ATMOS ENERGY CORP - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2002

OR

[ ] 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 (IRS Employer
incorporation or organization) Identification No.)

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

(972) 934-9227
(Registrant's telephone number, including area code)

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

Number of shares outstanding of each of the issuer's classes of common stock, as
of August 5, 2002.

Class Shares Outstanding
----- ------------------
No Par Value 41,519,759

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements

ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to condensed consolidated financial statements

2

ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements

3

ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements

4

ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

See accompanying notes to condensed consolidated financial statements

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ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002

1. Unaudited Interim Financial Information

In the opinion of management, all material adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation have been made to
the unaudited interim period financial statements. Because of seasonal and other
factors, the results of operations for the nine month period ended June 30, 2002
are not indicative of expected results of operations for the year ending
September 30, 2002. These interim financial statements and notes are condensed
as permitted by the instructions to Form 10-Q and should be read in conjunction
with the audited consolidated financial statements of Atmos Energy Corporation
in its Annual Report on Form 10-K for the fiscal year ended September 30, 2001.

Principles of consolidation - The accompanying condensed consolidated financial
statements include the accounts of Atmos Energy Corporation and its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.

Prior to April 1, 2001, we owned a 45 percent interest in Woodward Marketing,
L.L.C. and accounted for that ownership using the equity method of accounting
for investments. Beginning April 1, 2001, we owned 100 percent of Woodward
Marketing and have accounted for that ownership on a consolidated basis.

Common stock - As of June 30, 2002, we had 100,000,000 shares of common stock,
no par value (stated at $.005 per share), authorized and 41,445,585 shares
outstanding. At September 30, 2001, we had 40,791,501 shares outstanding.

Goodwill - Total goodwill was $67.4 million and $64.7 million at June 30, 2002
and September 30, 2001. Goodwill applicable to the utility segment was $37.5
million and $36.9 million at June 30, 2002 and September 30, 2001. Goodwill
applicable to the non-regulated segment was $29.9 million and $27.8 million at
June 30, 2002 and September 30, 2001. Goodwill applicable to the utility segment
resulted from the acquisition of the Louisiana Gas Service Company assets on
July 1, 2001 and is not subject to amortization under the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Goodwill applicable to the non-regulated
segment was amortized over 20 years until September 30, 2001. Effective October
1, 2001, goodwill applicable to the non-regulated segment was not amortized
under the provisions of SFAS No. 142. The proforma effect on goodwill
amortization of adopting SFAS No. 142 is not material.

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Under the provisions of SFAS No. 142, we evaluate our goodwill balance annually
for impairment. The initial evaluation took place during the second quarter of
our current fiscal year. No impairment of our goodwill balance was indicated as
a result of this evaluation.

Impairment of Intangible Assets - We periodically evaluate whether events or
circumstances have occurred that indicate that the value of intangible assets
may have been impaired. When such events or circumstances are present, we assess
the value of intangible assets by determining whether the carrying amount 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 amount, an impairment loss equal to the excess of the asset's carrying
value over its fair value is recorded. To date, no such impairment has been
recognized.

Revenue recognition - Sales of natural gas are billed on a monthly cycle 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
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. Estimated losses due to credit risk are reserved
at the time revenue is recognized.

Accounts receivable and allowance for doubtful accounts - Accounts receivable
consists of natural gas sales to residential, commercial, industrial,
agricultural and other customers. The allowance for doubtful accounts is
computed based on the aging of outstanding accounts receivable and historical
collections experience and, in management's opinion, represents an adequate
allowance to provide for probable uncollectable accounts. The allowance for
doubtful accounts was $17.9 million and $16.2 million at June 30, 2002 and
September 30, 2001.

Risk management assets and liabilities, utility segment - Our business units
entered into financial instruments for the 2001-2002 heating season. The purpose
of entering into these financial instruments was to protect us and our customers
from unusually large winter period gas price increases. We use the
mark-to-market method to account for these activities in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. In accordance with Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation", current period changes in the assets and liabilities from risk
management activities were recorded as deferred gas costs on the condensed
consolidated balance sheet as these costs will ultimately be recovered from
ratepayers. Accordingly, there was no earnings impact as a result of the use of
these financial instruments. Upon maturity, the contracts were recognized in
purchased gas cost.

Risk management assets and liabilities, non-regulated segment - We use storage,
transportation and requirements contracts, forwards, over-the-counter and
exchange-traded options, futures and swap contracts to conduct our risk
management activities.

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We use the mark-to-market method to account for these activities in accordance
with Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading
and Risk Management Activities." Under this method, the aforementioned contracts
are reflected at fair value, inclusive of future servicing costs and valuation
adjustments, with resulting unrealized gains and losses recorded as assets or
liabilities from risk management activities on the condensed consolidated
balance sheet. Current period changes in the assets and liabilities from risk
management activities are recognized as net gains or losses on the condensed
consolidated statement of income as gas trading margin. Changes in the assets
and liabilities from risk management activities result primarily from changes in
the valuation of the portfolio of contracts, maturity and settlement of
contracts and newly originated transactions. Market prices used to value these
transactions reflect our best estimate considering various factors including
closing exchange and over-the-counter quotations, time value and volatility
factors underlying the contracts. Values are adjusted to reflect the potential
impact of liquidating our positions in an orderly manner over a reasonable
period of time under present market conditions. Changes in market prices
directly affect our estimate of the fair value of these transactions. Current
period changes in assets and liabilities from risk management activities do not
impact cash in the current period. Cash is impacted when outstanding contracts
are closed.

Comprehensive income - The following table presents the components of
comprehensive income, net of related tax, for the three-month and nine-month
periods ended June 30, 2002 and 2001:

The only components of accumulated other comprehensive income (loss), net of
related tax, relate to unrealized holding gains and losses associated with
certain available for sale investments.

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Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Recently issued accounting standards not yet adopted - In June 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations." This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. We are currently in the process of
evaluating the impact the adoption of this Statement will have on our financial
condition, results of operations and net cash flows.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
provisions of this Statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. We are currently in the process
of evaluating the impact the adoption of this Statement will have on our
financial condition, results of operations and net cash flows.

Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year presentation.

2. Contingencies

Litigation

Greeley Gas Division

On September 23, 1999, a suit was filed in the District Court of Stevens County,
Kansas, by Quinque Operating Company, Tom Boles and Robert Ditto, against more
than 200 companies in the natural gas industry including us and our Greeley Gas
Division. The original plaintiffs have since withdrawn from the case and on
December 31, 2001, were substituted with Will Price, Stixon Petroleum Inc., Tom
Boles and The Cooper Clark Foundation as plaintiffs. The plaintiffs, who purport
to represent a class consisting of gas producers, royalty owners, overriding
royalty owners, working interest owners and state taxing authorities, accuse the
defendants of underpaying royalties on gas taken from wells situated on
non-federal and non-Indian lands throughout the United States and offshore
waters predicated upon allegations that the defendants' gas measurements are
simply inaccurate and that the defendants failed to comply with applicable
regulations and industry standards over the last 25 years. Although the
plaintiffs do not specifically allege an amount of damages, they contend that
this suit is brought to recover billions of dollars in revenues that the
defendants have allegedly unlawfully diverted from the

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plaintiffs to themselves. On April 10, 2000, this case was consolidated for
pre-trial proceedings with other similar pending litigation in federal court in
Wyoming in which we are also a defendant along with over 200 other defendants in
the case of In Re Natural Gas Royalties Quitam Litigation. In January 2001, the
federal court in Wyoming remanded this case back to the Kansas state court. A
reconsideration of remand was filed, but it was denied. The Kansas state court
now has jurisdiction over this proceeding and has issued a preliminary case
management order. We believe that the plaintiffs' claims are lacking in merit,
and we intend to vigorously defend this action. While the results of this
litigation 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 net cash flows because we believe that we
have adequate insurance and/or reserves to cover any damages that may ultimately
be awarded.

