ATMOS ENERGY CORP - 10-K Annual Report

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 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 75240
5430 LBJ FREEWAY, DALLAS, TEXAS (Zip code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 934-9227

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $853,523,154 as of October 31, 2002. On October 31, 2002 the
registrant had 41,731,717 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement to be filed for the
Annual Meeting of Shareholders on February 12, 2003 are incorporated by
reference into Part III of this report.
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PART I

The terms "we," "our," "us," "Atmos" and "Atmos Energy" refer to Atmos
Energy Corporation and its subsidiaries, unless the context suggests otherwise.
The abbreviations "Mcf," "MMcf" and "Bcf" mean thousand cubic feet, million
cubic feet and billion cubic feet.

ITEM 1. BUSINESS

OPERATIONS

Atmos Energy Corporation and its subsidiaries are engaged primarily in the
natural gas utility business as well as certain non-regulated businesses. We
distribute natural gas through sales and transportation arrangements to
approximately 1.4 million residential, commercial, public authority and
industrial customers through our five regulated utility divisions. Effective in
December 2002, our customer base will increase to approximately 1.7 million. See
"Recent Developments." Our five utility operating divisions cover service areas
located in Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana,
Missouri, Tennessee, Texas and Virginia. In addition, we transport natural gas
for others through our distribution system.

Prior to October 1, 2002, our five operating divisions were named Greeley
Gas Company with operations in Colorado, Kansas and a portion of Missouri;
Western Kentucky Gas Company with operations in Kentucky; Atmos Energy Louisiana
Gas Company with operations in Louisiana; United Cities Gas Company with
operations in Georgia, Illinois, Iowa, our remaining Missouri operations,
Tennessee and Virginia; and Energas Company with operations in Texas. Effective
October 1, 2002, we united our utility operations under the Atmos Energy brand.
Our former Greeley Gas Company operations are now conducted under the name Atmos
Energy Colorado-Kansas Division; our former Western Kentucky Gas Company
operations are now conducted under the name Atmos Energy Kentucky Division; our
former Atmos Energy Louisiana Gas Company operations are now conducted under the
name Atmos Energy Louisiana Division; our former United Cities Gas Company
operations are now conducted under the name Atmos Energy Mid-States Division;
and our former Energas Company operations are now conducted under the name Atmos
Energy Texas Division.

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
municipalities and industrial customers. In addition, we market natural gas to
industrial and agricultural customers primarily in west Texas and to industrial
customers in Louisiana.

FORMATION

We were organized under the laws of Texas in 1983 as Energas Company, a
subsidiary of Pioneer Corporation, for the purposes of owning and operating
Pioneer's natural gas distribution business in Texas. Immediately following the
transfer by Pioneer to Energas of its gas distribution business, which Pioneer
and its predecessors had operated since 1906, Pioneer distributed our
outstanding stock to its shareholders. In September 1988, we changed our name
from Energas Company to Atmos Energy Corporation. As a result of the merger with
United Cities Gas Company in July 1997, we also became incorporated in Virginia.

RECENT DEVELOPMENTS

Pending acquisition of Mississippi Valley Gas Company. In September 2001,
we entered into a definitive agreement to acquire Mississippi Valley Gas
Company, a privately held natural gas utility, for $75.0 million cash and $75.0
million of Atmos common stock. In addition, we will repay outstanding long-term
debt of Mississippi Valley Gas of approximately $45.0 million. Mississippi
Valley Gas provides natural gas distribution service to approximately 261,500
residential, commercial, industrial and other customers located primarily in the
northern and central regions of Mississippi. Mississippi Valley Gas has a 5,500
mile distribution system and 335 miles of intrastate pipeline. It also has two
underground storage facilities with 2.05 Bcf of working gas capacity. On October
31, 2002, we announced that we had received approval from the

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Mississippi Public Service Commission to acquire Mississippi Valley Gas. The
transaction had previously received federal regulatory approval and approvals
from the six other state utility commissions that required approval. We expect
to close the acquisition in December 2002.

Louisiana Regulatory Actions. In January and February 2002, our Louisiana
division submitted its 2001 Rate Stabilization filings to the Louisiana Public
Service Commission for the two gas systems we operate in Louisiana. Recently
completed audits by the Louisiana Public Service Commission of these filings
found our earnings to be deficient and that rate adjustments were appropriate.
Approved tariff revisions, which became effective November 1, 2002, will result
in $15.8 million in additional revenue per year during the first 24-month
period. Subsequent to the first 24-month period, adjusted rates will provide
$12.2 million in total annual revenue increases. As a result of the actions
taken by the Louisiana Public Service Commission, Atmos Energy has decreased its
overall weather sensitivity in Louisiana.

Atmos Power Systems, Inc. constructs power plant. In September 2002, Atmos
Power Systems, Inc., a subsidiary of Atmos Energy Holdings, Inc. completed
construction of a 20-megawatt natural gas fueled power plant in Tennessee which
was placed in operation in October 2002. The plant provides an interruptible
electric rate while reducing annual energy costs. Power is directly connected to
the customer's substation. The customer has leased the facility for a 10-year
period with an option to purchase the plant after the fifth year of the lease.
Capital expenditures for construction and related costs totaled $8.5 million.
Woodward Marketing, L.L.C., a subsidiary of Atmos Energy Marketing, LLC, has
entered into a contract to supply natural gas to the facility.

STRATEGY

Our overall strategy is to:

- deliver superior shareholder value,

- continue to manage our utility operations efficiently,

- profitably grow our non-utility operations to complement our utility
operations, and

- profitably grow our business through acquisitions.

We are running our operations efficiently by:

- managing our operating and maintenance expenses,

- leveraging our technology, such as our 24-hour call center, to achieve
more efficient operations,

- focusing on regulatory rate proceedings to increase revenue,

- mitigating weather-related risks through weather normalized rates in some
jurisdictions and purchasing weather insurance in others, and

- disposing of non-growth assets.

We are growing our non-utility operations by:

- increasing our non-regulated gas sales, and

- growing such non-utility businesses as distributed electrical power
generation.

We are growing our utility business by acquiring natural gas operations,
such as the pending acquisition of Mississippi Valley Gas Company.

Our operations are divided into three segments, the utility segment, which
includes our regulated natural gas distribution and sales operations; the
natural gas marketing segment, which includes Atmos Energy Marketing, Woodward
Marketing and Trans Louisiana Industrial Gas Company, Inc.; and our other non-
utility segment, which includes all of our other non-utility operations.

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UTILITY OPERATIONS SEGMENT OVERVIEW

Our utility operations segment is operated through our five regulated
natural gas divisions:

- Atmos Energy Colorado-Kansas Division (formerly Greeley Gas Company),

- Atmos Energy Kentucky Division (formerly Western Kentucky Gas Company),

- Atmos Energy Louisiana Division (formerly Atmos Energy Louisiana Gas
Company),

- Atmos Energy Mid-States Division (formerly United Cities Gas Company),
and

- Atmos Energy Texas Division (formerly Energas Company).

Atmos Energy Colorado-Kansas Division: Our Colorado-Kansas Division
operates in Colorado, Kansas and a portion of Missouri and is regulated by each
respective state's public service commission with respect to accounting, rates
and charges, operating matters and the issuance of securities. We operate under
terms of non-exclusive franchises granted by the various cities. At September
30, 2002 and 2001, our Colorado-Kansas Division had 216,980 and 212,484 utility
meters in service. For the years ended September 30, 2002 and 2001, this
division had total throughput of 33,554 and 37,797 MMcf.

Atmos Energy Kentucky Division: Our Kentucky Division operates in Kentucky
and is regulated by the Kentucky Public Service Commission, which regulates
utility services, rates, issuance of securities and other matters. We operate in
the various incorporated cities pursuant to non-exclusive franchises granted to
us by these cities. Sales of natural gas for use as vehicle fuel in Kentucky are
unregulated. We have been operating under a performance-based rate program since
July 1998. We also have weather normalization adjustments to our rates in
Kentucky. At September 30, 2002 and 2001, our Kentucky Division had 178,379 and
182,275 utility meters in service. For the years ended September 30, 2002 and
2001, this division had total throughput of 43,721 and 46,530 MMcf.

Atmos Energy Louisiana Division: Our Louisiana Division includes the
operations of the assets of Louisiana Gas Service Company acquired in July 2001
and our previously existing Trans La Division. Our Louisiana Division operates
in Louisiana and is regulated by the Louisiana Public Service Commission, which
regulates utility services, rates and other matters. In most of the areas in
which we operate in Louisiana, we do so pursuant to a non-exclusive franchise
granted by the governing authority of each area. Direct sales of natural gas to
industrial customers in Louisiana, who use gas for fuel or in manufacturing
processes, and sales of natural gas for vehicle fuel are exempt from regulation.

In connection with its review of our acquisition of Louisiana Gas Service,
the Louisiana Public Service Commission has approved a rate structure that
requires us to share cost savings that resulted from the acquisition with the
customers of Louisiana Gas Service. The shared cost savings will be the
difference between operation and maintenance expense in any future year and the
1998 normalized expense for Louisiana Gas Service, indexed for inflation, annual
changes in labor costs and customer growth. Beginning January 1, 2002, the
customers are assured annual savings, which will be indexed for inflation,
annual changes in labor costs and customer growth. The sharing mechanism will
remain in place for 20 years subject to established modification procedures.

The rates of Louisiana Gas Service are subject to a purchased gas
adjustment clause that allows it to pass changes in gas costs on to its
customers. In addition, on January 29, 2001, the Louisiana Public Service
Commission approved a rate stabilization clause for Louisiana Gas Service for a
three-year period beginning January 1, 2001. Under the rate stabilization
clause, Louisiana Gas Service will be allowed to earn a return on equity within
certain ranges that will be monitored on an annual basis. After the completion
of the acquisition of Louisiana Gas Service, our Atmos Energy Louisiana Division
also became subject to those clauses.

Prior to our acquisition of the assets of Louisiana Gas Service Company, a
division of Citizens Communications Company, in July 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, we agreed to take responsibility for assuring the payment of refunds
and/or credits to ratepayers that may arise from Citizens

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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.

In October 2002, Atmos received written notification from the Executive
Secretary of the Louisiana Public Service Commission that he was asserting that
a monthly facilities fee of approximately $0.6 million charged since July 2001
to Atmos by Trans Louisiana Gas Pipeline, Inc., a wholly-owned subsidiary of
Atmos, pursuant to a contract between the parties, was excessive. The Executive
Secretary asserted that all monthly facilities fees in excess of approximately
$0.1 million from July 2001 should be refunded to ratepayers with interest.

Atmos has responded to the Secretary and noted that it has previously made
all required filings with the Commission fully disclosing the amount of the
facilities fee. Atmos intends to file another petition seeking Commission
approval of the facilities fee by the end of calendar year 2003 similar to that
filed in 2001 but containing updated data. In the interim, Atmos is continuing
to charge a facilities fee of approximately $0.6 million per month, as the
Executive Secretary's correspondence does not constitute action of the
Commission.

The Louisiana Public Service Commission approved a rate stabilization
clause for a three year period for our former Trans La Division beginning
October 1, 1999. Under the rate stabilization clause, our former Trans La
Division will be allowed to earn a return on equity within certain ranges that
will be monitored on an annual basis.

At September 30, 2002 and 2001, our Louisiana Division had 370,012 and
368,436 utility meters in service. For the years ended September 30, 2002 and
2001, this division had total throughput of 30,435 and 12,578 MMcf. The increase
in throughput from 2001 to 2002 resulted from throughput from the Louisiana Gas
Service assets which we purchased in July 2001.

In January and February 2002, our Louisiana division submitted its 2001
Rate Stabilization filings to the Louisiana Public Service Commission for the
two gas systems we operate in Louisiana. Recently completed audits by the
Louisiana Public Service Commission of these filings found our earnings to be
deficient and that rate adjustments were appropriate. Approved tariff revisions,
which became effective November 1, 2002, will result in $15.8 million in
additional revenue per year during the first 24-month period. Subsequent to the
first 24-month period, adjusted rates will provide $12.2 million in total annual
revenue increases. As a result of the actions taken by the Louisiana Public
Service Commission, Atmos Energy has decreased its overall weather sensitivity
in Louisiana.

Atmos Energy Mid-States Division: Our Mid-States Division operates in
Georgia, Illinois, Iowa, Missouri, Tennessee and Virginia. In each of these
states, our rates, services and operations as a natural gas distribution company
are subject to general regulation by each state's public service commission. We
operate in each community, where necessary, under a franchise granted by the
municipality for a fixed term of years. In Tennessee and Georgia, we have
performance-based rates, which provide incentives for us to find ways to lower
costs. Any cost savings are then shared with our customers. We also have weather
normalization adjustments to our rates in Tennessee and Georgia. At September
30, 2002 and 2001, our Mid-States Division had 310,630 and 308,394 utility
meters in service. For the years ended September 30, 2002 and 2001, this
division had total throughput of 57,144 and 64,924 MMcf.

Atmos Energy Texas Division: Our Texas Division operates in Texas. The
governing body of each municipality we serve has original jurisdiction over all
utility rates, operations and services within its city limits, except with
respect to sales of natural gas for vehicle fuel and agricultural use. We
operate pursuant to non-exclusive franchises granted by the municipalities we
serve, which are subject to renewal from time to time. The Railroad Commission
of Texas has exclusive appellate jurisdiction over all rate and regulatory
orders and ordinances of the municipalities and exclusive original jurisdiction
over rates and services to customers not located within the limits of a
municipality. At September 30, 2002 and 2001, our Texas Division

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had 313,340 and 314,734 utility meters in service. For the years ended September
30, 2002 and 2001, this division had total throughput of 49,279 and 53,586 MMcf.

NATURAL GAS MARKETING SEGMENT OVERVIEW

Our natural gas marketing and other non-utility segments have operations in
18 states and are organized under Atmos Energy Holdings, Inc.

Atmos Energy Marketing, L.L.C. comprises our natural gas marketing segment.
Woodward Marketing, L.L.C. and Trans Louisiana Industrial Gas Company, Inc. are
wholly-owned subsidiaries of Atmos Energy Marketing. Atmos Energy Marketing
provides a variety of natural gas management services to natural gas utility
systems, municipalities and industrial natural gas consumers in several states
and to our Colorado-Kansas, Kentucky, Louisiana and Mid-States divisions. These
services consist primarily of the furnishing of natural gas supplies at fixed
and market-based prices, load forecasting and management, gas storage and
transportation services, peaking sales and balancing services and gas price
hedging through the use of derivative products. In addition, Trans Louisiana
Industrial Gas Company markets natural gas primarily to commercial customers in
Louisiana. For the year ended September 30, 2002, Atmos Energy Marketing
realized $49.0 million in gas trading margin from the sale of 273.8 Bcf of
natural gas to its customers.

ATMOS ENERGY MARKETING ACTIVITIES

We acquired a 45 percent interest in Woodward Marketing in July 1997 as a
result of the merger of Atmos and United Cities Gas Company, which had acquired
that interest in May 1995. In April 2001, we acquired the 55 percent interest
that we did not own from JD 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-utility
business activities, a position he has held since April 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, is the overall
management of natural gas requirements for municipalities, local gas utility
companies and industrial customers located primarily in the southeastern and
midwestern United States. This business involves the sale of natural gas by
Atmos Energy 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 September 30, 2002, Atmos Energy Marketing had a total of
101 municipal customers and 641 industrial customers. Atmos Energy 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,
Atmos Energy 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.

In the management of natural gas requirements for municipal and other local
utilities, Atmos Energy Marketing sells physical natural gas to those customers
for future delivery and manages the associated price risk through the use of gas
futures, forwards, over-the-counter and exchange-traded options, and swap
contracts with counterparties. These financial contracts are marked-to-market at
the daily close of business. Atmos Energy Marketing links gas derivatives to
physical delivery of natural gas and typically balances its derivatives
positions at the end of each trading day. Over-the-counter swap agreements
require Atmos Energy 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. Atmos Energy 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.
Mark-to-market accounting refers to the measurement of contracts at fair value
determined at the balance sheet date with any gains and losses included in
earnings. Options held to manage price risk provide the right, but not the
requirement, to buy or sell energy commodities at a fixed price. Atmos Energy
Marketing uses options to manage margins and to limit overall price risk
exposure. At any point in time, Atmos Energy Marketing may not have completely
hedged its price risk on these activities.

Energy related services provided by Atmos Energy Marketing include the sale
of natural gas to its various customer classes and management of transportation
and storage assets and inventories. More specifically,
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energy services include contract negotiation and administration, load
forecasting, storage acquisition, natural gas purchase and delivery and capacity
utilization strategies. In providing these services, Atmos Energy Marketing
generates income from its utility, municipal and industrial customers through
negotiated prices based on the volume of gas supplied to the customer. Atmos
Energy 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, Atmos Energy Marketing engaged in limited 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, Atmos Energy Marketing experienced losses in its financial speculative
trading business. Effective in May 2002, Atmos Energy Marketing's financial
trading for speculative purposes was discontinued. Atmos Energy Marketing will
continue its financial trading for hedging (risk management purposes) related to
its physical trading positions. With regard to its physical trading business,
Atmos Energy 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 Atmos' management which limits the level of
trading loss to a maximum of 25 percent of the budgeted annual operating income
of Atmos Energy Holdings. 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 September 30,
2002, Atmos Energy Marketing's net open positions in its trading operations
totaled 1.9 Bcf. Atmos Energy 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 intra-day fluctuations of gas prices 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 Atmos Energy 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.

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

From time to time, Woodward Marketing borrows money to fund its natural gas
purchases and to fulfill its obligations to maintain deposit accounts with its
counterparties. See Note 3 of notes to consolidated financial statements.

OTHER NON-UTILITY SEGMENT OVERVIEW

- Atmos Pipeline and Storage, L.L.C. Atmos Pipeline and Storage owns or
has an interest in underground storage fields in Kansas, Kentucky and
Louisiana and provides storage services to our Colorado-Kansas,
Mid-States and Louisiana divisions and to other non-utility customers.
Our total storage capacity is approximately 26.1 Bcf. Atmos Pipeline and
Storage also provides transportation services to our utility operations
in Louisiana.

