ATMOS ENERGY CORP - 10-Q Quarterly Report

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-10042

ATMOS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

TEXAS AND VIRGINIA 75-1743247
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

THREE LINCOLN CENTRE, SUITE 1800
5430 LBJ FREEWAY, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]

Number of shares outstanding of each of the issuer's classes of common
stock, as of May 1, 2003.

See accompanying notes to condensed consolidated financial statements

1

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See accompanying notes to condensed consolidated financial statements
2

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See accompanying notes to condensed consolidated financial statements
3

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements
4

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003

1. UNAUDITED INTERIM FINANCIAL INFORMATION

In the opinion of management, all material adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation have been made to
the unaudited interim period financial statements. Because of seasonal and other
factors, the results of operations for the six month period ended March 31, 2003
are not indicative of expected results of operations for the year ending
September 30, 2003. These interim financial statements and notes are condensed
as permitted by the instructions to Form 10-Q and should be read in conjunction
with the audited consolidated financial statements of Atmos Energy Corporation
in its Annual Report on Form 10-K for the fiscal year ended September 30, 2002.

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

Common stock -- As of March 31, 2003, we had 100,000,000 shares of common
stock, no par value (stated at $.005 per share), authorized and 45,624,705
shares outstanding. At September 30, 2002, we had 41,675,932 shares outstanding.

Goodwill -- Total goodwill was $275.0 million and $185.0 million at March
31, 2003 and September 30, 2002. Goodwill applicable to the utility segment was
$240.3 million and $150.3 million at March 31, 2003 and September 30, 2002.
Goodwill applicable to the natural gas marketing segment was $22.6 million and
$21.3 million at March 31, 2003 and September 30, 2002. Goodwill applicable to
the other non-utility segment was $12.1 million and $13.4 million at March 31,
2003 and September 30, 2002. Goodwill applicable to the utility and other
non-utility segments resulted from the acquisition of the Louisiana Gas Service
Company assets on July 1, 2001 and Mississippi Valley Gas Company on December 3,
2002 and is not subject to amortization under the provisions of Statement of
Financial Accounting Standards (SFAS) 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
has not been amortized pursuant to the provisions of SFAS No. 142.

Under the provisions of SFAS No. 142, we evaluate our goodwill balances for
impairment each year during our second fiscal quarter or as impairment
indicators arise. Our evaluation during the quarter ended March 31, 2003
resulted in no impairment. We use a present value technique based on discounted
cash flows to estimate the fair value of our reporting groups. If our
projections of estimated future cash flows change, those changes could result in
a reduction in the carrying value of our goodwill.

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 such impairment has
been recognized.

Retirement Obligations -- Effective October 1, 2002, we adopted SFAS 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 adoption of this Statement had no material impact to our financial
condition or results of operations based on the perpetual nature of our
franchise agreements and on our experience in the businesses in which we
operate.

5

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Accounts receivable and allowance for doubtful accounts -- Accounts
receivable consists of natural gas sales to residential, commercial, industrial,
agricultural and other customers. 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.

Risk management assets and liabilities, 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.

On October 25, 2002, through the issuance of Emerging Issues Task Force
(EITF) Issue No. 02-03, the EITF rescinded Issue No. 98-10 "Accounting for
Energy Trading and Risk Management Activities" thereby precluding mark-to-market
accounting for inventory and energy trading contracts that are not derivatives.
During the quarter ended December 31, 2002, energy trading contracts entered
into on or before October 25, 2002 were marked to market pursuant to the
provisions of EITF Issue No. 98-10. Energy trading contracts entered into after
October 25, 2002 were prospectively accounted for pursuant to the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Prior to December 31, 2002, we had recorded $12.9 million of unrealized
income in accordance with EITF Issue No. 98-10. Beginning January 1, 2003, all
energy trading contracts are being accounted for pursuant to the provisions of
SFAS No. 133. On January 1, 2003, we reversed the unrealized income on storage
contracts and certain full requirements contracts as a cumulative effect of a
change in accounting principle. The cumulative effect of the change in
accounting principle was reported in accordance with Accounting Principles Board
(APB) Opinion No. 20, "Accounting Changes." Further, many of our index priced
contracts qualify for the normal purchases and sales exception under SFAS No.
133 and are not marked to market for changes in value subsequent to December 31,
2002. Generally our fixed price contracts and our portfolio of options, swaps
and futures contracts will continue to be accounted for at fair value. In
addition, effective January 1, 2003, we designated a portion of our futures
contracts as fair value hedges of the natural gas marketing segment's gas
inventory. Accordingly, the inventory was adjusted to cost as of January 1, 2003
as part of the cumulative effect adjustment, but subsequent changes in fair
value will be recognized as an adjustment to the carrying value of the hedged
inventory. The cumulative noncash charge in the second quarter of fiscal 2003
was $7.8 million, net of $5.1 million of applicable income tax benefit. As
performance under these inventory, storage and transportation contracts is
completed, the applicable income will be recognized.