Energas Division

On May 18, 2001, a suit was filed in the 99th District Court of Lubbock County,
Texas, by the City of Lubbock, Texas, and the West Texas Municipal Agency
against Stewart & Stevenson Energy Products, Inc., a division of GE Packaged
Power, Inc. ("GE") and our Energas Division. The action arises out of (i) the
construction and installation of a gas-fired electric generating facility
designed and installed by GE and (ii) the design and installation by our Energas
Division of the natural gas pipeline that provides natural gas to the facility.
The plaintiffs allege that they incurred damages as a result of certain
corrosive products that were introduced into the facility's turbine that damaged
the turbine and necessitated repair costs of approximately $0.9 million and
consequential damages of approximately $4.7 million, as a result of electric
power purchases made by the plaintiffs from other sources while the facility was
inoperative or operating below specifications. The causes of action asserted by
the plaintiffs against the Energas Division include breach of contract, breach
of warranty and negligence. We have denied any liability and intend to
vigorously defend against the plaintiffs' claims. While the results of this
litigation 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 net cash flows because we believe that we
have adequate insurance and/or reserves to cover any damages that may ultimately
be awarded.

On February 13, 2002, a suit was filed in the 287th District Court of Parmer
County, Texas by Anderson Brothers, a Partnership, against Atmos Energy
Corporation, et al. The plaintiffs' claims arise out of an alleged breach of
contract by us and by a number of our divisions and subsidiaries concerning the
sale of natural gas used in irrigation activities since 1998 and an alleged
violation of the Texas Agricultural Gas Users Act of 1985. The Court has ruled
proper venue to be in Parmer County, Texas. We have been responding to numerous
discovery requests from the plaintiffs. We have also filed suit in Travis
County, Texas to have the Texas Agricultural Gas Users Act of 1985 to be
declared unconstitutional. The plaintiffs seek class action status and to
recover unspecified damages plus attorney's fees. We have denied any liability
and intend to vigorously defend against the plaintiffs' claims.

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We have a receivable from a supplier related to over payment for deliveries of
gas. A lawsuit was filed and we believe the receivable is fully recoverable.

Atmos Energy Louisiana Gas Division

Prior to our acquisition of the assets of Louisiana Gas Service Company, a
division of Citizens Communications Company, on July 1, 2001, Louisiana Gas
Service Company was involved in a proceeding with the Louisiana Public Service
Commission relating to past costs associated with the purchase of gas that it
charged to its customers. Subsequent to our acquisition of the Louisiana Gas
assets on July 1, 2001, we agreed to take responsibility for assuring the
payment of refunds and/or credits to ratepayers that may arise from Citizens
Communications' past activities with respect to purchased gas costs. On April
10, 2002, the Louisiana Public Service Commission issued a Report of Proceedings
in which it approved a Stipulation and Agreement between Citizens
Communications, Atmos and the Commission Staff. This Stipulation and Agreement
resulted in no refunds being due to customers.

United Cities Propane Gas, Inc.

United Cities Propane Gas, Inc., one of our wholly-owned subsidiaries, is a
party to a suit filed in June 2000 which is pending in the Circuit Court of
Sevier County, Tennessee. The plaintiffs' claims arise out of injuries alleged
to have been caused by a low-level propane explosion. The plaintiffs seek to
recover damages of $13.0 million. Discovery activities have begun in this case.
We have denied any liability, and we intend to vigorously defend against the
plaintiffs' claims. While the results of this litigation 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 net
cash flows because we believe that we have adequate insurance and/or reserves to
cover any damages that may ultimately be awarded.

We are a party to other litigation and claims that arise 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 net cash flows because we believe that we have adequate
insurance and/or reserves to cover any damages that may ultimately be awarded.

Environmental Matters

Manufactured Gas Plant Sites

Our United Cities Gas Division is the owner or previous owner of manufactured
gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri
which were used to supply gas prior to availability of natural gas. The gas
manufacturing process resulted in certain by-products and residual materials
including coal tar. The manufacturing process used by our predecessors was an
acceptable and satisfactory process at the time such

11

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 become necessary.

United Cities Gas Company and the Tennessee Department of Environment and
Conservation entered into a consent order effective January 23, 1997, to
facilitate the investigation, removal and remediation of the Johnson City site.
United Cities began the implementation of the consent order in the first quarter
of 1997 which has continued through June 30, 2002. The investigative phase of
the work at the site has been completed. An interim removal action was completed
in June 2001. United Cities is in the process of conducting a risk assessment at
the site.

In February 2002, the Tennessee Department of Environment and Conservation
contacted our United Cities Gas Division concerning the former manufactured gas
plant in Bristol, Tennessee. In May 2002, our United Cities Gas Division
completed a preliminary assessment of this location to learn more about the
history and operation of the manufactured gas plant, including limited sampling
activities. Our United Cities Gas Division is in the process of identifying and
locating other potentially responsible parties and intends to contact them in an
effort to have them join in any future remedial activities at the site.

On July 22, 1998, we entered into an Abatement Order on Consent with the
Missouri Department of Natural Resources addressing the former manufactured gas
plant located in Hannibal, Missouri. Through our United Cities Gas Division, we
agreed to perform a removal action, a subsequent site evaluation and to
reimburse the response costs incurred by the State of Missouri in connection
with the property. The removal action was conducted and completed in August
1998, and the site evaluation field work was conducted in August 1999. A risk
assessment for the site is currently being performed. On March 9, 1999, the
Missouri Public Service Commission issued an Order authorizing us to defer the
costs associated with this site until March 9, 2001. A renewal of the Order has
been requested. The matter is still pending before the Commission.

As of June 30, 2002, we had incurred costs of approximately $0.9 million for the
investigations of the Johnson City and Bristol, Tennessee and Hannibal, Missouri
sites and had a remaining accrual relating to these sites of $0.7 million.

Mercury Contamination Sites

We have completed investigation and remediation activities pursuant to Consent
Orders between the Kansas Department of Health and Environment and United Cities
Gas Company. The Orders provided for the investigation and remediation of
mercury contamination at gas pipeline sites which utilize or formerly utilized
mercury meter equipment in Kansas. The Final Interim Characterization and
Remediation Report has been submitted to the Kansas Department of Health. We
have agreed to amendments of the Orders with the Kansas Department of Health to
include all mercury meters that belonged to our Greeley Gas Division before the
merger with United Cities Gas

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Company on July 31, 1997. These sites will be investigated in 2003 and any
necessary remediation will be performed. As of June 30, 2002, we had incurred
costs of $0.1 million for these sites and had a remaining accrual of $0.3
million for recovery. The Kansas Corporation Commission has authorized us to
defer these costs and seek recovery in a future rate case.

We are a party to other environmental matters and claims, including those
discussed above, that arise 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 net cash flows because we believe that the
expenditures related to such response actions will either be recovered through
rates, shared with other parties or covered by adequate insurance or reserves.

3. Short-term Debt

At June 30, 2002, short-term debt was composed of $30.0 million of commercial
paper and $15.5 million outstanding under bank credit facilities.

Committed credit facilities

We have short-term committed credit facilities totaling $318.0 million. One
short-term unsecured credit facility is for $300.0 million and serves as a
backup liquidity facility for our commercial paper program. Effective July 31,
2002, this credit facility was renegotiated for $300.0 million. Our commercial
paper is rated A-2 by Standard and Poor's, P-2 by Moody's and F-2 by Fitch. At
June 30, 2002, $30.0 million of commercial paper was outstanding. We have a
second credit facility in place for $18.0 million. At June 30, 2002, $15.5
million was outstanding under this credit facility. These credit facilities are
negotiated at least annually and are used for working capital purposes.