- Atmos Power Systems, Inc. Atmos Power Systems constructs and operates
electrical power generating plants and associated facilities. Atmos Power
Systems may also enter into agreements to either lease or sell such
plants.

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OPERATING STATISTICS

The following table shows our consolidated operating statistics for each of
the five fiscal years from 1998 through 2002. It is followed by three additional
tables that show utility sales and statistical data by division for 2002 and
2001 and our non-utility sales and statistical data for the same periods.
Certain prior year amounts have been reclassified to conform with the current
year presentation.

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ATMOS ENERGY CORPORATION

CONSOLIDATED OPERATING STATISTICS

See footnotes following these tables.

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ATMOS ENERGY CORPORATION

UTILITY SALES AND STATISTICAL DATA BY DIVISION(3)

See footnotes following these tables.
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ATMOS ENERGY CORPORATION

UTILITY SALES AND STATISTICAL DATA BY DIVISION(3)

NATURAL GAS MARKETING AND OTHER NON-UTILITY
OPERATIONS AND STATISTICAL DATA

See footnotes following these tables.

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Notes to preceding tables:
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(1) Prior to August 2000, propane revenues and expenses were fully consolidated.
Subsequent to August 2000, the results of our propane operations are shown
on the equity basis.

(2) A heating degree day is equivalent to each degree that the average of the
high and the low temperatures for a day is below 65 degrees. The colder the
climate, the greater the number of heating degree days. Heating degree days
are used in the natural gas industry to measure the relative coldness of
weather and to compare relative temperatures between one geographic area and
another. Normal degree days are based on 30-year average National Weather
Service data for selected locations. Degree day information for 2002 and
2001 is adjusted for service areas included in the Mid-States Division and
the Kentucky Division which have weather normalized operations. Degree day
information for 2000, 1999 and 1998 has not been adjusted for service areas
with weather normalized operations as that information was not available.

(3) These tables present data for our five utility divisions. Their operations
include the regulated local distribution companies located in their
respective service areas. The operations of Louisiana Gas are included in
our Louisiana Division since July 1, 2001, the date of acquisition.

(4) Utility sales volumes and revenues reflect utility segment operations,
including intercompany sales and transportation amounts.

(5) The number of employees excludes 489 and 480 Atmos shared services and
customer support center employees and 83 and 62 non-utility employees in
2002 and 2001.

(6) In April 2001, we completed our acquisition of the remaining 55 percent
interest in Woodward Marketing that we did not already own. Subsequent to
April 2001, the revenues and expenses of Woodward Marketing are now shown on
a consolidated basis.

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We consider each division within our utility segment to be a reporting unit
of the utility segment and not a separate reportable segment.

The following table summarizes certain information regarding the operations
of the utility, natural gas marketing and other non-utility segments of Atmos as
of and for each of the three years ended September 30, 2002. The information is
net of intersegment eliminations.

GAS SALES

Our natural gas utility distribution business is seasonal and highly
dependent on weather conditions in our service areas. Gas sales to residential
and commercial customers are greater during the winter months than during the
remainder of the year. The volumes of gas sales during the winter months will
vary with the temperatures during these months. The seasonal nature of our sales
to residential and commercial customers is partially offset by our sales in the
spring and summer months to our agricultural customers in Texas, Colorado and
Kansas who use natural gas to operate irrigation equipment.

In addition to weather, our revenues are affected by the cost of natural
gas and economic conditions in the areas that we serve. Higher gas costs, which
we are generally able to pass through to our customers under purchased gas
adjustment clauses, may cause customers to conserve, or, in the case of
industrial customers, to use alternative energy sources.

To protect against volatility in gas prices, we are hedging gas costs for
the 2002-2003 heating season by using a combination of storage, financial hedges
and fixed forward contracts to stabilize gas prices. For the 2002-2003 heating
season, we have covered between 45 and 50 percent of our anticipated flowing gas
requirements through storage and financial instruments. The gas hedges should
help to moderate the effects of higher customer accounts receivable caused by
potentially higher gas prices.

We also have weather normalization adjustments in our rate jurisdictions in
Tennessee, Georgia and Kentucky which protect against earnings volatility. We
purchased a three-year weather insurance policy for our Texas and Louisiana
operations commencing with the 2001-2002 heating season, with an option to
cancel in the third year if we obtain weather protection in our rate structures.
The policy covers the entire heating

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season of October through March. See "Weather and Seasonality" in Management's
Discussion and Analysis of Operations.

Our distribution systems have experienced aggregate peak day deliveries of
approximately 2.0 Bcf per day. We have the ability to curtail deliveries to
certain customers under the terms of interruptible contracts and applicable
state statutes or regulations which enable us to maintain our deliveries to high
priority customers. We have not imposed curtailment in our Texas Division since
we began independent operations in 1983 or in our Louisiana Division since we
acquired Trans Louisiana Gas Company in 1986 and Louisiana Gas Service in 2001.
The Kentucky Division curtailed deliveries to certain interruptible customers
during exceptionally cold periods in December 1989, January 1994 and during the
winter of 1996. Neither the Colorado-Kansas Division nor its predecessor,
Greeley Gas Company, has curtailed deliveries to its sales customers since prior
to 1980. The Mid-States Division curtails interruptible service customers from
time to time each year in accordance with the interruptible contracts and
tariffs.

GAS SUPPLY

We receive gas deliveries in our utility operations through 35 pipeline
transportation companies, both interstate and intrastate, to satisfy our sales
market requirements. The pipeline transportation agreements are firm and many of
them have pipeline no-notice storage service which provides for daily balancing
between system requirements and nominated flowing supplies. These agreements
have been negotiated with the shortest term necessary while still maintaining
our right of first refusal.

The Kentucky Division's gas supply is delivered primarily by the following
pipelines: Williams Pipeline-Texas Gas, Tennessee Gas, Trunkline, Midwestern
Pipeline and ANR. During 2002, the Kentucky Division sought and was granted
approval by the Kentucky Public Service Commission for a four year extension of
its performance-based rate program which commenced in July 1998. Under the
performance-based program, we and our customers jointly share in any actual gas
cost savings achieved when compared to pre-determined benchmarks. We also have
similar gas cost performance-based rate mechanisms in Georgia and Tennessee.

Our Mid-States Division is served by 13 interstate pipelines. The majority
of the volumes are transported through East Tennessee Pipeline, Southern Natural
Gas, Tennessee Gas Pipeline and Columbia Gulf.

Colorado Interstate Gas Company, Williams Pipeline-Central, Public Service
Company of Colorado and Northwest Pipeline are the principal transporters of the
Colorado-Kansas Division's requirements. Additionally, the Colorado-Kansas
Division purchases substantial volumes from producers that are connected
directly to its distribution system.

Our Texas Division receives transportation service from ONEOK Pipeline. In
addition, the Texas Division purchases a significant portion of its supply from
Pioneer Natural Resources which is connected directly to our Amarillo, Texas
distribution system.

Louisiana Intrastate Gas Company, Acadian Pipeline, Gulf South and Williams
Pipeline-Texas Gas pipelines deliver most of the Louisiana Division's
requirements.

We also own or hold an interest in and operate numerous natural gas storage
facilities in Kentucky, Kansas and Louisiana which are used to help meet
customer requirements during peak demand periods and to reduce the need to
contract for additional pipeline capacity to meet such peak demand periods.
Additionally, we operate one propane plant and a liquefied natural gas plant for
peak shaving purposes. We also contract for storage service in underground
storage facilities on many of the interstate pipelines serving us. See "Item 2.
Properties" below for further information regarding the peak shaving facilities.

We normally inject gas into pipeline storage systems and company owned
storage facilities during the summer months and withdraw it in the winter
months. Our underground storage facilities in Kansas, Kentucky and Louisiana
have a combined maximum daily output capability of approximately 266,000 Mcf.

We purchase our gas supply from various producers and marketers. Supply
arrangements are contracted on a firm basis with various terms at market prices.
The firm supply consists of both base load and swing supply quantities. Base
load quantities are those that flow at a constant level throughout the month and
swing

13

supply quantities provide the flexibility to change daily quantities to match
increases or decreases in requirements related to weather conditions. Except for
local production purchases, we select suppliers through a competitive bidding
process by requesting proposals from suppliers that have demonstrated that they
can provide reliable service. We select these suppliers based on their ability
to deliver gas supply to our designated firm pipeline receipt points at the best
cost. Major suppliers during fiscal 2002 were Reliant Energy, Pioneer Natural
Resources, Duke Energy, our non-utility subsidiary Woodward Marketing, ONEOK Gas
Marketing, BP Energy, Anadarko and Tenaska Marketing. We do not anticipate
problems with obtaining additional gas supply as needed for our customers.

REGULATION

Each of our utility divisions is regulated by various state or local public
utility authorities. We are also subject to regulation by the United States
Department of Transportation with respect to safety requirements in the
operation and maintenance of our gas distribution facilities. Our distribution
operations are also subject to various state and federal laws regulating
environmental matters. From time to time we receive inquiries regarding various
environmental matters. We believe that our properties and operations
substantially comply with and are operated in substantial conformity with
applicable safety and environmental statutes and regulations. There are no
administrative or judicial proceedings arising under environmental quality
statutes pending or known to be contemplated by governmental agencies which
would have a material adverse effect on us or our operations. Our environmental
claims have arisen out of manufactured gas plant sites in Tennessee and Missouri
and mercury contamination sites in Kansas. See Note 5 of notes to consolidated
financial statements.

RATES

The method of determining regulated rates varies among the states in which
our utility divisions operate. The regulators have the responsibility of
ensuring that utilities under their jurisdiction operate in the best interests
of customers while providing the utilities the opportunity to earn a reasonable
return on investment. In a general rate case, the applicable regulatory
authority, which is typically the state public utility commission, establishes a
base margin, which is the amount of revenue authorized to be collected from
customers to recover authorized operating expense (other than the cost of gas),
depreciation, interest, taxes and return on rate base. The divisions in our
utility operations segment perform annual deficiency studies for each rate
jurisdiction to determine when to file rate cases.

Substantially all of our sales to our customers fluctuate with the cost of
gas that we purchase. Rates established by regulatory authorities are adjusted
for increases and decreases in our purchased gas cost through purchased gas
adjustment mechanisms. Purchased gas adjustment mechanisms provide gas utilities
a method of recovering purchased gas costs on an ongoing basis without the
necessity of a rate case addressing all of the utilities' non-gas costs. These
mechanisms are commonly utilized when regulatory authorities recognize a
particular type of expense, such as purchased gas costs, that (i) is subject to
significant price fluctuations compared to the utility's other costs, (ii)
represents a large component of the utility's cost of service and (iii) is
generally outside the control of the gas utility. Such purchased gas adjustment
mechanisms are not designed to allow the utility to earn a profit but are
designed to allow a dollar-for-dollar recovery of fuel costs. Therefore, while
our operating revenues may fluctuate, gross profit (which is defined as
operating revenues less purchased gas cost) is generally not eroded or enhanced
because of gas cost increases or decreases.

Approximately 98 percent of our revenues in the fiscal year ended September
30, 2002, and approximately 96 percent of our revenues in fiscal 2001 were
derived from sales at rates set by or subject to approval by local or state
authorities. Generally, the regulatory authority reviews our rate request and
establishes a rate structure intended to generate revenue sufficient to cover
our costs of doing business and provide a reasonable return on invested capital.

14

The following table sets forth major rate requests that we or other parties
have made during the most recent five years and the action taken on such
requests.

- ---------------

(a) The Louisiana Public Service Commission approved, in October 1999, a rate
stabilization clause for three years for our former Trans La Division. The
rate stabilization clause will allow the Trans La system to earn a return
on equity within certain ranges that will be monitored on an annual basis.
In 2002, we submitted our 2001 rate stabilization filing and received
tariff revisions which resulted in an increase in annual revenues of $0.5
million during the first 24-month period. Subsequent to the first 24-month
period, adjusted rates will provide an increase in annual revenues of $0.4
million.
(b) On January 29, 2001, the Louisiana Public Service Commission approved a
rate stabilization clause for our LGS system for a three-year period
beginning January 1, 2001. Under the rate stabilization clause, our LGS
system will be allowed to earn a return on equity within certain ranges
that will be monitored on an annual basis. In 2002, we submitted our 2001
rate stabilization filing and received tariff revisions which resulted in
an increase in annual revenues of $15.3 million during the first 24-month
period. Subsequent to the first 24-month period, adjusted rates will
provide an increase in annual revenues of $11.9 million.

(c) The Kentucky rate order also included a provision for a five-year pilot
program for weather normalization which began in November 2000.

(d) Rate reduction as a result of settlement in a case initiated by the
Colorado Consumer Council.

(e) Rate reduction as a result of an agreement initiated by the Iowa Consumer
Advocate Division of the Department of Justice.

(f) Rate reduction as a result of a settlement with the Virginia State
Corporation Commission staff.

COMPETITION

Our utility operations are not currently in significant direct competition
with any other distributors of natural gas to residential and commercial
customers within our service areas. However, we do compete with other natural
gas suppliers and suppliers of alternative fuels for sales to industrial and
agricultural customers. We compete in all aspects of our business with
alternative energy sources, including, in particular, electricity. Competition
for residential and commercial customers is increasing. Promotional incentives,
improved equipment efficiencies and promotional rates all contribute to the
acceptability of electrical equipment. Electric utilities offer electricity as a
rival energy source and compete for the space heating, water heating and cooking
markets. The principal means to compete against alternative fuels is lower
prices, and natural gas historically has maintained its price advantage in the
residential, commercial and industrial markets. In
15

addition, our Natural Gas Marketing segment competes with other natural gas
brokers in obtaining natural gas supplies for customers.

EMPLOYEES

At September 30, 2002, we had 2,338 employees, consisting of 2,255
employees in our utility segment and 83 employees in our other segments. See
"Utility Sales and Statistical Data by Division" for the number of employees by
division.

ITEM 2. PROPERTIES

We own an aggregate of 39,157 miles of underground distribution and
transmission mains throughout our gas distribution systems. These mains are
located on easements or rights-of-way which generally provide for perpetual use.
We maintain our mains through a program of continuous inspection and repair and
believe that our system of mains is in good condition. We also own and operate
one propane peak shaving plant with a total capacity of approximately 180,000
gallons that can produce an equivalent of approximately 3,300 Mcf daily. We own
a liquefied natural gas storage facility with a capacity of 500,000 Mcf which
can inject a daily volume of 30,000 Mcf into the system, as well as underground
storage fields, as discussed below, that are used to supplement the supply of
natural gas in periods of peak demand.

We have seven underground gas storage facilities in Kentucky and four in
Kansas. We own a 25 percent interest in a gas storage facility in Napoleonville,
Louisiana. This gas storage facility is operated by Acadian Gas Pipeline System
who also owns the remaining 75 percent interest. Our 25 percent usable capacity
is 364,782 Mcf. In addition to the usable capacity, we maintain 332,917 Mcf of
cushion gas to maintain reservoir pressure. The Napoleonville facility has a
maximum daily delivery capability of approximately 56,000 Mcf. We also have a
contract through March 2003 with Bridgeline Gas Distribution L.L.C. for 250,000
Mcf of usable storage capacity in a storage facility in Sorrento, Louisiana. The
Sorrento facility has a maximum daily delivery capability of approximately
25,000 Mcf.

Our total storage capacity is approximately 26.1 Bcf. However,
approximately 12.3 Bcf of gas in the storage facilities must be retained as
cushion gas to maintain reservoir pressure. The maximum daily delivery
capability of these storage facilities is approximately 266,000 Mcf.

Substantially all of our properties in our Colorado-Kansas Division and
Mid-States Division with net book values of approximately $184.8 million and
$328.8 million are subject to liens under First Mortgage Bonds assumed in our
acquisitions of Greeley Gas Company and United Cities Gas Company. At September
30, 2002, the liens collateralized $17.0 million of outstanding 9.4 percent
Series J First Mortgage Bonds due May 1, 2021, and $86.6 million of outstanding
Series P, Q, R, T, U and V First Mortgage Bonds due at various dates from 2004
through 2022.

Our administrative offices are consolidated in Dallas, Texas under one
lease. We also maintain field offices throughout our distribution system, the
majority of which are located in leased facilities. Our non-utility operations
are headquartered in Houston, Texas, with offices in Houston and other
locations, primarily in leased facilities.

Net property, plant and equipment at September 30, 2002 included
approximately $1,223.9 million for utility, $9.9 million for natural gas
marketing and $66.5 million for other non-utility.

We hold franchises granted by the incorporated cities and towns that we
serve. At September 30, 2002, we held 555 such franchises having terms generally
ranging from five to 25 years. We believe that each of our franchises will be
renewed.

16

ITEM 3. LEGAL PROCEEDINGS

See Note 5 of notes to consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information as of September 30,
2002, regarding the executive officers of the Company. It is followed by a brief
description of the business experience of each executive officer.

Robert W. Best was named Chairman of the Board, President and Chief
Executive Officer in March 1997. He previously served as Senior Vice
President -- Regulated Businesses of Consolidated Natural Gas Company
(1996-March 1997) and was responsible for its transmission and distribution
companies.

John P. Reddy was named Senior Vice President and Chief Financial Officer
in September 2000. From April 2000 to September 2000, he was Senior Vice
President, Chief Financial Officer and Treasurer. Mr. Reddy previously served
the Company as Vice President, Corporate Development and Treasurer from December
1998 to March 2000. He joined the Company in August 1998 from Pacific
Enterprises, a Los Angeles, California based utility holding company whose
principal subsidiary was Southern California Gas Co. where he was Vice President
of Planning and Advisory Services responsible for corporate development and
merger and acquisition activities. Mr. Reddy was with Pacific Enterprises from
1980 to 1998 in various management and financial positions.

