or failure to act, on the Participant’s part shall be deemed “willful” if done, or omitted to be done, by the Participant in good faith and with a reasonable belief that the action or omission was in the best interests of the Employer. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors of the Employer at a meeting of such Board of Directors called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant’s counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors that the Participant was guilty of conduct set forth above in subparagraph (i) or (ii) and specifying the particulars thereof in detail.
     (d) Change in Control :
     (i) A “Change in Control” of the Employer occurs upon a change in the Employer’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (A) Change in Ownership . A change in ownership of the Employer occurs on the date that any “Person” (as defined in subparagraph (ii) below), other than (1) the Employer or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Employer or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Employer in substantially the same proportions as their ownership of the Employer’s stock, acquires ownership of the Employer’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Employer’s stock. However, if any Person is considered to own already more than

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50% of the total fair market value or total voting power of the Employer’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Employer through ownership of 30% or more of the total voting power of the Employer’s stock, as discussed in subparagraph (i)(B) below, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(A); or
     (B) Change in Effective Control . Even though the Employer may not have undergone a change in ownership under subparagraph (i)(A) above, a change in the effective control of the Employer occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Employer’s stock possessing 30 percent or more of the total voting power of the Employer’s stock. However, if any Person owns 30% or more of the total voting power of the Employer’s stock, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(B)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (C) Change in Ownership of Substantial Portion of Assets . A change in the ownership of a substantial portion of the Employer’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Employer, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Employer’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Employer

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immediately after the transfer, through a transfer to (1) a shareholder of the Employer (immediately before the asset transfer) in exchange for or with respect to the Employer’s stock; (2) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Employer; (3) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock; or (4) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock.
     (ii) For purposes of subparagraph (i) above,
     (A) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (B) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (iii) The provisions of this Section 2.1(d) shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this Section 2.1(d) shall be in compliance with the requirements of said Code Section and said Regulations.
     (e) Code : The Internal Revenue Code of 1986, as amended, or any successor thereto.
     (f) Compensation : Except as otherwise provided in the Participant’s Participation Agreement, the sum of (i) and (ii) as follows:
     (i) The greater of (A) the Participant’s annual base salary with the Employer at the date of his termination of employment, or (B) the average of the Participant’s annual base salary for the highest three (3) calendar years (whether or not consecutive) of the Participant’s employment with the Employer.
     (ii) The greater of (A) the Participant’s last Performance Award, or (B) the average of the highest three (3) Performance Awards (whether or not consecutive).
     (g) Covered Employment : The total period of employment with the Employer.

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     (h) Death Benefit : The total benefit provided under this Plan upon the death of a Participant, which benefit is calculated in this Plan on a pre-tax basis.
     (i) Disability : The termination of a Participant’s active employment with the Employer on account of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, for which the Participant is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer.
     (j) Disability Benefit : The monthly benefit provided under this Plan to a Participant who suffers a Disability, which benefit is calculated in this Plan on a pre-tax basis.
     (k) Eligible Employee : An employee of the Employer (i) who was not a participant in the Supplemental Executive Benefits Plan (“SEBP”) as of August 12, 1998 and is either a (A) corporate officer of the Employer selected by the Board of Directors in its discretion to participate in the Plan, or (B) the president of an operating division of the Employer or any other employee of the Employer selected by the Board of Directors in its discretion to participate in the Plan; or (ii) who was a participant in the SEBP prior to January 1, 1999, but who as of January 1, 1999 elected in writing to cease his participation in the SEBP and become an Eligible Employee hereunder as of that date. Any employee who elected to become an Eligible Employee pursuant to clause (ii) of the preceding sentence shall receive credit as an Eligible Employee hereunder for the period of time he was an eligible employee under the SEBP.
     (l) Employer : Atmos Energy Corporation.
     (m) ERISA : The Employee Retirement Income Security Act of 1974, as amended.
     (n) Group Long-Term Disability Plan : The Atmos Energy Corporation Group Long-Term Disability Plan, as amended from time to time.
     (o) Involuntary Termination : The termination of a Participant’s participation in the Plan due to either (i) or (ii) as follows:
     (i) Involuntary termination of the Participant’s employment by the Employer, provided said termination constitutes a Separation from Service and such termination is for any reason other than Cause or Disability.
     (ii) Any reason other than for Cause by the Employer prior to the Participant’s Separation from Service with the Employer.
     (p) LTD Disability : A disability (i) as determined under the Group Long-Term Disability Plan, as in effect from time to time, or (ii) a determination of total

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disability for purposes of eligibility for Social Security disability benefits, if such Group Long-Term Disability Plan is not then in existence, or the Participant is no longer entitled to benefits under the Group Long-Term Disability Plan because such Participant received a lump sum settlement of disability benefits under that plan. If a Participant’s Disability is based on his eligibility for Social Security disability benefits, such Participant shall not be treated as having suffered an LTD Disability unless he shall provide the Plan Administrator, or a committee which may be established pursuant to Section 8.1, with written proof, in a form and within the time determined by the Plan Administrator, or a committee which may be established pursuant to Section 8.1, to be satisfactory, that such Participant is receiving Social Security disability benefits, and unless such Participant provides written proof of the continuing receipt of Social Security disability benefits six months after commencement of such Social Security disability benefits and every six months thereafter, such Participant’s Disability shall be deemed to have ceased at the time he fails to provide such written proof.
     (q) Participant : An Eligible Employee of the Employer who meets the requirements to participate in the Plan in accordance with the provisions of Article III hereof.
     (r) Participation Agreement : The agreement between the Employer and a Participant described in Section 9.5 of this Plan, executed in the form attached hereto as Exhibit A, or in such other form as the Board of Directors, in its sole discretion, may establish from time to time.
     (s) Plan : The Atmos Energy Corporation Supplemental Executive Retirement Plan, as set forth herein and as amended from time to time.
     (t) Pension Plan : Any defined benefit pension plan adopted, established or maintained by the Employer, whichever is applicable, as amended from time to time. Any amount payable to or with respect to a Participant from any group annuity contract maintained in connection with the Pension Plan shall be deemed part of the benefit applicable to the Participant under the Pension Plan.
     (u) Performance Awards : Except as otherwise provided in the Participant’s Participation Agreement, any amount paid, or authorized to be paid, to a Participant while a Participant in the Plan pursuant to any annual performance bonus or incentive compensation plan adopted or established by the Employer, or, upon and after a Change in Control, any amount paid, or authorized to be paid, to a Participant as a performance related cash bonus in addition to his base cash compensation.
     (v) Plan Administrator : The Board of Directors.
     (w) Plan Year : Each twelve (12) month period beginning on January 1 and ending on December 31.
     (x) Prior Plan : The Atmos Energy Corporation Performance-Based Supplemental Executive Benefits Plan, as in effect at any time prior to the Effective Date

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and, where applicable, operated in accordance with the interim guidance issued under Code Section 409A.
     (y) Retired Participant : A Participant under this Plan who receives benefits upon Retirement.
     (z) Retirement or Retire : A Participant’s voluntary termination from employment with the Employer that constitutes a Separation from Service after he is vested in his retirement benefits under the Pension Plan and has met the age and service requirements to be eligible to commence an early retirement benefit under the Pension Plan.
     (aa) Separation from Service : A Participant’s termination from employment with the Employer that constitutes a “separation from service” as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto.
     (bb) Supplemental Pension : A Participant’s pension benefit provided under this Plan, which benefit is calculated in this Plan on a pre-tax basis.
     (cc) The expressions listed below shall have the meanings stated in the subparagraphs hereof respectively indicated:
     
“Affiliate”
  subparagraph 2.1(d)(ii)(B)
 
   
“Dependent Death Benefit”
  subparagraph 7.2(a)(iii)
 
   
“Lump Sum Death Benefit”
  subparagraph 7.2(a)(i)
 
   
“Monthly Death Benefit”
  subparagraph 7.2(a)(ii)
 
   
“Original Payment Date”
  subparagraph 5.4(c)
 
   
“Person”
  subparagraph 2.1(d)(ii)(A)
 
   
“SEBP”
  subparagraph 2.1(k)
 
   
“Specified Employee”
  subparagraph 5.4(c)
      Section 2.2. Construction : The masculine gender, whenever appearing in this Plan, shall be deemed to include the feminine gender; the singular may include the plural; and vice versa, unless the context clearly indicates to the contrary.

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      Section 2.3. Governing Law : This Plan shall be construed in accordance with and governed by the laws of the State of Texas, except to the extent otherwise preempted by ERISA or any other Federal law.
ARTICLE III
Eligibility and Participation
      Section 3.1. Employees Eligible to Participate : Each participant in the Prior Plan who terminated employment prior to August 7, 2007, shall remain a participant in the Prior Plan; each Participant who is an Eligible Employee on August 7, 2007 shall remain a Participant and shall continue to participate in this Plan; and any other Eligible Employee who becomes a Participant shall participate in this Plan, provided he complies with the provisions of Section 9.5 hereof. Any Participant who ceases being an Eligible Employee during his employment with the Employer shall immediately cease active participation in this Plan and shall no longer be a Participant, except as otherwise set forth herein.
ARTICLE IV
Assets Used for Benefits
      Section 4.1. Amounts Provided by the Employer : Benefits payable under this Plan shall constitute general obligations of the Employer in accordance with the terms of this Plan. The Employer may, in its sole discretion, establish a trust or other funding arrangement that is subject to the claims of the Employer’s general unsecured creditors for the purpose of funding a Participant’s accrued benefit payable under this Plan. Any such trust or other funding arrangement may also provide for the distribution to the Participant of an amount equal to any federal, state, local or other taxes that are incurred by the Participant in the event the establishment of such trust or other funding arrangement constitutes the constructive receipt by

8


 

the Participant of any benefits payable hereunder prior to the actual receipt of such benefits. The Employer shall make appropriate adjustments to the amount of the Participant’s Supplemental Pension in order to reflect the effect upon such Supplemental Pension of the distribution described in the foregoing sentence. The Employer also may, but shall not be obligated to, purchase one or more life insurance policies or contracts to provide for the payment of the Death Benefits. Any such policies or contracts purchased hereunder shall remain a general asset of the Employer or of any trust established hereunder.
      Section 4.2. Funding : Not later than the time each Participant who elected to receive his Supplemental Pension in the form of a monthly annuity provided for in Section 5.3(a)(i), (ii) or (iv) Retires or becomes eligible to receive an unreduced Supplemental Pension under this Plan, whichever occurs first, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of such Participant’s accrued Supplemental Pension. The amount required to be funded by this Section 4.2 shall be calculated in accordance with Section 8.3 hereof. Each Participant who elected or is otherwise entitled to receive his Supplemental Pension in a lump sum payment shall not, except as provided below, have any amount contributed to a trust or other funding arrangement on his behalf pursuant to this Section 4.2. Notwithstanding the foregoing, immediately upon a Change in Control, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of all Supplemental Pension benefits (vested and unvested) payable hereunder to each Participant and Retired Participant, regardless of whether any such person is then eligible to Retire or to receive an unreduced Supplemental Pension and regardless of the form in which such Supplemental Pension is to be paid. The Employer shall review the funding status of each such trust or other funding arrangement

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required to be established under this Section 4.2 on an annual basis and shall make such contributions thereto as may be required to maintain the value of the assets thereof at no less than 100% of the then-present value of all such Supplemental Pension benefits.
ARTICLE V
Supplemental Pension Benefits
      Section 5.1. Eligibility for Supplemental Pension :
     (a) Upon Retirement . Except as otherwise provided elsewhere in this Plan or in a Participation Agreement, a Participant who has been an Eligible Employee for at least two years and Retires shall be entitled to receive a Supplemental Pension.
     (b) Upon Involuntary Termination Prior to a Change in Control . A Participant who suffers an Involuntary Termination prior to a Change in Control shall be entitled to receive a Supplemental Pension, subject to the provisions of Section 5.1(c) of this Plan, so long as he is vested in his retirement benefits under the Pension Plan at the time of his Involuntary Termination and has been an Eligible Employee for at least two years prior to the Involuntary Termination.
     (c) Upon Voluntary Termination Prior to a Change in Control or Termination For Cause . A Participant who voluntarily resigns from employment with the Employer prior to being eligible for Retirement and prior to a Change in Control or who is terminated from employment with the Employer for Cause shall not be entitled to receive a Supplemental Pension.
     (d) Upon Disability . A Participant who suffers a Disability shall be entitled to a Supplemental Pension as provided in Section 6.4.

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      Section 5.2. Amount of Supplemental Pension :
     (a) Upon Retirement . Except as otherwise provided in the Participant’s Participation Agreement, the Supplemental Pension payable to a Participant who Retires, and who has been an Eligible Employee for at least two years shall, unless reduced as provided in subparagraph (b) below, and based on the form of payment specified in Section 5.3(a)(i) or (ii), depending on the marital status of the Participant at Retirement, equal (i) minus (ii) as follows:
     (i) One-twelfth (1/12 th ) of sixty percent (60%) of the Participant’s Compensation, reduced if the Participant has fewer than ten full (10) years of Covered Employment by one-tenth (1/10th) for each full year of his Covered Employment less than ten (10) (no credit shall be given for any partial year of Covered Employment;
     (ii) The monthly amount of pension payable to the Participant under the Pension Plan as of the date that his Supplemental Pension commences, assuming payment in the automatic form applicable to him under the Pension Plan.
     (b) Reduction for Early Commencement of Supplemental Pensions . If a Participant’s Supplemental Pension commences, without regard to Section 5.4(c) before the Participant attains age 62, the amount determined under subparagraph (a)(i) above shall, unless otherwise provided in a Participation Agreement, be reduced by 2% per year for the first two (2) years (or fractional years thereof, based on full months) that such date of commencement precedes age 62, and by 4% per year for the next five (5) years (or fractional years thereof, based on full months) that such date of commencement precedes age 60.
     (c) Upon Involuntary Termination Prior to a Change in Control . The Supplemental Pension payable to a Participant who suffers an Involuntary Termination prior to a Change in Control shall be determined in accordance with subparagraph (a)