Uncommitted credit facilities

Our Woodward Marketing subsidiary has an uncommitted demand credit facility for
$125.0 million which is used for its non-regulated business. Atmos Energy
Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all
amounts outstanding under this facility. At June 30, 2002, no amount was
outstanding under this credit facility. Related letters of credit totaling $55.6
million reduced the amount available under this facility. This facility is used
for working capital purposes. Effective July 1, 2002, this facility was
renegotiated to increase the amount available to $210.0 million and change the
sole guarantor to Atmos Energy Holdings, Inc., also our wholly-owned subsidiary
and parent company of Atmos Energy Marketing, LLC.

We also have an unsecured short-term uncommitted credit line for $20.0 million.
No amounts were outstanding under this credit facility at June 30, 2002. This
uncommitted line is renewed or renegotiated at least annually with varying
terms, and we pay no fee for the availability of the line. Borrowings under this
line are made on a when- and as-

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available basis at the discretion of the bank. This facility is also used for
working capital purposes.

In addition, Woodward Marketing has up to $100.0 million of credit available
from Atmos Energy Marketing, LLC for its non-regulated business. At June 30,
2002, $8.0 million was outstanding. Effective July 1, 2002, Atmos Energy
Holdings, Inc. replaced Atmos Energy Marketing, LLC as the provider of such
credit to Woodward Marketing. This intercompany facility is subordinated in
terms of repayment to the $210.0 million uncommitted demand credit facility
described above.

4. Earnings Per Share

Basic earnings per share has been computed by dividing net income for the period
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share has been computed by dividing net income for the
period by the weighted average number of common shares outstanding during the
period adjusted for the assumed exercise of restricted stock and other
contingently issuable shares of common stock. Net income for basic and diluted
earnings per share are the same, as there are no contingently issuable shares of
stock whose issuance would have impacted net income. A reconciliation between
basic and diluted weighted average common shares outstanding follows:

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5. Derivative Instruments and Hedging Activities

Effective October 1, 2000, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that all
derivative financial instruments be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them. In
our utility operations, changes in the fair value of derivative financial
instruments are recognized periodically as deferred gas costs. The cumulative
effect of the change in accounting for the adoption of this Statement did not
have a material impact on our financial position, results of operations or net
cash flows.

Weather Hedges and Insurance

In July 2000, we entered into an agreement to purchase weather hedges for our
Texas and Louisiana operations effective for the 2000-2001 heating season. The
hedges were designed to help mitigate the effects of weather that was at least
seven percent warmer than normal in both Texas and Louisiana while preserving
any upside. The cost of the weather hedges was approximately $4.9 million which
was amortized over the 2000-2001 heating season. No income was recognized for
the 2000-2001 heating season for these weather hedges due to the colder than
normal weather.

In June 2001, we purchased a three year weather insurance policy with an option
to cancel in the third year if we obtain weather protection in our rate
structures. The policy is for our Texas and Louisiana operations and covers the
entire heating season of October to March beginning with the 2001-2002 heating
season. The cost of the three year policy was approximately $13.2 million which
was prepaid and is being amortized over the appropriate heating seasons based on
degree days. The insurance is designed to protect against weather that is at
least seven percent warmer than normal for the entire heating season. During the
2001-2002 heating season, weather was not at least seven percent warmer than
normal resulting in no claim having been filed under the insurance policy. Only
the amortization of $4.4 million of premiums was recognized during the heating
season.

Utility Hedging Activities

Historically we have effectively hedged 20 percent of the gas supply required
during our annual October through March heating season by utilizing our
underground storage assets. For the 2001-2002 heating season, we covered
approximately 64 percent of our anticipated flowing gas requirements through
storage and futures and fixed forward contracts.

In accordance with Statement of Financial Accounting Standards No. 133, we use
the mark-to-market method to account for our financial instruments discussed
previously.

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In accordance with Statement of Financial Accounting Standards No. 71
"Accounting for the Effects of Certain Types of Regulation", current period
changes in the assets and liabilities from risk management activities are
recorded as deferred gas costs on the condensed consolidated balance sheet as
these costs will ultimately be recovered from ratepayers. Accordingly, there is
no earnings impact as a result of the use of these financial instruments. Upon
maturity, the contracts are recognized in purchased gas cost.

Non-Regulated Hedging Activities

At the close of business on June 30, 2002, we had outstanding contracts
representing 1.0 Bcf of net notional volumes with average contract maturities of
less than two years. These contracts were marked to market. Contracts
representing 59 percent of the fair value of these contracts are scheduled to
mature within one year. Contracts representing 39 percent of the remaining fair
value are scheduled to mature within three years.

Effective April 1, 2001, natural gas sales from our natural gas trading
operations have been netted against purchased gas costs and shown as gas trading
margin on the condensed consolidated statements of income. For the three months
ended June 30, 2002, our gas trading margin consisted of a $2.8 million realized
trading gain and a $9.5 million unrealized trading gain. For the nine months
ended June 30, 2002, our gas trading margin consisted of a $37.1 million
realized trading gain and a $8.1 million unrealized trading loss.

We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a
result of the merger of Atmos and United Cities Gas Company, which had acquired
that interest in 1995. On April 1, 2001, we acquired the 55 percent interest
that we did not own from J.D. Woodward and others for 1,423,193 restricted
shares of our common stock. Immediately following the acquisition, Mr. Woodward
was elected as a Senior Vice President of Atmos in charge of all non-regulated
business activities, a position he has held since April 1, 2001. Prior to that
time, Mr. Woodward had not been an officer or employee of Atmos.

The principal business of Atmos Energy Marketing, including the activities of
Woodward Marketing and Trans Louisiana Industrial Gas Company, Inc., is the
overall management of natural gas requirements for municipalities, local gas
utility companies and industrial customers located primarily in the southwestern
and midwestern United States. This business involves the sale of natural gas by
Woodward Marketing to its customers and the management of storage and
transportation contracts for its customers under contracts generally having one
to two-year terms. At June 30, 2002, Woodward Marketing had a total of 102
municipal and local gas utility customers and 324 industrial customers. Woodward
Marketing also sells natural gas to certain of its industrial customers on a
delivered burner tip basis under contract terms from 30 days to two years. In
addition, Woodward Marketing supplies our regulated operations with a portion of
our natural gas requirements on a competitive bid basis. Any mark-to-market
gains or losses on these affiliate contracts are eliminated.

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In the management of natural gas requirements for municipal and other local
utilities, Woodward Marketing sells physical natural gas to those customers for
future delivery and manages the associated price risk through the use of gas
futures, including forwards, over-the-counter and exchange-traded options and
swap contracts with counterparties. These financial contracts are
marked-to-market daily at the close of business. Woodward Marketing links gas
futures to physical delivery of natural gas and balances its futures positions
at the end of each trading day. Over-the-counter swap agreements require
Woodward Marketing to receive or make payments based on the difference between a
fixed price and the market price of natural gas on the settlement date. Woodward
Marketing uses these futures and swaps to manage margins on offsetting
fixed-price purchase or sale commitments for physical quantities of natural gas,
which are also carried on a mark-to-market basis. Options held to manage price
risk provide the right, but not the requirement, to buy or sell energy
commodities at a fixed price. Woodward Marketing uses options to manage margins
and to limit overall price risk exposure. At any point in time, Woodward
Marketing may not have completely offset its price risk on these activities.