R. Earl Fischer was named Senior Vice President, Utility Operations in May
2000. He previously served the Company as President of the Texas Division from
January 1999 to April 2000 and as President of the Kentucky Division from
February 1989 to December 1998.

JD Woodward was named Senior Vice President, Non-Utility Operations in
April 2001. Prior to joining the Company, Mr. Woodward was President of Woodward
Marketing, L.L.C. from January 1995 to March 2001.

Louis P. Gregory joined the Company as Senior Vice President and General
Counsel in September 2000. Prior to joining the Company, he practiced law from
April 1999 to August 2000 with the law firm of McManemin & Smith. Prior to that,
he served as a consultant and independent contractor from August 1996 to
December 1998 for Nomas Corp. (formerly known as Lomas Mortgage USA, Inc.) and
Siena Holdings, Inc. (formerly known as Lomas Financial Corporation).

Wynn D. McGregor was named Vice President, Human Resources in January 1994.
He previously served the Company as Director of Human Resources from February
1991 to December 1993 and as Manager, Compensation and Employment from December
1987 to January 1991.

17

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our stock trades on the New York Stock Exchange under the trading symbol
"ATO." The high and low sale prices and dividends paid per share of our common
stock for fiscal 2002 and 2001 are listed below. The high and low prices listed
are the actual closing NYSE quotes for shares of our common stock.

See Note 3 of notes to consolidated financial statements for restriction on
payment of dividends. The number of record holders of our common stock on
September 30, 2002 was 28,829.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company and
should be read in conjunction with the consolidated financial statements
included herein. All income was from continuing operations.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

This section provides management's discussion of the financial condition,
cash flows and results of operations of Atmos Energy Corporation with specific
information on liquidity, capital resources and results of operations. It
includes management's interpretation of such financial results, the factors
affecting these results, the major factors expected to affect future operating
results and future investment and financing plans. This discussion should be
read in conjunction with the Company's consolidated financial statements and
notes thereto.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this Annual Report on Form 10-K may contain
"forward-looking statements" within the meaning of Section 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 economic conditions, including
competition from other energy suppliers as well as alternative forms of energy;
regulatory approvals, including the impact of rate proceedings before various
state regulatory commissions; successful completion and integration of pending
acquisitions; 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. 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.

RATEMAKING ACTIVITY

The following is a discussion of our ratemaking activity for rate cases
that are currently pending as of September 30, 2002 or rate proceedings
completed during the three years ended September 30, 2002.

Results of our rate activity for the three years ended September 30, 2002
can be summarized as follows: no rate increases implemented in 2002, net annual
rate increases totaling $6.4 million implemented in 2001 and net annual rate
increase totaling $12.1 million in 2000.

In August 1999, the Texas Division filed rate cases in its West Texas
System cities and Amarillo, Texas, requesting rate increases of approximately
$9.8 million and $4.4 million. The Texas Division received an increase in annual
revenues of approximately $2.1 million in base rates plus an increase of $0.1
million in service charges in Amarillo, Texas, effective for bills rendered on
or after January 1, 2000. The agreement with Amarillo also provided for changes
in the rate structure to reduce the impact of warmer than normal weather and to
improve the recovery of the actual cost of service calls. The Texas Division's
request for an annual increase of approximately $9.8 million from the 67 cities
served by its West Texas System was denied. In March 2000, this decision was
appealed to the Railroad Commission of Texas. Subsequently, 59 cities
representing approximately 58 percent of the Texas Division's customers ratified
a non-binding Settlement Agreement. The Settlement Agreement capped the rate
increase at $3.0 million and entitled the ratifying cities to accept a rate
increase below $3.0 million in the event the Railroad Commission adopted a
lesser

19

increase for the non-ratifying cities. Eight cities declined to participate in
the settlement and a hearing with the Railroad Commission was held in August
2000. In December 2000, the Railroad Commission approved an increase in annual
revenues of approximately $3.0 million that covered all 67 cities served by the
West Texas System effective December 1, 2000. In addition, the Railroad
Commission approved a new rate design providing more protection from warmer than
normal weather for our West Texas System.

In June 1999, the Trans La operations of the Louisiana Division were
involved in a rate investigation before the Louisiana Public Service Commission,
including the redesign of rates to mitigate the effects of warm winter weather.
A decision was rendered by the Louisiana Commission in October 1999 that
increased service charges associated with customer service calls and increased
the monthly customer charges from $6 to $9, both effective November 1, 1999.
While these changes are revenue neutral, they have mitigated the impact of
warmer than normal winter weather on earnings. The decision also included a
three-year rate stabilization clause which will allow the Trans La operations of
our Louisiana Division's rates to be adjusted annually to allow us to earn a
return on equity within certain ranges that will be monitored on an annual
basis.

In connection with its review of our acquisition of Louisiana Gas Service,
the Louisiana Public Service Commission approved a rate structure that requires
us to share cost savings that resulted from the acquisition with the customers
of Louisiana Gas Service. The shared cost savings will be the difference between
operation and maintenance expense in any future year and the 1998 normalized
expense for Louisiana Gas Service, indexed for inflation, annual changes in
labor costs and customer growth. Beginning January 1, 2002, the customers are
assured annual savings, which will be indexed for inflation, annual changes in
labor costs and customer growth. The sharing mechanism will remain in place for
20 years subject to established modification procedures.

In January and February 2002, our Louisiana division submitted its 2001
Rate Stabilization filings to the Louisiana Public Service Commission for the
two gas systems we operate in Louisiana. Recently completed audits by the
Louisiana Public Service Commission of these filings found our earnings to be
deficient and that rate adjustments were appropriate. Approved tariff revisions,
which became effective November 1, 2002, will result in $15.8 million in
additional revenue per year during the first 24-month period. Subsequent to the
first 24-month period, adjusted rates will provide $12.2 million in total annual
revenue increases. As a result of the actions taken by the Louisiana Public
Service Commission, Atmos Energy has decreased its overall weather sensitivity
in Louisiana.

In October 2002, Atmos received written notification from the Executive
Secretary of the Louisiana Public Service Commission that he was asserting that
a monthly facilities fee of approximately $0.6 million charged since July 2001
to Atmos by Trans Louisiana Gas Pipeline, Inc., a wholly-owned subsidiary of
Atmos, pursuant to a contract between the parties, was excessive. The Executive
Secretary asserted that all monthly facilities fees in excess of approximately
$0.1 million from July 2001 should be refunded to ratepayers with interest.

Atmos has responded to the Secretary and noted that it has previously made
all required filings with the Commission fully disclosing the amount of the
facilities fee. Atmos intends to file another petition seeking Commission
approval of the facilities fee by the end of calendar year 2003 similar to that
filed in 2001 but containing updated data. In the interim, Atmos is continuing
to charge a facilities fee of approximately $0.6 million per month, as the
Executive Secretary's correspondence does not constitute action of the
Commission.

In May 1999, the Kentucky Division requested from the Kentucky Public
Service Commission an increase in revenues, a weather normalization adjustment
and changes in rate design to shift a portion of revenues from commodity charges
to fixed rates. In December 1999, the Kentucky Commission granted an increase in
annual revenues of approximately $9.9 million. The new rates were effective for
services rendered on or after December 21, 1999. In addition, the Kentucky
Commission approved a five-year pilot program for weather normalization
beginning in November 2000.

On March 25, 2002, the Kentucky Commission issued an Order approving a four
year extension, effective April 1, 2002, of the Performance-based Ratemaking
mechanism related to gas procurement and gas

20

transportation activities filed by the Kentucky Division. The Performance-based
Ratemaking mechanism is incorporated into the Kentucky Division's gas cost
adjustment clause. As discussed above, it provides for sharing of purchased gas
cost savings between our customers and us. We recognized other income of $1.1
million, $0.2 million and $2.1 million under the Kentucky Performance-based
Ratemaking mechanism in fiscal years 2002, 2001 and 2000.

In November 2000, the Colorado-Kansas Division filed a rate case with the
Colorado Public Utilities Commission for approximately $4.2 million in
additional annual revenues. In May 2001, we received an increase in annual
revenues of approximately $2.8 million from the Colorado Public Utilities
Commission. The new rates went into effect on May 4, 2001.

Effective April 1, 1999, the Tennessee Regulatory Authority approved the
Mid-States Division's request to continue its Performance-based Ratemaking
mechanism related to gas procurement and gas transportation activities. The
Tennessee Regulatory Authority revised the mechanism from the original two-year
experimental period, by increasing the cap for incentive gains and/or losses to
$1.25 million per year. Under this agreement, the mechanism has no expiration
date and can be amended or cancelled by either the Mid-States Division or the
Tennessee Regulatory Authority according to the provisions of the agreement.
Similar to Tennessee, the Georgia Public Service Commission renewed our
Performance-based Ratemaking program for an additional three years effective May
1, 2002. The gas purchase and capacity release mechanisms of the
Performance-based Ratemaking mechanism are designed to provide us incentives to
find innovative methods to lower gas costs to our customers. We recognized other
income of $0.4 million, $1.0 million and $0.2 million in fiscal years 2002, 2001
and 2000 attributable to the Georgia and Tennessee Performance-based Ratemaking
mechanisms.

In February 2000, the Mid-States Division filed a rate case in Illinois
with the Illinois Commerce Commission requesting an increase in annual revenues
of approximately $3.1 million. After review by the Illinois Commerce Commission,
the amount requested was revised to approximately $2.1 million. The Mid-States
Division received an increase in annual revenues of approximately $1.4 million.
The new rates went into effect on October 23, 2000 and are collected primarily
through an increase in monthly customer charges.

In March 2000, the Mid-States Division filed a rate case in Virginia with
the State Corporation Commission of the Commonwealth of Virginia requesting an
increase in annual revenues of approximately $2.3 million. The State Corporation
Commission of Virginia reviewed the filing to determine if it met the
appropriate rules and regulations. In July 2000, we refiled the case requesting
an increase in revenues of approximately $2.1 million. The Commission accepted
the revised filing. In April 2001, the Mid-States Division agreed to an annual
rate reduction of $0.5 million effective beginning with the April 2001 billing
cycle.

In March 2001, the Mid-States Division and the Iowa Consumer Advocate
Division of the Department of Justice reached an agreement for an annual rate
reduction of $0.3 million relating to our Iowa operations. The rate reduction
was effective in March 2001.

In 2001, the Mid-States Division filed requests for accounting orders
related to uncollectable delinquencies in three states. As a result, we were
able to defer $1.5 million as a regulatory asset.

We continue to monitor rates in all of our service areas to ensure that
they are adequate for the recovery of service costs and return on investment.

WEATHER AND SEASONALITY

Our natural gas utility 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

21

affected by rainfall amounts. The effects of colder than normal winter weather
in 2001 and the effects of warmer than normal winter weather in 2002 and 2000 on
our consolidated volumes delivered are illustrated by the following degree day
information. The degree day information presented below for 2002 and 2001 is
adjusted for service areas with weather normalized operations. The degree day
information for 2000 has not been adjusted for service areas with weather
normalized operations as that information was not available.

The effects of temperatures that are above or below normal are partially
offset in the Tennessee and Georgia jurisdictions served by the Mid-States
Division and in the Kentucky jurisdiction served by the Kentucky 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
Mid-States Division and the Kentucky 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 revenue of $6.0 million in 2002, a
decrease in revenues of $3.3 million for 2001 and an increase in revenues of
$4.1 million in 2000. Approximately 374,000 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 year ended
September 30, 2002. We also received approval to change our rate structure in
our West Texas System of the Texas Division beginning in December 2000 to help
offset some of the negative effects of weather.

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. 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. We will receive a refund of a portion of the
cost of the policy if we cancel in the third year. 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 $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.

We have historically hedged approximately 20 to 25 percent of our gas
supply through the use of our underground storage assets. For the 2001-2002
heating season, we covered approximately 64 percent of our flowing gas
requirements through storage, financial hedges and fixed forward contracts at a
weighted average cost of slightly less than $4.00 per Mcf. For the 2002-2003
heating season, we have covered between 45 and 50 percent of our anticipated
flowing gas requirements through storage, financial hedges and fixed forward

22

contracts at a weighted average cost of less than $4.00 per Mcf. This should
provide protection to us and our customers against potential sharp increases in
the price of natural gas during the 2002-2003 heating season.

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 long-term debt of Mississippi
Valley Gas of approximately $45.0 million. Mississippi Valley Gas provides
natural gas distribution service to approximately 261,500 residential,
commercial, industrial and other customers located primarily in the northern and
central regions of Mississippi. On October 31, 2002, we announced that we had
received approval from the Mississippi Public Service Commission to acquire
Mississippi Valley Gas. The transaction had previously received federal
regulatory approval and approvals from the six other state utility commissions
that require approval. We expect to close the acquisition in December 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General -- Our 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 various other assumptions
that we believed to be reasonable under the circumstances. On an ongoing basis,
we evaluate our estimates, including those related to risk management and
trading activities, allowance for doubtful accounts, goodwill and pension and
other post retirement plans. 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 activity
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 estimates 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, 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.

Goodwill -- At September 30, 2002, we had $185.0 million of goodwill,
$150.3 million of which was attributable to our utility segment, $21.3 million
was attributable to our natural gas marketing segment and
23

$13.4 million was attributable to our other non-utility 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.

Pension and Other Postretirement Plans -- Pension and other postretirement
plan expenses and liabilities are determined on an actuarial basis and are
affected by the market value of plan assets, estimates of the expected return on
plan assets and assumed discount rates. Actual changes in the fair market value
of plan assets and differences between the actual return on plan assets and the
expected return on plan assets could have a material effect on the amount of
pension expense ultimately recognized. The assumed return on plan assets is
based on management's expectation of the long-term return on plan assets
portfolio. The discount rate used to compute the present value of plan
liabilities is based generally on rates of high grade corporate bonds with
maturities similar to the average period over which benefits will be paid.

CAPITAL RESOURCES AND LIQUIDITY
(SEE "CONSOLIDATED STATEMENTS OF CASH FLOWS")

Fiscal 2002 was a year in which total cash inflows exceeded total cash
outflows. This was generally the result of increased cash flows from operating
activities as a result of the Louisiana Gas Service assets acquired in July
2001, the acquisition of the remaining 55 percent of Woodward Marketing that we
did not already own in April 2001 and a decrease in cash held in margin accounts
partially offset by increased capital expenditures. Common stock issued
primarily through our Retirement Savings Plan and our Direct Stock Purchase Plan
was also used to finance operations.

CASH FLOWS FROM OPERATING ACTIVITIES

Items on the Consolidated Statement of Cash Flows for the year ended
September 30, 2001 reflect changes in balances for the year, net of assets
acquired and liabilities assumed in the acquisition of the additional interest
in Woodward Marketing, L.L.C. and the assets of Louisiana Gas Service Company
and LGS Natural Gas Company. See Note 10 of notes to consolidated financial
statements.

Cash flows from operating activities as reported in the consolidated
statements of cash flows totaled $296.2 million for 2002 compared to $83.0
million for 2001 and $54.2 million for 2000. The increase in net cash provided
by operating activities from 2001 to 2002 was primarily the result of increases
in net income, accounts payable and other current liabilities and decreases in
cash held on deposit in margin accounts and deferred gas costs. The increase in
net cash provided by operating activities was partially offset by increases in
accounts receivable. The increase in net income was due primarily to higher
gross profit and income from our gas marketing activities partially offset by
higher operating expenses and interest expense.

CASH FLOWS FROM INVESTING ACTIVITIES

During the last three years, a substantial portion of our cash resources
was used to fund acquisitions, our ongoing construction program to provide
natural gas services to our customer base and technology improvements. Net cash
used in investing activities totaled $158.2 million in 2002 compared with $468.1
million in 2001 and $100.1 million in 2000. Capital expenditures in fiscal 2002
amounted to $132.3 million, compared with $113.1 million in 2001 and $75.6
million in 2000. The increase in capital expenditures from 2001 to 2002 was
primarily the result of additional capital requirements needed due to our
growing customer base. Included in investing activities for 2002 is $15.7
million, in our natural gas marketing and other non-utility 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. Included in investing activities for 2001 is $363.4 million used
to acquire the assets of Louisiana Gas Service Company and LGS Natural Gas
Company as discussed in Note 2 of the notes to consolidated financial
statements. Included in investing activities in 2000 was $32.0 million used to
acquire the Missouri natural gas distribution assets of Associated Natural Gas.
Currently budgeted capital expenditures for fiscal 2003 total approximately
$160.2 million and include funds for additional mains, services, meters and
equipment. In 2003, we also plan to complete the
24

Mississippi Valley Gas Company acquisition for $150.0 million plus the repayment
of approximately $45.0 million of outstanding long-term debt as discussed in
Note 2 of the notes to consolidated financial statements. Capital expenditures
and acquisitions for fiscal 2003 are planned to be financed from internally
generated funds and financing activities as discussed below. In 2002, we had
$8.5 million in expenditures for assets to be used in leasing activities. In
2001, we had $5.4 million in expenditures for assets to be used in leasing
activities. In connection with our acquisition of Woodward Marketing in 2001, we
received $8.6 million in cash. In 2001, we received net proceeds of $6.6 million
in connection with the sale of certain utility assets. In 2000, we received net
proceeds of $6.5 million in connection with the sale of certain propane assets
to Heritage Propane Partners, L.P.