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above, but, except as otherwise provided in the Participant’s Participation Agreement, for purposes of subparagraph (a)(i), shall be based upon his Compensation and full years of Covered Employment calculated as of the date of his Involuntary Termination.
      Section 5.3. Form of Payment of Supplemental Pension :
     (a) Participants Prior to October 3, 2007 . Each Participant who was an Eligible Employee on October 2, 2007, shall be paid or commence his Supplemental Pension in accordance with the following provisions:
     (i) Married Participants . Except as otherwise provided in the Participant’s Participation Agreement or in subparagraph (iii) or (iv) below, if the Participant is married when his Supplemental Pension commences or is scheduled to commence pursuant to Section 5.4(a), without regard to Section 5.4(c), it shall be paid in the form of a joint and 50% survivor annuity, with the Participant’s spouse on the date payment commences or is scheduled to commence pursuant to Section 5.4(a) without regard to Section 5.4(c), as the joint annuitant. If a Participant’s spouse dies between the date the Supplemental Pension is scheduled to commence and the date the Supplemental Pension actually commences, such Participant shall be treated as unmarried for purposes of this subparagraph (a)(i).
     (ii) Unmarried Participants . Except as otherwise provided in the Participant’s Participation Agreement or in subparagraph (iii) or (iv) below, if the Participant is not married when his Supplemental Pension commences or is scheduled to commence pursuant to Section 5.4(a), without regard to Section 5.4(c), it shall be paid in the form of a life annuity, payable monthly, but guaranteed for a period of 120 months, payable to the Participant or the Participant’s named Beneficiary. If an unmarried Participant becomes married between the date the Supplemental Pension is scheduled to commence and the date the Supplemental Pension actually commences, such Participant shall be treated as married for purposes of this subparagraph (a)(ii).
     (iii) 2007 Transition Election for Certain Participants . Notwithstanding any provisions of the Plan to the contrary, each Participant who has not incurred a Separation from Service and is still an Eligible Employee on October 3, 2007 shall be given an election to change his or her form of payment from the form set forth in subparagraph (i) or (ii) above, as the case may be, to a lump sum payment equal to the actuarial equivalent lump sum value of the Supplemental Pension

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provided for in subparagraph (i) or (ii) above, or to one of the actuarial equivalent alternative annuity forms provided for in subparagraph (iv) below. The actuarial equivalent lump sum value and the actuarial equivalent alternative annuity forms of Supplemental Pension payments shall be determined in accordance with the actuarial assumptions set forth in Exhibit B hereto. Any election pursuant to this subparagraph (iii) shall not permit benefits scheduled to be paid in 2007 to be deferred beyond 2007 and shall not permit benefits scheduled to be paid after 2007 to be accelerated and paid in 2007. Any election pursuant to this subparagraph (iii) may be changed at any time on and after January 1, 2008 and prior to December 31, 2008, so long as any such election does not permit benefits scheduled to be paid in 2008 to be deferred beyond 2008 and does not permit benefits scheduled to be paid after 2008 to be accelerated and paid in 2008. Elections pursuant to this subparagraph (iii) shall be made in accordance with the transition relief regarding changing the time and form of payment on or before December 31, 2008, provided for in the interim guidance issued under Code Section 409A.
     (iv) Change in Annuity Form of Supplemental Pension . Any Participant who has elected, pursuant to subparagraph (iii) above, to receive his Supplemental Pension in an annuity form as provided for in subparagraph (i) or (ii) above or this subparagraph (iv) may elect, by submitting a completed election form to the Plan Administrator, or a committee which may be established pursuant to Section 8.1, at least 30 days prior to the date payments under the elected annuity form are to commence or are scheduled to commence pursuant to Section 5.4(a) without regard to Section 5.4(c), to convert the elected annuity form into any of the following actuarially equivalent annuity forms which are otherwise permissible or the annuity form provided for in subparagraph (i) or (ii) above, as applicable:
     (A) Life Annuity , with a monthly amount payable for the life of the Participant;
     (B) Joint and Survivor Annuity , with a monthly amount payable for the life of the Participant, and an amount payable upon the Participant’s death to the Participant’s surviving spouse which is equal to 100%, 75% or 66.67% of the monthly amount which was payable to the Participant;
     (C) Life Annuity with Guaranteed Payment Period , with a monthly amount payable for the life of the Participant, and if the Participant dies before either 60 or 120 (as selected by the Participant) monthly payments are made, the remaining monthly payments for the selected period will be paid to the Participant’s surviving spouse or other designated Beneficiary.

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If no election pursuant to this subparagraph (iv) is on file when benefits commence or are scheduled to commence pursuant to Section 5.4(a), without regard to Section 5.4(c) below for a Participant for whom this subparagraph (iv) applies, benefits will be paid in the form applicable under subparagraph (i) or (ii) above, as the case may be. The actuarial equivalents provided for in this subparagraph (a) will be determined on the basis of the actuarial assumptions used for determining actuarial equivalent optional forms of annuities as set forth in Exhibit B hereto.
     (b) Participants on and after October 3, 2007 . Each Participant who becomes a Participant on or after October 3, 2007, shall be paid his Supplemental Pension in a lump sum payment equal to the actuarial equivalent lump sum value of the Supplemental Pension provided for in subparagraph (a)(i) or (ii) above, based on his marital status when his Supplemental Pension commences or is scheduled to commence pursuant to Section 5.4(a)(ii) without regard to Section 5.4(c). The actuarial equivalents provided for in this subparagraph (b) will be determined on the basis of the actuarial assumptions used for determining actuarial equivalent lump sums as set forth in Exhibit B hereto.
      Section 5.4. Commencement of Supplemental Pension :
     (a) Upon Retirement .
     (i) Except as otherwise provided in subparagraph (c) below, the Supplemental Pension of a Participant, other than a Participant to whom Section 5.3(b) applies, who Retires prior to January 1, 2009, shall be paid or commence at the time he begins receiving retirement benefits from the Pension Plan. However, (A) if a Participant who made the election in 2007 to receive a lump sum payment in accordance with Section 5.3(a)(iii) above becomes entitled to receive a lump sum payment in 2007, such lump sum cannot be paid prior to January 1, 2008, and except as otherwise provided in subparagraph (c) below, such Participant shall receive the monthly Supplemental Pension annuity payments otherwise provided for in Section 5.3(a)(i) or (ii), as the case may be, until January 1, 2008, at which time a lump sum payment of the actuarial equivalent lump sum value of the remaining monthly annuity payments shall be paid to such Participant on or prior to January 15, 2008, and (B) if a Participant who changed his 2007 election in 2008 (1) to receive a lump sum payment in accordance with Section 5.3(c) hereof in lieu of the monthly Supplemental Pension annuity payments provided for in Section

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5.3(a)(i), (ii) or (iv), as the case may be, which such Participant elected in 2007, and such Participant becomes entitled to receive a lump sum payment in 2008, such lump sum cannot be paid prior to January 1, 2009, and except as otherwise provided in subparagraph (c) below, such Participant shall receive the monthly Supplemental Pension annuity payments otherwise elected in 2007 until January 1, 2009, at which time a lump sum payment of the actuarial equivalent lump sum value of the remaining monthly annuity payments shall be paid to such Participant on or prior to January 15, 2009, or (2) to receive monthly annuity payments in lieu of a lump sum payment which such Participant elected in 2007, and such Participant becomes entitled to receive benefits under this Plan in 2008, such 2008 election shall not be valid, and such Participant shall receive the lump sum payment elected in 2007.
     (ii) Except as otherwise provided in subparagraph (c) below, (A) the Supplemental Pension of a Participant, other than a Participant to whom Section 5.3(b) applies, who Retires on or after January 1, 2009, and (B) the Supplemental Pension of a Participant to whom Section 5.3(b) applies who Retires at any time shall be paid or commence on the first day of the month following the month in which such Participant Retires.
     (b) Upon Involuntary Termination Prior to a Change in Control . The Supplemental Pension of a Participant who suffers an Involuntary Termination prior to a Change in Control shall, except as otherwise provided in subparagraph (c) below, be paid or commence at the later of (i) the first day of the month following the month in which such Participant incurs a Separation from Service with the Employer, or (ii) the first day of the month following the month in which such Participant attains age 55.
     (c) Six Months Delay in Payment . Notwithstanding the foregoing provisions of this Section 5.4, Section 5.5(c) and Section 9.1(c), from and after January 1, 2009, if a Participant who is entitled to payments under said applicable Section is a “specified employee,” as defined in § 1.409A-1(i) of the Final Regulations under Code Section 409A, and the Supplemental Pension would otherwise be paid or commence (the “Original Payment Date”) before a date which is at least six (6) months following the date of the Participant’s Separation from Service, the Supplemental Pension shall be paid

15


 

or commence on the date which is six (6) months following the date of the Participant’s Separation from Service (or, if earlier, the date of death of the Participant), provided the six (6) months delay requirements of Code Section 409A otherwise apply to the payments under said applicable Section. All monthly annuity payments which are delayed for six (6) months shall be paid in a lump sum on the date specified in this subparagraph (c) for commencement of such payments. All lump sum or monthly annuity payments which are delayed as provided in this subparagraph (c) shall accrue interest for the period from the Original Payment Date (or, in the case of the monthly annuity payments the first day of the month in which such payment was to be made) until the date such payment is actually made. Said interest shall be equal to the applicable segment rates as defined in Code Section 417(e)(3)(D), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which the participant retires or otherwise becomes entitled to payments without regard to this Section 5.4(c).
      Section 5.5. Supplemental Pensions After a Change in Control :
     (a) Eligibility For Supplemental Pension . Notwithstanding anything to the contrary in this Plan, a Participant shall be entitled to a Supplemental Pension, regardless of whether he has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan, if following a Change in Control of the Employer which occurs at a time when he is an Eligible Employee, either (i) or (ii) occurs:
     (i) The Participant incurs a Separation from Service
     (A) on account of LTD Disability; or

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     (B) involuntarily by the Employer for any reason other than for Cause.
     (ii) The Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause prior to his Separation from Service with the Employer.
In order for the provisions of this Section 5.5 to apply, the involuntary Separation from Service referred to in subparagraph (i)(A) above or the termination of participation referred to in subparagraph (ii) above must occur within three (3) years after the Change in Control.
     If a Participant incurs a Separation from Service involuntarily by the Employer for any reason other than for Cause, or his participation in the Plan is terminated by the Employer for any reason other than for Cause, prior to a Change in Control (whether or not a Change in Control ever occurs) and such Separation either (A) was at the request or direction of a person who has entered into an agreement with the Employer, the consummation of which would constitute a Change in Control, or (B) was otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs), then such Participant’s Separation from Service or termination of participation shall be deemed to have followed a Change in Control of the Employer, and such Participant shall be one who is described in this subparagraph (a).
     (b) Amount of Supplemental Pension . The Supplemental Pension payable to a Participant described in subparagraph (a) above shall be calculated in the same manner as set forth in Section 9.1(c) for benefits payable in the event of a termination of the Plan, but based on his Compensation as of the date of his Separation from Service or the date his participation in the Plan is terminated, whichever is applicable.

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     (c) Commencement of Supplemental Pension . Except as otherwise provided in Section 5.4(c), the Supplemental Pension payable to a Participant described in subparagraph (a) above shall be paid or commence on the later of (i) the first day of the month following the month in which he incurs a Separation from Service, or (ii) the first day of the month following the month in which such Participant attains age 55.
ARTICLE VI
Disability Benefits
      Section 6.1. Eligibility For Disability Benefit : A Participant who is an Eligible Employee and otherwise is actively participating in the Plan shall be entitled to a Disability Benefit if he suffers a Disability and an LTD Disability prior to his Retirement.
      Section 6.2. Amount of Disability Benefit : The Disability Benefit payable to an eligible Participant shall equal (a) minus (b) as follows:
     (a) One-twelfth (1/12th) of sixty percent (60%) of the Participant’s Compensation calculated as of the date of his Disability.
     (b) The total monthly amount of disability benefit payable to the Participant under the Group Long-Term Disability Plan (before any offsets) as of the date that his employment terminates due to Disability.
      Section 6.3. Payment of Disability Benefit : A Participant’s Disability Benefit shall be paid commencing on the 181 st day following the later of the date of his Disability or the date of his LTD Disability , and shall continue for so long as benefits are paid due to an LTD Disability.
      Section 6.4. Payment of Supplemental Pension to Disabled Participants :
     (a) Upon Reaching Age 65 . If a Participant who has suffered an LTD Disability reaches age 65 while still receiving a Disability Benefit, such Participant shall be entitled to a Supplemental Pension, to be paid or to commence on the first day of the month following the month in which such Participant attains age 65, regardless of

18


 

whether the Participant has been an Eligible Employee for at least two years. The Supplemental Pension payable to such Participant shall be in the form provided in Section 5.3 and determined in accordance with Section 5.2(a). Upon commencement of a Participant’s Supplemental Pension under this Section 6.4(a), such Participant’s Disability Benefit under Section 6.3 hereof shall cease.
     (b) Prior to Reaching Age 65 . Notwithstanding the provisions of subparagraph (a) above, a Participant receiving a Disability Benefit shall receive a Supplemental Pension to be paid or to commence on the first day of the month following the month in which occurs the later of (i) such Participant’s 62 nd birthday, or (ii) such Participant’s entitlement to an unreduced Supplemental Pension under Section 5.2(a)(i), if such month occurs prior to such Participant’s 65 th birthday. If a Participant becomes entitled to a Supplemental Pension pursuant to this subparagraph (b), the Participant’s Disability Benefits shall cease, and such Supplemental Pension shall be in the form provided for in Section 5.3, determined in accordance with Sections 5.2(a) and (b) and shall be based on the Participant’s Compensation as of the date that such individual suffered a Disability.
ARTICLE VII
Death Benefits
      Section 7.1. Eligibility For Death Benefit : A Participant’s Beneficiary shall be entitled to a Death Benefit if the Participant meets the requirements of either (a), (b) or (c) as follows:
     (a) He dies before his employment with the Employer terminates or while receiving a Disability Benefit under this Plan.
     (b) He Retires but dies before the commencement of his Supplemental Pension.