Under the mark-to-market method of accounting, contracts are reflected at
fair value, inclusive of future servicing costs and valuation adjustments, with
resulting unrealized gains and losses recorded as assets or liabilities from
risk management activities on the condensed consolidated balance sheet. Current
period changes in the assets and liabilities from risk management activities are
recognized as net gains or losses on the condensed consolidated statement of
income. Changes in the mark-to-market valuation of assets and liabilities from
risk management activities primarily result 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

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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exchange and over-the-counter quotations, time value and volatility factors
underlying the contracts. Values are adjusted to reflect the potential impact of
an orderly liquidation of our positions over a reasonable period of time under
present market conditions. Changes in market prices directly affect our estimate
of the fair value of these transactions. For those futures contracts designated
as fair value hedges, the market adjustment is offset by the adjustment to the
carrying value of the inventory.

Risk management assets and liabilities, utility segment -- We entered into
hedging agreements for the 2002-2003 heating season to protect us and our
customers from unusually large winter period gas price increases. We accounted
for these activities pursuant to SFAS No. 133. In accordance with SFAS 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 due
to recoverability in rates. Accordingly, there was no earnings impact as a
result of the use of these financial instruments. Upon maturity, the contracts
were recognized in purchased gas cost on the condensed consolidated statement of
income.

Comprehensive income -- The following table presents the components of
comprehensive income, net of related tax, for the three-month and six-month
periods ended March 31, 2003 and 2002:

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

Stock-based compensation plans -- We have two stock-based compensation
plans that provide for the granting of stock options and restricted stock 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 our success 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, we adopted this
plan by registering a total of 250,000 shares of our common stock to be issued
under the Long-Term Stock Plan for the Mid-States Division. Under this plan,
incentive stock options,
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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. For the six
months ended March 31, 2003, 5,000 options were exercised under the plan. For
the six months ended March 31, 2002, no options were exercised under the plan.
At March 31, 2003, there were 14,300 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 SFAS No. 123, "Accounting for Stock-Based Compensation" would have less
than a $.01 per diluted share effect on earnings per share or $753 and $1,191
for the three months ended March 31, 2003 and 2002 and $1,506 and $2,382 for the
six months ended March 31, 2003 and 2002.

LONG-TERM INCENTIVE PLAN

On August 12, 1998, our Board of Directors approved and adopted the 1998
Long-Term Incentive Plan, which became effective October 1, 1998 after approval
by our shareholders. An amendment to this plan increasing the share reserve by
2,500,000 shares was approved by the shareholders at the Company's 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 our 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. As of March 31, 2003, 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
March 31, 2003, we had 1,932,433 options outstanding under the Long-Term
Incentive Plan at an exercise price ranging from $14.68 to $25.66. At March 31,
2002, we had 1,570,708 options outstanding under the Long-Term Incentive Plan at
an exercise price ranging from $14.68 to $25.66.

In October 1995, SFAS 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
APB 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.

8

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of activity for grants of stock options under the Long-Term
Incentive Plan for the six months ended March 31, 2003 follows:

A summary of activity for grants of stock options under the Long-Term
Incentive Plan for the six months ended March 31, 2002 follows:

9

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 the three months ended March 31, 2003
and 2002 would have been impacted as shown in the following table.

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 the six months ended March 31, 2003
and 2002 would have been impacted as shown in the following table.

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.