CASH FLOWS FROM FINANCING ACTIVITIES

Net cash used by financing activities totaled $106.4 million for 2002
compared with net cash provided by financing activities of $393.0 million for
2001 and $44.7 million for 2000. Financing activities during these periods
included issuance of common stock, dividend payments, short-term borrowings from
banks under our credit facilities and issuance and repayment of long-term debt.
The change in cash used by financing activities in 2002 as compared to cash
provided by financing activities in 2001 was due primarily to the issuance of
long-term debt and the issuance of common stock during 2001. In 2001, we
received $347.1 million in net proceeds from our $350.0 million debt offering in
May 2001. The net proceeds were used to help finance the completion of the
Louisiana Gas Service Company and LGS Natural Gas Company acquisition in July
2001. Long-term debt repayments totaled $20.7 million, $17.7 million and $14.6
million for 2002, 2001 and 2000. Repayments of long-term debt in 2002, 2001 and
2000 consisted of annual installments under the various loan documents. During
2002, short-term debt decreased by $55.5 million due primarily to more effective
collection experience of customer accounts receivable balances which increased
the amount of cash available to reduce short-term debt. During 2001, short-term
debt decreased $48.8 million due primarily to the use of the net proceeds from
our equity offering in December 2000 to reduce commercial paper debt. During
2000, short-term debt increased $81.7 million due to the effect of warmer
weather on net income for 2000, the acquisition of the Missouri natural gas
distribution assets of Associated Natural Gas for $32.0 million and increases in
accounts receivable, cost of gas stored underground and deferred charges.

Issuance of common stock. We issued 884,431, 674,468 and 704,540 shares of
common stock in 2002, 2001 and 2000 under our various plans. See the
Consolidated Statements of Shareholders' Equity and Note 6 of notes to
consolidated financial statements for the number of shares issued and available
for issuance under each of our plans. In addition to the shares issued under our
various plans, we also issued 6,741,500 shares through our equity offering in
December 2000 and 1,423,193 shares of restricted common stock for the
acquisition of the remaining 55 percent of Woodward Marketing in April 2001. The
net proceeds from the equity offering were used to reduce commercial paper debt
as discussed above.

Cash dividends paid. We paid $48.6 million in cash dividends during 2002
compared with $44.1 million in 2001 and $36.0 million in 2000. We increased the
dividend per share by $.02 in both 2002 and 2001 and $.04 in 2000. The increase
in cash dividends in 2002 over 2001 was also due to the increase in the number
of shares outstanding as discussed above.

25

LIQUIDITY

The excess of cash inflows over outflows has resulted in a slight decrease
in debt as a percentage of total capitalization, including short-term debt, as
shown in the table below.

Total debt as a percentage of total capitalization, including short-term
debt, was 59.4 percent and 61.0 percent at September 30, 2002 and 2001. Our
long-term plans are to decrease the debt to capitalization ratio to nearer its
target range of 50-52 percent through cash flow generated from operations,
continued issuance of new common stock under our Direct Stock Purchase Plan and
Retirement Savings Plan, access to the debt and equity capital markets and
limiting annual maintenance and capital expenditures. It is likely that the debt
to capitalization ratio will remain in its current range in the near term.

At September 30, 2002, we had 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. Our commercial paper is rated A-2 by Standard and Poor's, P-2 by
Moody's and F-2 by Fitch. At September 30, 2002, $132.7 million of commercial
paper was outstanding. We have a second credit facility in place for $18.0
million. At September 30, 2002, $13.1 million was outstanding under this credit
facility. These credit facilities are negotiated at least annually and are used
for working capital purposes.

On October 7, 2002, we entered into a $150.0 million short-term unsecured
committed credit facility. This credit facility will be used to provide initial
funding for the cash portion of the Mississippi Valley Gas acquisition and to
refinance Mississippi Valley Gas' existing debt.

At September 30, 2002, our Woodward Marketing subsidiary had an uncommitted
demand credit facility for $210.0 million which is used for working capital
purposes for our non-utility business. Atmos Energy Holdings, Inc., our
wholly-owned subsidiary, is the sole guarantor of all amounts outstanding under
this facility. At September 30, 2002, there were no amounts outstanding under
this credit facility. Related letters of credit totaling $41.0 million reduced
the amount available under this facility. The amount available under this credit
facility is also limited by various covenants, including covenants based on
working capital. Under the most restrictive covenant, the amount available to
Woodward Marketing under this credit facility at September 30, 2002 was $59.0
million.

At September 30, 2002, we also had an unsecured short-term uncommitted
credit line for $20.0 million. There were no borrowings under this uncommitted
credit facility at September 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.

In addition, Woodward Marketing has up to $100.0 million available from
Atmos Energy Holdings for its non-utility business. At September 30, 2002, $20.0
million was outstanding. Any outstanding amounts under the Atmos Energy Holdings
facility are subordinated to Woodward Marketing's $210.0 million uncommitted
demand credit facility described above. This intercompany loan is eliminated in
the consolidated financial statements.

The loan agreements pursuant to which our Senior Notes and First Mortgage
Bonds have been issued contain covenants by us with respect to the maintenance
of certain debt-to-equity ratios and cash flows and restrictions on the payment
of dividends. See Note 3 of notes to consolidated financial statements for more
information on these covenants.

26

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.

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

RISK MANAGEMENT AND TRADING ACTIVITIES

We conduct our risk management activities through both our utility and
natural gas marketing segments. See Notes 1 and 15 of notes to consolidated
financial statements for a description of our risk management activities. The
following table shows our risk management assets and liabilities by segment at
September 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 cost on the 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 on the consolidated
statement of income.

To conduct our risk management and trading activities, Atmos Energy
Marketing uses natural gas storage, transportation and requirements contracts,
forwards, over-the-counter and exchange-traded options, futures and swap
contracts. Prior to May 2002, Atmos Energy Marketing engaged in limited
financial trading for speculative purposes. Effective in May 2002, Atmos Energy
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, EITF Issue 00-17 and EITF Issue 02-03. 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 from risk management activities" and "Liabilities
from risk

27

management activities" on the consolidated balance sheet. Current period changes
in the assets and liabilities from risk management activities are recognized as
net gains or losses on the 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.

At its October 2002 meeting, the Emerging Issues Task Force rescinded EITF
Issue Nos. 98-10 and 00-17. The impact on Atmos will be to discontinue
mark-to-market accounting of our sales, storage and transportation contracts and
our natural gas storage inventory. Any cumulative effect of this change in
accounting will depend on the number and valuation of our sales, storage and
transportation contracts and our natural gas storage inventory level and
valuation at the time we adopt the new rules.

The following table reflects the components of the change in fair value of
our non-utility energy trading contract activities for the year ended September
30, 2002 (in thousands).

Fair value of contracts at September 30, 2001............... $ 28,349
Contracts realized/settled................................ (18,910)
Fair value of new contracts............................... 2,447
Other changes in value.................................... (5,235)
--------
Fair value of contracts at September 30, 2002............... $ 6,651
========

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

FUTURE CAPITAL REQUIREMENTS

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 fiscal 2003.

RESULTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2002 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2001

Operating revenues decreased by 34 percent to $950.8 million for 2002 from
$1.4 billion for 2001. The most significant factors contributing to the decrease
in operating revenues were a 31 percent decrease in average sales price due to
the decreased cost of gas and a 17 percent decrease in sales volumes due to
warmer weather, excluding the additional sales volumes attributable to the
Louisiana Gas Service operations acquired
28

in July 2001. During 2002, temperatures were 18 percent warmer than in the
corresponding period of the prior year and were six 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
2002 was 130.6 Bcf compared with 156.5 Bcf for 2001. However, the decrease in
sales volumes was partially offset by the additional sales volumes of 14.9 Bcf
attributable to the Louisiana Gas Service operations acquired in July 2001. The
average cost of gas per Mcf sold decreased 44 percent to $3.81 for 2002 from
$6.83 for 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 by five percent to $392.6 million for 2002 from
$374.7 million for 2001. The increase in gross profit was due primarily to the
additional gross profit resulting from the Louisiana Gas Service acquisition in
July 2001 partially offset by the effect of warmer weather. Changes in the cost
of gas do not directly affect gross profit because the fluctuations in gas
prices are passed through to the customer.

In April 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 2002, Atmos Energy Marketing, which includes
the operations of Woodward Marketing and Trans Louisiana Industrial Gas Company,
had income of $38.5 million in gas trading margin. For 2001, Atmos Energy
Marketing had income of $0.5 million in gas trading margin and an equity in
earnings of Woodward Marketing of $8.1 million. The increase for 2002 compared
to 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.

Operating expenses increased to $275.8 million for 2002 from $244.9 million
for 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 $10.7 million in pension costs. In addition,
operation and maintenance expense increased $9.2 million due to the full
consolidation of Woodward Marketing's operations beginning April 1, 2001. A
decrease in the provision for doubtful accounts of $26.2 million partially
offset this increase. The decrease in the provision for doubtful accounts was
attributable to the lower gas commodity prices during 2002 as well as our
effective recovery of customer receivable balances. Depreciation and
amortization increased $13.8 million due to the addition of the assets from the
Louisiana Gas Service acquisition in July 2001. Taxes other than income
decreased as a result of decreased city franchise taxes and state gross receipts
taxes, which are revenue based. However, these taxes are paid by our customers;
thus, these amounts are offset in revenues through customer billings and have no
effect on net income. The decrease in taxes other than income was partially
offset by increases in property and payroll taxes related to the Louisiana Gas
Service acquisition in July 2001.

Operating income increased 19 percent for 2002 to $155.3 million from
$130.3 million for 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 $0.6 million to $1.3 million in 2002
compared to $1.9 million in 2001. This decrease was due primarily to an increase
in net recoveries related to our performance based-ratemaking mechanisms, the
recognition of $0.5 million related to a large industrial contract we received
during 2002 and a reduction in the amortization expense recognized related to
weather insurance purchased for the 2001-2002 heating season. In addition, we
had an increase of $3.0 million in interest income in May 2001 due primarily to
interest income earned on the proceeds from our $350.0 million debt offering in
2001. We invested these proceeds in short-term investments until the completion
of the Louisiana Gas Service acquisition in July 2001. No such interest income
was recognized in 2002.

Interest expense increased $12.2 million to $59.2 million for 2002 compared
to $47.0 million for 2001. This increase was due primarily to the interest
expense on the $350.0 million debt offering in May 2001.

Net income increased for 2002 by $3.6 million to $59.7 million from $56.1
million for 2001. This increase in net income resulted primarily from the
increase in operating income partially offset by the increase in interest
expense discussed above.

29

YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2000

Operating revenues increased by 70 percent to $1.4 billion for 2001 from
$850.2 million for 2000. The most significant factors contributing to the
increase in operating revenues were a 58 percent increase in average sales price
due to the increased cost of gas and a 10 percent increase in sales and
transportation volumes due to colder weather. During 2001, excluding service
areas with weather normalized operations, temperatures were 31 percent colder
than in the corresponding period of the prior year and were seven percent colder
than the 30-year normal. The total volume of gas sold and transported for 2001
was 217.8 Bcf compared with 197.6 Bcf for 2000. During the early part of our
2001 fiscal year, natural gas prices throughout the country began to increase
significantly. The average cost of gas per Mcf sold increased to $6.83 for 2001
from $3.79 for 2000. Although we expect to recover our purchased gas costs from
customers through purchased gas adjustment mechanisms, generally there is a lag
between the time we pay for gas purchases and the time when regulators allow us
to place higher rates in service and recover those gas costs. As a result, we
have from time to time used short-term borrowings to temporarily finance
unrecovered purchased gas costs. Where permitted, we have increased our
purchased gas adjustments to help mitigate the increased cost of gas. In
addition, as a result of the increased gas costs, our accounts receivable
balances during fiscal 2001 increased significantly and, consequently, we also
increased our allowance for doubtful accounts, which we considered to be
adequate. We do not, however, expect this rise in natural gas prices to have a
material adverse effect on our financial condition, results of operations or net
cash flows.

In addition, operating revenues increased due to the impact of rate
increases in Kentucky, Illinois, Colorado, Amarillo, Texas, and west Texas. Also
contributing to the increase in operating revenues was the addition of
approximately 48,000 customers in Missouri due to the Associated Natural Gas
acquisition completed in fiscal 2000 and the addition of approximately 279,000
residential and commercial meters in Louisiana due to the completion of the
Louisiana Gas Service Company acquisition in July 2001. However, operating
revenues were partially offset by a reduction related to our former propane
assets which were placed into a joint venture partnership in August 2000.

Gross profit increased by 15 percent to $374.7 million for 2001 from $325.7
million for 2000. The increase in gross profit was due primarily to the increase
in volumes sold to weather sensitive customers, an increase of $5.1 million in
transportation revenues due to higher average transportation revenue per Mcf and
increased volumes and a $6.7 million non-recurring adjustment to purchased gas
cost to reflect state filings. In addition, gross profit increased due to the
impact of rate increases and additional customers, partially offset by a
reduction related to our former propane operations. Changes in the cost of gas
do not directly affect gross profit because the fluctuations in gas prices are
passed through to our customers.

On April 1, 2001, we completed our acquisition of the remaining 55 percent
interest in Woodward Marketing, L.L.C. As a result of this acquisition, the
revenues and expenses of Woodward Marketing are now shown on a consolidated
basis.

Operating expenses increased to $244.9 million for 2001 from $240.4 million
for 2000. Operation and maintenance expense decreased due to savings resulting
from the continued cost control initiatives started during fiscal 2000 and
reduced operation and maintenance expenses associated with our former propane
operations which were placed into a joint venture partnership in fiscal 2000. An
increase in the provision for doubtful accounts of $8.5 million and pension
costs of $4.5 million partially offset this decrease. Depreciation and
amortization expense increased due to the completion of the Louisiana Gas
Service Company and LGS Natural Gas Company acquisition in July 2001. Taxes
other than income increased as a result of increased city franchise taxes and
state gross receipts taxes, which are revenue based. However, these taxes are
paid by our customers; thus, these amounts are offset in revenues through
customer billings and have no effect on net income.

Operating income increased 53 percent for 2001 to $130.3 million from $85.3
million for 2000. The increase in operating income resulted primarily from
increased gross profit described above.

30

Equity in earnings of Woodward Marketing, L.L.C. was $8.1 million for the
six months ended March 31, 2001 compared with $7.3 million for the year 2000.

Miscellaneous income (expense) decreased $9.3 million to $(1.9) million for
2001 compared to $7.4 million for 2000. This decrease was due primarily to
charges incurred related to our Performance-based Ratemaking mechanisms and the
amortization of $4.9 million related to weather hedges purchased for our
Louisiana and Texas operations. In addition, we recognized a gain of $5.8
million in 2000 resulting from the sale of certain non-utility assets. No such
gain occurred in 2001. Partially offsetting the decrease in miscellaneous income
(expense) during 2001 was an increase of $3.0 million in interest income due
primarily to interest income earned on the proceeds from our $350.0 million debt
offering in May 2001. We invested these proceeds in short-term investments until
the completion of the Louisiana Gas Service Company and LGS Natural Gas Company
acquisition in July 2001.

Interest expense increased $3.2 million to $47.0 million for 2001 compared
to $43.8 million for 2000. This increase was due primarily to interest expense
on the $350.0 million debt offering in May 2001.

Net income increased for 2001 by $20.2 million to $56.1 million from $35.9
million for 2000. This increase in net income resulted primarily from the
increase in sales volumes due to the colder than normal weather and the impact
of rate increases discussed above.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE OF THE COMPANY

Our performance in the future will primarily depend on the results of our
utility and natural gas marketing operations. Several factors exist that could
influence Atmos' future financial performance, some of which are described
below. They should be considered in connection with evaluating forward-looking
statements contained in this report or otherwise made by or on behalf of us
since these factors could cause actual results and conditions to differ
materially from those projected in these forward-looking statements.

ADVERSE WEATHER CONDITIONS

Our natural gas sales volumes and related revenues are correlated with
heating requirements that result from cold winter weather. Our agricultural
sales volumes are associated with the rainfall levels during the growing season
in our west Texas irrigation market. Weather is one of the most significant
factors influencing our performance. However, as was more fully discussed above,
we have purchased weather insurance to mitigate the effect of warmer than
historically normal weather in our Texas and Louisiana service areas. In
addition, weather normalized rates are in effect in several of our
jurisdictions, which should mitigate the adverse effects of warmer than normal
weather on our operating results.

NATIONAL, REGIONAL AND LOCAL ECONOMIC CONDITIONS

Our operations will always be affected by the conditions and overall
strength of the national, regional and local economies, including interest
rates, changes in the capital markets and increases in the costs of our primary
commodity, natural gas. These factors impact the amount of residential,
industrial and commercial growth in our service territories. Higher costs of
natural gas in recent years have already caused many of our customers to
conserve in the use of our gas services and could lead to even more customers
utilizing such conservation methods.

REGULATORY APPROVALS

Our utility business is subject to various regulated returns on its rate
base in each of the 11 states in which we operate. We monitor the allowed rates
of return, our effectiveness in earning such rates and initiate rate proceedings
or operating changes as needed. In addition, in the normal course of the
regulatory environment, assets are placed in service and historical test periods
are established before rate cases can be filed. Once rate cases are filed,
regulatory bodies have the authority to suspend implementation of the new rates
while studying the cases. Because of this process, we must temporarily suffer
the negative financial effects of having placed assets in service without the
benefit of rate relief, which is commonly referred to as "regulatory lag". In

31

addition, our debt and equity financing programs are also subject to approval by
regulatory bodies in five states, which could limit our ability to take
advantage of favorable short-term market conditions.

SUCCESSFUL COMPLETION AND INTEGRATION OF PENDING ACQUISITION

Our acquisition strategy depends on our ability to successfully acquire and
integrate the operations of companies such as Mississippi Valley Gas Company,
which acquisition is currently expected to close in December 2002. Acquisitions
such as Mississippi Valley Gas should help us achieve greater economies of scale
by spreading the fixed costs of the utility business over a larger customer
base. In addition, the integration of this acquisition into our operations
during the next fiscal year will require a substantial commitment of financial
resources and management time.

INFLATION AND INCREASED GAS COSTS

We believe that inflation has caused, and will continue to cause, increases
in certain operating expenses, and has required, and will continue to require,
assets to be replaced at higher costs. We have a process in place to continually
review the adequacy of our gas rates in relation to the increasing cost of
providing service and the inherent regulatory lag in adjusting those gas rates.
Historically, we have been able to budget and control operating expenses and
investments within the amounts authorized to be collected in rates and intend to
continue to do so. The ability to control expenses is an important factor that
will influence future results.