Energy related services provided by Woodward Marketing include the sale of
natural gas to its various customer classes and management of transportation and
storage assets and inventories. More specifically, energy services include
contract negotiation and administration, load forecasting, storage acquisition,
natural gas purchase and delivery and capacity utilization strategies. In
providing these services, Woodward Marketing generates income from its utility,
municipal and industrial customers through negotiated prices based on the volume
of gas supplied to the customer. Woodward Marketing also generates income by
taking advantage of the difference between near-term gas prices and prices for
future delivery as well as the daily movement of gas prices by utilizing storage
and transportation capacity that it controls.

Prior to May 2002, Woodward Marketing engaged in financial trading for
speculative purposes. Financial trading involves utilizing financial instruments
(futures, options, swaps, etc.) to hedge natural gas prices or to take a
position in the market based on anticipated price movement. In some prior years,
Woodward Marketing experienced losses in its financial speculative trading
business. Effective in May 2002, Woodward Marketing's financial trading for
speculative purposes was discontinued. Woodward Marketing will continue its
financial trading for hedging (risk management purposes) related to its physical
trading positions. With regard to its physical trading business, Woodward
Marketing does engage in limited speculative natural gas trading for its own
account primarily related to its storage activity, subject to a risk management
policy established by us which limits the level of trading loss to a maximum of
$8.9 million in fiscal 2002. Physical trading involves utilizing physical assets
(storage and transportation) to sell and deliver gas to customers or to take a
position in the market based on anticipated price movement. Compliance with such
risk management policy is monitored on a daily basis. In addition, Woodward
Marketing's bank credit facility limits trading positions that are not closed at
the end of the day (open positions) to 5.0 Bcf of natural gas. At June 30, 2002,
Woodward Marketing's net open positions in its trading operations totaled 1.0
Bcf. In its speculative trading, Woodward Marketing's open trading positions are
monitored on a daily basis but are not required to be closed if they remain
within the limits set by the bank loan agreement. In addition to the price risk
of any net open position at the end of each trading day, the financial exposure
that results from the daily fluctuations of gas

17

prices and the potential for daily price movements constitutes a risk of loss
since the price of natural gas purchased or sold for future delivery at the
beginning of the day may not be hedged until later in the day.

Financial instruments, which subject Woodward Marketing to counterparty risk,
consist primarily of financial instruments arising from trading and risk
management activities and overnight repurchase agreements that are not insured.
Counterparty risk is the risk of loss from nonperformance by financial
counterparties to a contract. Exchange-traded future and option contracts are
generally guaranteed by the exchanges.

Woodward Marketing's operations are concentrated in the natural gas industry,
and its customers and suppliers may be subject to economic risks affecting that
industry.

6. Segment Information

Our determination of reportable segments considers, in part, the strategic
operating units under which we manage sales of various products and services to
customers in differing regulatory environments. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies included in Note 1 of notes to consolidated financial
statements in our Annual Report on Form 10-K for the year ended September 30,
2001. All intersegment sales prices are market based. We evaluate performance
based on net income or loss of the respective operating units.

In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", we have
identified the Utility and Non-regulated segments. For an expanded description
of these segments, refer to Note 1 of notes to consolidated financial statements
in our Annual Report on Form 10-K for the year ended September 30, 2001. We
consider each business unit within our utility segment to be a reporting unit of
the utility segment and not a reportable segment. Our chief executive officer
makes decisions about allocating resources to the utility segment as a whole and
not to individual reporting units. The individual operations that comprise the
non-regulated segment are not currently material to our consolidated financial
position or results of operations and therefore do not require separate
reporting. Prior to April 1, 2001, we owned a 45 percent interest in Woodward
Marketing and accounted for that ownership using the equity method of accounting
for investments. Beginning April 1, 2001, we own 100 percent of Woodward
Marketing and have accounted for that ownership on a consolidated basis.

18

Summarized financial information concerning our reportable segments for the
three months and nine months ended June 30, 2002 and 2001 are shown in the
following tables:

19

A reconciliation of total assets for the reportable segments to total
consolidated assets for June 30, 2002 and 2001 is presented below:

20

7. Supplemental Disclosures

The following supplemental condensed financial statements show Atmos Energy
Corporation, consisting of Atmos' regulated natural gas divisions; Atmos Energy
Holdings Inc., consisting of Atmos' non-regulated subsidiaries; and the
elimination of material intercompany transactions. The following supplemental
condensed balance sheet is as of June 30, 2002.

21

The following supplemental condensed statement of income is for the three months
ended June 30, 2002.

The following supplemental condensed statement of income is for the nine months
ended June 30, 2002.

Organization - Atmos Energy Corporation distributes natural gas in 11 states
through its operating divisions - Atmos Energy Louisiana, Energas Company,
Greeley Gas Company, United Cities Gas Company and Western Kentucky Gas Company.
Our nonutility operations are organized under Atmos Energy Holdings, Inc., which
includes Atmos Energy Marketing, LLC, Atmos Pipeline and Storage, Inc., Atmos
Power Systems, Inc. and an indirect equity interest in Heritage Propane
Partners, L.P. Atmos Energy Marketing includes the operations of Woodward
Marketing.

Consolidating Financial Statements - The column headed "Atmos Energy
Corporation" includes operations of Atmos' five operating divisions.

22

The column headed "Atmos Energy Holdings, Inc." comprises our nonutility
operations. Operating revenues and purchased gas costs from our natural gas
marketing operations are shown on a gross basis in the Atmos Energy Holdings,
Inc. column. Such natural gas marketing activities are reclassified in the
elimination column as gas trading margin.

Current and noncurrent assets and liabilities from risk management activities on
the supplemental condensed consolidated balance sheet consist of the fair value,
inclusive of future servicing costs and valuation adjustments, of our storage,
transportation and requirements contracts, forwards, over-the-counter and
exchange traded options, futures and swap contracts.

The gas trading margin on the supplemental condensed consolidated statement of
income consists primarily of the difference between revenue arising from Atmos
Energy Holdings' sale of physical natural gas to its customers less the cost to
purchase natural gas and current period changes in assets and liabilities from
risk management activities.

Risk management assets and liabilities, Atmos Energy Holdings, Inc. - We use
storage, transportation and requirements contracts, forwards, over-the-counter
and exchange-traded options, futures and swap contracts to conduct our risk
management activities. We use the mark-to-market method to account for these
activities in accordance with Emerging Issues Task Force Issue No. 98-10,
"Accounting for Energy Trading and Risk Management Activities" and EITF 00-17,
"Measuring the Fair Value of Energy-Related Contracts in Applying Issue No.
98-10." Under this method, the aforementioned contracts are reflected at fair
value, inclusive of future servicing costs and valuation adjustments, with
resulting unrealized gains and losses recorded as assets or liabilities from
risk management activities on the condensed consolidated balance sheet. Current
period changes in the assets and liabilities from risk management activities are
recognized as gas trading margins on the condensed consolidated statement of
income. Changes in the mark-to-market valuation of assets and liabilities from
risk management activities result primarily from changes in the valuation of the
portfolio of contracts, maturity and settlement of contracts and newly
originated transactions. Market prices and models used to value these
transactions reflect our best estimate considering various factors including
closing exchange and over-the-counter quotations, time value and volatility
factors underlying the contracts. Values are adjusted to reflect the potential
impact of liquidating our positions in an orderly manner over a reasonable
period of time under present market conditions. Changes in market prices
directly affect our estimate of the fair value of these transactions.

Related Party - Included in purchased gas cost in the Atmos Energy Corporation
column are natural gas purchases from Woodward Marketing. These purchases were
made in a competitive open bidding process and reflect market prices. In
addition, we have entered into contracts with Woodward Marketing to manage a
significant portion of our underground storage facilities. Woodward Marketing
has acted as agent in placing financial instruments for the various business
units that protect us and our customers from unusually large winter period gas
price increases.