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     (c) He is entitled to a Supplemental Pension pursuant to the provisions of Section 5.1(b) or Section 5.5(a) of this Plan, but dies before the commencement of his Supplemental Pension.
      Section 7.2. Amount of Death Benefit :
     (a) In-Service Death . In the case of a Participant who dies as provided in Section 7.1(a), the Death Benefit will be the total of the following (i), (ii) and (iii):
     (i) A lump sum payment equal to two times the Participant’s Compensation minus any amount payable under the Employer’s Group Basic Life Insurance Plan (the “Lump Sum Death Benefit”).
     (ii) A monthly benefit equal to one-twelfth of an amount equal to fifty percent of the Participant’s Compensation at the time of his death (the “Monthly Death Benefit”).
     (iii) If the Participant leaves a child or children to whom payments are to be made under Section 7.3 hereof, a monthly benefit equal to one-twelfth of an amount equal to twenty-five percent (25%) of the Participant’s Compensation at the time of his death (the “Dependent Death Benefit”).
     (b) Post-Retirement Death . In the case of a Participant who dies as provided in Section 7.1(b), a Death Benefit will be paid as follows:
     (i) If such Participant was entitled to receive his Supplemental Pension in a form provided for in Section 5.3(a)(i), (ii) or (iv), a Death Benefit will be paid to the Beneficiary who is so entitled at the time of his death. If such Participant Retires either (A) prior to January 1, 2009, or (B) on or after January 1, 2009 and the six months delay provision of Section 5.4(c) does not apply, such Death Benefit shall be paid in the amount that would have been applicable had the Participant’s Supplemental Pension commenced in the month of his death. If such Participant Retires on or after January 1, 2009 and the six months delay provision of Section 5.4(c) applies, such Death Benefit shall consist of the following: (C) a lump sum payment will be paid to the Beneficiary entitled to receive the Death Benefit pursuant to Section 7.3(a) below in an amount equal to the sum of the monthly annuity payments which would have been payable to the Participant for the months between the month in which his Supplemental Pension would have commenced without regard to Section 5.4(c) and the month in which he died, plus interest through the date of his death as provided for in Section 5.4(c), and (D) the monthly survivor benefit will be paid to the Beneficiary who would have been so entitled on the basis of the form of payment that would have applied to

20


 

him pursuant to Section 5.3(a)(i), (ii) or (iv) had the Participant’s Supplemental Pension commenced in the month of his death.
     (ii) If such Participant was entitled to receive his Supplemental Pension in the form of a lump sum payment pursuant to Section 5.3(a)(iii) or Section 5.3(b), a Death Benefit will be paid to the Beneficiary entitled to receive the Death Benefit pursuant to Section 7.3(a) below. The amount of such Death Benefit shall be equal to the lump sum amount such Participant would have been entitled to receive had the Participant’s Supplemental Pension been paid in the month of his death, plus interest, if applicable, through the date of his death pursuant to Section 5.4(c) as if the date of his death were the end of the six months delay period.
     (c) Deferred Retirement Death . In the case of a Participant who dies as provided in Section 7.1(c), a Death Benefit will be paid as provided in (i) or (ii) as follows:
     (i) In the case of a Participant who dies prior to reaching age 55, a Death Benefit will be paid to the Beneficiary who would have been so entitled at the time of his death and in the amount determined as follows:
     (A) If such Participant was entitled to receive his Supplemental Pension in the form provided for in Section 5.3(a)(i), (ii) or (iv), such Death Benefit shall be paid in the form applicable under section 5.3(a)(i) or (ii), based on his marital status at the time of his death, to the Beneficiary who would have been so entitled at the time of his death on the basis of that form, and in the amount that would have been applicable had the Participant lived to age 55, commenced his Supplemental Pension in the month immediately following the month in which he reached age 55 and died immediately after his Supplemental Pension commenced, as reduced actuarially, on the basis of the Beneficiary’s age, to reflect commencement of such Death Benefit pursuant to Section 7.4(b) prior to such Participant reaching age 55.
     (B) If such Participant was entitled to receive his Supplemental Pension in the form of a lump sum payment, such Death Benefit shall be paid as provided in Section 7.3(a) in a lump sum amount equal to the actuarial equivalent lump sum value of the survivor benefit that would have been paid under the form applicable under Section 5.3(a)(i) or (ii) had the Participant lived to age 55, commenced his Supplemental Pension in the month immediately following the month in which he reached age 55 and died immediately after his Supplemental Pension commenced, as

21


 

reduced actuarially, on the basis of the Beneficiary’s age, to reflect commencement of such Death Benefit pursuant to Section 7.4(b) prior to such Participant reaching age 55.
     (ii) In the case of a Participant who dies after reaching age 55, a Death Benefit will be paid to the Beneficiary in the amount provided for in Section 7.2(b) above.
     (iii) For purposes of this Section 7.2(c), the actuarial equivalent lump sum value and the actuarial equivalent alternative annuity forms of Supplemental Pension payments shall be determined in accordance with the actuarial assumptions set forth in Exhibit C hereto.
      Section 7.3. Form of Payment of Death Benefits :
     (a) Lump Sum and Monthly Death Benefits . The Lump Sum Death Benefit, the Monthly Death Benefit, the Death Benefit provided for in Section 7.2(b)(i)(C), the Death Benefit provided for in Section 7.2(b)(ii) and the Death Benefit provided for in Section 7.2(c)(i)(B) are payable to the Participant’s designated Beneficiary. In the event that no Beneficiary has been effectively designated as provided with respect to the Death Benefits described in the preceding sentence or the guaranteed monthly payments for the selected period under the annuity form described in Sections 5.3(a)(ii) and 5.3(a)(iv)(C), the Participant’s surviving spouse shall be deemed the designated Beneficiary, or if the Participant has no surviving spouse, his children, if any, per stirpes, and if none, the estate of the Participant shall be deemed the designated Beneficiary. If a Beneficiary entitled to receive a Death Benefit that is a survivor annuity payment hereunder (other than the guaranteed monthly payments for the selected period under the annuity form described in Sections 5.3(a)(ii) and 5.3(a)(iv)(C)) dies before commencement of payment of that Death Benefit, then that Death Benefit shall not be payable from the Plan. The Monthly Death Benefit shall be a single life annuity, if the Participant’s surviving spouse

22


 

is the designated Beneficiary, and shall be a 120-month term certain annuity, if someone other than the surviving spouse is the Participant’s designated Beneficiary.
     (b) Dependent Death Benefit . The Dependent Death Benefit is payable to the Participant’s dependent children in equal shares until there cease to be any dependent children remaining. As each child loses his or her dependent status, the child’s share of the Dependent Death Benefit shall be paid to the remaining dependent child or children in equal shares. A child of the Participant is deemed to be a dependent until the child reaches age eighteen or, if a full-time student (i.e. enrolled in twelve hours or more of courses of higher education), age 25, or until the child’s death if earlier. At the discretion of the Plan Administrator, any dependent child’s share of the Dependent Death Benefit may be paid to the Participant’s surviving spouse or other guardian of such child if applicable and shall constitute full settlement of the Plan’s obligation to such child with respect to such payment. If the Participant’s surviving spouse is the designated Beneficiary for the Monthly Death Benefit and dies while receiving the Monthly Death Benefit and while any dependent child or children of the Participant remain, then the Monthly Death Benefit being paid to the surviving spouse shall be added to the Dependent Death Benefit and shall be payable in equal shares to the dependent children in the same manner and for the same time period as the Dependent Death Benefit.
      Section 7.4. Commencement of Death Benefits :
     (a) The Death Benefits payable pursuant to Section 7.2(a) shall be paid, with respect to the Lump Sum Death Benefit, or shall commence, with respect to the Monthly Death Benefit and the Dependent Death Benefit, as of the first day of the month next following the Participant’s death.

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     (b) The Death Benefits payable pursuant to Sections 7.2(b) and (c) shall commence as of the first day of the month next following the Participant’s death.
ARTICLE VIII
Administration
      Section 8.1. Plan Administration : The Plan shall be administered by the Board of Directors. The Board of Directors may, in its sole discretion, establish a committee to carry out the day-to-day administration of the Plan and may delegate any portion of its authority and responsibilities as Plan Administrator to such committee.
      Section 8.2. Powers of Plan Administrator : The Plan Administrator shall have the discretionary power and authority to interpret and administer the Plan according to its terms, including the power to construe and interpret the Plan, to supply any omissions therein, to reconcile and correct any errors or inconsistencies, to decide any questions in the administration and application of the Plan, and to make equitable adjustments for any mistakes or errors in the administration and application of the Plan. The Plan Administrator shall have such additional powers as may be necessary to discharge its duties and responsibilities hereunder.
      Section 8.3. Calculation of Funding Obligations : The Employer shall calculate its funding obligations hereunder solely by using the actuarial assumptions and methodology set forth in Exhibit C hereto. In its discretion, at any time prior to a Change in Control of the Employer, the Employer may amend Exhibit C to change such actuarial assumptions and methodology, provided that such changes are communicated promptly in writing to all Participants, Retired Participants, and Beneficiaries. Upon and after a Change in Control of the Employer, the actuarial assumptions and methodology set forth in Exhibit C may be changed with respect to any Participant, Retired Participant, or Beneficiary who was a Participant, Retired

24


 

Participant, or Beneficiary at the time of such Change in Control, only with the written consent of such affected Participant, Retired Participant, or Beneficiary.
      Section 8.4. Annual Statements : As soon as practicable after the end of each Plan Year, the Employer shall deliver to each Participant, Retired Participant, and Beneficiary a statement containing (a) the present value of the Employer’s future benefit obligations to the Participant, Retired Participant, or Beneficiary; (b) the actuarial assumptions used to calculate the present value of the Employer’s future benefit obligations hereunder; and (c) the aggregate current value of the assets, if any, held in a trust or other funding arrangement which are sufficient to fund 100% of the then-present value of the accrued Supplemental Pension for any Participant, Retired Participant, or Beneficiary for whom benefits are paid in the form of an annuity and for whom assets are required to be held in trust.
ARTICLE IX
Miscellaneous Provisions
      Section 9.1. Amendment or Termination of the Plan :
     (a) In General . Subject to the remaining provisions of this Section 9.1, the Board of Directors may by resolution, in its absolute discretion, from time to time, amend, suspend, or terminate any or all of the provisions of the Plan; provided, however, that no amendment, suspension, or termination may apply so as to decrease the payment to any Participant or Beneficiary of any benefit under the Plan that he accrued prior to the effective date of such amendment, suspension, or termination, nor shall such amendment, suspension, or termination change the time and form of payment to be made under the provisions of the Plan as in effect before such amendment, suspension, or termination,

25


 

except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder.
     (b) Amendment That Decreases Benefits . If the Board of Directors amends the Plan and such amendment results in a decrease in the Supplemental Pension, Death Benefits or Disability Benefit that otherwise would be paid under this Plan but for the amendment, except as provided in subparagraphs (iii) and (iv) below, the Participant’s Supplemental Pension, Death Benefits or Disability Benefit shall equal the sum of (i) and (ii) as follows:
     (i) The amount derived by multiplying the Participant’s benefit calculated pursuant to the terms of the Plan in effect immediately prior to the amendment and based upon the Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years of Covered Employment the Participant has prior to the effective date of the amendment, and the denominator is the total number of full years of Covered Employment the Participant has; however, neither the numerator nor the denominator shall exceed 10.
     (ii) The amount derived by multiplying the Participant’s benefit as calculated pursuant to the terms of the Plan as amended based upon the Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years that the Participant participated in the Pension Plan after the effective date of the amendment (but this number when added to the numerator of the fraction in subparagraph (i) above, shall not exceed 10) and the denominator is the total number of full years of Covered Employment the Participant has (but this number shall not exceed 10).
     (iii) Notwithstanding the foregoing provisions of this subparagraph (b), if the Plan is so amended before a Participant is vested in his retirement benefits under the Pension Plan, the Participant’s Supplemental Pension, Death Benefit or Disability Benefit shall be calculated solely in accordance with the terms of the Plan as amended.
     (iv) Notwithstanding the foregoing provisions of this subparagraph (b), if any such amendment occurs upon or after a Change in Control, the Participant’s Supplemental Pension shall at least equal the benefits which would be paid under subparagraph (c) below if there was a termination of the Plan at the time of such amendment.

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     Notwithstanding the foregoing provisions of this subparagraph (b), the Amendment and Restatement of the Plan effective August 7, 2007 shall not for any purposes be treated as resulting in a decrease in the Supplemental Pension, Death Benefit or Disability Benefit otherwise payable under this Plan.
     (c) Termination of the Plan .
     (i) If the Board of Directors terminates all or any portion of the Plan and such termination adversely affects a Participant’s Supplemental Pension, such Participant shall be entitled to receive a Supplemental Pension whether or not such Participant has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan at the time of such Plan termination.
     (A) It shall be based upon the Participant’s Compensation as of the date of the termination of the Plan;
     (B) If payment of the Supplemental Pension begins before the Participant has ten full years of Covered Employment, the reduction referred to in Section 5.2(a)(i) shall not apply;
     (C) If payment of the Supplemental Pension begins before the Participant attains age 62, the reductions referred to in Section 5.2(b) shall not apply; and
     (D) If the Participant is not otherwise vested under the Pension Plan, the calculation made under Section 5.2(a)(ii) above shall be made as if he were so vested.
Except as otherwise provided in Section 5.4(c), the Supplemental Pension determined under this subparagraph (c) shall be paid or commence on the later of (i) the first day of the month following the month in which such Participant incurs a Separation from Service, or (ii) the first day of the month following the month in which such Participant attains age 55.
     (ii) If the Board of Directors terminates all or any portion of the Plan and such termination adversely affects the Disability Benefits or Death Benefits described in the Plan, a Participant shall continue to be entitled to the Disability Benefits or Death Benefits described in the Plan if he thereafter dies or suffers a Disability. Any such Death Benefit or Disability Benefit, however, shall be calculated as of the date of termination of such benefit or the Plan as if such date of termination was the date the Participant died or suffered a Disability. Payment of any such Death Benefit or Disability Benefit shall be made in accordance with the

27


 

terms of the Plan as in effect immediately prior to the date of termination of such benefit or the Plan.
     (d) Amendments to Comply with Internal Revenue Code Section 409A . Notwithstanding any of the foregoing provisions of this Section 9.1 or any of the terms and conditions of the Participation Agreement to the contrary, the Board of Directors reserves the right, in its sole discretion, to amend the Plan and/or any Participation Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A.
      Section 9.2. Nonguarantee of Employment : Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any employee, as a right of any employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its employees, with or without Cause.
      Section 9.3. Nonalienation of Benefits : To the extent permitted by law, benefits payable under this Plan shall not, without the Plan Administrator’s consent, be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary. Any unauthorized attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, or otherwise dispose of any right to benefits payable hereunder shall be void. No part of the assets of the Employer shall be subject to seizure by legal process resulting from any attempt by creditors of or claimants against any Participant or Beneficiary or any person claiming under or through the foregoing to attach his interest under the Plan.
      Section 9.4. Liability : No director, officer, or employee of the Employer shall be liable for any act or action, whether of commission or omission, taken by any other director, officer, employee, or agent of the Employer under the terms of the Plan or, except in circumstances

28


 

involving his bad faith, for anything done or omitted to be done by him under the terms of the Plan.
      Section 9.5. Participation Agreement : Each Participant shall enter into a Participation Agreement as a condition to his participation in the Plan. Such Participation Agreement shall constitute a separate and enforceable agreement between the Employer and the Participant regarding the Participant’s rights in the Plan.
      Section 9.6. Successors to the Employer : Any successor to the Employer hereunder, which successor continues or acquires any of the business of the Employer, shall be bound by the terms of this Plan in the same manner and to the same extent as the Employer.
      Section 9.7. Tax Withholding : The Employer shall have the right to deduct from all amounts paid in cash or other form under this Agreement any Federal, state, local or other taxes required by law to be withheld.
     IN WITNESS WHEREOF, and as conclusive evidence of its adoption of this Supplemental Executive Retirement Plan, as an amendment and restatement of the Performance-Based Supplemental Executive Benefits Plan, the Employer has caused this Plan to be duly executed on this 10 th day of September, 2008, to be effective as of the date set forth in Section 1.2 above.
         