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

10

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACQUISITION OF MISSISSIPPI VALLEY GAS COMPANY

On December 3, 2002, we completed the acquisition of Mississippi Valley Gas
Company, Mississippi's largest natural gas utility. We paid approximately $74.7
million cash and $74.7 million in Atmos Energy common stock consisting of
3,386,287 unregistered shares. We also repaid approximately $70.9 million of
Mississippi Valley Gas' outstanding debt. Beginning in December 2002, results of
operations of Mississippi Valley Gas Company have been consolidated with our
results of operations.

The following table summarizes the fair values of the assets acquired and
liabilities assumed, in thousands:

Net property, plant and equipment........................... $156,516
Current assets.............................................. 43,848
Other intangible assets..................................... 11,746
Goodwill.................................................... 89,997
Deferred charges and other assets........................... 10,670
--------
Total assets acquired..................................... 312,777
Current liabilities......................................... (47,637)
Noncurrent liabilities...................................... (92,613)
Other acquisition related costs............................. (23,227)
--------
Purchase price............................................ $149,300
========

Other intangible assets represent the fair value of rights-of-way. The
value assigned to goodwill was based on our belief that the acquisition of
Mississippi Valley Gas Company will enable us to leverage our existing
technology in order to add value to Atmos. We expect that the goodwill amount
will not be deductible for tax purposes. Other acquisition-related costs consist
of $13.1 million of make-whole premiums related to the repayment of Mississippi
Valley Gas' debt and other costs including termination benefits.

The pro forma effects for the three months ended March 31, 2002 of
combining the results of operations of Mississippi Valley Gas Company with our
consolidated results of operations were a $91.9 million increase in operating
revenues to $471.4 million, a $9.9 million increase in net income to $51.3
million and a $0.14 increase in diluted earnings per share to $1.15.

The pro forma effects for the six months ended March 31, 2003 of combining
the results of operations of Mississippi Valley Gas Company with our
consolidated results of operations were a $35.8 million increase in operating
revenues to $1.1 billion, a $3.2 million decrease in net income to $71.1 million
and an $0.11 decrease in diluted earnings per share to $1.57.

Such pro forma effects for the six months ended March 31, 2002 were a
$151.2 million increase in operating revenues to $802.0 million, a $12.4 million
increase in net income to $74.4 million and a $0.16 increase in diluted earnings
per share to $1.67.

3. 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

11

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

authorities, allege the defendants have underpaid royalties on gas taken from
wells situated on non-federal and non-Indian lands throughout the United States
and offshore waters predicated upon allegations that the defendants' gas
measurements are simply inaccurate and that the defendants failed to comply with
applicable regulations and industry standards over the last 25 years. Although
the plaintiffs do not specifically allege an amount of damages, they contend
that this suit is brought to recover billions of dollars in revenues that the
defendants have allegedly unlawfully diverted from the 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 Qui Tam 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. On April 10,
2003, the court denied the plaintiffs' motion to certify this proceeding as a
class action. This ruling was appealed by the plaintiffs. 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 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 also filed suit in Travis County,
Texas to have the Texas Agricultural Gas Users Act of 1985 declared
unconstitutional. The court denied our motion for summary judgment which we have
appealed. The plaintiffs seek class action status and to recover unspecified
damages plus attorneys' 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 a 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 recorded receivable is fully recoverable.

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

12

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

We are 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 the 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 (TDEC) entered into a consent order effective January 23, 1997, to
facilitate the investigation, removal and remediation of the Johnson City site.
Prior to our merger with United Cities Gas Company in July 1997, United Cities
Gas Company began the implementation of the consent order in the first quarter
of 1997 which we have continued through March 31, 2003. The investigative phase
of the work at the site has been completed. An interim removal action was
completed in June 2001. We installed four groundwater monitoring wells at the
site in 2002 and have submitted the analytical results to the TDEC. We have
completed a risk assessment report which is currently under review by the TDEC.
The Tennessee Regulatory Authority granted us permission to defer, until our
next rate case in Tennessee, all costs incurred in Tennessee in connection with
state and federally mandated environmental control requirements.

In March 2002, the TDEC contacted us about conducting an investigation at a
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 focused removal
action to remove any such residuals in fiscal 2003. The TDEC has requested that
the focused removal action be conducted pursuant to a voluntary agreement. We
intend to conduct the focused removal action later this year.