23

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Board of Directors
Atmos Energy Corporation

We have reviewed the accompanying condensed consolidated balance sheet of Atmos
Energy Corporation as of June 30, 2002 and the related condensed consolidated
statements of income for the three-month periods and nine-month periods ended
June 30, 2002 and 2001 and the condensed consolidated statements of cash flows
for the nine-month periods ended June 30, 2002 and 2001. These financial
statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Atmos Energy
Corporation as of September 30, 2001, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended, not
presented herein, and in our report dated November 2, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of September 30, 2001 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

Dallas, Texas
August 9, 2002

24

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

Introduction

The following discussion should be read in conjunction with the condensed
consolidated financial statements contained in this Quarterly Report on Form
10-Q and Management's Discussion and Analysis contained in our Annual Report on
Form 10-K for the year ended September 30, 2001.

We distribute and sell natural gas to approximately 1.4 million residential,
commercial, industrial, agricultural and other customers. We operate through
five divisions in service areas located in Colorado, Georgia, Illinois, Iowa,
Kansas, Kentucky, Louisiana, Missouri, Tennessee, Texas and Virginia. Such
business is subject to regulation by state and/or local authorities in each of
the states in which we operate. In addition, our business is affected by
seasonal weather patterns, competitive factors within the energy industry and
economic conditions in the areas that we serve. We also transport natural gas
for others through our distribution system.

We provide natural gas storage services and own or hold an interest in natural
gas storage fields in Kansas, Kentucky and Louisiana to supplement natural gas
used by customers in Kansas, Kentucky, Tennessee, Louisiana and other states. We
also provide energy management and gas marketing services to industrial
customers, municipalities and other local distribution companies. We also
provide electrical power generation to meet peak load demands for a municipality
regulated by the Tennessee Valley Authority. In addition, we market natural gas
to industrial and agricultural customers primarily in West Texas and to
industrial customers in Louisiana.

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

The statements contained in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Report are forward-looking statements made in good faith by the
Company and are intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995. When used
in this Report, or any other of the Company's documents or oral presentations,
the words "anticipate," "expect," "estimate," "plans," "believes," "objective,"
"forecast," "goal" or similar words are intended to identify forward-looking
statements. Such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the statements relating to the Company's strategy,
operations, markets, services, rates, recovery of costs, availability of gas
supply and other factors. These risks and uncertainties include the following:
adverse weather conditions such as warmer than normal weather in the Company's
service territories; national, regional and local

25

economic conditions, including competition from other energy suppliers as well
as alternative forms of energy; recent national events; regulatory approvals,
including the impact of rate proceedings before various state regulatory
commissions; successful completion and integration of pending acquisition;
inflation and increased gas costs, including their effect on commodity prices
for natural gas; increased competition; further deregulation or "unbundling" of
the natural gas distribution industry; hedging and market risk activities and
other uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. A discussion of these risks and uncertainties
may be found in the Company's Form 10-K for the year ended September 30, 2001.
Accordingly, while the Company believes these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. Further,
the Company undertakes no obligation to update or revise any of its
forward-looking statements whether as a result of new information, future events
or otherwise.

Weather and Seasonality

Our natural gas distribution business and irrigation sales business is seasonal
and dependent upon weather conditions in our service areas. Natural gas sales to
residential, commercial and public authority customers are affected by winter
heating season requirements. This generally results in higher operating revenues
and net income during the period from October through March of each year and
lower operating revenues and either net losses or lower net income during the
period from April through September of each year. Sales to industrial customers
are much less weather sensitive. Sales to agricultural customers, who typically
use natural gas to power irrigation pumps during the period from March through
September, are affected by rainfall amounts and the price of natural gas.
Weather, adjusted for service areas with weather normalized operations, for the
nine months ended June 30, 2002 was 5 percent warmer than normal and 18 percent
warmer than weather in the corresponding period of the prior year.

The effects of temperatures that are above or below normal are partially offset
in the Tennessee and Georgia jurisdictions served by the United Cities Gas
Division and in the Kentucky jurisdiction served by the Western Kentucky Gas
Division through weather normalization adjustments. The Georgia Public Service
Commission, the Tennessee Regulatory Authority and the Kentucky Public Service
Commission have approved weather normalization adjustments. The weather
normalization adjustments, effective October through May each year in Georgia,
and November through April each year in Tennessee and Kentucky, allow the United
Cities Gas Division and Western Kentucky Gas Division to increase the base rate
portion of customers' bills when weather is warmer than normal and decrease the
base rate when weather is colder than normal. The net effect of the weather
normalization adjustments was an increase in revenues of approximately $6.0
million for the nine months ended June 30, 2002, as compared with a decrease of
approximately $3.3 million for the nine months ended June 30, 2001.
Approximately 373,000 or 27 percent of our meters in service are located in
Georgia, Tennessee and Kentucky. We did not have weather normalization
adjustments in our other service areas during the nine months ended June 30,
2002.

26

In July 2000, we entered into an agreement to purchase weather hedges for our
Texas and Louisiana operations effective for the 2000-2001 heating season. The
hedges were designed to help mitigate the effects of weather that was at least
seven percent warmer than normal in both Texas and Louisiana while preserving
any upside. The cost of the weather hedges was approximately $4.9 million which
was amortized over the 2000-2001 heating season. The cost of the weather hedges
was more than offset by the positive effects of colder weather on our gross
profit.

In June 2001, we purchased a three year weather insurance policy with an option
to cancel in the third year if we obtain weather protection in our rate
structures. The policy is for our Texas and Louisiana operations and covers the
entire heating season of October to March beginning with the 2001-2002 heating
season. The cost of the three year policy was approximately $13.2 million which
was prepaid and is being amortized over the appropriate heating seasons based on
degree days. The insurance is designed to protect against weather that is at
least seven percent warmer than normal for the entire heating season. During the
2001-2002 heating season, weather was not at least seven percent warmer than
normal resulting in no claim having been filed under the insurance policy. Only
the amortization of $4.4 million of premiums was recognized during the heating
season.

Historically we have effectively hedged 20 percent of the gas supply required
during our annual October through March heating season by utilizing our
underground storage assets. For the 2001-2002 heating season, we covered
approximately 64 percent of our anticipated flowing gas requirements through
storage and futures and fixed forward contracts.

Status of Pending Acquisition

In September 2001, we entered into a definitive agreement to acquire Mississippi
Valley Gas Company, a privately held natural gas utility, for $150.0 million,
consisting of $75.0 million cash and $75.0 million of Atmos common stock. In
addition, we will repay outstanding debt of Mississippi Valley Gas, net of
working capital, of approximately $45.0 million. Mississippi Valley Gas provides
natural gas distribution service to more than 261,500 residential, commercial,
industrial and other customers located primarily in the northern and central
regions of Mississippi. The acquisition is subject to state and federal
regulatory approval. It is anticipated that the acquisition will be completed in
2002.

Critical Accounting Policies and Estimates

General - Our condensed consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
Preparation of these financial statements required us to make estimates and
judgments that affected 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

27

various other assumptions that we believed to be reasonable under the
circumstances. On an on-going basis, we evaluate our estimates, including those
related to risk management and trading activities, allowance for doubtful
accounts, deferred income tax assets, intangible assets and goodwill. Actual
results may differ from estimates.

Regulation - Our utility 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 utility operations are accounted for in accordance with Statement of
Financial Accounting Standards 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.