  ATMOS ENERGY CORPORATION
 
 
  By:   /s/ ROBERT W. BEST    
    Robert W. Best   
    Chairman, President and
Chief Executive Officer 
 
 

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EXHIBIT A
PARTICIPATION AGREEMENT
     THIS PARTICIPATION AGREEMENT is entered into as of the             day of                      , 20       by and between ATMOS ENERGY CORPORATION, a Texas and Virginia corporation (the “Employer”), and                                           (“Participant”).
WITNESSETH:
     WHEREAS, the Employer has adopted the Atmos Energy Corporation Performance-based Supplemental Executive Benefits Plan (the “Plan”), pursuant to which certain executive or management employees of the Employer may receive supplemental pension, disability, and death benefits; and
[The following three recitals should be used for participants in the SERP as of October 3, 2007:
      WHEREAS, Participant commenced participation in the Plan prior to October 3, 2007; and
      WHEREAS, effective as of August 7, 2007 (the “Effective Date”), the Employer amended and restated the Plan, which was renamed the Atmos Energy Corporation Supplemental Benefits Plan; and
      WHEREAS, the parties desire to enter into a new participation agreement in order for Participant to continue participation in the amended and restated Plan; and]
     WHEREAS, in accordance with Section 9.5 of the Plan, the Employer and Participant have agreed to execute and enter into this Agreement.
     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     1.  Agreement . The Employer hereby agrees to provide to Participant the benefits described in the Plan pursuant to the terms and conditions set forth in the Plan, a copy of which has been provided to Participant and is incorporated by reference into this Agreement. The capitalized terms used in the Plan shall have the same meanings in this Agreement as assigned to them in the Plan. Participant acknowledges he or she has received a copy of the Plan.
     2.  Calculation of Supplemental Pension . For purposes of calculating the Participant’s Supplemental Pension under Section 5.2(a) of the Plan and other applicable provisions of the Plan, Covered Employment for the Participant commenced                      .
     3.  Delay in Payment of Supplemental Pension For Certain Participants . If a Participant who is a “specified employee,” as defined in § 1.409A-1(i) of the Final Regulations

1


 

under Code Section 409A, and whose Supplemental Pension would otherwise be paid or commence (the “Original Payment Date”) before a date which is at least six (6) months following the date of Participant’s termination of employment that constitutes a “separation from service,” as defined in Code Section 409A and the Final Regulations issued thereunder (“Separation from Service”), the Supplemental Pension shall be paid or commence for such Participant on the date which is six (6) months following the date of Participant’s Separation from Service (or, if earlier, the date of death of Participant), provided such six (6) month delay is required by Code Section 409A. All monthly annuity payments which are delayed for six months shall be paid in a lump sum on the date specified in this paragraph 3 for commencement of such payments. All lump sum or monthly annuity payments which are delayed as provided in this paragraph 3 shall accrue interest for the period from the Original Payment Date (or, in the case of the monthly annuity payments the first day of the month in which such payment was to be made) until the date such payment is actually made. Said interest shall be equal to the applicable segment rates as defined in Code Section 417(e)(3)(D), without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii), for the November preceding the first day of the calendar year in which Participant retires or otherwise becomes entitled to payments without regard to this paragraph 3.
     4.  Amendment or Termination of the Plan; Separation from Service or Termination of Participation Without Cause . The Employer hereby agrees that, if
     (i) the Employer amends or terminates the Plan in such a manner that results in a decrease in the amount of the benefits to be paid under the Plan to Participant,
     (ii) Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 4(e) below), or on account of LTD Disability, or
     (iii) Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause prior to Participant’s Separation from Service with the Employer,
Participant shall have the right to, and the Employer agrees to pay to Participant, any benefits accrued prior to the effective date of such amendment or termination of the Plan or of such Participant’s Separation from Service with the Employer or termination of participation in the Plan. Such benefits shall become payable, however, only upon such an event, in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the effective date of such amendment or termination of the Plan or such Participant’s Separation from Service with the Employer or termination of participation in the Plan, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder. The amount of benefits that shall be paid under this paragraph 4 shall be calculated as follows:
     (a) In the event the Employer amends the Plan and such amendment results in a decrease in the amount of the Supplemental Pension, Disability Benefit, or Death

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Benefits that would be paid under the Plan but for the amendment thereof, the amount of Participant’s benefit shall be the sum of:
     (i) The amount derived by multiplying Participant’s benefit calculated pursuant to the terms of the Plan in effect immediately prior to the amendment and based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of full years of Covered Employment Participant has prior to the effective date of the amendment, and the denominator is the total number of full years of Covered Employment Participant has; however, neither the numerator nor the denominator shall exceed 10; plus
     (ii) The amount derived by multiplying Participant’s benefit as calculated pursuant to the terms of the Plan as amended based upon Participant’s Compensation used to calculate the appropriate benefit by the following fraction: The numerator is the number of years that Participant participated in the Pension Plan after the effective date of the amendment (but this number when added to the numerator of the fraction in subparagraph (i) above, shall not exceed 10) and the denominator is the total number of full years of Covered Employment Participant has (but this number shall not exceed 10);
provided , however , that if the Plan is so amended prior to Participant being vested in his retirement benefits under the Pension Plan, Participant’s Supplemental Pension, Death Benefit or Disability Benefit payable hereunder shall be calculated solely in accordance with the terms of the Plan as amended; and provided , further , that, if such amendment occurs upon or after a “Change in Control” (as defined in subparagraph 5(b) below), Participant’s Supplemental Pension must at least equal the benefits which would be paid under Section 9.1(c) of the Plan if there was a termination of the Plan at the time of such amendment.
     (b) In the event the Employer terminates the Plan or any portion thereof after August 7, 2007, and such termination adversely affects the Disability Benefit or Death Benefits described in the Plan, Participant’s Disability Benefit and Death Benefits shall be calculated as of the date of termination of such benefit or the Plan as though the date of such termination was the date that Participant became disabled or died. Such Disability Benefit and Death Benefits shall become payable, however, only upon Participant’s disability or death occurring in accordance with the terms of the Plan or any portion thereof as in effect immediately prior to the date of its termination, except as otherwise permitted or required under Code Section 409A and the Treasury regulations issued thereunder.
     (c) In the event the Employer terminates the Plan or any portion thereof and such termination adversely affects Participant’s Supplemental Pension described in the Plan, Participant’s Supplemental Pension shall be the amount determined in accordance with Section 5.2 of the Plan except that

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     (i) It shall be based upon Participant’s Compensation as of the date of the termination of the Plan;
     (ii) If payment of the Supplemental Pension begins before Participant has ten full years of Covered Employment, the reduction referred to in Section 5.2(a)(i) of the Plan shall not apply;
     (iii) If payment of the Supplemental Pension begins before Participant attains age 62, the reductions referred to in Section 5.2(b) of the Plan shall not apply; and
     (iv) If Participant is not otherwise vested under the Pension Plan, the calculation made under Section 5.2(a)(ii) of the Plan shall be made as if he were so vested.
     (d) If, at any time prior to a “Change in Control” (as defined in subparagraph 5(b) below), Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 4(e) below), or on account of LTD Disability, or if Participant’s participation in the Plan is terminated by the Employer for any reason other than for Cause, Participant shall nevertheless be entitled to the benefits under the Plan that have accrued prior to Participant’s Separation from Service or the termination of Plan participation, the amount of such benefits to be calculated in the manner set forth in Section 5.2(c) of the Plan and payable at such time and form as otherwise provided for under the Plan; provided , however , that Participant’s right to a Supplemental Pension shall vest only if Participant has been an Eligible Employee for at least two years and is vested in his retirement benefits under the Pension Plan as of the date of such termination.
     (e) As used in this Agreement, “Cause” for Separation from Service shall mean termination upon
     (i) the willful and continued failure by Participant to substantially perform his duties with the Employer (other than any such failure resulting from Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Participant by the Employer that specifically identifies the manner in which the Employer believes that Participant has not substantially performed his duties, or
     (ii) Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Employer, monetarily or otherwise.
For purposes of this subparagraph, no act, or failure to act, on Participant’s part shall be deemed “willful” if done, or omitted to be done, by Participant in good faith and with a reasonable belief that the action or omission was in the best interests of the Employer. Notwithstanding the foregoing, Participant shall not be deemed to have been terminated

4


 

for Cause unless and until there shall have been delivered to Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board of Directors of the Employer at a meeting of such Board of Directors called and held for such purpose (after reasonable notice to Participant and an opportunity for Participant, together with Participant’s counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors that Participant was guilty of conduct set forth above in subparagraph (i) or (ii) and specifying the particulars thereof in detail.
     5.  Change in Control .
     (a) Notwithstanding anything expressly or impliedly to the contrary contained in this Agreement or the Plan, if, at any time during the three (3)-year period immediately following a Change in Control of the Employer, Participant incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause (as defined in subparagraph 4(e) above), or he is demoted or reassigned to a position that causes him to cease to be an Eligible Employee, for any reason other than for Cause (as defined in subparagraph 4(e) above), Participant shall nevertheless be entitled to receive a Supplemental Pension at such time as he becomes entitled to receive a benefit under the Plan regardless of whether Participant has been an Eligible Employee for at least two years or is vested in his retirement benefits under the Pension Plan at the time of such termination, demotion, or reassignment. If a Participant’s incurs a Separation from Service by reason of Participant’s employment being terminated involuntarily by the Employer for any reason other than for Cause, or his participation in the Plan is terminated by the Employer for any reason other than for Cause, prior to a Change in Control (whether or not a Change in Control ever occurs) and such Separation from Service or termination either (i) was at the request or direction of a person who has entered into an agreement with the Employer, the consummation of which would constitute a Change in Control, or (ii) was otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs), then such Participant’s Separation from Service or termination of participation shall be deemed to have followed a Change in Control of the Employer. Such Supplemental Pension shall be calculated in the same manner as set forth in subparagraph 4(c) above for benefits payable in the event of a termination of the Plan .
     (b) (i) As used in this Agreement, except as provided herein, a “Change in Control” of the Employer occurs upon a change in the Employer’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (A) Change in Ownership . A change in ownership of the Employer occurs on the date that any “Person” (as defined in subparagraph (ii) below), other than (1) the Employer or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Employer or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or

5


 

indirectly, by the shareholders of the Employer in substantially the same proportions as their ownership of the Employer’s stock, acquires ownership of the Employer’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Employer’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Employer’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Employer through ownership of 30% or more of the total voting power of the Employer’s stock, as discussed in subparagraph (i)(B) below, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(A); or
     (B) Change in Effective Control . Even though the Employer may not have undergone a change in ownership under subparagraph (i)(A) above, a change in the effective control of the Employer occurs on either of the following dates:
     (1) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Employer’s stock possessing 30 percent or more of the total voting power of the Employer’s stock. However, if any Person owns 30% or more of the total voting power of the Employer’s stock, the acquisition of additional control of the Employer by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (i)(B)(1); or
     (2) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (C) Change in Ownership of Substantial Portion of Assets . A change in the ownership of a substantial portion of the Employer’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the

6


 

most recent acquisition by such Person) assets of the Employer, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Employer’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Employer immediately after the transfer, through a transfer to (1) a shareholder of the Employer (immediately before the asset transfer) in exchange for or with respect to the Employer’s stock; (2) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Employer; (3) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock; or (4) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Employer’s outstanding stock.
     (ii) For purposes of subparagraph (i) above,
     (A) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (B) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (iii) The provisions of this subparagraph 5(b) shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this subparagraph 5(b) shall be in compliance with the requirements of said Code Section and said Regulations.
     6.  Limitations . Except as otherwise provided in paragraph 5 of this Agreement, Participant agrees that nothing in this Agreement or the Plan shall entitle him, or be deemed to entitle him, to receive a Supplemental Pension under the Plan if:
     (a) he has not met the requirements for a Supplemental Pension as set forth in the Plan,
     (b) his employment with the Employer is terminated prior to his reaching the age of eligibility for the immediate commencement of his Pension Plan benefit due to resignation, or

7


 

     (c) his employment with the Employer or participation in the Plan is terminated for Cause (as defined in subparagraph 4(e) above).
     7.  Amendment or Termination . No amendment or termination of the Plan by the Employer shall constitute an amendment or termination of this Agreement. This Agreement may be amended or modified only by the written agreement of the parties hereto, and will terminate only upon the occurrence of the earlier of the following events: (a) the execution of a written agreement to terminate this Agreement signed by all of the parties hereto, (b) the satisfaction of all of the Employer’s obligations to Participant under the Plan and this Agreement, (c) the termination by Participant of Participant’s employment with the Employer by resignation effective prior to Participant reaching age 55, unless such resignation occurs after a Change in Control, or (d) the termination for Cause of Participant’s employment with the Employer. Notwithstanding any of the terms and conditions of this Participation Agreement or Section 9.1 of the Plan to the contrary, the Board of Directors reserves the right, in its sole discretion, to amend the Plan and/or this Participation Agreement in any manner it deems necessary or desirable in order to comply with or otherwise address issues resulting from Code Section 409A.
     8.  Funding . Not later than the time each Participant who elected to receive his Supplemental Pension in the form of a monthly annuity provided for in Section 5.3(a)(i), (ii) or (iv) of the Plan Retires or becomes eligible to receive an unreduced Supplemental Pension under the Plan, whichever occurs first, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of Participant’s accrued Supplemental Pension. Each Participant who elected or is otherwise entitled to receive his Supplemental Pension in a lump sum payment shall not, except as provided below, have any amount contributed to a trust or other funding arrangement on his behalf pursuant to this paragraph 8. Notwithstanding the foregoing, immediately upon a Change in Control, the Employer shall contribute to a trust or other funding arrangement an amount necessary to fund 100% of the then-present value of all Supplemental Pension benefits (vested and unvested) payable under this Agreement and/or the Plan to Participant, regardless of whether Participant is then eligible to Retire or to receive an unreduced Supplemental Pension and regardless of the form in which such Supplemental Pension is to be paid. The amount required to be funded by this paragraph 8 shall be calculated in accordance with paragraph 9 hereof. The Employer shall review the funding status of the trust or other funding arrangement established under this paragraph 8 on an annual basis and shall make contributions thereto as may be required to maintain the value of the assets thereof at no less than 100% of the then-present value of all such Supplemental Pension benefits.
     9.  Calculation of Funding Obligations . The Employer shall calculate its funding obligations under this Agreement and the Plan solely by using the actuarial assumptions and methodology set forth in Exhibit C to the Plan. Upon and after a Change in Control of the Employer which occurs at a time when Participant is an Eligible Employee, the actuarial assumptions and methodology set forth in Exhibit C may be changed with respect to Participant or, if applicable, his Beneficiary, only with Participant’s, or, if applicable, his Beneficiary’s, written consent.