In addition, the rapid increases in the price of purchased gas, as has
occurred in some prior years, causes us to experience a significant increase in
short-term debt because we must pay suppliers for such gas when it is purchased
long before such costs may be recovered through the collection of monthly
customer bills for gas delivered. Also, increases in purchased gas costs cause
more customers to be slow to pay their gas bills, leading to higher than normal
accounts receivable which in turn lead to higher short-term debt levels and
increased bad debts. Should the price of purchased gas increase significantly in
the upcoming heating season, we would expect increases in our short-term debt
and accounts receivable during fiscal 2003.

INCREASED COMPETITION

We are facing increased competition from other energy suppliers as well as
electric companies and from energy marketing and trading companies. In the case
of industrial customers, such as manufacturing plants, and agricultural
customers, adverse economic conditions, including higher gas costs, could cause
such customers to use alternative sources of energy such as electricity or to
bypass our systems in favor of special competitive contracts with lower per-unit
costs.

DEREGULATION OR UNBUNDLING

We are closely monitoring the development of unbundling initiatives in the
natural gas industry. Unbundling is the separation of the provision and pricing
of local distribution gas services into discrete components. It typically
focuses on the separation of the distribution and gas supply components and the
resulting opening of the regulated components of sales services to alternative
unregulated suppliers of those services. Because of our enhanced technology and
distribution system infrastructures, we believe that we are now positively
positioned as unbundling evolves. Consequently, we expect there would be no
significant adverse effect on our business should unbundling or further
deregulation of the natural gas distribution service business occur.

32

HEDGING AND MARKET RISK ACTIVITIES

Utility hedging activities

To protect against volatility in gas prices, we are hedging gas costs for
the 2002-2003 heating season by utilizing a combination of storage, financial
hedges and fixed forward contracts to stabilize gas prices. For the 2002-2003
heating season, we have covered approximately 45 to 50 percent of our
anticipated flowing gas requirements through storage and financial instruments.
The gas hedges should help to moderate the effects of higher customer accounts
receivable caused by potentially higher gas prices.

Atmos Energy Marketing activities

We acquired a 45 percent interest in Woodward Marketing, L.L.C. in July
1997 as a result of the merger of Atmos and United Cities Gas Company, which had
acquired that interest in May 1995. In April 2001, we acquired the 55 percent
interest that we did not own from JD 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-utility business activities, a position he has held since April 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 southeastern
and midwestern United States. This business involves the sale of natural gas by
Atmos Energy 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 September 30, 2002, Atmos Energy Marketing had 101
municipal customers and 641 industrial customers. Atmos Energy 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, Atmos
Energy 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 contacts are eliminated.

In the management of natural gas requirements for municipal and other local
utilities, Atmos Energy Marketing sells physical natural gas for future delivery
and manages the associated price risk through the use of gas futures, forwards,
over-the-counter and exchange-traded options, and swap contracts with
counterparties. These financial contracts are marked-to-market at the daily
close of business. Atmos Energy Marketing links gas derivatives to physical
delivery of natural gas and typically balances its derivatives positions at the
end of each trading day. Over-the-counter swap agreements require Atmos Energy
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. Atmos Energy
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. Mark-to-market accounting refers to
the measurement of contracts at fair value determined at the balance sheet date
with any gains and losses included in earnings. Options held to manage price
risk provide the right, but not the requirement, to buy or sell energy
commodities at a fixed price. Atmos Energy Marketing uses options to manage
margins and to limit overall price risk exposure. At any point in time, Atmos
Energy Marketing may not have completely offset its price risk on these
activities.

Energy related services provided by Atmos Energy 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, Atmos Energy Marketing generates income from its
utility, municipal and industrial customers through negotiated prices based on
the volume of gas supplied to the customer. Atmos Energy 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.

33

Prior to May 2002, Atmos Energy Marketing engaged in limited 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, Atmos Energy Marketing experienced losses in its financial speculative
trading business. Effective in May 2002, Atmos Energy Marketing's financial
trading for speculative purposes was discontinued. Atmos Energy Marketing will
continue its financial trading for hedging (risk management purposes) related to
its physical trading positions. With regard to its physical trading business,
Atmos Energy 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 25 percent of the budgeted annual operating income of Atmos Energy
Holdings. 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 September 30,
2002, Atmos Energy Marketing's net open positions in its trading operations
totaled 1.9 Bcf. Atmos Energy 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 intra-day fluctuations of gas 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 Atmos Energy 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.

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

From time to time, Woodward Marketing borrows money to fund its natural gas
purchases and to fulfill its obligations to maintain deposit accounts with its
counterparties. See Note 3 of notes to consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The risk inherent in our market risk sensitive instruments is the potential
loss arising from adverse changes in natural gas commodity prices and interest
rates as discussed below. The sensitivity analysis does not, however, consider
the effects that such adverse changes may have on overall economic activity nor
do they consider additional actions we may take to mitigate exposure to such
changes. Actual results may differ.

GAS PRICES

UTILITY SEGMENT

We purchase natural gas for our operations. Substantially all of the cost
of gas purchased for utility operations is recovered through purchased gas
adjustment mechanisms. The utility segment has a limited market risk in gas
prices related to gas purchases in the open market at spot prices for sale to
non-regulated energy services customers at fixed prices. As a result, our
earnings could be affected by changes in the price and availability of such gas.
To protect against volatility in gas prices, we from time to time hedge our gas
costs by purchasing futures contracts. Our utility segment does not use such
financial instruments for trading purposes and we are not a party to any
leveraged derivatives. Market risk is estimated as a hypothetical 10 percent
increase in the portion of our gas cost related to fixed-price non-regulated
sales. Based on projected fiscal 2003 non-regulated gas sales at fixed prices,
such an increase would result in an increase to cost of gas of approximately
$4.1 million in fiscal 2003.

34

NATURAL GAS MARKETING SEGMENT

In April 2001, we acquired the 55 percent interest in Woodward Marketing,
L.L.C., that we did not already own. Atmos Energy Marketing's principal business
is the management of natural gas requirements for municipalities, local gas
utility companies and industrial customers located primarily in the southeastern
and midwestern United States. This business involves the sale of natural gas and
the management of storage and transportation contracts for customers under
contracts generally having one to two-year terms. Atmos Energy Marketing also
sells natural gas to industrial customers on a delivered burner tip basis under
contract terms from 30 days to two years. In the management of natural gas
requirements for municipal and other local utilities, Atmos Energy Marketing
sells natural gas for future delivery and manages price risk through the use of
gas futures including forwards, over-the-counter and exchange-traded options,
futures and swap contracts. Financial contracts are marked-to-market at the
daily close of business.

Prior to May 2002, Atmos Energy Marketing engaged in limited financial
trading for speculative purposes for its own account, subject to a risk
management policy established by us which limits the level of trading loss to a
maximum of 25 percent of the budgeted annual operating income of Atmos Energy
Holdings. Compliance with such risk management policy is monitored on a daily
basis. In addition, Woodward Marketing's bank credit facility limits open
trading positions to 5.0 Bcf of natural gas. Atmos Energy Marketing will
continue its financial trading for hedging (risk management purposes) related to
its physical trading positions. At September 30, 2002, Atmos Energy Marketing's
open positions in its trading operations totaled 1.9 Bcf. In its trading, Atmos
Energy Marketing's open trading positions are monitored on a daily basis but are
not required to be closed if within the limits set by the bank credit facility.
The financial exposure that results from intra-day fluctuations of gas prices
and the potential for daily price movements has an impact on the net open
position. Based on its open positions at September 30, 2002, a $.50 increase in
market strip would result in a $1.0 million decrease in the trading gain. A $.50
decrease in market strip would result in a $1.0 million increase in the trading
gain.

Atmos Energy Marketing uses gas futures contracts, over-the-counter and
exchange-traded options and swap agreements, in the conduct of its business.
Atmos Energy Marketing links gas derivatives to physical delivery of natural gas
and typically balances its derivatives positions at the end of each trading day.
Over-the-counter swap agreements require Atmos Energy 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. Atmos Energy Marketing uses futures and
swaps to manage margins on offsetting fixed-price purchase or sale commitments
for physical quantities of natural gas. Options held to hedge price risk provide
the right, but not the requirement, to buy or sell energy commodities at a fixed
price. Atmos Energy Marketing uses options to manage margins and to limit
overall price risk exposure.

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

Atmos Energy Marketing's operations are concentrated in the natural gas
industry, and its customers and suppliers may be subject to economic risks
affecting that industry. Therefore, an economic downturn in the industry could
have an adverse affect on the creditworthiness of Atmos Energy Marketing's
customers. Atmos Energy Marketing manages credit risk to attempt to minimize its
exposure to uncollectible receivables. In compliance with Atmos Energy
Marketing's existing credit policy, prospective and existing customers are
reviewed for creditworthiness and customers not meeting minimum standards, at
the discretion of management, provide security deposits and are subject to
various requisite secured payment terms.

INTEREST RATES

Our earnings are affected by changes in short-term interest rates as a
result of our issuance of short-term commercial paper and our other short-term
borrowings. If market interest rates for short-term borrowings in

35

fiscal 2002 had averaged two percent more, our interest expense would have
increased by approximately $2.7 million.

Market risk for fixed-rate long-term obligations is estimated as the
potential increase in fair value resulting from a hypothetical one percent
decrease in interest rates and amounts to approximately $63.5 million based on
discounted cash flow analyses.

As of September 30, 2002, we were not engaged in other activities which
would cause exposure to the risk of material earnings or cash flow loss due to
changes in interest rates, foreign currency exchange rates or market commodity
prices.

36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to financial statements and financial statement schedule:

All other financial statement schedules are omitted because the required
information is not present, or not present in amounts sufficient to require
submission of the schedule or because the information required is included in
the financial statements and accompanying notes thereto.

37

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Atmos Energy Corporation

We have audited the accompanying consolidated balance sheets of Atmos
Energy Corporation as of September 30, 2002 and 2001, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended September 30, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Atmos Energy Corporation at September 30, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 1 to the financial statements, in fiscal 2002 the
Company adopted Statement of Financial Accounting Standards No. 141, Business
Combinations and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets.

ERNST & YOUNG LLP

Dallas, Texas
November 8, 2002

38

ATMOS ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

39

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements

40

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes to consolidated financial statements

41

ATMOS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements

42

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business -- Atmos Energy Corporation and its subsidiaries
are engaged primarily in the natural gas utility business as well as certain
non-regulated businesses. We distribute natural gas through sales and
transportation arrangements to approximately 1.4 million residential,
commercial, public authority and industrial customers through our five regulated
utility divisions: Atmos Energy Colorado-Kansas Division (formerly Greeley Gas
Division) in Colorado, Kansas and Missouri; Atmos Energy Kentucky Division
(formerly Western Kentucky Gas Division) in Kentucky; Atmos Energy Louisiana
Division (formerly Atmos Energy Louisiana Gas Division) in Louisiana; Atmos
Energy Mid-States Division (formerly United Cities Gas Division) in Illinois,
Tennessee, Iowa, Virginia, Georgia and Missouri; and Atmos Energy Texas Division
(formerly Energas Division) in Texas. Such business is subject to federal and
state regulation and/or regulation by local authorities in each of the states in
which the utility divisions operate. Our shared services unit is located in
Dallas, Texas and our customer support centers are located in Amarillo, Texas
and Metairie, Louisiana. Our non-utility businesses include various energy
service businesses as described below.

Through Atmos Energy Marketing, L.L.C., we are engaged in gas marketing and
energy management services. Atmos Energy Marketing provides gas supply
management services to industrial customers, municipalities and local
distribution companies including our five regulated utility divisions. Woodward
Marketing, L.L.C. and Trans Louisiana Industrial Gas Company, Inc. are
wholly-owned subsidiaries of Atmos Energy Marketing.

Through Atmos Pipeline and Storage, L.L.C., we own and operate natural gas
storage fields in Kansas, Kentucky and Louisiana to supplement natural gas used
by customers of the regulated utility divisions in Kansas, Kentucky, Tennessee
and Louisiana and to provide storage services to other customers including
customers in other states.

Through Atmos Power Systems, Inc., we construct and operate electrical
power generating plants and associated facilities. Atmos Power Systems may also
enter into agreements to either lease or sell such plants.

In addition, our non-utility businesses provide various retail services and
own an indirect interest in Heritage Propane Partners as described below.

We were formerly engaged in the retail and wholesale distribution of
propane gas through United Cities Propane Gas, Inc. On February 15, 2000, we
entered into an agreement to form a joint venture which combined our propane
operations with the propane operations of three other unrelated companies. The
combined joint venture was named U.S. Propane, L.P. On June 15, 2000, U.S.
Propane, in which we are a 19 percent partner, entered into an agreement to
combine its operations with Heritage Holdings, Inc. Upon closing of this
transaction, which occurred in August 2000, U.S. Propane owns all of the general
partnership interest and approximately 30 percent of the limited partnership
interest in Heritage Propane Partners, a publicly traded master limited
partnership. Through our ownership in U.S. Propane, we own an approximate six
percent interest in Heritage Propane Partners.

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

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. Subsequent to April 1, 2001, we owned 100 percent of
Woodward Marketing and have accounted for that ownership on a consolidated
basis. See Note 2.

Subsequent to August 10, 2000, we accounted for our interest in U.S.
Propane using the equity method of accounting.

43

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intangible assets -- Intangible assets consist primarily of customer
contracts valued at fair market value. These contracts have a gross carrying
value of $5.8 million. The weighted average amortization period is 10 years and
amortization expense is $0.6 million per year.

Goodwill -- Total goodwill was $185.0 million and $64.7 million at
September 30, 2002 and 2001. Goodwill applicable to the utility segment was
$150.3 million and $36.9 at September 30, 2002 and 2001. Goodwill applicable to
the natural gas marketing segment was $21.3 million and $15.0 million at
September 30, 2002 and 2001. Goodwill applicable to the other non-utility
segment was $13.4 million and $12.8 million at September 30, 2002 and 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." Goodwill applicable to the
natural gas marketing segment was amortized over 20 years through September 30,
2001. Effective October 1, 2001, goodwill applicable to the natural gas
marketing segment was not amortized under the provisions of SFAS No. 142. The
proforma effect of adopting SFAS No. 142 would be to increase net income by $0.3
million in 2001 and $0.1 million in 2000. Under the provisions of SFAS No. 142,
we evaluate our goodwill balance annually in our second quarter or as impairment
indicators arise. The initial evaluation took place during the second quarter of
fiscal 2002. We use a present value technique based on discounted cash flows to
estimate the fair value of our reporting groups. No impairment of our goodwill
balance was indicated as a result of that evaluation.

Impairment of Long-Lived Assets -- We periodically evaluate whether events
or circumstances have occurred that indicate that other long-lived assets may
not be recoverable or that the remaining useful life may warrant revision. When
such events or circumstances are present, we assess the recoverability of
long-lived assets by determining whether the carrying value will be recovered
through the expected future cash flows. In the event the sum of the expected
future cash flows resulting from the use of the asset is less than the carrying
value of the asset, an impairment loss equal to the excess of the asset's
carrying value over its fair value is recorded. To date, no impairment has been
recognized.

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.

We record regulatory assets which represent assets that are being recovered
through customer rates or are probable of being recovered through customer
rates. Significant regulatory assets as of September 30, 2002 included merger
and integration costs included in deferred charges and other assets and
environmental costs of $3.7 million. Regulatory liabilities represent probable
future reductions in revenues associated with amounts that are to be credited to
customers through the ratemaking process. As of September 30, 2002, we had
recorded a regulatory liability of $3.3 million for deferred income taxes.

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 consist of natural gas sales to residential, commercial, industrial,
agricultural and other customers. The allowance for doubtful

44

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounts is computed based on the aging of outstanding accounts receivable and
historical collections experience and represents in management's opinion, an
adequate allowance to provide for probable uncollectable accounts.

Utility property, plant and equipment -- Utility property, plant and
equipment is stated at original cost net of contributions in aid of
construction. The cost of additions includes direct construction costs, payroll
related costs (taxes, pensions and other fringe benefits), administrative and
general costs and an allowance for funds used during construction. (See
allowance for funds used during construction below). Major renewals and
betterments are capitalized while the costs of maintenance and repairs are
charged to expense as incurred. The costs of large projects are accumulated in
construction in progress until the project is completed. When the project is
completed, tested and placed in service, the balance is transferred to the
utility plant in service account included in the rate base and depreciation
begins. Property, plant and equipment is depreciated at various rates on a
straight-line basis over the estimated useful lives of the assets. The composite
rates were 3.8 percent for 2002, 3.7 percent for 2001 and 4.1 percent for 2000.
At the time property, plant and equipment is retired, the cost, plus removal
expenses less salvage, is charged to accumulated depreciation.

Allowance for funds used during construction -- Allowance for funds used
during construction represents the estimated cost of funds used to finance the
construction of major projects. Under regulatory practices, the costs are
capitalized and included in rate base for ratemaking purposes when the completed
projects are placed in service. Interest expense of $1.3 million and $1.2
million was capitalized in 2002 and 2001. No interest expense was capitalized
during 2000.

Non-utility property, plant and equipment -- Balances are stated at cost
and depreciation is generally computed on the straight-line method for financial
reporting purposes. The estimated useful lives of our non-utility assets range
between 8 and 38 years.

Gas stored underground -- Net additions of inventory gas to storage and
withdrawals of inventory gas from storage are priced using the average cost
method for all our utility divisions, except for the Mid-States Division, where
it is priced on the first-in first-out method. Gas stored underground and owned
by Atmos Pipeline and Storage is priced on the last-in first-out method. Gas in
storage that is retained as cushion gas to maintain reservoir pressure is
classified as property, plant and equipment and is priced at cost.

Risk management assets, natural gas marketing 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. 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 consolidated balance sheet. Current period changes in the
assets and liabilities from risk management activities are recognized as net
gains or losses on the consolidated statement of income. 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 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.
Certain contracts within this segment are not subject to EITF Issue No. 98-10
and are therefore accounted for on the accrual basis.