Risk Management and Trading Activities - We use storage, transportation and
requirements contracts, forwards, over-the-counter and exchange-traded options,
futures and swap contracts to conduct our risk management and trading
activities. Changes in the assets and liabilities from risk management
activities result primarily from changes in the valuation of the portfolio of
contracts, maturity and settlement of contracts, and newly originated
transactions. The market prices and models used to value these transactions
reflect management's best estimate considering various factors including closing
exchange and over-the-counter quotations, the time value of money and volatility
factors underlying the contracts. We adjust the values to reflect the potential
impact of liquidating our positions in an orderly manner over a reasonable
period of time under present market conditions. Changes in market prices
directly affect management's estimate of the fair value of these transactions.
Assumptions different from those used would impact these carrying values.

Allowance for Doubtful Accounts - For the majority of our receivables, we
establish an allowance for doubtful accounts based on an aging of those
receivable balances. We apply percentages to each aging category based on our
collections experience. On certain other receivables where we are aware of a
specific customer's inability or reluctance to pay its receivable balance, we
record an allowance for doubtful accounts against amounts due to reduce the net
receivable balance to the amount we reasonably expect to collect. We believe our
allowance for doubtful accounts is adequate. However, if circumstances change,
our estimate of the recoverability of accounts receivable could be different.

Deferred Income Tax Assets - We have deferred income tax assets consisting of
employee and retiree benefit liabilities not currently deductible, credit
carryforwards and other items treated as expenses for book purposes but not
currently deductible for tax purposes. We have not recorded any valuation
allowance for these deferred income tax assets because we believe that it is
more likely than not that our deferred income tax assets will be realized.
Realization of these assets is based on estimates of future taxable income.
Those estimates were prepared using the same assumptions used to prepare

28

internal forecasts. We estimate that the credit carryforwards will be utilized
before they expire. If our estimates of taxable income are reduced in the
future, a valuation allowance could be required.

Intangible Assets - We acquired intangible assets valued at approximately $12.0
million in fiscal year 2001. Those intangible assets relate to the value
assigned to relationships with certain of our industrial customers and are being
amortized over 10 years. If our assumptions of the useful lives of those assets
change, the amount of amortization expense would be impacted.

Goodwill - At June 30, 2002, we had $67.4 million of goodwill, $37.5 million of
which was attributable to our utility segment and $29.9 million was attributable
to our non-regulated segment. We evaluate our goodwill balances for impairment
each year during our second fiscal quarter. Our evaluation during the quarter
ended March 31, 2002 resulted in no impairment. If our projections of estimated
future cash flows change, those changes could result in a reduction in the
carrying value of our goodwill.

FINANCIAL CONDITION

For the nine months ended June 30, 2002, net cash provided by operating
activities in the statement of cash flows totaled $301.7 million compared with
$145.5 million for the nine months ended June 30, 2001. The increase in net cash
provided by operating activities was primarily the result of a decrease in other
current assets and prepayments compared to the previous period, a decrease in
cash held on deposit in margin accounts and an increase in accounts payable and
accrued liabilities and a smaller increase in deferred charges and other assets
compared to the previous period. This increase was partially offset by an
increase in accounts receivable compared to the previous period and a smaller
increase in other current liabilities compared to the previous period A slight
increase in net income also added to the increase in net cash provided by
operating activities. The increase in net income was primarily due to increases
in gross profit and income from our gas marketing activities partially offset by
higher operating expenses and interest expense.

For the nine months ended June 30, 2002, net cash used in investing activities
totaled $114.3 million compared with $56.0 million for the nine months ended
June 30, 2001. Major cash flows used in investing activities for the nine months
ended June 30, 2002 included capital expenditures of $89.8 million compared with
$70.3 million for the nine months ended June 30, 2001. Capital expenditures for
fiscal 2002, excluding acquisitions, are expected to be in the range of $125.0
million to $130.0 million as compared with capital expenditures of $113.1
million for fiscal 2001. Capital projects for fiscal 2002 include expenditures
for additional mains, services, meters and equipment. In 2002, we plan to
complete the Mississippi Valley Gas Company acquisition for $75.0 million cash,
$75.0 million of Atmos common stock and the repayment of approximately $45.0
million of long-term debt. Capital expenditures and acquisitions for fiscal 2002
are planned to be financed from internally generated funds and financing
activities as discussed below. For the nine months ended June 30, 2002,
investing activities included

29

$15.7 million, in our non-regulated operations, for the acquisition of
Kentucky-based market area storage and associated pipeline facility assets,
certain gas marketing assets and the common stock of Southern Resources, Inc.
For the nine months ended June 30, 2002, we had expenditures for the acquisition
of assets to be leased of $6.9 million compared to $4.9 million for the nine
months ended June 30, 2001. In connection with our acquisition of Woodward
Marketing in April 2001, we received $13.1 million in cash for the nine months
ended June 30, 2001. We also received net proceeds of $6.6 million in connection
with the sale of certain utility assets for the nine months ended June 30, 2001.

For the nine months ended June 30, 2002, net cash used by financing activities
totaled $195.6 million compared with net cash provided by financing activities
of $327.5 million for the nine months ended June 30, 2001. For the nine-month
period ended June 30, 2002, short-term debt decreased $155.8 million compared
with a decrease of $125.8 million for the nine months ended June 30, 2001. The
decrease for the nine months ended June 30, 2002 was due primarily to more
effective collection experience of customer accounts receivable balances which
increased the amount of cash available to repay short-term debt. The decrease
for the nine months ended June 30, 2001 was due to the net proceeds of
approximately $142.0 million from the equity offering in December 2000 being
used to reduce the amount of short-term debt outstanding. Repayments of
long-term debt totaled $16.9 million for the nine months ended June 30, 2002
compared with $13.8 million for the nine months ended June 30, 2001. We received
$347.1 million in net proceeds during the nine months ended June 30, 2001 from
our $350.0 million debt offering. The net proceeds were used to help finance the
completion of the Louisiana Gas Service Company acquisition in July 2001. We
paid $36.4 million in cash dividends during the nine months ended June 30, 2002
compared with dividends paid of $32.3 million during the nine months ended June
30, 2001. This reflects increases in the quarterly dividend rate and in the
number of shares outstanding. During the nine months ended June 30, 2002, we
issued 654,084 shares of common stock.

The following table presents the number of shares issued for the nine-month
periods ended June 30, 2002 and 2001:

30

We believe that internally generated funds, our credit facilities, commercial
paper program and access to the public debt and equity capital markets will
provide necessary working capital and liquidity for capital expenditures and
other cash needs for the remainder of fiscal 2002.

We have short-term committed credit facilities totaling $318.0 million. One
short-term unsecured credit facility is for $300.0 million and serves as a
backup liquidity facility for our commercial paper program. Effective July 31,
2002, this credit facility was renegotiated for $300.0 million. Our commercial
paper is rated A-2 by Standard and Poor's, P-2 by Moody's and F-2 by Fitch. At
June 30, 2002, $30.0 million of commercial paper was outstanding. We have a
second credit facility in place for $18.0 million. At June 30, 2002, $15.5
million was outstanding under this credit facility. These credit facilities are
negotiated at least annually and are used for working capital purposes.

Our Woodward Marketing subsidiary has an uncommitted demand credit facility for
$125.0 million which is used for its non-regulated business. Atmos Energy
Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all
amounts outstanding under this facility. At June 30, 2002, no amount was
outstanding under this credit facility. Related letters of credit totaling $55.6
million reduced the amount available under this facility. This facility is used
for working capital purposes. Effective July 1, 2002, this facility was
renegotiated to increase the amount available to $210.0 million and change the
sole guarantor to Atmos Energy Holdings, Inc., also our wholly-owned subsidiary
and parent company of Atmos Energy Marketing, LLC.