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     10.  Confidential Information .
     (a) Participant shall not disclose or use at any time, either during employment or thereafter, any Confidential Information (as defined below) of which Participant is or becomes aware, whether or not such information is developed by him, except to the extent that such disclosure or use is directly related to and required by Participant’s performance in good faith of duties assigned to Participant by the Employer. Participant will take all appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Participant shall deliver to the Employer at the termination of employment or at any time the Employer may request all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof, including electronic copies) relating to the Confidential Information, work product or the business of the Employer or any of its Subsidiaries which he may then possess or have under his control.
     (b) As used in this Agreement, the term “Confidential Information” means information that is not generally known to the public and that is used, developed or obtained by the Employer in connection with its business, including but not limited to (i) information, observations and data obtained by Participant while employed by the Employer and its predecessors (including information, observations and data obtained prior to the date of this Agreement), concerning the business or affairs of the Employer, (ii) products or services, (iii) fees, costs and pricing structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports, (vii) computer software, including operating systems, applications and program listings, (viii) flow charts, manuals and documentation, (ix) data bases, (x) accounting and business methods, (xi) inventions, devices, new developments, methods and processes, whether patentable or unpatentable and whether or not reduced to practice, (xii) customers and clients and customer or client lists (including names of contact persons, purchasing patterns or preferences, past purchase and sale history and other information), (xiii) other copyrightable works, (xiv) all production methods, processes, technology and trade secrets, (xv) business strategies, acquisition plans and candidates, financial or other performance data and personnel lists and data, and (xvi) all similar and related information in whatever form. Confidential Information will not include any information that has been published in a form generally available to the public, or has become otherwise generally known by the public (in each case, through no fault of Participant) prior to the date Participant proposes to disclose or use such information. Participant shall not disclose Confidential Information unless it is required to be disclosed by law, regulation or an order of a court or other governmental entity. In the event that an action is initiated pursuant to which Participant may become legally compelled to disclose all or any portion of the Confidential Information, he shall provide the Employer with prompt notice thereof, so that the Employer may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, Participant shall furnish only that portion of the Confidential Information which is

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legally required and shall exercise his best efforts to obtain reliable assurances that confidential treatment will be afforded such portion of the Confidential Information. Confidential Information will not be deemed to have been published merely because individual portions of the information have been separately published, but only if all material features comprising such information have been published in combination.
     11.  Annual Statements . As soon as practicable after the end of each Plan Year, the Employer shall deliver to Participant or, if applicable, his Beneficiary, a statement containing (a) the present value of the Employer’s future benefit obligations to Participant, or, if applicable, his Beneficiary; (b) the actuarial assumptions used to calculate the present value of the Employer’s future benefit obligations under the Plan; and (c) the aggregate current value of the assets, if any, held in a trust or other funding arrangement which are sufficient to fund 100% of the then-present value of the accrued Supplemental Pension for any Participant, Retired Participant, or Beneficiary for whom benefits are paid in the form of an annuity and for whom assets are required to be held in trust.
     12.  No Guarantee of Employment . Nothing contained in this Agreement shall be construed as a contract of employment between the Employer and Participant, or as a right of Participant to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge Participant with or without cause.
     13.  Legal Fees and Expenses . The Employer agrees to pay any and all legal fees and expenses incurred by Participant in seeking to obtain or enforce any right or benefit provided by this Agreement.
     14.  Capitalized Terms . Each capitalized term used in this Agreement that is not otherwise defined herein shall have the same meaning attributed to it in the Plan.
     15.  Agreement Binding on Successors to the Employer . Any successor to the Employer hereunder, which successor continues or acquires any of the business of the Employer, shall be bound by the terms of this Agreement in the same manner and to the same extent as the Employer.
     16.  Prior Agreements Superseded . The terms of this Agreement supersede the terms of all prior Participation Agreements between Participant and the Employer.
     17.  Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of Texas.
     IN WITNESS WHEREOF, the parties hereto have executed this Participation Agreement as of the date first written above.
           
PARTICIPANT     ATMOS ENERGY CORPORATION
 
 
    By:      
         

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EXHIBIT B
ATMOS ENERGY CORPORATION
SUMMARY OF ACTUARIAL ASSUMPTIONS
FOR DETERMINING
LUMP SUM DISTRIBUTIONS
AND
OPTIONAL ANNUITY FORMS
Actuarial assumptions for determining lump sums:
  (i) Interest:  The applicable segment rates as defined in Code Section 417(e)(3)(D) for the November preceding the first day of the calendar year in which the lump sum is paid and without regard to the phase-in percentages specified in Code Section 417(e)(3)(D)(iii).
 
  (ii) Mortality:   The applicable mortality table as defined in Code Section 417(e)(3), and amended by the Pension Protection Act.
Actuarial assumptions for conversion of a life annuity to an optional form of payment other than a lump sum:
  (i) Interest:   6.0% per year.
 
  (ii) Mortality:   1983 Unisex Group Annuity Mortality (50% 1983 Group Annuity Mortality for males, 50% 1983 Group Annuity Mortality for females).

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EXHIBIT C
ATMOS ENERGY CORPORATION
SUMMARY OF ACTUARIAL ASSUMPTIONS AND METHODS
FOR
DETERMINING SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TRUST
ANNUAL FUNDING LIABILITIES
Actuarial Assumptions
     
Discount Rate  
8%
   
 
Mortality  
 
Prior to Age 62
 
None
After Age 62
 
Code Section 417(e)(3)
   
Applicable Mortality Table*
   
 
Salary Scale  
0%
   
 
Benefit Percentage  
60%
 
*   The table prescribed in Rev. Rul. 2001-62, or such other mortality table which in the future may be specified from time to time as the applicable mortality table for purposes of Code Section 417(e)(3).
Method for Determining Liabilities
The liability determined is the present value as of the valuation date of the projected age 62 Supplemental Executive Retirement Plan benefit. The projected age 62 benefit is based on Supplemental Executive Retirement Plan compensation determined as the sum of (1) and (2) as follows:
  (1)   The greater of (A) Participant’s annual base salary at the date of his termination of employment, or (B) the average of the Participant’s annual base salary for the highest three (3) calendar years (whether or not consecutive) of the Participant’s employment with the Employer.
 
  (2)   The greater of (A) the Participant’s last Performance Award or (B) the average of the highest three (3) Performance Awards (whether or not consecutive).
     The qualified plan offset is the projected age 62 qualified plan benefit with no salary scale or wage base projections.

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Exhibit 10.10
ATMOS ENERGY CORPORATION EQUITY INCENTIVE
AND DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
     The Atmos Energy Corporation Equity Incentive and Deferred Compensation Plan for Non-Employee Directors (the “Plan”) is an amendment and restatement of the Atmos Energy Corporation Deferred Compensation Plan for Outside Directors adopted by the Company on May 10, 1990, and subsequently amended and restated on August 12, 1998 and approved by the Board of Directors on February 10, 1999. This Plan document is designed to supersede the prior plan document and includes all terms and provisions of the Plan. This Plan was adopted by the Board of Directors of Atmos Energy Corporation, a Texas and Virginia corporation (hereinafter called the “Company”), on August 7, 2007.
ARTICLE 1
PURPOSE
     The Plan, as amended, allows each non-employee Director to defer receipt of his annual retainer and meeting fees, to invest his deferred fees in either a cash account or a stock account, and to receive an annual grant of share units to be credited to his stock account for each year the non-employee Director serves on the Company’s Board of Directors. The Plan, as amended, is intended to encourage qualified individuals to accept nominations as Directors of the Company and to strengthen the mutuality of interests between the non-employee Directors and the Company’s other shareholders.
ARTICLE 2
DEFINITIONS
     The following are defined terms wherever they appear in the Plan:
     2.1 “Board of Directors” or “Board” shall mean the Board of Directors of Atmos Energy Corporation.
     2.2 (a) “Change in Control” of the Company occurs upon a change in the Company’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
     (i) Change in Ownership . A change in ownership of the Company occurs on the date that any “Person” (as defined in Section 2.2(b) below), other than (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the Company’s stock, acquires ownership of the Company’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Company’s stock. However, if any Person is

 


 

considered to own already more than 50% of the total fair market value or total voting power of the Company’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Company through ownership of 30% or more of the total voting power of the Company’s stock, as discussed in paragraph (ii) below, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this paragraph (i); or
     (ii) Change in Effective Control . Even though the Company may not have undergone a change in ownership under paragraph (i) above, a change in the effective control of the Company occurs on either of the following dates:
     (A) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Company’s stock possessing 30 percent or more of the total voting power of the Company’s stock. However, if any Person owns 30% or more of the total voting power of the Company’s stock, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (ii)(A); or
     (B) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (iii) Change in Ownership of Substantial Portion of Assets. A change in the ownership of a substantial portion of the Company’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Company’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, through a transfer to (A) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (B) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (C) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock; or (D) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock.

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     (b) For purposes of Section 2.2(a) above,
     (i) “Person” shall have the meaning given in Code Section 7701(a)(1). Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
     (ii) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (c) The provisions of this Section 2.2 shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this Section 2.2 shall be in compliance with the requirements of said Code Section and said Regulations.
     2.3 “Cash Account” means the Sub-Account under the Plan to which the Director may voluntarily elect to defer annual retainer and meeting fees for payment at a specified future date, under the terms and provisions of the Plan.
     2.4 “Code” means the Internal Revenue Code of 1986, as amended, together with the published rulings, regulations, and interpretations duly promulgated thereunder.
     2.5 “Company” means Atmos Energy Corporation, a Texas and Virginia Corporation, and any successor entity.
     2.6 “Common Stock” means the Common Stock of the Company, with no par value (stated value of $.005 per share), or such other security or right or instrument into which such Common Stock may be changed or converted in the future.
     2.7 “Director” means a member of the Board of Directors who is not employed by the Company or any of its Subsidiaries.
     2.8 “Fair Market Value” of a share of Common Stock is the mean of the highest and lowest prices per share on the New York Stock Exchange Consolidated Tape, or such reporting service as the Board may select, on the appropriate date, or in the absence of reported sales on such day, the most recent previous day for which sales were reported.
     2.9 “Plan” means the Atmos Energy Corporation Equity Incentive and Deferred Compensation Plan for Non-Employee Directors, as described herein and as amended from time to time.
     2.10 “Plan Benefits” means the benefits described in Articles 5 and 6 hereof.
     2.11 “Plan Year” means the calendar year.
     2.12 “Share Unit” means a notional share that is a fictitious share whose value at any point in time is always equal to the Fair Market Value of a share of the Common Stock of the Company at such point in time.

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     2.13 “Stock Account” means the Sub-Account under the Plan to which the Director may voluntarily elect to defer annual retainer and meeting fees, and to which the periodic grants of Share Units are credited, for payment at a specified future date, under the terms and provisions of the Plan.
     2.14 “Sub-Account” means the Cash Account, the Stock Account, or both.
     2.15 “Termination of Service” means with respect to each Director a “separation from service” as a Director, as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto.
ARTICLE 3
ADMINISTRATION
     The Plan shall be administered by the Board of Directors. The Board of Directors shall have the full authority to construe and interpret the Plan, and any action of the Board of Directors with respect to the Plan shall be final, conclusive, and binding on all persons. Subject to adjustment as provided in Section 7.8 hereof, the total number of shares of Common Stock reserved for issuance under the Plan shall be 150,000.
ARTICLE 4
GRANTS OF SHARE UNITS
     After the effective date of the Plan (as defined in Section 7.11), each Plan Year, the Board may grant to each Director such number of Share Units, if any, as the Board may determine. The grants will occur on the 30 th day following the Company’s Annual Meeting of Shareholders each Plan Year.
ARTICLE 5
SUB-ACCOUNT CREDITS AND INVESTMENTS
     5.1 Sub-Accounts . On or before December 31 of the calendar year immediately preceding the start of the next Plan Year, each Director participating in the Plan shall designate the Sub-Account into which any retainer, meeting fees, or other compensation for services as a Director shall be credited for the Plan Year. The Director may elect to have the retainer, meeting fees, and other compensation credited to either Sub-Account in increments of ten percent (10%), provided that fees may only be allocated to the Stock Account in whole Share Units. Except as otherwise provided herein, retainer, meeting fees, and other compensation allocated to a Sub-Account may not thereafter be allocated to the other Sub-Account.
     5.2 Cash Account . The amount of retainer, meeting fees, and other compensation allocated as a credit to the Cash Account shall be converted to a cash balance to be credited with interest in the means set forth below.
     (a) The balance in the Cash Account prior to any additional allocations or credits of fees and other compensation for such month, if any, shall be credited with interest equal to one-twelfth of the Annual Interest Rate.

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     (b) The Annual Interest Rate for each applicable Plan Year will be equal to the sum of (i) 2.5 percent, plus (ii) the annual yield reported on a 10-year Treasury Bond for the first business day of January for each Plan Year, as reported in the Wall Street Journal.
     5.3 Stock Account . The amount of retainer, meeting fees, and other compensation allocated as a credit to the Stock Account shall be converted to Share Units as described below. Any retainer, meeting fees, and other compensation payable for services in any month or fiscal year quarter shall be converted to a number of whole Share Units on the last trading day of that month or quarterly period. The amount attributable to any fractional Share Units remaining after conversion shall be allocated to the Cash Account. Share Units shall be credited with dividend equivalents as and when dividends are declared on shares of Common Stock. Such dividend equivalent credits shall be converted to whole Share Units on the last trading day of the month in which such dividends are paid. The amount attributable to any fractional Share Units remaining after conversion shall be allocated to the Cash Account.
ARTICLE 6
PLAN BENEFITS
     6.1 Form . Plan Benefits of a Director shall be comprised of two forms. Plan Benefits paid from the Cash Account shall be paid in the form of cash. Plan Benefits paid from the Stock Account shall be paid in the form of shares of Common Stock equal in number to the Share Units in the Director’s Stock Account.
     6.2 Distribution .
     (a) From and after August 7, 2007, and except as otherwise provided in Section 6.2(b), a Director’s Plan Benefits payable from either the Cash Account or the Stock Account, shall be distributed in a single lump sum at the time of the Director’s Termination of Service.
     (b) (i) Each Director who has not incurred a Termination of Service as of August 7, 2007 shall be given an election to change his or her form of distribution of Plan Benefits from the form previously elected to either (i) a lump sum payment made within 10 business days following the date of the Director’s Termination of Service, or (ii) in up to five (5) equal annual installments beginning within 10 business days following the date of the Director’s Termination of Service and on each anniversary of said date of Termination of Service, as the case may be. Notwithstanding the foregoing election, (A) if a Director who previously had elected to receive his benefits in the form of installment payments has made the election provided for in this Section 6.2(b)(i) to receive a lump sum payment, and that Director becomes entitled to receive a lump sum payment in 2007, such lump sum cannot be paid prior to January 1, 2008, and such Director shall receive the installment payments previously elected until January 1, 2008, at which time a lump sum payment of the present value of the remaining installments shall be made to such Director on or prior to January 15, 2008; and (B) if a Director who previously had elected to receive his benefits in the form of a lump sum payment has made the election provided for in this Section 6.2(b)(i) to receive his Plan Benefits in installment payments, and that Director becomes entitled to receive payment of his Plan Benefits in 2007, such Director shall receive a lump sum payment of his Plan Benefits in 2007 instead of the installment payments so elected. The foregoing special election being provided for 2007 is intended to comply with the transition relief set forth in IRS Notice 2006-79, and shall be interpreted so as to be consistent and in conformity with the requirements of said transition relief.