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. 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.

As of March 31, 2003, 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 $0.8
million.

Mercury Contamination Sites

We have completed investigation and remediation activities pursuant to
Consent Orders between the Kansas Department of Health and Environment (KDHE)
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 KDHE. We have
amended the Orders with the KDHE to include all
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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 has
been completed. A report describing the results of the work has been submitted
to the KDHE. As of March 31, 2003, 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 that arise out of
our ordinary 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 adequately
covered by insurance.

4. SHORT-TERM DEBT

At March 31, 2003, short-term debt consisted of $29.7 million of commercial
paper.

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 March
31, 2003, $29.7 million of commercial paper was outstanding. We have a second
unsecured facility in place for $18.0 million. At March 31, 2003, there were no
borrowings 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 was used to provide initial
funding for the cash portion of the Mississippi Valley Gas Company acquisition
and to repay Mississippi Valley Gas Company's existing debt. A total of $147.0
million was borrowed under this credit facility during the first quarter. This
amount was refinanced in January 2003 with a portion of the proceeds of our
$250.0 million debt offering, as discussed below.

UNCOMMITTED CREDIT FACILITIES

Our Woodward Marketing subsidiary has a $210.0 million uncommitted demand
working capital credit facility. Atmos Energy Holdings, Inc. and Atmos Energy
Marketing, L.L.C., our wholly-owned subsidiaries, are guarantors of all amounts
outstanding under this facility. At March 31, 2003, no amount was outstanding
under this credit facility, although letters of credit totaling $179.0 million
reduced the amount available. 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 March 31, 2003 was $31.0 million. During the
quarter ended March 31, 2003, Woodward Marketing was not in technical compliance
with one of the covenants contained in this uncommitted demand credit facility.
Woodward Marketing has obtained a waiver for the period of non-compliance. This
credit facility expires on March 31, 2004.

We also have an unsecured short-term uncommitted credit line for $20.0
million. There were no borrowings under this uncommitted credit facility at
March 31, 2003. This uncommitted line is renewed or renegotiated at least
annually with varying terms and we pay no fee for the availability of the line.
Borrowings under this line are made on a when- and as-available basis at the
discretion of the bank. This facility is also used for working capital purposes.

In addition, Woodward Marketing has up to $100.0 million for its
non-utility business available from Atmos Energy Holdings. At March 31, 2003,
$42.0 million was outstanding. Any outstanding amounts under
14

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

5. LONG-TERM DEBT

On January 16, 2003, we issued $250.0 million of 5 1/8% Senior Notes due
2013. The net proceeds of $249.3 million were used to repay $147.0 million under
an acquisition credit facility used to provide the initial financing of our
acquisition of Mississippi Valley Gas Company, which closed in December 2002, as
well as for general corporate purposes.

In addition, the net proceeds were used to repay $54.0 million in unsecured
senior notes held by institutional lenders and for the repayment of short-term
debt under our commercial paper program. The repayment of the unsecured senior
notes resulted in a make-whole premium of $9.3 million.

6. EARNINGS PER SHARE

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

15

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

WEATHER INSURANCE

In June 2001, we purchased a three year weather insurance policy with an
option to cancel the third year of coverage. 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 quarter ended December 31, 2001, we recognized $5.9
million in income relating to this insurance policy. During the quarter ended
March 31, 2002, weather was colder than normal resulting in the reversal of the
$5.9 million income that was recognized earlier. Because weather was not at
least seven percent warmer than normal, no income was recognized under this
insurance policy during the three months and six months ended March 31, 2003.
Amortization expense of $2.5 million was recognized during the three months
ended March 31, 2003 and 2002. Amortization expense of $4.4 million was
recognized during the six months ended March 31, 2003 and 2002. In April 2003,
we canceled the third year of coverage on this policy primarily as a result of
rate relief in Louisiana and prospects for WNA in Texas. The remaining amount of
prepaid cost, less cash received for early termination of this policy, will be
written off in the third quarter of fiscal 2003 resulting in a pretax charge of
approximately $0.6 million.