At September 30, 2002, we had net outstanding contracts representing 1.9
Bcf of net notional volumes with average contract maturities of less than two
years. These contracts were marked to market. Contracts

45

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

representing 75 percent of the fair value of these contracts are scheduled to
mature within one year. Contracts representing 22 percent of the remaining fair
value are scheduled to mature within three years.

Risk management assets, utility segment -- Our divisions have entered into
financial instruments for the 2002-2003 heating season. The purpose of entering
into these financial instruments is to protect us and our customers from
unusually large winter period gas price increases. We use the mark-to-market
method as prescribed by Financial Accounting Standard No. 133 "Accounting for
Derivatives and Hedging Activities" to account for these activities. 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 are recorded as deferred gas
costs on the consolidated balance sheet due to recoverability in rates.
Accordingly, there is no earnings impact as a result of the use of these
financial instruments. See Note 15. Upon maturity, the contracts are recognized
in purchased gas cost.

Income taxes -- Income taxes are provided based on the liability method,
resulting in income tax assets and liabilities due to temporary differences.
Temporary differences are differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. The liability method
requires the effect of tax rate changes on current and accumulated deferred
income taxes to be reflected in the period in which the rate change was enacted.
The liability method also requires that deferred tax assets be reduced by a
valuation allowance unless it is more likely than not that the assets will be
realized.

Cash and cash equivalents -- We consider all highly liquid investments with
an initial or remaining maturity of three months or less to be cash equivalents.

Deferred charges and other assets -- Deferred charges and other assets at
September 30, 2002 and 2001 include merger and integration costs of $27.0
million and $24.2 million, net of the related reserve for possible non-recovery
and accumulated amortization and the indirect investment in Heritage Propane
Partners of $22.2 million and $23.8 million in 2002 and 2001. Also included in
deferred charges and other assets are assets of our qualified defined benefit
retirement plans in excess of the plans' obligations of none and $44.4 million,
assets related to the nonqualified retirement plans of $27.7 million and $25.1
million, unamortized debt acquisition expense of $8.9 million and $9.7 million,
prepaid weather insurance premiums of $8.8 million and $8.8 million, long-term
receivable on leased assets of $8.8 million and $9.8 million and deferred asset
projects of $6.6 million and $12.6 million at September 30, 2002 and 2001.

Deferred credits and other liabilities -- Deferred credits and other
liabilities at September 30, 2002 and 2001 include customer advances for
construction of $12.0 million and $11.7 million; net additional minimum pension
liability related to our qualified defined benefit retirement plan of $15.7
million and none; obligations under other postretirement benefits of $39.5
million and $38.1 million; and obligations under our nonqualified retirement
plans of $38.0 million and $34.2 million.

Pension and Other Postretirement Plans -- Pension and other postretirement
plan expenses and liabilities are determined on an actuarial basis and are
affected by the market value of plan assets, estimates of the expected return on
plan assets and assumed discount rates. Actual changes in the fair market value
of plan assets and differences between the actual return on plan assets and the
expected return on plan assets could have a material effect on the amount of
pension expense ultimately recognized. The assumed return on plan assets is
based on management's expectation of the long-term return on plan assets
portfolio. The discount rate used to compute the present value of plan
liabilities is based generally on rates of high grade corporate bonds with
maturities similar to the average period over which benefits will be paid. At
September 30, 2002 and 2001, prepaid pension assets were $47.9 million and $44.4
million. At September 30, 2002, we recorded an additional minimum pension
liability of $63.6 million resulting in a net pension liability of $15.7 million
which is included in deferred credits and other liabilities on the consolidated
balance sheet. At September 30, 2001,

46

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

no minimum pension liability was required and the prepaid pension assets were
included in deferred charges and other assets on the consolidated balance sheet.

Earnings per share -- The calculation of basic earnings per share is based
on net income divided by the weighted average number of common shares
outstanding. The calculation of diluted earnings per share is based on net
income divided by the weighted average number of shares outstanding plus the
dilutive shares related to the United Cities' Long-term Stock Plan, the
Long-Term Incentive Plan and Atmos' Restricted Stock Grant Plan.

Comprehensive income -- In 1999, we adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires reporting of comprehensive income and its components (revenues,
expenses, gains and losses) in any complete presentation of general purpose
financial statements. Comprehensive income describes all changes, except those
resulting from investments by owners and distributions to owners, in the equity
of a business enterprise from transactions and other events including, as
applicable, foreign-currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. While the primary component of comprehensive income is our reported
net income, the other components of comprehensive income relate to unrealized
gains and losses associated with certain investments held as available for sale
and minimum pension liability adjustments.

The following table presents the components of other comprehensive income
(loss) and the related tax effect for the years ended September 30, 2002, 2001
and 2000:

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.

Weather insurance and hedges -- In June 2001, we purchased a three year
weather insurance policy with an option to cancel in the third year. We will
receive a refund of a portion of the cost of the policy if we cancel in the
third year. 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 $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.

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-

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001 heating season. No income was recognized for the 2000-2001 heating season
for these weather hedges due to the colder than normal weather. The cost of the
weather hedges was more than offset by the positive effects of colder weather on
our gross profit.

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. The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after June 15, 2002. We believe that the
impact of adopting SFAS No. 143 will not be material. This conclusion was based
on the perpetual nature of our franchise agreements and on our experience in the
businesses in which we operate.

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 believe that the impact of
adopting SFAS No. 144 will not be material.

At its October 2002 meeting, the Emerging Issues Task Force rescinded EITF
Issue Nos. 98-10 and 00-17. The impact on Atmos Energy Marketing will be to
discontinue mark-to-market accounting of our sales, storage and transportation
contracts and our natural gas storage inventory. Any cumulative effect of this
change in accounting will depend on the number and valuation of our sales,
storage and transportation contracts and our natural gas storage inventory level
and valuation at the time we adopt the new rules. The consensus to rescind EITF
Issue No. 98-10 is effective for all new contracts entered into (and physical
inventory purchased or produced) after October 25, 2002. The consensus is
effective for fiscal periods beginning after December 15, 2002 for energy
trading and energy-related contracts that existed on or before October 25, 2002
that remain in effect at the date the consensus is initially applied. We are
currently evaluating the impact of this rescission on our financial condition,
results of operations and cash flows.

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

2. ACQUISITIONS

ACQUISITION OF REMAINING EQUITY INTEREST IN WOODWARD MARKETING

In April 2001, we acquired from Woodward Marketing, Inc. the 55 percent
interest in Woodward Marketing, L.L.C. that we did not already own in exchange
for 1,423,193 restricted shares of our common stock. The consideration is
subject to a potential upward adjustment, based on our share price, of up to
232,547 shares plus an amount of shares to compensate for dividends paid after
the completion of the acquisition. The adjustment period expires on March 31,
2006. The pro forma effects for the fiscal year ended September 30, 2001 of
combining 100 percent of Woodward Marketing's results of operations with Atmos'
consolidated results of operations would have been a $17.9 million increase in
gas trading margin to $18.4 million, elimination of the $8.1 million equity in
earnings of Woodward Marketing, a $6.2 million increase in net income to $62.3
million and a $.13 increase in diluted earnings per share to $1.60.

Such pro forma effects for the fiscal year ended September 30, 2000 would
have been a $16.2 million increase in gas trading margin to $16.2 million,
elimination of the $7.3 million equity in earnings of Woodward Marketing, a $5.7
million increase in net income to $41.2 million and a $.12 increase in diluted
earnings per share to $1.26.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The acquisition enabled us to control Woodward Marketing's future direction
and strategies. Since April 1, 2001, 100 percent of Woodward Marketing's
operations have been consolidated with our operations.

The following table summarizes the fair market value of Woodward
Marketing's assets as of April 1, 2001, in thousands:

Net property, plant and equipment........................... $ 1,649
Current assets.............................................. 128,386
Other intangible assets..................................... 250
Goodwill.................................................... 12,310
Deferred charges and other assets........................... 22
---------
Total assets acquired............................. 142,617
Current liabilities......................................... (102,997)
Noncurrent liabilities...................................... (856)
Value of 45 percent already owned........................... (12,107)
---------
Net assets acquired............................... $ 26,657
=========

Other intangible assets represent the fair market value of non-compete
contracts. The cost assigned to these contracts is being amortized over 10
years. The value assigned to goodwill was based on our belief that ownership of
100 percent of Woodward Marketing would enable us to exercise greater control
over Woodward Marketing's operation, thereby increasing its value. The goodwill
amount is applicable to our Natural Gas Marketing segment. We expect that the
goodwill amount will not be deductible for tax purposes.

ACQUISITION OF NATURAL GAS OPERATIONS IN LOUISIANA

Effective July 1, 2001, we acquired the assets of Louisiana Gas Service
Company and LGS Natural Gas Company for $363.4 million. The acquired assets
provide natural gas distribution service through approximately 279,000
residential and commercial meters in southeastern and northern Louisiana. The
service territory includes the suburban areas of metropolitan New Orleans
(excluding Orleans Parish), the north shore of Lake Pontchartrain and the
Monroe/West Monroe metropolitan area. The non-utility operations include a
natural gas marketing company and an intrastate pipeline company which provides
gas transportation service to industrial customers in Louisiana and to the
acquired assets.

The acquisition increased the size of our operations in Louisiana and
allowed us to achieve certain synergies and cost savings by combining the
acquired operations with our existing Louisiana operations. Beginning in July
2001, results of operations of the Louisiana Gas Service assets have been
consolidated with our results of operations.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the fair market values of the assets
acquired and liabilities assumed as of July 1, 2001, in thousands:

Net property, plant and equipment........................... $313,251
Current assets.............................................. 31,423
Other intangible assets..................................... 11,200
Goodwill.................................................... 49,793
Noncurrent assets from risk management activities........... 5,355
Deferred charges and other assets........................... 958
--------
Total assets acquired............................. 411,980
Current liabilities......................................... (45,972)
Noncurrent liabilities...................................... (2,609)
--------
Net assets acquired............................... $363,399
========

Other intangible assets represent the fair market value of industrial
customer contracts and are being amortized over 10 years. The value assigned to
goodwill was based on our belief that the acquisition of the Louisiana Gas
assets will enable us to realize cost savings in the state of Louisiana when
combined with our existing Louisiana operations. The amount assigned to goodwill
was increased from $49.8 million in fiscal 2001 to $162.5 million in fiscal
2002. The revised amount was based on additional information acquired during
2002 about the regulated rate base of the acquired assets and the value assigned
to other intangible assets. At September 30, 2002, goodwill was assigned $144.2
million to our utility segment, $5.8 million to our natural gas marketing
segment and $12.5 million to our other non-utility segment. We expect the entire
goodwill amount to be deductible for tax purposes.

The pro forma effects for the fiscal year ended September 30, 2001 of
combining the results of operations of the Louisiana Gas assets with our
consolidated results of operations were a $306.2 million increase in operating
revenues to $1.7 billion, a $24.2 million decrease in net income to $31.9
million and a $.64 decrease in diluted earnings per share to $.83.

Such pro forma effects for the fiscal year ended September 30, 2000 were a
$186.1 million increase in operating revenues to $1.0 billion, a $6.9 million
decrease in net income to $29.0 million and a $.22 decrease in diluted earnings
per share to $.92.

PENDING ACQUISITION OF MISSISSIPPI VALLEY GAS COMPANY

In September 2001, we entered into a definitive agreement to acquire
Mississippi Valley Gas Company, a privately held natural gas utility. This
acquisition will be accounted for as a purchase and will be acquired using $75.0
million in cash and the issuance of $75.0 million of our common stock. We will
also repay Mississippi Valley Gas' outstanding long-term debt of approximately
$45.0 million. Mississippi Valley Gas provides natural gas distribution service
to approximately 261,500 residential, commercial, industrial and other customers
located primarily in the northern and central regions of Mississippi.
Mississippi Valley Gas has two underground storage facilities with 2.05 Bcf of
working gas capacity. On October 31, 2002, we announced that we had received
approval from the Mississippi Public Service Commission to acquire Mississippi
Valley Gas. The transaction had previously received federal regulatory approval
and approvals from the six other state utility commissions that require
approval. We expect to close the acquisition in December 2002.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DEBT

LONG-TERM DEBT

Long-term debt at September 30, 2002 and 2001 consisted of the following:

Most of the Senior Notes and First Mortgage Bonds contain provisions that
allow us to prepay the outstanding balance in whole at any time, subject to a
prepayment premium. The Senior Note agreements and First Mortgage Bond
indentures provide for certain cash flow requirements and restrictions on
additional indebtedness, sale of assets and payment of dividends. Under the most
restrictive of such covenants, cumulative cash dividends paid after December 31,
1988 may not exceed the sum of accumulated net income for periods after December
31, 1988 plus $15.0 million. At September 30, 2002, approximately $67.7 million
of retained earnings was unrestricted.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of September 30, 2002, all of the Colorado-Kansas Division utility plant
assets with a net book value of approximately $184.8 million were subject to a
lien under the 9.4 percent Series J First Mortgage Bonds assumed by us in the
acquisition of Greeley Gas Company. Also, substantially all of the Mid-States
Division utility plant assets, totaling $328.8 million, were subject to a lien
under the Indenture of Mortgage of the Series P through V First Mortgage Bonds.

Based on the borrowing rates currently available to us for debt with
similar terms and remaining average maturities, the fair value of long-term debt
at September 30, 2002 and 2001 is estimated, using discounted cash flow
analysis, to be $775.5 million and $709.9 million.

Maturities of long-term debt at September 30, 2002 were as follows (in
thousands):

2003........................................................ $ 21,980
2004........................................................ 18,766
2005........................................................ 16,196
2006........................................................ 14,259
2007........................................................ 11,507
Thereafter.................................................. 609,735
--------
$692,443
========

SHORT-TERM DEBT

At September 30, 2002, short-term debt consisted of $132.7 million of
commercial paper and $13.1 million outstanding under bank credit facilities. At
September 30, 2001, short-term debt was composed of $171.0 million of commercial
paper and $30.2 million outstanding under bank credit facilities. The weighted
average interest rate on short-term borrowings outstanding was 2.3 percent and
4.0 percent at September 30, 2002 and 2001.

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. Our commercial paper
is rated A-2 by Standard and Poor's, P-2 by Moody's and F-2 by Fitch. At
September 30, 2002, $132.7 million of commercial paper was outstanding. At
September 30, 2001, $171.0 million of commercial paper was outstanding. We have
a second credit facility in place for $18.0 million. At September 30, 2002,
$13.1 million was outstanding under this credit facility. At September 30, 2001,
$2.2 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 $210.0 million which is used for its non-utility business. Atmos Energy
Holdings, Inc., our wholly-owned subsidiary, is the sole guarantor of all
amounts outstanding under this facility. At September 30, 2002, there were no
amounts outstanding under this credit facility. Related letters of credit
totaling $41.0 million reduced the amount available under this facility. This
facility is used for working capital purposes. The amount available under this
credit facility is also limited by various covenants, including covenants based
on working capital. Under the most restrictive covenant, the amount available to
Woodward Marketing under this credit facility at September 30, 2002 was $59.0
million. During the quarter ended September 30, 2002, Woodward was not in

52

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

technical compliance with certain of the covenants contained in this uncommitted
demand credit facility. Woodward has obtained waivers for the periods of
non-compliance.

We also have an unsecured short-term uncommitted credit line for $20.0
million. There were no borrowings under this uncommitted credit facility at
September 30, 2002. At September 30, 2001, we had unsecured short-term
uncommitted credit lines from two banks totaling $40.0 million of which there
were no amounts outstanding. This uncommitted line is renewed or renegotiated at
least annually with varying terms and we pay no fee for the availability of the
line. Borrowings under this line are made on a when- and as-available basis at
the discretion of the bank.

In addition, Woodward Marketing has up to $100.0 million available from
Atmos Energy Holdings for its non-utility business. At September 30, 2002, $20.0
million was outstanding. Any outstanding amounts under the Atmos Energy Holdings
facility are subordinated to Woodward Marketing's $210.0 million uncommitted
demand credit facility described above. This intercompany loan is eliminated in
the consolidated financial statements.

On October 7, 2002, we entered into a $150.0 million short-term unsecured
committed credit facility. This credit facility will be used to provide initial
funding for the cash portion of the Mississippi Valley Gas acquisition and to
refinance Mississippi Valley Gas' existing debt.

4. INCOME TAXES

The components of income tax expense for 2002, 2001 and 2000 were as
follows:

53

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the tax effect of differences between the
basis of assets and liabilities for book and tax purposes. The tax effect of
temporary differences that give rise to significant components of the deferred
tax liabilities and deferred tax assets at September 30, 2002 and 2001 are
presented below:

Reconciliations of the provisions for income taxes computed at the
statutory rate to the reported provisions for income taxes for 2002, 2001 and
2000 are set forth below:

We have tax credit carryforwards amounting to $6.1 million, the majority of
which represent alternative minimum tax credits which do not expire. The
remaining tax credit carryforwards will expire at varying times between 2011 and
2018. We also have net operating loss carryforwards for state income tax
purposes amounting to $0.3 million which expire at varying times depending on
the jurisdiction in which the net operating loss was generated.

54

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. CONTINGENCIES

LITIGATION

Colorado-Kansas 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
Colorado-Kansas Division. 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 was brought to recover
billions of dollars in revenues that the defendants have allegedly unlawfully
diverted from the 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 elected to remand this case back to the
Kansas state court. A reconsideration of remand was filed, but it was denied.
The 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.

Texas 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 Texas Division. The action arose out of (i)
the construction and installation of a gas-fired electric generating facility
designed and installed by GE and (ii) the natural gas pipeline, which provides
natural gas to the facility, that was designed and installed by our Texas
Division. This suit was settled in October 2002.

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 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. 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.