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     (ii) Any election pursuant to Section 6.2(b)(i) may be changed at any time on and after January 1, 2008 and prior to December 31, 2008; provided, however, (A) if a Director who previously had elected to receive his benefits in the form of installment payments pursuant to Section 6.2(b)(i) has made the election provided for in this Section 6.2(b)(ii) to receive a lump sum payment, and that Director becomes entitled to receive a lump sum payment in 2008, such lump sum cannot be paid prior to January 1, 2009, and such Director shall receive the installment payments previously elected until January 1, 2009, at which time a lump sum payment of the present value of the remaining installments shall be made to such Director on or prior to January 15, 2009; and (B) if a Director who previously had elected to receive his benefits in the form of a lump sum payment pursuant to Section 6.2(b)(i) has made the election provided for in this Section 6.2(b)(ii) to receive his Plan Benefits in installment payments, and that Director becomes entitled to receive payment of his Plan Benefits in 2008, such Director shall receive a lump sum payment of his Plan Benefits in 2008 instead of the installment payments so elected. The foregoing special election being provided for 2008 is intended to comply with the transition relief set forth in IRS Notice 2007-86, and shall be interpreted so as to be consistent and in conformity with the requirements of said transition relief.
     (c) In the case of the death of a Director, the Director’s Plan Benefits shall be distributed, within a reasonable time as determined by the Company, after the Director’s death to the Director’s beneficiary or beneficiaries, as specified by the Director on a form furnished by and filed with the Corporate Secretary of the Company. If no beneficiary has been designated by the Director or if no designated beneficiary survives the Director, the undistributed balance of his Plan Benefit shall be distributed to the Director’s surviving spouse as beneficiary if such spouse is still living or, his children, if any, per stripes as beneficiary, or, if none, to the Director’s estate as beneficiary. Any such Plan Benefits shall be payable in the form elected by the Director, if an election was permitted as provided in Section 6.2(b).
ARTICLE 7
GENERAL PROVISIONS AND TERMS
     7.1 Change in Control . In the event of an occurrence of a Change in Control as defined herein, the Company or its successor organization shall be required to fully fund the Cash Account and Stock Account Plan Benefits through a grantor trust arrangement established by the Company for the express purpose of the Plan. Such financing of the grantor trust shall occur within 20 business days following the date of the Change in Control and within 10 business days following any subsequent increase in the value of the Cash Account or Stock Account.
     7.2 Nontransferability . Except as provided in Article 6.2(c) above, no payment of any Plan Benefit of a Director shall be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily or involuntarily or by operation of law. Any act in violation of this subsection shall be void.
     7.3 Compliance with Legal and Trading Requirements . The Plan shall be subject to all applicable laws, rules and regulations, including but not limited to, federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required. No provision of the Plan shall be interpreted or construed to obligate the Company to register any shares of Common Stock under federal or state securities laws. The transfer by a Director of shares of Common Stock distributed pursuant to the Plan will be subject to such restrictions as the Company deems

6


 

necessary or desirable in connection with federal or state securities laws, and Common Stock certificates will bear a legend setting forth any such restriction.
     7.4 Taxes . The Company is authorized to withhold from any payment made under this Plan any amount of withholding and other taxes due in connection therewith, and to take such other action as the Company may deem advisable to enable the Company and a Director to satisfy obligations for the payment of any withholding taxes and other tax obligations relating thereto.
     7.5 Amendment or Termination . The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of shareholders of the Company or individual Directors; provided, however, that, (i) without the consent of an affected Director, no amendment, alteration, suspension, discontinuation, or termination of the Plan may materially impair the rights or, in any other manner, materially and adversely affect the rights of such Director hereunder to the Plan Benefits then credited to his Sub-Accounts, and (ii) no amendment, alteration, suspension, discontinuation, or termination of the Plan shall change the time or form of payment hereunder, unless such change is otherwise in compliance with the requirements of Code Section 409A and the Treasury Regulations issued thereunder.
     7.6 Unfunded Status of Awards . This Plan is intended to constitute an “unfunded” plan of deferred compensation. With respect to any payments not yet made to a Director, nothing contained in the Plan shall give any such Director any rights that are greater than those of a general unsecured creditor of the Company; provided, however, subject to Article 7.1 hereof, that the Company may authorize the creation of trusts or make other arrangements to meet the Company’s obligations under the Plan to deliver cash or other property, which trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Company otherwise determines with the consent of each affected Director.
     7.7 Nonexclusivity of the Plan . The adoption of the Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other compensation arrangements and other awards otherwise than under the Plan as it may deem desirable, and such arrangements and other awards may be either applicable generally or only in specific cases.
     7.8 Adjustments . In the event that subsequent to the effective date of the Plan any dividend in shares of Common Stock, recapitalization, Common Stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or exchange, or other such change, affects the shares of Common Stock such that they are increased or decreased or changed into or exchanged for a different number or kind of shares of Common Stock, other securities of the Company or of another corporation or other consideration, then in order to maintain the proportionate interest of the Directors and preserve the value of the Directors’ Share Units and to maintain the value of the Plan there shall automatically be substituted (i) for each Share Unit a new Share Unit and (ii) for the number of shares of Common Stock set forth in Section 3 above a number of shares of Common Stock or other consideration, in the case of (i) and (ii) above, representing the number and kind of shares of Common Stock, other securities or other consideration into which each outstanding share of Common Stock shall be changed or for which each share of Common Stock shall be exchanged. The substituted units shall be subject to the same terms and conditions as the original Share Units.
     7.9 No Right to Remain on the Board . Neither the Plan nor the crediting of Share Units under the Plan shall be deemed to give any individual a right to remain a Director of the Company or create any obligation on the part of the Board to nominate any Director for reelection by the shareholders of the Company.
     7.10 Governing Law . The validity, construction, and effect of the Plan shall be determined in accordance with the laws of Texas without giving effect to principles of conflict of laws.

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     7.11 Effective Date . The Plan shall become effective upon approval of this Plan by the shareholders of the Company.
     7.12 Titles and Headings . The titles and heading of those Articles in the Plan are for convenience of reference only. In the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
     7.13 Indemnification . No member of the Board, nor any officer or Employee of the Company acting on behalf of the Board, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board and each and any officer or Employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation. Notwithstanding the foregoing, to the extent it is determined that the indemnification provided herein constitutes a deferral of compensation for purposes of Code Section 409A, then (i) the amount provided as indemnification during a calendar year shall not affect the amount eligible for indemnification in any other calendar year, and (ii) payment of indemnification amounts shall be made on or before the last day of the calendar year following the calendar year in which such amounts subject to indemnification were incurred.
     IN WITNESS WHEREOF, the Company has caused this instrument to be executed this 10 th day of September, 2008 by its President pursuant to prior action taken by the Board.
         
  ATMOS ENERGY CORPORATION
 
 
  By:   /s/ ROBERT W. BEST    
    Robert W. Best   
    Chairman, President and Chief Executive Officer   
 
Attest:
         
     
/s/ DWALA KUHN      
Corporate Secretary     
     
 

8

Exhibit 10.12(b)
AMENDMENT
TO THE
ATMOS ENERGY CORPORATION
1998 LONG-TERM INCENTIVE PLAN
(As Amended and Restated February 9, 2007)
     Pursuant to the authority set forth in Article 12 of the Atmos Energy Corporation 1998 Long-Term Incentive Plan, as amended and restated effective February 9, 2007 (the “Plan”), the Plan is amended, effective as of August 7, 2007, as follows:
     1. Section 2.6 is amended by striking said section and substituting in lieu thereof the following:
          2.6 (a) “Change in Control” of the Company occurs upon a change in the Company’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
          (i) Change in Ownership . A change in ownership of the Company occurs on the date that any “Person” (as defined in Section 2.6(b) below), other than (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the Company’s stock, acquires ownership of the Company’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Company’s stock. However, if any Person is considered to own already more than 50% of the total fair market value or total voting power of the Company’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Company through ownership of 30% or more of the total voting power of the Company’s stock, as discussed in paragraph (ii) below, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this paragraph (i); or
          (ii) Change in Effective Control . Even though the Company may not have undergone a change in ownership under paragraph (i) above, a change in the effective control of the Company occurs on either of the following dates:
          (A) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Company’s stock possessing 30 percent or more of the total voting power of the

 


 

Company’s stock. However, if any Person owns 30% or more of the total voting power of the Company’s stock, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (ii)(A); or
          (B) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
          (iii) Change in Ownership of Substantial Portion of Assets. A change in the ownership of a substantial portion of the Company’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Company’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, through a transfer to (A) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (B) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (C) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock; or (D) an entity, at least 50% of the total value or voting power of the stock of which is owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock.
          (b) For purposes of subparagraph (a) above
          (i) “Person” shall have the meaning given in Section 7701(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
          (ii) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.

 


 

          (c) The provisions of this Section 2.6 shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this Section 2.6 shall be in compliance with the requirements of said Code Section and said Regulations.
     2. Section 2.36 is amended by striking said section and substituting in lieu thereof the following:
     2.36 “Termination of Service” means with respect to each Participant who is an Employee or Non-employee Director a “separation from service” as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto
     3. Section 2.37 is amended by striking said section and substituting in lieu thereof the following:
     2.37 “Total and Permanent Disability” means the termination of a Participant’s active employment with the Company on account of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, for which the employee is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company.
     IN WITNESS WHEREOF, the Company has caused this AMENDMENT TO THE ATMOS ENERGY CORPORATION 1998 LONG-TERM INCENTIVE PLAN (AS AMENDED AND RESTATED FEBRUARY 9, 2007), to be executed in its name and on its behalf this 10 th day of September, 2008, effective as of the date provided herein.
         
  ATMOS ENERGY CORPORATION
 
 
  By:   /s/ ROBERT W. BEST    
    Robert W. Best   
    Chairman, President and
Chief Executive Officer 
 
 

 

Exhibit 10.12(d)
AWARD AGREEMENT OF RESTRICTED STOCK WITH TIME-LAPSE VESTING
UNDER THE ATMOS ENERGY CORPORATION
1998 LONG-TERM INCENTIVE PLAN
     This Award Agreement of Restricted Stock with time-lapse vesting is dated as of April 29, 2008, by and between, Atmos Energy Corporation, a Texas and Virginia corporation (the “Company”), and [name of employee] (“Grantee”), pursuant to the Company’s 1998 Long-Term Incentive Plan (the “Plan”). Capitalized terms that are used, but not defined, in this document shall have the meaning set forth in the Plan.
     Pursuant to authorization by the Human Resources Committee of the Board of Directors (the “Committee”), which has been designated by the Board of Directors of the Company to administer the Plan, the parties agree as follows.
1.   Grant of Shares .
     The Company hereby grants to the Grantee a total of [number of shares] of Common Stock of the Company (“Shares’’) for no consideration from the Grantee, with the restrictions set forth below.
2.   Legends on Certificates .
     Each certificate representing the Shares shall be registered in the name of the Grantee and shall bear the following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions hereof (any such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed):
     On the face of the certificate:
“Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate.”
     On the reverse:
“The shares of stock evidenced by this certificate are subject to and transferrable only in accordance with that certain Atmos Energy Corporation 1998 Long-Term Incentive Plan, a copy of which is on file at the principal office of the Company in Dallas, Texas. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan.”
3.   Restrictions on Alienation of Shares .
     Shares awarded hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated in any manner, whether voluntarily, by operation of law, or otherwise, until

 


 

the restrictions on the Shares are removed in the manner provided for below and the Shares are delivered to the Grantee.
4.   Forfeiture of Shares .
     All Shares awarded will be forfeited if, prior to the removal of restrictions on the Shares awarded hereunder as provided in Section 8 below, the Grantee voluntarily or involuntarily terminates employment for any reason other than as described below in Section 5. Each Grantee, by his or her acceptance of the Shares, shall irrevocably grant to the Company a power of attorney to transfer any Shares forfeited to the Company and agrees to execute any documents requested by the Company in connection with such forfeiture and transfer. Such provisions with respect to forfeited Shares shall be specifically performable by the Company in a court of equity or law. Upon any forfeiture, all rights of the Grantee with respect to the forfeited Shares shall cease and terminate, without any further obligation on the part of the Company.
5.   Removal of Restrictions due to Death, Terminations due to Total and Permanent Disability and Retirement, Certain Involuntary Terminations, and Terminations following a Change in Control .
     At the time and on the date of the Grantee’s death, termination of employment due to Total and Permanent Disability, or Retirement (but not before attaining the age of 55, unless expressly approved in advance by the Company), involuntary termination of employment due to a general reduction in force or specific elimination of the Grantee’s job, or termination of employment for any reason following a Change in Control, while employed by the Company or a Subsidiary, all restrictions placed on each Share awarded shall be removed and such Shares shall be delivered to the Grantee or to his legal representatives, beneficiaries or heirs. From and after such date, the Grantee or the Grantee’s legal representatives, beneficiaries or heirs, as the case may be, shall have full rights of transfer or resale with respect to such stock subject to applicable state and federal regulations.
6.   Custody of Share Certificates .
     Share certificates representing the number of Shares awarded shall be registered in the Grantee’s name, but the certificates representing the Shares shall be held in the custody of the Company for the Grantee’s account. During such time, the Grantee shall have all of the rights of a shareholder of the Company with respect to the Shares, including the right to vote the Shares. All dividends and distributions (other than stock dividends and distributions) on Shares held in the custody of the Company shall be paid to the Grantee, however, regardless of the fact that the Shares are being held on behalf of the Grantee. Any new, additional, or different shares or securities issued (due to a stock split, stock dividend, or other stock distribution) with respect to the Shares previously awarded under the Plan shall be held by the Company as additional Shares for the Grantee’s account and shall have the same restrictions as the underlying Shares with respect to which such new, additional, or different shares or securities were issued. At such time as restrictions are removed from any portion of the Shares held by the Company for the Grantee, certificates representing such Shares shall be delivered free of all restrictions to the Grantee or to the Grantee’s legal representatives, beneficiaries or heirs.

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7.   Adjustment Upon Changes in Stock.
     If there shall be any change in the number of shares of Common Stock of the Company outstanding resulting from subdivision, combination, or reclassification of shares, or through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure, an appropriate adjustment in the number of Shares with respect to which restrictions have not lapsed shall be made by the Committee.
8.   Removal of Restrictions.
     The Grantee shall be entitled to delivery of the Shares, free and clear of all restrictions, if the Grantee has been an employee of the Company or a Subsidiary with continuous service of three years from the date of the Grant. Notwithstanding the foregoing provision, the Grantee shall, in the event of a “Change of Control” of the Company, as such term is defined in Section 2.6 of the Plan, receive free of restriction all Shares granted hereunder within 60 days after the time such Change of Control is deemed to have occurred. Notwithstanding anything contained in this section to the contrary, the Shares acquired by virtue of this Grant may not be sold during the first six (6) months after the date hereof if that would subject the Grantee to liability under Section 16 of the Securities Exchange Act of 1934, as amended.
9.   Stock Withholding Requirement.
     Upon the removal or lapse of the restrictions on the Shares, the number of Shares issuable by the Company to the Grantee shall be subject to applicable withholding requirements for income and employment taxes arising from the removal or lapse of the restrictions on the Shares.
      IN WITNESS WHEREOF , the Company and the Grantee have executed this Agreement as of the date first written above.
                 
