ATOAtmos Energy

Please tell us how your presentation of “gross profit” complies with Item 10(e)(1)(ii)(E) of Regulation S-K, which prohibits using titles for non-GAAP measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures.

We referenced the non-GAAP measure “gross profit” and included its computation in our filing to better discuss and analyze our financial performance. To better distinguish this non-GAAP measure from similar terms, we will revise the term “gross profit” to “net revenues” in future filings and earnings releases. The following statement is indicative of the disclosure that we may include regarding net revenues, a non-GAAP measure:

Our operations are affected by the cost of natural gas.

Rest of the answer

The cost of gas is passed through to our customers without markup and includes commodity price, transportation, storage, injection and withdrawal fees and settlements of financial instruments used to mitigate commodity price risk. These costs are reflected in the income statement as purchased gas cost. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe net revenues, a non-GAAP financial measure defined as operating revenues less purchased gas cost, is a better indicator of our financial performance than operating income as it provides a useful and more relevant measure to analyze our financial performance. Further, the term net revenues is not intended to represent operating income, the most comparable GAAP measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies.

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To avoid placing undue prominence on gross profit, a non-GAAP measure, your discussion on page 2 should include a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. Your tabular disclosure of the non-GAAP measure on page 5 should be preceded with an equally prominent tabular disclosure of the comparable GAAP measure.

Rest of the question

In this regard, please show operating revenues and purchased gas cost in deriving the non-GAAP measure. Please review the guidance in our Compliance and Disclosure Interpretations issued on May 17, 2016, specifically question 102.10, when preparing your next earnings release. Reference is made to Item 2.02, Instruction 2, of Form 8-K and the requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K.

To avoid placing undue prominence on net revenues, a non-GAAP financial measure, in future earnings releases furnished as exhibits to Form 8-K filings, we will begin our discussion of results with a discussion of operating income rather than net revenues. Further, we will provide the operating revenues and purchased gas costs used in deriving net revenues in our tabular disclosures in all future earnings releases furnished as exhibits to Form 8-K filings. Read in the reply ↗

We note your response to comment 1. Please tell us how your proposed presentation of "net revenues" complies with Item 10(e)(1)(ii)(E) of Regulation S-K, which prohibits using titles for non-GAAP measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures.

In our prior response, we proposed to replace the term "gross profit" with "net revenues" as the non-GAAP financial measure we use to help measure and analyze our financial performance because it is commonly used in the utility industry. To comply with Item 10(e)(1)(ii)(E) of Regulation S-K, we will replace the term “gross profit” with "contribution margin" in future filings and earnings releases. The following statement is indicative of the disclosure that we may include regarding contribution margin, a non-GAAP financial measure:

Our operations are affected by the cost of natural gas.

Rest of the answer

The cost of gas is passed through to our customers without markup and includes commodity price, transportation, storage, injection and withdrawal fees and settlements of financial instruments used to mitigate commodity price risk. These costs are reflected in the income statement as purchased gas cost. Therefore, increases in the cost of gas are offset by a corresponding increase in revenues. Accordingly, we believe contribution margin, a non-GAAP financial measure defined as operating revenues less purchased gas cost, is a better indicator of our financial performance than operating income as it provides a useful and more relevant measure to analyze our financial performance. Further, the term contribution margin is not intended to represent operating income, the most comparable GAAP financial measure, as an indicator of operating performance and is not necessarily comparable to similarly titled measures reported by other companies.

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We note your disclosure on page 38 that you believe gross profit is a better indicator of your financial performance than revenues since increases in the cost of gas are offset by a corresponding increase in revenues. In future filings, please disclose that gross profit is a non-GAAP financial measure and why management believes the non-GAAP measure provides useful information to investors.

Rest of the question

Refer to Item 10(e) of Regulation S-K.

Beginning with our Form 10-Q for the three and nine months ended June 30, 2017, we will disclose that gross profit is a non-GAAP financial measure. We are also mindful of the additional disclosure requirements relating to the use of non-GAAP financial measures, as set forth in Item 10(e) of Regulation S-K.

Rest of the answer

The disclosures in our future filings that use any such financial measures will be prepared in accordance with such requirements, including the requirement in Item 10(e)(1)(i)(C) that a statement be included disclosing the reasons why management believes that presentation of the non-GAAP financial measure provides useful information to investors. The following statement is indicative of the disclosure that we may include regarding gross profit:

We calculate gross profit as operating revenues less purchased gas cost. This net amount is considered a non-GAAP financial measure. Management uses this financial measure because operating revenues include the cost of purchased gas, which is a tracked cost that is passed through to our customers without markup under purchased gas cost adjustment mechanisms. Accordingly, we believe that gross profit provides investors a useful and more relevant measure to analyze our financial performance than operating revenues because purchased gas cost does not impact our operating income.

To facilitate the reconciliation between gross profit and GAAP operating revenues, we will include operating revenues and purchased gas cost in the tables included in our financial highlights within Management's Discussion and Analysis in all our future Form 10-K and 10-Q filings.

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Please quantify, on an absolute dollar basis, the revenue generated from sales of products, sales of services and other sales within your non-regulated businesses. Additionally, please tell us what consideration you gave to separately disclosing revenues and cost of revenues for products, services and other pursuant to Rules 503(b)(1) and (2) of Regulation S-X for your non-regulated businesses.

The table below provides our nonregulated revenues, by class, in accordance with Rule 5-03(b)(1) of Regulation S-X.

2014

2013

2012

Nonregulated revenues

Percent of Consolidated Operating Revenues

(In thousands)

Product revenues

$

2,050,580

41.50%

1,568,462

40.47%

1,330,815

38.73%

Service revenues

Transportation

5,737

5,690

4,616

Other service revenues

1,427

3,956

3,253

Total service revenues

7,164

0.14%

9,646

0.25%

7,869

0.23%

Rental income

9,532

0.19%

9,786

10,260

0.30%

Other revenues

—%

Total

2,067,292

1,587,914

1,348,982

Consolidated operating

Rest of the answer

revenues

4,940,916

3,875,460

3,436,162

Product revenues represent the unregulated sale of natural gas to our Nonregulated segment's customers. Service revenues are earned through the transportation of gas and other services provided to the Nonregulated segment's customers. Rental income is derived from demand fees earned on proprietary storage and other facilities.

Rule 5-03(b) of Regulation S-X permits the aggregation of revenue classes if each class represents 10 percent or less of consolidated operating revenues. Revenues earned by our Nonregulated segment from sales of natural gas to customers represented approximately 40 percent of consolidated operating revenues for each of the last three fiscal years. However, other revenues earned by our Nonregulated segment, collectively, represented less than one percent of consolidated operating revenue. Therefore, as permitted by Rule 5-03(b) of Regulation S-X, we combined all nonregulated revenue classes into one line item in our Consolidated Statements of Income.

Applicable costs of revenues are reported as Purchased gas cost for the Nonregulated segment. The costs associated with sales of natural gas to customers exceeded 10 percent of consolidated purchase gas cost for each of the last three fiscal years. The costs associated with the remaining revenue classes, collectively, represented less than 10 percent of consolidated purchase gas cost. Therefore, as required by Rule 5-03(b), we combined all nonregulated purchase gas costs into one line item in our Consolidated Statements of Income.

We continue to monitor the components of our revenues and cost of sales and will include additional disclosure, as required by Rule 5-03(b)(1) of Regulation S-X, if the 10 percent threshold is met.

Atmos Energy Corporation acknowledges that (i) we are responsible for the adequacy and accuracy of the disclosure in the filing; (ii) staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and (iii) we may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

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