We also have an unsecured short-term uncommitted credit line for $20.0 million.
No amounts were outstanding under this credit facility at June 30, 2002. This
uncommitted line is renewed or renegotiated at least annually with varying terms
and we pay no fee for the availability of the line. Borrowings under this line
are made on a when- and as-available basis at the discretion of the bank. This
facility is also used for working capital purposes.

In addition, Woodward Marketing has up to $100.0 million of credit available
from Atmos Energy Marketing LLC for its non-regulated business. At June 30,
2002, $8.0 million was outstanding. Effective July 1, 2002, Atmos Energy
Holdings, Inc. replaced Atmos Energy Marketing, LLC as the provider of such
credit to Woodward Marketing. This intercompany facility is subordinated in
terms of repayment to the $210.0 million uncommitted demand credit facility
described above.

In December 2001, we filed a shelf registration statement with the Securities
and Exchange Commission to issue, from time to time, up to $600.0 million in new
common stock and/or debt. In connection with this filing, we filed applications
for approval to issue securities with five state utility commissions and have
received approval from all five commissions. The registration statement was
declared effective by the Securities and Exchange Commission on January 30,
2002. The proceeds from any issuance of securities under the registration
statement are planned to be used for general corporate purposes, including
acquisitions, debt repayment and other business-related matters.

31

The following tables provide information about contractual obligations and
commercial commitments at June 30, 2002.

Risk Management and Trading Activities

We conduct our risk management activities through both our utility and
non-regulated segments. See Note 5 to the condensed consolidated financial
statements for a description of our risk management activities. The following
table shows our risk management assets and liabilities by segment at June 30,
2002.

In accordance with Financial Accounting Standards No. 71 "Accounting for the
Effects of Certain Types of Regulation", current period changes in the assets
and liabilities from risk management activities related to our utility segment
are recorded as deferred gas costs on the condensed consolidated balance sheet
as these costs will ultimately be

32

recovered from ratepayers. Accordingly, there is no earnings impact as a result
of the use of these financial instruments. Upon maturity, the contracts are
recognized in purchased gas cost.

To conduct our risk management and trading activities, Atmos Energy Marketing, a
unit of our non-regulated segment, uses natural gas storage, transportation and
requirements contracts, forwards, over-the-counter and exchange-traded options,
futures and swap contracts. Prior to May 2002, Woodward Marketing engaged in
financial trading for speculative purposes. Effective in May 2002, Woodward
Marketing's financial trading for speculative purposes was discontinued. The
mark-to-market method is used to account for these activities, as prescribed in
EITF Issue No. 98-10 and EITF Issue 00-17. Under these methods, the
aforementioned contracts are reflected at fair value, inclusive of future
servicing costs and valuation adjustments, with resulting unrealized gains and
losses recorded as "Assets from risk management activities" and "Liabilities
from risk management activities" on the balance sheet. Current period changes in
the assets and liabilities from risk management activities are recognized as net
gains or losses on the condensed consolidated statement of income as gas trading
margin. Changes in assets and liabilities from risk management activities result
primarily from changes in valuation of the portfolio of contracts, maturity and
settlement of contracts, and newly originated transactions.

Market prices are primarily used to value these transactions. In addition, a
market price based model is used for valuing certain storage and transportation
contracts. These values reflect management's best estimate considering various
factors, including closing exchange and over-the-counter quotations, time value,
and volatility factors underlying the contracts. The values are adjusted to
reflect the potential impact of liquidating our position in an orderly manner
over a reasonable time frame under present market conditions. Changes in market
prices directly affect management's estimate of the fair value of these
transactions.

The following table reflects the components of the change in fair value of our
non-regulated energy trading contract activities for the three months ending
June 30, 2002 (in thousands).

Fair value of contracts at March 31, 2002 $ 6,090
Contracts realized/settled (1,628)
Fair value of new contracts 4,917
Other changes in value 2,685
---------
Fair value of contracts at June 30, 2002 $ 12,064
=========

33

The following table reflects the components of the change in fair value of our
non-regulated energy trading contract activities for the nine months ending
June 30, 2002 (in thousands).

Fair value of contracts at September 30, 2001 $ 28,349
Contracts realized/settled (14,831)
Fair value of new contracts 37
Other changes in value (1,491)
---------
Fair value of contracts at June 30, 2002 $ 12,064
=========

The fair value of our non-regulated energy trading contracts at June 30, 2002,
is segregated below, by time period and fair value source.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2002, Compared with Three Months Ended June 30, 2001

Operating revenues decreased by 2 percent to $161.8 million for the three months
ended June 30, 2002 from $164.3 million for the three months ended June 30,
2001. The most significant factor contributing to the decrease in operating
revenues was a 23 percent decrease in average sales price due to the decreased
cost of gas. However, the decrease in operating revenues was offset by an 11
percent increase in sales volumes, excluding the additional sales volumes
attributable to the Louisiana Gas Service operations acquired in July 2001, due
to weather that was colder than in the corresponding quarter of the prior year.
In addition, increased revenues resulting from the Louisiana Gas Service
acquisition in July 2001 helped to offset the decrease in operating revenues.
The average sales price per Mcf sold decreased $2.01 or 23 percent to $6.72
primarily due to a decrease in the average cost of gas. The average cost of gas
per Mcf sold decreased 31 percent to $3.99 for the three months ended June 30,
2002 from $5.79 for the three months ended June 30, 2001. During the quarter
ended June 30, 2002, temperatures were 8 percent colder than in the
corresponding quarter of the prior year and were 4 percent warmer than the
30-year normal for the quarter, adjusted for service areas with weather

34

normalized operations. The total volume of gas sold, excluding the Louisiana Gas
Service volumes, for the three months ended June 30, 2002 was 19.7 billion cubic
feet compared with 17.7 billion cubic feet for the three months ended June 30,
2001. The addition of the Louisiana Gas Service operations added 2.7 billion
cubic feet of sales volumes for the quarter ended June 30, 2002.

Gross profit increased to $73.8 million for the three months ended June 30, 2002
from $61.3 million for the three months ended June 30, 2001. The increase in
gross profit was primarily due to the additional gross profit resulting from the
Louisiana Gas Service acquisition in July 2001 and the increase in volumes sold
to weather sensitive customers. Changes in the cost of gas do not directly
affect gross profit because the fluctuations in gas prices are passed through to
the customer.

On April 1, 2001, we completed our acquisition of the remaining 55 percent
interest in Woodward Marketing, L.L.C. that we did not already own. As a result
of this acquisition, the revenues and expenses of Woodward Marketing are now
shown on a consolidated basis. For the three months ended June 30, 2002, Atmos
Energy Marketing, which includes the operations of Woodward Marketing, had
income of $12.3 million in gas trading margin compared with a loss of $3.2
million in gas trading margin for the three months ended June 30, 2001. The
$15.5 million change in gas trading margin was primarily due to gains on
inventory sales and favorable pricing under natural gas sales contracts.

Operating expenses increased to $66.9 million for the three months ended June
30, 2002 from $54.9 million for the three months ended June 30, 2001. Operation
and maintenance expense increased primarily due to the addition of $6.3 million
relating to the Louisiana Gas Service acquisition in July 2001 and an increase
of $0.9 million in pension costs. A decrease in the provision for doubtful
accounts of $2.2 million partially offset this increase. The decrease in the
provision for doubtful accounts was attributable to the lower gas commodity
prices during the third quarter of fiscal 2002 as well as our effective recovery
of customer receivable balances. Depreciation and amortization increased $4.2
million due to the addition of the assets from the Louisiana Gas Service
acquisition in July 2001.

Operating income increased for the three months ended June 30, 2002 to $19.2
million from $3.2 million for the three months ended June 30, 2001. The increase
in operating income resulted primarily from the increase in gross profit and the
income from our gas trading margin described above partially offset by the
increase in operating expenses.