GRANTEE:           ATMOS ENERGY CORPORATION
 
               
Signature:
          By:    
 
               
 
              Robert W. Best
Printed Name:
              Chairman, President and Chief Executive Officer
 
               

3

Exhibit 10.12(e)
AWARD AGREEMENT OF PERFORMANCE-BASED
RESTRICTED STOCK UNITS
UNDER THE ATMOS ENERGY CORPORATION
1998 LONG-TERM INCENTIVE PLAN
     This Award Agreement of Performance-Based Restricted Stock Units is dated as of April 29, 2008, by and between Atmos Energy Corporation, a Texas and Virginia corporation (the “Company”), and [name of employee] (“Grantee”), pursuant to the Company’s 1998 Long-Term Incentive Plan (the “Plan”). Capitalized terms that are used, but not defined, in this document shall have the meaning set forth in the Plan.
     Pursuant to authorization by the Human Resources Committee of the Board of Directors (the “Committee”), which has been designated by the Board of Directors of the Company to administer the Plan, the parties agree as follows.
1.   Grant of Units .
     The Company hereby grants to the Grantee a total of [number of RSU] performance-based restricted stock units (“Units”) under the Plan, for no consideration from the Grantee, with the restrictions set forth below. Each such Unit shall be a notional share of common stock of the Company (“Common Stock”), with the value of each Unit being equal to the fair market value of a share of Common Stock at any time.
2.   Restrictions on Alienation of Units .
     Units awarded hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated in any manner, whether voluntarily, by operation of law, or otherwise, until the restrictions on the Units are removed and the Units are delivered to the Grantee in the form of shares of Common Stock in the manner described below in Section 8.
3.   Number of Units Awarded .
     The number of Units ultimately to be awarded to the Grantee upon vesting is contingent upon the cumulative amount of earnings per share achieved by the Company for the three year measurement cycle, Fiscal Years 2008 through 2010 (October 1, 2007 through September 30, 2010). The percentage of Units earned for each level of the cumulative amount of earnings per share is illustrated in the performance schedule below. In addition, should the performance levels achieved be between the stated criteria below, straight-line interpolation will be used. For example, should the cumulative amount of earnings per share for the three-year period be $[      ], the percentage of Units earned would be 125% of the number of Units originally granted.

 


 

Performance-Based Restricted Stock Units
Performance Schedule for Grant of Performance Period FY 2008-2010
         
        Restricted Stock Units
Performance Level   Cumulative 3-Yr. EPS   Earned
Below Threshold   Less than $______   0%
Threshold   $______   50%
Target   $______   100%
Maximum   $______   150%
4.   Forfeiture of Units .
     All Units granted will be forfeited if, prior to the removal of restrictions on the Units awarded hereunder as provided below in Section 8, the Grantee voluntarily or involuntarily terminates employment for any reason other than as described below in Section 5. Each Grantee, by his or her acceptance of the Units, agrees to execute any documents requested by the Company in connection with such forfeiture. Such provisions with respect to forfeited Units shall be specifically performable by the Company in a court of equity or law. Upon any forfeiture, all rights of the Grantee with respect to the forfeited Units shall cease and terminate, without any further obligation on the part of the Company.
5.   Removal of Restrictions due to Death, Terminations due to Total and Permanent Disability and Retirement, Certain Involuntary Terminations, and Terminations following a Change in Control .
     At the time and on the date of the Grantee’s death, termination of employment due to Total and Permanent Disability or Retirement (but not before attaining the age of 55, unless expressly approved in advance by the Company), involuntary termination of employment due to a general reduction in force or specific elimination of the Grantee’s job, or termination of employment for any reason following a Change in Control, while employed by the Company or a Subsidiary, all restrictions placed on each Unit awarded shall be removed, and the measurement cycle for purposes of Section 6 and Section 8 below will be deemed to have ended. The amount of the award of Units shall be prorated, which will be the product of the “Target” performance level discussed above in Section 3, multiplied by the ratio of actual months of service to 36 months of the original measurement cycle, with the resulting product being increased, if appropriate, as provided below in Section 6. The Grantee, or his legal representatives, beneficiaries or heirs shall be entitled to a distribution of shares of Common Stock equal in number to such prorated amount of Units at the time provided for in Section 8.

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6.   Account Credits .
     No physical certificates representing the number of Units awarded shall be issued to the Grantee, but an account will be established and maintained for the Grantee, in which each grant of Units to the Grantee will be recorded, with the final number of Units as determined in accordance with Section 3 or Section 5 above. During such time, the Grantee shall not have any of the rights of a shareholder of the Company with respect to the Units, except that upon the vesting of the Units as described above in Section 5 or below in Section 8, the Grantee’s account shall be credited with the amount of Units equal to the amount of dividends that are declared and paid on shares of Common Stock during each fiscal quarter of the measurement cycle, in accordance with Section 3 or Section 5 above (“dividend equivalents”). The number of Units upon which dividend equivalents will be credited for the benefit of the Grantee is the total amount of Units finally determined to have been earned by the Grantee at the end of the measurement cycle in accordance with Section 3 or Section 5 above, as appropriate. The total amount of each quarterly dividend equivalent shall be converted to Units, by dividing such dividend equivalent amount by the price of the Common Stock on the last trading day of the month during each quarter that such dividends are paid during the appropriate measurement cycle.
7.   Adjustment Upon Changes in Stock.
     If there shall be any change in the number of shares of Common Stock outstanding resulting from subdivision, combination, or reclassification of shares, or through merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other change in the corporate structure, an appropriate adjustment in the number of Units with respect to which restrictions have not lapsed shall be made by the Committee. Depending upon the change in corporate structure, the Committee will issue additional Units or substitute Units to the Grantee for his account, which shall have the same restrictions, terms and conditions as the original Units.
8.   Removal of Restrictions and Distribution of Common Stock.
     The Grantee shall receive a distribution of whole shares of Common Stock equal in number to the Units finally determined to be earned as set forth in Section 3 above, as increased, if appropriate, as provided in Section 6 above, provided the Grantee has been an employee of the Company or a Subsidiary with continuous service during the term of the measurement cycle, except in the event of the Grantee’s employment termination as discussed above in Section 5. Distribution of shares of Common Stock as provided for in this Section 8 or above in Section 5 shall occur as soon as administratively possible following the last trading day of the quarter in which the measurement cycle ends, as provided for in either Section 3 or Section 5 above, as the case may be, on a date within the same calendar year or, if later, not more than 90 days following the date upon which the Grantee incurs a “separation from service” as defined below. Notwithstanding the immediately preceding sentence, in the case of a distribution of shares on account of any employment termination as provided for in Section 5 other than death, a distribution on behalf of the Grantee, if the Grantee is a “specified employee” as defined in §1.409A-1(i) of the Final Regulations under Code Section 409A, shall not occur until the date which is six (6) months following the date of the Grantee’s “separation from service” as defined in Code Section 409A and the regulations issued thereunder (or, if earlier, the date of death of the Grantee). From and after the date of receipt of such shares, the

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Grantee or the Grantee’s legal representatives, beneficiaries or heirs, as the case may be, shall have full rights of transfer or resale with respect to such stock subject to applicable state and federal regulations.
9.   Withholding Requirement.
     Upon the removal or lapse of the restrictions on the Units, the amount of shares of Common Stock to be distributed by the Company to the Grantee, which are equal to the number of Units finally determined to be earned by the Grantee as set forth in Sections 3 and Section 6 above, shall be subject to applicable withholding requirements for income and employment taxes arising from the removal or lapse of the restrictions on the Units.
10.   Modification.
     This Agreement may be changed or modified without the Grantee’s consent or signature, if the Company determines, in its sole discretion, that such change or modification is necessary for purposes of compliance with or exemption from the requirements of Section 409A of the Code and any regulations or other guidance issued thereunder, or otherwise to comply with any law.
      IN WITNESS WHEREOF , the Company and the Grantee have executed this Agreement as of the date first written above.
                 
GRANTEE:           ATMOS ENERGY CORPORATION
 
               
Signature:
          By:    
 
               
 
              Robert W. Best
Printed Name:
              Chairman, President and Chief Executive Officer
 
               

4

Exhibit 10.12(f)
ATMOS ENERGY CORPORATION
ANNUAL INCENTIVE PLAN FOR MANAGEMENT
(as amended and restated August 8, 2007)
ARTICLE 1
PURPOSE
     The Plan is intended to provide the Company a means by which it can engender and sustain a sense of personal commitment on the part of its executives and senior managers in the continued growth, development, and financial success of the Company and encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may award to executives and senior managers annual incentive compensation on the terms and conditions established herein.
ARTICLE 2
DEFINITIONS
     For the purposes of the Plan, unless the context requires otherwise, the following terms shall have the meanings indicated:
     2.1 “Award” means the compensation payable under this Plan to a Participant by the Committee pursuant to such terms, conditions, restrictions, and limitations established by the Committee and Plan.
     2.2 “Board” means the Board of Directors of the Company.
     2.3 “Bonus Stock” or “Bonus Shares” means shares of Common Stock of the Company awarded to a Participant as permitted and pursuant to the terms of the LongTerm Incentive Plan.
     2.4 (a) “Change in Control” of the Company occurs upon a change in the Company’s ownership, its effective control or the ownership of a substantial portion of its assets, as follows:
          (i) Change in Ownership . A change in ownership of the Company occurs on the date that any “Person” (as defined in Section 2.4(b)(i) below), other than (1) the Company or any of its subsidiaries, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding stock pursuant to an offering of such stock, or (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of the Company’s stock, acquires ownership of the Company’s stock that, together with stock held by such Person, constitutes more than 50% of the total fair market value or total voting power of the Company’s stock. However, if any Person is considered to own

 


 

already more than 50% of the total fair market value or total voting power of the Company’s stock, the acquisition of additional stock by the same Person is not considered to be a Change of Control. In addition, if any Person has effective control of the Company through ownership of 30% or more of the total voting power of the Company’s stock, as discussed in paragraph (ii) below, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this paragraph (i); or
          (ii) Change in Effective Control . Even though the Company may not have undergone a change in ownership under paragraph (i) above, a change in the effective control of the Company occurs on either of the following dates:
          (A) the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) ownership of the Company’s stock possessing 30 percent or more of the total voting power of the Company’s stock. However, if any Person owns 30% or more of the total voting power of the Company’s stock, the acquisition of additional control of the Company by the same Person is not considered to cause a Change in Control pursuant to this subparagraph (ii)(A); or
          (B) the date during any 12-month period when a majority of members of the Board is replaced by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election; provided, however, that any such director shall not be considered to be endorsed by the Board if his or her initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
          (iii) Change in Ownership of Substantial Portion of Assets. A change in the ownership of a substantial portion of the Company’s assets occurs on the date that a Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person) assets of the Company, that have a total gross fair market value equal to at least 40% of the total gross fair market value of all of the Company’s assets immediately before such acquisition or acquisitions. However, there is no Change in Control when there is such a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, through a transfer to (A) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (B) an entity, at least 50% of the total value or voting power of the stock of which is owned, directly or indirectly, by the Company; (C) a Person that owns directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock; or (D) an entity, at least 50% of the total value or voting power of the stock of which is

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owned by a Person that owns, directly or indirectly, at least 50% of the total value or voting power of the Company’s outstanding stock.
     (b) For purposes of subparagraph (a) above:
          (i) “Person” shall have the meaning given in Section 7701(a)(1) of the Code. Person shall include more than one Person acting as a group as defined by the Final Treasury Regulations issued under Section 409A of the Code.
          (ii) “Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.
     (c) The provisions of this Section 2.4 shall be interpreted in accordance with the requirements of the Final Treasury Regulations under Code Section 409A, it being the intent of the parties that this Section 2.4 shall be in compliance with the requirements of said Code Section and said Regulations.
     2.5 “Code” means the Internal Revenue Code of 1986, as amended, together with the published rulings, regulations, and interpretations duly promulgated thereunder.
     2.6 “Committee” means the committee appointed or designated by the Board to administer the Plan in accordance with Article 3 of this Plan.
     2.7 “Common Stock” or “Common Shares” means the Common Stock of the Company, with no par value (stated value of $.005 per share), or such other security or right or instrument into which such common stock may be changed or converted in the future.
     2.8 “Company” means Atmos Energy Corporation, a Texas and Virginia corporation, and any successor entity.
     2.9 “Covered Participant” means a Participant who is a “covered employee” as defined in Section 162(m)(3) of the Code, and the regulations promulgated thereunder, or who the Committee believes will be such a covered employee for a Performance Period, and who the Committee believes may have remuneration in excess of $1,000,000 for the Performance Period, as provided in Section 162(m) of the Code.
     2.10 “Date of Conversion” means the date on which the Committee determines and approves Awards; this is also the effective Date of Conversion for Restricted Stock or Restricted Shares.
     2.11 “Employee” means common law employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company and any Subsidiary of the Company.
     2.12 “Fair Market Value” of a share of Common Stock is the mean of the highest and lowest prices per share on the New York Stock Exchange Consolidated Tape, or such reporting service as the Board may select, on the appropriate date, or in the absence of reported sales on such day, the most recent previous day for which sales were reported.

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     2.13 “Long-Term Incentive Plan” is the Atmos Energy Corporation 1998 Long-Term Incentive Plan, as amended from time to time.
     2.14 “Participant” means an Employee who is selected by the Committee to participate in the Plan.
     2.15 “Performance Criteria” or “Performance Goals” or “Performance Measures” mean the objectives established by the Committee for the Performance Period pursuant to Article V hereof, for the purpose of determining Awards under the Plan.
     2.16 “Performance Period” means the consecutive 12 month period that constitutes the Company’s fiscal year.
     2.17 “Plan” means the Atmos Energy Corporation Annual Incentive Plan for Management, dated effective October 1, 1998, as amended from time to time.
     2.18 “Restricted Stock” or “Restricted Shares” means shares of Common Stock of the Company contingently granted to a Participant as permitted and pursuant to the terms and provisions of the Long-Term Incentive Plan.
     2.19 “Section 162(m)” means Section 162(m) of the Code and the regulations promulgated thereunder.
     2.20 “Subsidiary” means (i) any corporation in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total combined voting power of all classes of stock in one of the other corporations in the chain, (ii) any limited partnership, if the Company or any corporation described in item (i) above owns a majority of the general partnership interest and a majority of the limited partnership interests entitled to vote on the removal and replacement of the general partner, and (iii) any partnership or limited liability company, if the partners or members thereof are composed only of the Company, any corporation listed in item (i) above or any limited partnership listed in item (ii) above. “Subsidiaries” means more than one of any such corporations, limited partnerships, partnerships or limited liability companies.
     2.21 “Termination of Service” occurs when a Participant who is an Employee or Non-employee Director has a “separation from service” as defined in Section 1.409A-1(h) of the Final Treasury Regulations under Code Section 409A, or any successor provision thereto, for any reason.
ARTICLE 3
ADMINISTRATION
     The Plan shall be administered by the Human Resources Committee of the Board unless otherwise determined by the Board. If said Human Resources Committee does not so serve, the Committee shall consist of not fewer than two persons; any member of the Committee may be removed at any time, with or without cause, by resolution of the Board; and any vacancy occurring in the membership of the Committee may be filled by appointment by the Board.
     All actions to be taken by the Committee under this Plan, insofar as such actions affect compliance with Section 162(m) of the Code, shall be limited to those members of the Board who

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are Non-employee Directors and who are “outside directors” under Section 162(m). The Committee shall select one of its members to act as its Chairman. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the act of the Committee.
     The Committee shall determine and designate from time to time the eligible persons to whom Awards will be made. The Committee, in its discretion, shall (i) interpret the Plan, (ii) prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and (iii) make such other determinations and take such other action as it deems necessary or advisable in the administration of the Plan. Any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties.
     With respect to restrictions in the Plan that are based on the requirements of Section 162(m) of the Code or any other applicable law, rule or restriction (collectively, “applicable law”), to the extent that any such restrictions are no longer required by applicable law, the Committee shall have the sole discretion and authority to make Awards hereunder that are no longer subject to such restrictions.
ARTICLE 4
ELIGIBILITY
     Any Employee (including an Employee who is also a director or an officer) is eligible to participate in the Plan. The Committee, upon its own action, may make, but shall not be required to make, an Award to any Employee. Awards may be made by the Committee at any time and from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Committee shall determine. The Committee’s determinations under the Plan (including without limitation determinations of which Employees, if any, are to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards, and the agreements evidencing same) may be made by the Committee selectively among Employees who receive, or are eligible to receive, Awards under the Plan. Generally, an Employee must be a Participant in the Plan for a minimum of six months during the Performance Period to be eligible for a full Award for that Performance Period. However, an Employee with less than six months of participation in the Plan during a Performance Period may receive a pro rata Award at the discretion of the Committee.
ARTICLE 5
PERFORMANCE GOALS AND MEASUREMENT
     5.1 Performance Goals Establishment . Performance Goals shall be established by the Committee not later than 90 days after commencement of the Performance Period. The Performance Goals may be identical for all Participants or, at the discretion of the Committee, may be different to reflect more appropriate measures of individual performance.
     5.2 Awards . Awards shall be made annually in accordance with actual performance compared to the Performance Goals previously established by the Committee for the Performance Period.