We are a plaintiff in the case styled Energas Company, a Division of Atmos
Energy Corporation v. ONEOK Energy Marketing and Trading Company, L.P., ONEOK
Westex Transmission, Inc. and ONEOK Energy Marketing and Trading Company II,
filed in December 2001, pending in the District Court of Lubbock County, Texas,
72nd Judicial District. In this case, we are seeking to collect our receivable
related to approximately 5.0 Bcf of natural gas that we believe was not
delivered. We believe the receivable is fully recoverable.

55

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Louisiana 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 an action 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.

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.

ENVIRONMENTAL MATTERS

Manufactured Gas Plant Sites

The Mid-States 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 operations were being
conducted. Under current environmental protection laws and regulations, we may
be responsible for response actions with respect to such materials if response
actions are necessary.

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 Gas Company began the implementation of the consent order in the
first quarter of 1997 which continued through September 30, 2002. The
investigative phase of the work at the site has been completed. An interim
removal action was completed in June 2001. We have completed a risk assessment
report which is currently under review by the Tennessee Department of
Environment and Conservation. The Tennessee Regulatory Authority granted United
Cities Gas Company permission to defer, until its next rate case, all costs
incurred in Tennessee in connection with state and federally mandated
environmental control requirements.

In March 2002, the Tennessee Department of Environment and Conservation
contacted us about conducting an investigation at the former manufactured gas
plant located in Bristol, Tennessee. We agreed to perform a preliminary
investigation at the site which was completed in June 2002. The investigation
identified manufactured gas plant residual materials in the soil beneath the
site and we have proposed performing a removal action to remove any such
residuals in the first quarter of fiscal 2003. The Tennessee Department of
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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Environment and Conservation has requested that the removal action be conducted
pursuant to a voluntary agreement and we are currently preparing a draft
agreement.

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 Mid-States 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 has been completed and is currently under review by the Missouri
Department of Natural Resources. In preparation for the risk assessment, we
executed and recorded certain site use limitations including restricting use of
the site to commercial and industrial purposes and prohibiting the withdrawal of
groundwater for use as drinking water. 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 September 30, 2002, we had incurred costs of approximately $1.1
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
$0.6 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 amended the Orders with the Kansas Department of
Health to include all mercury meters that belonged to our Colorado-Kansas
Division before the merger with United Cities Gas Company on July 31, 1997. All
work on these sites will be completed in fiscal 2003.

As of September 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.

6. COMMON STOCK AND STOCK OPTIONS

SHAREHOLDERS' RIGHTS PLAN

We have a Rights Agreement under which each right ("Right") will entitle
the holder thereof, until May 10, 2008 or the date of redemption of the Rights,
to buy 1/10 of one share of Common Stock of Atmos at the exercise price of
$8.00, subject to adjustment. At no time will the Rights have any voting rights.
The exercise price payable and the number of shares of Common Stock or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution. At the date upon which the
rights become separate from our Common Stock (the "Distribution Date"), we will
issue one right with each share of Common Stock that becomes outstanding so that
all shares of Common Stock will have

57

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

attached Rights. After the Distribution Date, we may issue Rights when we issue
Common Stock if the Board deems such issuance to be necessary or appropriate.

The Rights will separate from the Common Stock and a Distribution Date will
occur upon the occurrence of certain events specified in the Rights Agreement,
including but not limited to, the acquisition by certain persons of at least 15
percent of the beneficial ownership of our Common Stock. The Rights have certain
anti-takeover effects and may cause substantial dilution to a person or entity
that attempts to acquire the Company on terms not approved by the Board of
Directors except pursuant to an offer conditioned upon a substantial number of
Rights being acquired. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors because, prior to the
time that the Rights become exercisable or transferable, the Rights may be
redeemed by us at $.01 per Right.

SHARES ISSUED UNDER VARIOUS PLANS

The following table presents the number of shares issued under our various
plans in 2002 and 2001, as well as the number of shares available for future
issuance at September 30, 2002.

RESTRICTED STOCK GRANT PLAN

Our Restricted Stock Grant Plan for management and key employees of the
Company, which became effective October 1, 1987 and was amended and restated in
February 1998, provides for awards of common stock that are subject to certain
restrictions. The Restricted Stock Grant Plan is administered by the Board of
Directors. The members of the Board who are not employees of Atmos make the
final determinations regarding participation in the Plan, awards under the Plan
and restrictions on the restricted stock awarded. The restricted stock may
consist of previously issued shares purchased on the open market or shares
issued directly from us. During 1998, we increased the number of shares of our
common stock that may be issued under the Restricted Stock Grant Plan by 650,000
shares. Compensation expense of $0.8 million, $1.1 million and $2.3 million was
recognized in 2002, 2001 and 2000 in connection with the vesting of shares
awarded under the Plan. Effective in February 2002, no additional shares of
Restricted Stock will be granted under this Plan.

RETIREMENT SAVINGS PLAN

Prior to January 1, 1999, we had an Employee Stock Ownership Plan and the
Mid-States Division had a 401(k) savings plan. The Employee Stock Ownership Plan
was amended effective January 1, 1999, as is more fully discussed in Note 7.
Effective March 1, 2002, the Employee Stock Ownership Plan was renamed the Atmos
Energy Corporation Retirement Savings Plan and Trust.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DIRECT STOCK PURCHASE PLAN

We also have a Direct Stock Purchase Plan. Participants in the Direct Stock
Purchase Plan may have all or part of their dividends reinvested at a three
percent discount from market prices. Direct Stock Purchase Plan participants may
purchase additional shares of Atmos common stock as often as weekly with
voluntary cash payments of at least $25, up to an annual maximum of $100,000.

OUTSIDE DIRECTORS STOCK-FOR-FEE PLAN

In November 1994, the Board adopted the Outside Directors Stock-for-Fee
Plan which was approved by the shareholders of Atmos in February 1995 and was
amended and restated in November 1997. The plan permits non-employee directors
to receive all or part of their annual retainer and meeting fees in stock rather
than in cash.

EQUITY INCENTIVE AND DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS

In November 1998, the Board adopted the Equity Incentive and Deferred
Compensation Plan for Non-Employee Directors which was approved by the
shareholders of Atmos in February 1999. Such plan represents an amendment to the
Atmos Energy Corporation Deferred Compensation Plan for Outside Directors
adopted by the Company on May 10, 1990 and replaced the pension payable under
the Company's Retirement Plan for Non-Employee Directors. Only non-employee
directors of Atmos are eligible to participate in the Equity Incentive and
Deferred Compensation Plan, the purpose of which is to provide non-employee
directors with the opportunity to defer receipt of compensation for services
rendered to the Company, invest deferred compensation into either a cash account
or a stock account and to receive an annual grant of share units for each year
of service on the Board.

STOCK-BASED COMPENSATION PLANS

We have two stock-based compensation plans that provide for the granting of
stock options to officers, key employees and non-employee directors. The
objectives of these plans include attracting and retaining the best personnel,
providing for additional performance incentives and promoting the success of
Atmos by providing employees the opportunity to acquire common stock.

United Cities Long-Term Stock Plan

Prior to the merger with Atmos, certain United Cities Gas Company officers
and key employees participated in the United Cities Long-Term Stock Plan
implemented in 1989. At the time of the merger on July 31, 1997, Atmos adopted
this plan by registering a total of 250,000 shares of Atmos stock to be issued
under the Long-Term Stock Plan for the Mid-States Division. Under this plan,
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock or any combination thereof may be granted to officers and key
employees of the Mid-States Division. Options granted under the plan become
exercisable at a rate of 20 percent per year and expire 10 years after the date
of grant. During 2002, no options were exercised under the plan. At September
30, 2002, there were 19,300 options outstanding, all of which were fully vested.
No incentive stock options, nonqualified stock options, stock appreciation
rights or restricted stock have been granted under the plan since 1996. Because
of the limited activities of this plan, the pro forma effects of applying
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" would have less than a $.01 per diluted share effect on earnings
per share or $4,030, $4,764 and $8,580 for 2002, 2001 and 2000.

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Long-Term Incentive Plan

On August 12, 1998, the Board of Directors approved and adopted the 1998
Long-Term Incentive Plan, which became effective October 1, 1998 after approval
by the shareholders of Atmos. An amendment to this plan increasing the share
reserve by 2,500,000 shares was amended by the shareholders at its annual
meeting on February 13, 2002. The Long-Term Incentive Plan represents a part of
our Total Rewards strategy which we developed as a result of a study we
conducted of all employee, executive and non-employee director compensation and
benefits. The Long-Term Incentive Plan is a comprehensive, long-term incentive
compensation plan providing for discretionary awards of incentive stock options,
non-qualified stock options, stock appreciation rights, bonus stock, restricted
stock and performance-based stock to help attract, retain and reward employees
and non-employee directors of Atmos and its subsidiaries.

We are authorized to grant awards for up to a maximum of 4,000,000 shares
of common stock under the Long-Term Incentive Plan subject to certain adjustment
provisions. To date only non-qualified stock options have been issued. The
option price is equal to the market price of our stock at the date of grant. The
stock options expire 10 years from the date of the grant and options vest
annually over a service period ranging from one to three years. At September 30,
2002, we had 1,557,606 options outstanding under the Long- Term Incentive Plan
at an exercise price ranging from $14.68 to $25.66.

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued. This statement
established a fair value-based method of accounting for employee stock options
or similar equity instruments and encourages, but does not require, all
companies to adopt that method of accounting for all of their employee stock
compensation plans. SFAS No. 123 allows companies to continue to measure
compensation cost for employee stock options or similar equity instruments using
the intrinsic value method of accounting described in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". We have
elected to continue using the intrinsic value method as prescribed by APB No.
25. Under this method, no compensation cost for stock options is recognized for
stock option awards granted at or above fair market value.

A summary of activity for grants of stock options under the Long-Term
Incentive Plan follows:

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Information about outstanding and exercisable options under the Long-Term
Incentive Plan, as of September 30, 2002, follows:

A summary of outstanding options under the Long-Term Incentive Plan that
are fully exercisable follows:

The following table sets forth the number of securities authorized for
issuance under our equity compensation plans at September 30, 2002.

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PRO FORMA FAIR VALUE DISCLOSURES

Had compensation expense for our stock options been recognized based on the
fair value on the grant date under the methodology prescribed by SFAS No. 123,
our net income and earnings per share for 2002, 2001 and 2000 would have been
impacted as shown in the following table.

In accordance with the fair value method of determining compensation
expense, the weighted average grant date fair value per share of options granted
was as follows:

- $3.55 in fiscal 2002;

- $3.97 in fiscal 2001; and

- $2.88 in fiscal 2000.

We used the Black-Scholes pricing model to estimate the fair value of each
option granted with the following weighted average assumptions for 2002, 2001
and 2000:

7. EMPLOYEE RETIREMENT, STOCK OWNERSHIP AND OTHER PLANS

DEFINED BENEFIT PLANS

Effective January 1, 1999, we established the Atmos Pension Account Plan
which covers substantially all employees of Atmos. Opening account balances were
established for participants as of January 1, 1999 equal to the present value of
their respective accrued benefits under the pension plans which were previously
in effect as of December 31, 1998. The Pension Account Plan credits an
allocation to each participant's account at the end of each year according to a
formula based on the participant's age, service and total pay (excluding
incentive pay).

The Pension Account Plan also provides for an additional annual allocation
based upon a participant's age as of January 1, 1999 for those participants who
were participants in the prior pension plans. The plan will credit this
additional allocation each year through December 31, 2008. In addition, at the
end of each year, a participant's account will be credited with interest on the
employee's prior year account balance. A special grandfather benefit also
applies through December 31, 2008, for participants who were at least age 50 as
of January 1, 1999, and who were participants in one of the prior plans on
December 31, 1998. Participants are fully vested in their account balances after
five years of service and may choose to receive their account balances as a lump
sum or an annuity.

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Our funding policy is to contribute annually an amount in accordance with
the requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.

At September 30, 2002, we recorded the accrued pension asset against the
additional minimum pension liability resulting in a net pension liability in
deferred credits and other liabilities. At September 30, 2001, we recorded the
accrued pension asset in deferred charges and other assets. The following table
sets forth the total for the Pension Account Plan's funded status for 2002 and
2001.

The plan assets consist primarily of investments in common stocks, interest
bearing securities and interests in commingled pension trust funds.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic pension cost, which is recorded as an operation expense, for
the Pension Account Plan for 2002, 2001 and 2000, included the following
components:

SUPPLEMENTAL EXECUTIVE BENEFITS PLANS

We have a nonqualified Supplemental Executive Benefits Plan which provides
additional pension, disability and death benefits to the officers and certain
other employees of Atmos. The Supplemental Executive Benefits Plan was amended
and restated in August 1998. In addition, in August 1998, we adopted the
Performance-Based Supplemental Executive Benefits Plan which covers all
employees who become officers or division presidents after August 12, 1998 or
any other employees selected by our Board of Directors in its discretion.

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We record the accrued pension cost in deferred credits and other
liabilities. The following table sets forth the total for the Supplemental
Plans' funded status for 2002 and 2001.

Assets for the Supplemental Plans are held in our rabbi trusts (see Note
12) and consist primarily of investments in equity mutual funds. The market
value of the rabbi trusts amounted to $27.7 million and $25.1 million at
September 30, 2002 and 2001. The assets in the rabbi trusts are included on our
balance sheet under deferred charges and other assets and are not presented
above as plan assets.

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the Supplemental Plans with accumulated benefit
obligations in excess of plan assets were $59.2 million, $53.2 million and none
as of September 30, 2002 and $52.8 million, $45.5 million and none, as of
September 30, 2001.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic pension cost, which is recorded as an operation expense, for
the Supplemental Plans for 2002, 2001 and 2000 consisted of the following
components:

RETIREMENT SAVINGS PLAN

Atmos sponsors a Retirement Savings Plan for substantially all employees.
Effective January 1, 1999 the Retirement Savings Plan was amended to provide for
deferral of a portion of a participant's salary ranging from a minimum of one
percent of eligible compensation, as defined by the Plan, up to the maximum
allowed by the Internal Revenue Service. In addition, among other changes to the
Retirement Savings Plan, participants are provided with automatic matching
contributions of 100 percent of each participant's salary reduction up to four
percent of the participant's salary and are provided the option of taking out
loans against their accounts subject to certain restrictions. Each participant
enters into a salary reduction agreement with Atmos pursuant to which the
participant's salary is reduced by an amount not to exceed the maximum amount
allowed by the Internal Revenue Service. Taxes on the amount by which the
participant's salary is reduced are deferred pursuant to Section 401(k) of the
Internal Revenue Code. The amount of the salary reduction is contributed by us
to the Retirement Savings Plan for the account of the participant. Matching
contributions to the Plan were expensed as incurred and amounted to $3.6
million, $3.2 million, and $3.0 million for 2002, 2001 and 2000. The directors
may also approve discretionary contributions, subject to the provisions of the
Internal Revenue Code of 1986 and applicable regulations of the Internal Revenue
Service. No discretionary contributions were made for 2002, 2001 or 2000.

VARIABLE PAY PLAN

The Variable Pay Plan was created to give each employee an opportunity to
share in the success of Atmos based on certain criteria. Each fiscal year, we
establish key performance measures for the Variable Pay Plan. These performance
measures are considered critical to achieving business objectives for a given
year and may include such things as growth in earnings, improved cash flows or
crucial customer satisfaction and safety results. Each year a performance
measure is established, and we make accruals during the year of the expected
payout based on the best estimates available at that time.

8. OTHER POSTRETIREMENT BENEFITS

Prior to January 1, 1999, Atmos sponsored two postretirement plans other
than pensions. Each provided health care benefits to retired employees. One
provided benefits to the Mid-States Division retirees and the other provided
medical benefits to all other retired Atmos employees.

Effective January 1, 1999, the United Cities plan was merged into the Atmos
plan and began providing benefits to future retirees that are essentially the
same as provided to other Atmos employees.

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Substantially all of our employees become eligible for these benefits if
they reach retirement age while working for us and attain certain specified
years of service. In addition, participant contributions are required under the
plan.

We record the accrued postretirement cost primarily in deferred credits and
other liabilities. The following table sets forth the total liability currently
recognized for the postretirement plan other than pensions for 2002 and 2001.

The plan assets consist primarily of investments in registered investment
companies and common/collective trusts.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net periodic postretirement cost, which is recorded as an operation
expense, for the postretirement benefit plan for 2002, 2001 and 2000 included
the following components:

Assumed health care cost trend rates have a significant effect on the
amounts reported for the plan. A one-percentage point change in assumed health
care cost trend rates would have the following effects on the latest actuarial
calculations:

We are currently recovering other postretirement benefits costs through our
regulated rates under Statement of Financial Accounting Standards No. 106
accrual accounting in Colorado, Kansas, the majority of the Texas service area
and Kentucky. We receive rate treatment as a cost of service item for other
postretirement benefits costs on the pay-as-you-go basis in Louisiana. Other
postretirement benefits costs have been specifically addressed in rate orders in
each jurisdiction served by the Mid-States Division or have been included in a
rate case and not disallowed. Management believes that accrual accounting in
accordance with SFAS No. 106 is appropriate and will continue to seek rate
recovery of accrual-based expenses in its ratemaking jurisdictions that have not
yet approved the recovery of these expenses.

9. EARNINGS PER SHARE

Basic earnings per share have 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 have been computed by dividing net income for
the period by the weighted average number of common shares outstanding during
the period adjusted for restricted stock and other contingently issuable shares
of common stock. Net income for the years ended September 30, 2002, 2001 and
2000 for basic and diluted earnings per share is the same, as there were no
contingently issuable shares of stock whose issuance would have impacted

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net income. A reconciliation between basic and diluted weighted average common
shares outstanding at September 30 follows:

10. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES

Supplemental disclosures of cash flow information for 2002, 2001 and 2000
are presented below.

In connection with the transaction related to the sale in 2000 of our
propane business (see Note 1), we contributed property, plant and equipment of
$38.9 million with a related accumulated depreciation of $17.1 million and
deferred charges and other assets of $3.9 million in exchange for an indirect
investment in Heritage Propane Partners. In addition, we received net proceeds
of $6.5 million and recorded a gain on the transaction of $5.8 million.