Interest expense increased $4.6 million, or 50 percent, for the three months
ended June 30, 2002 compared with the three months ended June 30, 2001 due
primarily to the interest expense on the $350.0 million debt offering in May
2001.

35

Net income increased for the three months ended June 30, 2002 by $6.7 million to
$3.3 million from a loss of $3.4 million for the three months ended June 30,
2001. This increase in net income resulted primarily from the increase in
operating income partially offset by the increase in interest expense discussed
above.

Nine Months Ended June 30, 2002, Compared with Nine Months Ended June 30, 2001

Operating revenues decreased by 37 percent to $812.6 million for the nine months
ended June 30, 2002 from $1.3 billion for the nine months ended June 30, 2001.
The most significant factors contributing to the decrease in operating revenues
were a 35 percent decrease in average sales price due to the decreased cost of
gas and a 15 percent decrease in sales volumes due to warmer weather, excluding
the additional sales volumes attributable to the Louisiana Gas Service
operations acquired in July 2001. During the nine-month period ended June 2002,
temperatures were 18 percent warmer than in the corresponding period of the
prior year and were 5 percent warmer than the 30-year normal, adjusted for
service areas with weather normalized operations. The total volume of gas sold,
excluding the Louisiana Gas Service volumes, for the nine months ended June 30,
2002 was 111.9 billion cubic feet compared with 132.2 billion cubic feet for the
nine months ended June 30, 2001. However, the decrease in sales volumes was
partially offset by the additional sales volumes of 14.9 billion cubic feet
attributable to the Louisiana Gas Service operations acquired in July 2001. The
average sales price per Mcf sold decreased $3.25 or 35 percent to $6.10
primarily due to a decrease in the average cost of gas. The average cost of gas
per Mcf sold decreased 48 percent to $3.79 for the nine months ended June 30,
2002 from $7.27 for the nine months ended June 30, 2001. However, the decrease
in operating revenues was partially offset by increased revenues resulting from
the Louisiana Gas Service acquisition in July 2001.

Gross profit increased to $333.1 million for the nine months ended June 30, 2002
from $309.6 million for the nine months ended June 30, 2001. The increase in
gross profit was primarily due to the additional gross profit resulting from the
Louisiana Gas Service acquisition in July 2001 partially offset by a decrease in
volumes sold to weather sensitive customers. Changes in the cost of gas do not
directly affect gross profit because the fluctuations in gas prices are passed
through to the customer.

On April 1, 2001, we completed our acquisition of the remaining 55 percent
interest in Woodward Marketing, L.L.C. that we did not already own. As a result
of this acquisition, the revenues and expenses of Woodward Marketing are now
shown on a consolidated basis. For the nine months ended June 30, 2002, Atmos
Energy Marketing, which includes the operations of Woodward Marketing, had
income of $29.0 million in gas trading margin. For the nine months ended June
30, 2001, Atmos Energy Marketing had a loss of $3.2 million in gas trading
margin and an equity in earnings of Woodward Marketing of $8.1 million. The
increase for the nine months ended June 30, 2002 compared to the nine months
ended June 30, 2001 was primarily due to gains on inventory sales and favorable
pricing under natural gas sales contracts as well as our full consolidation of
Woodward Marketing beginning April 2001.

36

Operating expenses increased to $213.2 million for the nine months ended June
30, 2002 from $180.4 million for the nine months ended June 30, 2001. Operation
and maintenance expense increased due primarily to the addition of $21.5 million
relating to the Louisiana Gas Service acquisition in July 2001 and an increase
of $7.1 million in pension costs. In addition, operation and maintenance expense
increased due to the full consolidation of Woodward Marketing's operations
beginning April 1, 2001. A decrease in the provision for doubtful accounts of
$13.2 million partially offset this increase. The decrease in the provision for
doubtful accounts was attributable to the lower gas commodity prices during the
first nine months of fiscal 2002 as well as our effective recovery of customer
receivable balances. Depreciation and amortization increased $13.1 million due
to the addition of the assets from the Louisiana Gas Service acquisition in July
2001.

Operating income increased 18 percent for the nine months ended June 30, 2002 to
$149.0 million from $126.0 million for the nine months ended June 30, 2001. The
increase in operating income resulted primarily from the increase in gross
profit and the income from our gas trading margin described above partially
offset by an increase in operating expenses.

Miscellaneous expense decreased $0.5 million to $0.9 million for the nine months
ended June 30, 2002 compared to $1.4 million for the nine months ended June 30,
2001. The primary reason for the decrease was due to an increase of $0.5 million
in net recoveries related to our performance based-ratemaking mechanisms and the
recognition of $0.5 million related to a large industrial contract we received
during 2002 partially offset by a reduction in our equity earnings of Heritage
Propane Partners, LLC.

Interest expense increased $13.0 million, or 42 percent, for the nine months
ended June 30, 2002 compared with the nine months ended June 30, 2001 due
primarily to the interest expense on the $350.0 million debt offering in May
2001.

Net income increased for the nine months ended June 30, 2002 by $1.7 million to
$65.3 million from $63.6 million for the nine months ended June 30, 2001. This
increase in net income resulted primarily from the increase in operating income
partially offset by the increase in interest expense discussed above.

Quantitative and Qualitative Disclosures about Market Risk

For a summary of our risk management and trading activities, see "Risk
Management and Trading Activities" under "Financial Condition". There have been
no significant changes in our other market risks since September 30, 2001.

37

UTILITY AND NON-REGULATED OPERATING DATA

Our utility business is composed of our five regulated utility divisions: Atmos
Energy Louisiana Gas Division, Energas Division, Greeley Gas Division, United
Cities Gas Division, Western Kentucky Gas Division and Shared Services.
Beginning October 1, 2002, we will use the name Atmos Energy Corporation to
identify all of our utility divisions. The non-regulated business includes gas
marketing and energy management services, operation of natural gas storage
fields, construction and operation of electrical power generating plants and
associated facilities and non-regulated industrial sales. The following tables
of operating statistics summarizes data of the utility and non-regulated
segments for the three-month and nine month periods ended June 30, 2002 and
2001. Heating degree days are presented as adjusted for weather-normalized
operations. Prior periods have been adjusted to reflect current period
presentation. For further information regarding operating results of the
segments, see Note 6 of notes to condensed consolidated financial statements.

38

ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS

(1) Volumes are reported as metered in million cubic feet (MMcf).

39

ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS

(1) Volumes are reported as metered in million cubic feet (MMcf).

40

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information provided in Item 7A of
our Annual Report on Form 10-K for the year ended September 30, 2001.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 2 of notes to condensed consolidated financial statements herein for a
description of legal proceedings.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

A list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Exhibits Index, which
immediately precedes such exhibits.

The certifications pursuant to 18 U.S.C. Section 1350 by the Company's
Chief Executive Officer and Chief Financial Officer, furnished as
Exhibits 99.1 and 99.2, respectively, to this Quarterly Report on Form
10-Q, will not be deemed to be filed with the 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.

(b) Reports on Form 8-K

None.

41

SIGNATURES

Pursuant to the requirements 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)

Date: August 14, 2002 By: /s/ F.E. MEISENHEIMER
---------------------
F.E. Meisenheimer
Vice President and Controller
(Chief Accounting Officer
and duly authorized signatory)

42

EXHIBITS INDEX
Item 6(a)

- ----------
* These certifications pursuant to 18 U.S.C. Section 1350 by the Company's
Chief Executive Officer and Chief Financial Officer, furnished as Exhibits
99.1 and 99.2, respectively, to this Quarterly Report on Form 10-Q, will
not be deemed to be filed with the 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.

43