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     5.3 Performance Goals . Performance Goals relating to Covered Participants for a Performance Period shall be established by the Committee in writing. Performance Goals may include alternative and multiple Performance Goals and may be based on one or more business and/or financial criteria. In establishing the Performance Goals for the Plan Year, the Committee in its discretion may include one or any combination of the following criteria in either absolute or relative terms, for either the Company or any of its Subsidiary organizations:
  (a)   Total shareholder return
 
  (b)   Return on assets, equity, capital, or investment
 
  (c)   Pre-tax or after-tax profit levels, including: earnings per share; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; net operating profits after tax, and net income
 
  (d)   Cash flow and cash flow return on investment
 
  (e)   Economic value added and economic profit
 
  (f)   Growth in earnings per share
 
  (g)   Levels of operating expense or other expense items as reported on the income statement, including operating and maintenance expense
 
  (h)   Measures of customer satisfaction and customer service as surveyed from time to time, including the relative improvement therein.
     5.4 Adjustments for Extraordinary Items . The Committee shall be authorized to make adjustments in the method of calculating attainment of Performance Goals in recognition of: (i) extraordinary or non-recurring items, (ii) changes in tax laws, (iii) changes in generally accepted accounting principles or changes in accounting policies, (iv) charges related to restructured or discontinued operations, (v) restatement of prior period financial results, and (vi) any other unusual, non-recurring gain or loss that is separately identified and quantified in the Company’s financial statements. Notwithstanding the foregoing, the Committee may, at its sole discretion, reduce the performance results upon which Awards are based under the Plan, to offset any unintended result(s) arising from events not anticipated when the Performance Goals were established, provided that such adjustment is permitted by Section 162(m).
     5.5 Determination of Awards . The Award and payment of any Award under this Plan to a Covered Participant with respect to the Performance Period shall be contingent upon the attainment of the Performance Goals that are applicable to such Covered Participant. The Committee shall certify in writing prior to payment of any such Award that such applicable Performance Goals relating to the Award are satisfied. Approved minutes of the Committee may be used for this purpose. The Performance Goals shall not allow for any discretion by the Committee as to an increase in any Award, but discretion to lower an Award is permissible.
ARTICLE 6
AWARDS
     6.1 Timing of Awards . At the first meeting of the Committee after the completion of the Performance Period, the Committee shall review the prior year’s performance in relation to the Performance Goals. The first meeting of the Committee shall occur within 60 days following the completion of the Performance Period.

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     6.2 Form of Awards . Awards are paid in cash. In addition, if and as the Committee so permits and depending upon the Participant’s voluntary election prior to the commencement of the Performance Period, the Participant may elect to convert any Award paid to him in cash in 25 percent increments, in whole or part, into the following forms:
     (a) Bonus Stock . The Participant may elect to convert all or a portion of the Award to Bonus Shares, with the value of the Bonus Shares (based on the Fair Market Value of such Bonus Shares as of the Date of Conversion) being equal to 110% of the amount of the Award. Such Bonus Shares shall be unrestricted and shall be granted pursuant to the Long-Term Incentive Plan.
     (b) Restricted Stock Awards . The Participant may elect to convert all or a portion of the Award to Company Restricted Shares, with the value of the Restricted Shares (based on the Fair Market Value of such Restricted Shares as of the Date of Conversion) being equal to 150% of the amount of the Award. Such Restricted Stock will have a restriction period of not less than 3 years from the Date of Conversion. These Restricted Shares will be granted pursuant to the Long-Term Incentive Plan.
     6.3 Maximum Awards . The maximum cash Award that may be made to a Covered Participant under the Plan for any Performance Period shall be $1.0 million.
ARTICLE 7
WITHHOLDING TAXES
     The Company shall have the right to deduct from any payment to be made pursuant to the Plan the amount of any taxes required by law to be withheld with respect to such payments.
ARTICLE 8
NO RIGHT TO CONTINUED EMPLOYMENT OR AWARDS
     No Employee shall have any claim or right to be made an Award, and the making of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any of its Subsidiaries. Further, the Company and its Subsidiaries expressly reserve the right at any time to terminate the employment of any Participant free from any liability under the Plan; except that a Participant, who meets or exceeds the Performance Goals for the Performance Period and was actively employed for the full term of the Performance Period, will be eligible for an Award even though the Participant is not an active employee of the Company at the time the Committee makes Awards under the Plan.
ARTICLE 9
CHANGE IN CONTROL
     Immediately upon a Change in Control, notwithstanding any other provision of this Plan, all Awards for the Performance Period in which the Change in Control occurs shall be deemed earned at the maximum Performance Goal level, and the Company shall make a payment in cash to each Participant within ten (10) days after the effective date of the Change in Control in the

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amount of such maximum Award. The making of Awards under the Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize, or otherwise change its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any portion of its businesses or assets.
ARTICLE 10
AMENDMENT, MODIFICATION, SUSPENSION, OR TERMINATION
     Subject to the limitations set forth in this Article 10, the Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan and Awards under the Plan to continue to comply with Section 162(m) of the Code, including any successors to such Section, shall be effective unless such amendment shall be approved by the requisite vote of the stockholders of the Company entitled to vote thereon.
ARTICLE 11
GOVERNING LAW
     The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable Federal law.
ARTICLE 12
SUCCESSORS AND ASSIGNS
     The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly to assume and agree to perform the Company’s obligation under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. As used herein, the “Company” shall mean the Company as hereinbefore defined and any aforesaid successor to its business and/or assets.
ARTICLE 13
EFFECTIVE DATE AND TERM
     The Plan became effective as of October 1, 1998 and will terminate as of September 30, 2011 . After termination of the Plan, no future Awards may be made.
ARTICLE 14
INTERPRETATION
     The Plan is designed to comply with Section 162(m) of the Code, and all provisions hereof shall be construed in a manner consistent with that intent.

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ARTICLE 15
INDEMNIFICATION
     No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or Employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation.
* * * * *
     IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of September 10, 2008 by its President pursuant to prior action taken by the Board.
         
  ATMOS ENERGY CORPORATION
 
 
  By:   /s/ ROBERT W. BEST    
    Robert W. Best   
    Chairman of the Board, President
and Chief Executive Officer 
 
 
         
Attest:
 
   
/s/ DWALA KUHN      
Dwala Kuhn     
Corporate Secretary     
 

9

Exhibit 12
Atmos Energy Corporation
Computation of Earnings to Fixed Charges
                                         
    Year Ended September 30  
    2008     2007     2006     2005     2004  
    (Dollars in thousands)  
 
                                       
Income from continuing operations before provision for income taxes per statement of income
  $ 292,704     $ 262,584     $ 236,890     $ 218,018     $ 137,765  
Add:
                                       
Portion of rents representative of the interest factor
    6,882       5,560       5,581       4,307       3,571  
Interest on debt & amortization of debt expense
    137,922       145,236       146,607       132,658       65,437  
     
Income as adjusted
  $ 437,508     $ 413,380     $ 389,078     $ 354,983     $ 206,773  
     
 
                                       
Fixed charges:
                                       
Interest on debt & amortization of debt expense (1)
  $ 137,922     $ 145,236     $ 146,607     $ 132,658     $ 65,437  
Capitalized interest (2)
    2,879       3,011       3,641       2,542       1,184  
Rents
    20,647       16,679       16,743       12,922       10,712  
Portion of rents representative of the interest factor (3)
    6,882       5,560       5,581       4,307       3,571  
     
Fixed charges (1)+(2)+(3)
  $ 147,683     $ 153,807     $ 155,829     $ 139,507     $ 70,192  
     
 
                                       
Ratio of earnings to fixed charges
    2.96       2.69       2.50       2.54       2.95  

Exhibit 21
SUBSIDIARIES OF ATMOS ENERGY CORPORATION
             
    State of   Percent of
Name   Incorporation   Ownership
 
           
ATMOS ENERGY HOLDINGS, INC.
(wholly-owned by Atmos Energy Corporation)
  Delaware     100 %
 
           
BLUE FLAME INSURANCE SERVICES, LTD
(wholly-owned by Atmos Energy Corporation)
  Bermuda     100 %
 
           
MISSISSIPPI ENERGIES, INC.
(wholly-owned by Atmos Energy Corporation)
  Mississippi     100 %
 
           
LEGENDARY LIGHTING, LLC
(50% owned by Mississippi Energies, Inc.)
  Mississippi     50 %
 
           
UNITARY GH&C PRODUCTS, LLC
(28% owned by Mississippi Energies, Inc.)
  Delaware     28 %
 
           
ATMOS ENERGY SERVICES, LLC
(a limited liability company)
(wholly-owned by Atmos Energy Holdings, Inc.)
  Delaware     100 %
 
           
EGASCO, LLC
(a limited liability company)
(wholly-owned by Atmos Energy Holdings, Inc.)
  Texas     100 %
 
           
ENERGAS ENERGY SERVICES TRUST
(a business trust)
(wholly-owned by Atmos Energy Services, LLC)
  Pennsylvania     100 %
 
           
ENERMART ENERGY SERVICES TRUST
(a business trust)
(wholly-owned by Atmos Energy Holdings, Inc.)
  Pennsylvania     100 %
 
           
ATMOS ENERGY MARKETING, LLC
(a limited liability company)
(wholly-owned by Atmos Energy Holdings, Inc.)
  Delaware     100 %
 
           
ATMOS POWER SYSTEMS, INC.
(a wholly-owned subsidiary of Atmos Energy Holdings, Inc.)
  Georgia     100 %
 
           
ATMOS PIPELINE AND STORAGE, LLC
(a limited liability company)
(wholly-owned by Atmos Energy Holdings, Inc.)
  Delaware     100 %


 

             
    State of   Percent of
Name   Incorporation   Ownership
 
           
UCG STORAGE, INC.
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Delaware     100 %
 
           
WKG STORAGE, INC.
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Delaware     100 %
 
           
ATMOS EXPLORATION AND PRODUCTION, INC.
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Delaware     100 %
 
           
TRANS LOUISIANA GAS PIPELINE, INC.
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Louisiana     100 %
 
           
TRANS LOUISIANA GAS STORAGE, INC.
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Delaware     100 %
 
           
ATMOS GATHERING COMPANY, LLC
(a limited liability company)
(wholly-owned by Atmos Pipeline and Storage, LLC)
  Delaware     100 %
 
           
PHOENIX GAS GATHERING COMPANY
(wholly-owned by Atmos Gathering Company,
LLC)
  Delaware     100 %
 
           
ATMOS-HNNG, LLC
(a limited liability company)
(jointly owned by Atmos Gathering Company, LLC and HNNG Midstream Partners, LLC)
  Delaware     70 %

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-3, No. 33-37869; Form S-3 D/A, No. 33-70212; Form S-3, No. 33-58220; Form S-3, No. 33-56915; Form S-3/A, No. 333-03339; Form S-3/A, No. 333-32475; Form S-3/A, No. 333-50477; Form S-3/A, No. 333-93705; Form S-3, No. 333-95525; Form S-3, No. 333-75576; Form S-3D, No. 333-113603; Form S-3, No. 333-118706; Form S-3ASR, No 333-139093; Form S-4, No. 333-13429; Form S-8, No. 33-68852; Form S-8, No. 33-57687; Form S-8, No. 33-57695; Form S-8, No. 333-32343; Form S-8, No. 333-46337; Form S-8, No. 333-73143; Form S-8, No. 333-73145; Form S-8, No. 333-63738; Form S-8, No. 333-88832; Form S-8, No. 333-116367; Form S-8, No. 333-138209; and Form S-8, No. 333-145817) of Atmos Energy Corporation and in the related Prospectuses of our reports dated November 18, 2008, with respect to the consolidated financial statements and schedule of Atmos Energy Corporation and the effectiveness of internal control over financial reporting of Atmos Energy Corporation, included in this Annual Report (Form 10-K) for the year ended September 30, 2008.
/s/ ERNST & YOUNG LLP
Dallas, Texas
November 18, 2008

 

EXHIBIT 31
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Robert W. Best, certify that:
  1.   I have reviewed this annual report on Form 10-K of Atmos Energy Corporation;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 18, 2008
         
     
/s/ ROBERT W. BEST      
Robert W. Best     
Chairman of the Board and
Chief Executive Officer 
   

 


 

         
I, John P. Reddy, certify that:
  1.   I have reviewed this annual report on Form 10-K of Atmos Energy Corporation;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  (c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
  (a)   All significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 18, 2008
         
     
/s/ JOHN P. REDDY      
John P. Reddy     
Senior Vice President and
Chief Financial Officer 
   

 

         
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
     In connection with the Annual Report of Atmos Energy Corporation (the “Company”) on Form 10-K for the period ending September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Best, Chairman of the Board and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 18, 2008
         
     
/s/ ROBERT W. BEST      
Robert W. Best     
Chairman of the Board and
Chief Executive Officer 
   
 
A signed original of this written statement has been provided to Atmos Energy Corporation and will be retained by Atmos Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 


 

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Annual Report of Atmos Energy Corporation (the “Company”) on Form 10-K for the period ending September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Reddy, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 18, 2008
         
     
/s/ JOHN P. REDDY      
John P. Reddy     
Senior Vice President and
Chief Financial Officer 
   
 
A signed original of this written statement has been provided to Atmos Energy Corporation and will be retained by Atmos Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.