In May 2000, we completed the acquisition, which was accounted for as a
purchase, of the Missouri natural gas distribution assets of Southwestern Energy
Company and subsequent thereto, its operations were included in our consolidated
results. We paid $32.0 million in connection with this acquisition. Of the $32.0
million paid in cash, we recorded property, plant and equipment of $52.3 million
with a related accumulated depreciation of $21.7 million, accounts receivable of
$1.3 million, inventories of $0.3 million and gas stored underground of $2.0
million. In addition, we recorded accounts payable of $0.2 million, taxes
payable of $0.4 million, customer deposits of $1.2 million and deferred credits
of $0.4 million.

In April 2001, we completed the acquisition, which was accounted for as a
purchase, of the remaining 55 percent of Woodward Marketing that we did not
already own in exchange for 1,423,193 restricted shares of our common stock.
Subsequent to the acquisition, Woodward Marketing's operations were included in
our consolidated results. Consideration given for the stock purchase was $26.7
million. In connection with the issuance of the stock for this acquisition, we
recorded property, plant and equipment of $2.1 million with a related
accumulated depreciation of $0.4 million, accounts receivable of $94.8 million,
gas stored underground of $10.7 million, assets from risk management activities
of $9.8 million, intangible assets of $0.2 million and goodwill of $12.3
million. In addition, we received $8.6 million in cash and $4.5 million of cash
held on deposit in margin accounts. We also reduced deferred charges and other
assets by $12.1 million which related to the net of the amounts received in the
purchase and the removal of the 45 percent equity investment we had in Woodward
Marketing which we had previously owned. Liabilities assumed in the acquisition
included $95.2 million in accounts payable, $0.5 million in customer deposits,
$7.3 million in other current liabilities and $0.8 million in deferred credits
and other liabilities.

In July 2001, we completed the acquisition, which was accounted for as a
purchase, of the natural gas operations of Louisiana Gas Service Company and LGS
Natural Gas Company. Subsequent to the

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquisition, the operations of Louisiana Gas Service and LGS Natural Gas were
included in our consolidated results. We paid $363.4 million in cash in
connection with this acquisition. We recorded property, plant and equipment of
$466.5 million with a related accumulated depreciation of $153.2 million,
accounts receivable of $18.1 million, gas stored underground of $12.4 million, a
deferred gas credit of $10.8 million, assets from risk management activities of
$11.7 million, noncurrent assets from risk management activities of $5.3 million
and deferred charges and other assets of $1.0 million. In addition, we recorded
intangible assets of $11.2 million, goodwill of $49.8 million and $9.0 million
in deferred tax assets. Liabilities assumed in the acquisition included $12.8
million in accounts payable, $16.0 million in customer deposits, $14.1 million
in liabilities from risk management activities, $3.1 million in other current
liabilities and $11.6 million in deferred credits and other liabilities. The
amount assigned to goodwill was increased from $49.8 million in fiscal 2001 to
$162.5 million in fiscal 2002. The revised amount was based on additional
information acquired during 2002 about the regulated rate base of the acquired
assets and the value assigned to other intangible assets.

11. SEGMENT INFORMATION

Our determination of reportable segments considers the strategic operating
units under which we manage sales of various products and services to customers
in differing regulatory environments. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. All intersegment sales prices are market based. We evaluate
performance based on net income or loss of the respective operating units.

Included in purchased gas cost were purchases from Atmos Energy Marketing
of $190.6 million, $525.6 million and $228.6 million in 2002, 2001 and 2000.
Volumes purchased were 67.7 Bcf, 96.3 Bcf and 74.4 Bcf in 2002, 2001 and 2000.
These purchases were made in a competitive open bidding process and reflect
market prices. Average prices per Mcf for gas purchased from Atmos Energy
Marketing were $2.82, $5.46 and $3.07 in 2002, 2001 and 2000. In addition, we
have entered into contracts with Atmos Energy Marketing to manage a significant
portion of our underground storage facilities. Atmos Energy Marketing has acted
as agent in placing financial instruments for the various divisions that protect
us and our customers from unusually large winter period gas price increases.

In accordance with Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information", we have
identified the Utility, Natural Gas Marketing and Other Non-Utility segments, as
described in Note 1. We consider each division within our utility segment to be
a reporting unit of the utility segment and not a separate reportable segment.
The individual operations that comprise the other non-utility segment are not
currently material to our consolidated financial position or results of
operation and therefore do not require separate reporting. Income from our other
non-utility segment is generated primarily from pipeline and storage operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized financial information concerning our reportable segments is
shown in the following table:

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents a reconciliation of the operating revenues to
total consolidated revenues for the years ended September 30, 2002, 2001 and
2000.

A reconciliation of total assets for the reportable segments to total
consolidated assets for September 30, 2002, 2001 and 2000 is presented below.

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes our revenues by products and services for
the year ended September 30.

12. MARKETABLE SECURITIES

In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," all
marketable securities are classified as available-for-sale and are reported at
market value with unrealized gains and losses shown as a component of
"accumulated other comprehensive income (loss)" labeled "unrealized holding
gains (losses) on investments, net." All marketable securities are held in rabbi
trusts for the Supplemental Executive Benefits Plans.

The cost, unrealized holding gain (loss) and the market value of the
marketable securities are as follows:

13. LEASES

We have entered into non-cancelable operating leases for office and
warehouse space used in our operations. The remaining lease terms range from one
to 15 years and generally provide for the payment of taxes, insurance and
maintenance by the lessee. Renewal options exist for certain of these leases. We
have also

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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

entered into capital leases for division offices and operating facilities.
Property, plant and equipment included amounts for capital leases of $5.2
million at September 30, 2002 and 2001. Accumulated depreciation for these
capital leases totaled $2.2 million and $1.9 million at September 30, 2002 and
2001.

The related future minimum lease payments at September 30, 2002 were as
follows:

Consolidated lease and rental expense amounted to $8.1 million, $5.9
million and $9.0 million for fiscal 2002, 2001 and 2000.

14. RELATED PARTY TRANSACTIONS

JD Woodward became Senior Vice President, Non-Utility Operations of the
Company on April 1, 2001. Woodward Marketing L.L.C., a wholly-owned subsidiary
of the Company, leases office space and furniture from two corporations owned by
Mr. Woodward. The lease originated in April 2002 and expires in March 2007. Base
lease payments are $225,000 in the first year of the lease and increase to
$253,000 in the final year.

Effective in October 1994, Charles Vaughan retired as an officer and
employee of the Company and entered into a consulting agreement with the
Company. Under the terms of the agreement, Mr. Vaughan performed such consulting
services as the Board requested from time to time. During fiscal 2002, Mr.
Vaughan received $130,000 in payment for his services during that period. In
addition, pursuant to the terms of the agreement, upon early termination of the
agreement by the Company in September 2002, Mr. Vaughan received a total of
$175,000, representing the total sums due him under the remainder of the
agreement that was due to expire September 30, 2004.

15. 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 established 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.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or as deferred gas costs, depending on the
classification of the derivative. Derivative instruments may be classified as
either fair value hedges or cash flow hedges. 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 cash flows.

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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. 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. We will receive a refund of a portion of the
cost of the policy if we cancel in the third year. 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 $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

We have historically hedged 20 to 25 percent of our gas supply through the
use of our underground storage assets. For the 2002-2003 heating season, we have
covered between 45 and 50 percent of our anticipated flowing gas requirements
through storage, financial hedges and fixed forward contracts at a weighted
average cost of less than $4.00 per Mcf. This should provide protection to us
and our customers against potential sharp increases in the price of natural gas
during the 2002-2003 heating season.

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. 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 on the consolidated
statement of income.

NON-UTILITY HEDGING ACTIVITIES

At the close of business on September 30, 2002, we had outstanding
contracts representing 1.9 Bcf of net notional volumes with average contract
maturities of less than two years. These contracts were marked to market.
Contracts representing 75 percent of the fair value of these contracts are
scheduled to mature within one year. Contracts representing 22 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 year ended
September 30, 2002, our gas trading margin consisted of a $49.0 million realized
trading gain and a $10.5 million unrealized trading loss. For the year ended
September 30, 2001, our gas trading margin consisted of a $4.0 million realized
trading loss and a $4.5 million unrealized trading gain.

We acquired a 45 percent interest in Woodward Marketing in July 1997 as a
result of the merger of Atmos and United Cities Gas Company, which had acquired
that interest in May 1995. In April 2001, we acquired the 55 percent interest
that we did not own from JD Woodward and others for 1,423,193 restricted
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ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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-utility
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, is the overall
management of natural gas requirements for municipalities, local gas utility
companies and industrial customers located primarily in the southeastern and
midwestern United States. This business involves the sale of natural gas by
Atmos Energy 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 September 30, 2002, Atmos Energy Marketing had a total of
101 municipal customers and 641 industrial customers. Atmos Energy 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,
Atmos Energy 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.

In the management of natural gas requirements for municipal and other local
utilities, Atmos Energy 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. Atmos Energy Marketing links
gas futures to physical delivery of natural gas and typically balances its
futures positions at the end of each trading day. Over-the-counter swap
agreements require Atmos Energy 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. Atmos Energy 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.
Mark-to-market accounting refers to the measurement of contracts at fair value
determined at the balance sheet date with any gains and losses included in
earnings. Options held to manage price risk provide the right, but not the
requirement, to buy or sell energy commodities at a fixed price. Atmos Energy
Marketing uses options to manage margins and to limit overall price risk
exposure. At any point in time, Atmos Energy Marketing may not have completely
offset its price risk on these activities.

Energy related services provided by Atmos Energy 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, Atmos Energy Marketing generates income from its
utility, municipal and industrial customers through negotiated prices based on
the volume of gas supplied to the customer. Atmos Energy 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, Atmos Energy Marketing engaged in limited 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, Atmos Energy Marketing experienced losses in its financial speculative
trading business. Effective in May 2002, Atmos Energy Marketing's financial
trading for speculative purposes was discontinued. Atmos Energy Marketing will
continue its financial trading for hedging (risk management purposes) related to
its physical trading positions. With regard to its physical trading business,
Atmos Energy 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 25 percent of the budgeted annual operating income of Atmos Energy
Holdings. Physical trading involves utilizing physical assets (storage and
transportation) to sell and deliver gas to customers or to take a position in
the

76

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 September 30, 2002, Atmos
Energy Marketing's net open positions in its trading operations totaled 1.9 Bcf.
Atmos Energy 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 intra-day
fluctuations of gas 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 Atmos Energy 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.

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

From time to time, Woodward Marketing borrows money to fund its natural gas
purchases and to fulfill its obligations to maintain deposit accounts with its
counterparties. See Note 3 of notes to consolidated financial statements.

16. SUBSEQUENT EVENT (UNAUDITED)

On October 31, 2002, the Mississippi Public Service Commission approved the
acquisition by Atmos of Mississippi Valley Gas Company, a privately held natural
gas utility. The acquisition, which we expect to be effective in December 2002,
will be accounted for as a purchase. The acquisition price is $75.0 million in
cash and the issuance of $75.0 million of our common stock. In addition, we will
repay approximately $45.0 million of Mississippi Valley Gas' long-term debt. On
October 7, 2002, we entered into a $150.0 million short-term unsecured committed
credit facility that will be used to provide initial funding for the cash
portion of the acquisition and to refinance Mississippi Valley Gas' existing
debt.

77

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial data is presented below. The sum
of net income per share by quarter may not equal the net income per share for
the year due to variations in the weighted average shares outstanding used in
computing such amounts. Our businesses are seasonal due to weather conditions in
our service areas. For further information on its effects on quarterly results,
see the "Weather and Seasonality" discussion included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section herein.

78

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. SUPPLEMENTAL DISCLOSURES (UNAUDITED)

The following supplemental condensed financial statements show our three
operating segments and the elimination of material intercompany transactions.
The following supplemental condensed balance sheet is as of September 30, 2002.

79

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following supplemental condensed statement of income is for the year
ended September 30, 2002.

Organization -- Atmos Energy Corporation distributes natural gas in 11
states through its regulated utility operating divisions -- Colorado-Kansas
Division, Kentucky Division, Louisiana Division, Mid-States Division and Texas
Division. Our nonutility operations are organized under Atmos Energy Holdings,
Inc., which includes Atmos Energy Marketing, L.L.C., 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 and Trans Louisiana Industrial Gas Company.

Consolidating Financial Statements -- The column headed "Utility" consists
of the operations of Atmos' five operating divisions. The column headed "Natural
Gas Marketing" consists of Atmos Energy Marketing, Woodward Marketing and Trans
Louisiana Industrial Gas Company. The column headed "Other Non-Utility" consists
of our nonutility operations excluding natural gas marketing. Operating revenues
and purchased gas costs from our natural gas marketing operations are shown on a
gross basis in the "Natural Gas Marketing" 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
Natural Gas Marketing's 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, Natural Gas Marketing -- 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,

80

ATMOS ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

At its October 2002 meeting, the Emerging Issues Task Force rescinded EITF
Issue Nos. 98-10 and 00-17. The impact on Atmos will be to discontinue
mark-to-market accounting of our sales, storage and transportation contracts and
our natural gas storage inventory. Any cumulative effect of this change in
accounting will depend on the number and valuation of our sales, storage and
transportation contracts and our natural gas storage inventory level and
valuation at the time we adopt the new rules. We are evaluating the impact on
Atmos of this action.

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

81

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders on
February 12, 2003. Information regarding executive officers is included in Part
I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders on February 12, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference from the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders on February 12, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders on February 12, 2003.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chairman, President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Chairman, President and Chief
Executive Officer; and Senior Vice President and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective.

Such disclosure controls and procedures are controls and procedures
designed to ensure that all information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods set forth in applicable Securities and Exchange
Commission forms, rules and regulations. In addition, we have reviewed our
internal controls and have concluded that there have been no significant changes
in such internal controls or other factors that could significantly affect those
controls subsequent to the date of our review.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. and 2. Financial Statements and Financial Statement Schedules

The financial statements and financial statement schedules listed in the
Index to Financial Statements in Item 8 are filed as part of this Form 10-K.

3. Exhibits

The exhibits listed in the accompanying Exhibits Index are filed as part of
this Form 10-K. The exhibits numbered 10.21(a) through 10.32(b) are management
contracts or compensatory plans or arrangements.

82

(b) Reports on Form 8-K

The Company filed a Form 8-K Current Report, Item 9, Regulation FD
Disclosure, dated August 14, 2002, disclosing that on August 14, 2002, each of
the Principal Executive Officer, Robert W. Best, and Principal Financial
Officer, John P. Reddy, of Atmos Energy Corporation, submitted to the Securities
and Exchange Commission sworn statements pursuant to Securities and Exchange
Commission Order No. 4-460. Also, two exhibits were attached: a copy of these
statements dated August 14, 2002.

83

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

ATMOS ENERGY CORPORATION
(REGISTRANT)

By /s/ JOHN P. REDDY
------------------------------------
John P. Reddy
Senior Vice President
and Chief Financial Officer

Date: November 22, 2002

84

POWER OF ATTORNEY

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:

/s/ ROBERT W. BEST Chairman, President and Chief November 22, 2002
- -------------------------------------- Executive Officer
Robert W. Best

/s/ JOHN P. REDDY Senior Vice President and Chief November 22, 2002
- -------------------------------------- Financial Officer
John P. Reddy

/s/ F.E. MEISENHEIMER Vice President and Controller November 22, 2002
- -------------------------------------- (Principal Accounting Officer)
F.E. Meisenheimer

/s/ TRAVIS W. BAIN, II Director November 22, 2002
- --------------------------------------
Travis W. Bain, II

/s/ DAN BUSBEE Director November 22, 2002
- --------------------------------------
Dan Busbee

/s/ RICHARD W. CARDIN Director November 22, 2002
- --------------------------------------
Richard W. Cardin

/s/ THOMAS J. GARLAND Director November 22, 2002
- --------------------------------------
Thomas J. Garland

/s/ RICHARD K. GORDON Director November 22, 2002
- --------------------------------------
Richard K. Gordon

/s/ GENE C. KOONCE Director November 22, 2002
- --------------------------------------
Gene C. Koonce

/s/ THOMAS C. MEREDITH Director November 22, 2002
- --------------------------------------
Thomas C. Meredith

/s/ PHILLIP E. NICHOL Director November 22, 2002
- --------------------------------------
Phillip E. Nichol

/s/ CARL S. QUINN Director November 22, 2002
- --------------------------------------
Carl S. Quinn

/s/ CHARLES K. VAUGHAN Director November 22, 2002
- --------------------------------------
Charles K. Vaughan

/s/ RICHARD WARE II Director November 22, 2002
- --------------------------------------
Richard Ware II

85

CERTIFICATIONS

I, Robert W. Best, certify that:

1. I have reviewed this annual report on Form 10-K of Atmos Energy
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By /s/ ROBERT W. BEST
------------------------------------
Robert W. Best
Chairman, President and Chief
Executive Officer

Date: November 22, 2002

86

CERTIFICATIONS

I, John P. Reddy, certify that:

1. I have reviewed this annual report on Form 10-K of Atmos Energy
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By /s/ JOHN P. REDDY
------------------------------------
John P. Reddy
Senior Vice President and Chief
Financial Officer

Date: November 22, 2002

87

SCHEDULE II

ATMOS ENERGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED SEPTEMBER 30, 2002

- ---------------

(1) This amount was charged to regulatory assets within deferred charges and
other assets as recovery was specifically permitted by the relevant
regulators.

(2) Uncollectible accounts written off

88

EXHIBITS INDEX

ITEM 14.(A)(3)

- ---------------

* This exhibit constitutes a "management contract or compensatory plan,
contract, or arrangement."

** These certifications pursuant to 18 U.S.C. Section 1350 by the Company's
Chief Executive Officer and Chief Financial Officer, furnished as Exhibits
99.1 and 99.2, respectively, to this Annual Report on Form 10-K, 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.

100