UTILITY HEDGING ACTIVITIES

For the 2002-2003 heating season, we covered approximately 51 percent of
our anticipated flowing gas requirements through a combination of storage,
financial hedges and fixed forward contracts at a weighted average cost of less
than $4.00 per Mcf. This provided a measure of 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 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," we use the mark-to-market method, discussed previously, to
account for our financial instruments. In accordance with SFAS 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 ultimately will 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 condensed
consolidated statement of income.

NON-UTILITY HEDGING ACTIVITIES

At the close of business on March 31, 2003, we had outstanding contracts
representing 0.4 Bcf of net notional volumes with average contract maturities of
less than three years. Contracts representing 99 percent of the fair value of
these contracts are scheduled to mature within three years.

For the three months ended March 31, 2003, our gas trading margin consisted
of a $10.1 million realized trading loss and a $12.5 million unrealized trading
gain. For the three months ended March 31, 2002, our gas trading margin
consisted of a $31.5 million realized trading gain and a $21.9 million
unrealized trading loss.

For the six months ended March 31, 2003, our gas trading margin consisted
of a $4.4 million realized trading loss and an $11.3 million unrealized trading
gain. For the six months ended March 31, 2002, our gas trading margin consisted
of a $34.4 million realized trading gain and a $17.6 million unrealized trading
loss.

The principal business of Atmos Energy Marketing, L.L.C., including the
activities of Woodward Marketing, L.L.C. 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

16

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 March 31, 2003, Atmos Energy Marketing had a total of 154
municipal customers and 638 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 consolidation.

In the management of natural gas requirements for municipal and other local
utilities, Atmos Energy Marketing sells physical natural gas to 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 the sale of inventory or the 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. See Note 1 for a
discussion of the change in accounting principle related to mark-to-market
accounting.

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.

Atmos Energy Marketing manages 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 daily. 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 March 31, 2003, Atmos Energy Marketing's net open positions in its
trading operations totaled 0.4 Bcf. Atmos Energy Marketing's open trading
positions are monitored daily 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.

17

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial instruments, which subject Atmos Energy Marketing to counterparty
risk, consist primarily of financial instruments arising from trading and risk
management activities 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 4 of notes to condensed consolidated financial
statements.

8. 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 included in Note 1 of notes to consolidated financial statements in our
Annual Report on Form 10-K for the year ended September 30, 2002. 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 $127.3 million and $53.7 million for the three months ended March 31, 2003
and 2002 and $190.7 million and $103.5 million for the six months ended March
31, 2003 and 2002. Volumes purchased were 20.1 Bcf and 21.7 Bcf for the three
months ended March 31, 2003 and 2002 and 35.5 Bcf and 41.2 Bcf for the six
months ended March 31, 2003 and 2002. 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 $6.34 and $2.47 for the three months
ended March 31, 2003 and 2002 and $5.37 and $2.51 for the six months ended March
31, 2003 and 2002. In addition, our regulated utility divisions have entered
into contracts with Atmos Energy Marketing to manage a significant portion of
our regulated utility divisions' underground storage facilities. Atmos Energy
Marketing has acted as agent in placing financial instruments for the various
regulated utility divisions that partially protect us and our customers from
unusually large winter period gas price increases.

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", we have identified the Utility, Natural Gas
Marketing and Other Non-Utility segments. For an expanded description of these
segments, please refer to Note 1 of notes to consolidated financial statements
in our Annual Report on Form 10-K for the year ended September 30, 2002. We
consider each division within our utility segment to be a reporting unit of the
utility segment and not a reportable segment. The individual operations that
comprise the other non-utility segment are not currently material to our
consolidated financial position or results of operations and therefore do not
require separate reporting. Income from our other non-utility segment is
generated primarily from pipeline and storage operations.

18

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized financial information concerning our reportable segments for the
three months and six months ended March 31, 2003 and 2002 are shown in the
following table:

19

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of total assets for the reportable segments to total
consolidated assets for March 31, 2003 and 2002 is presented below:

20

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SUPPLEMENTAL DISCLOSURES

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 March 31, 2003.

21

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following supplemental condensed statement of income is for the three
months ended March 31, 2003.

22

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following supplemental condensed statement of income is for the six
months ended March 31, 2003.

Organization -- Atmos Energy Corporation distributes natural gas in 12
states through its regulated utility operating divisions -- Colorado-Kansas
Division, Kentucky Division, Louisiana Division, Mid-States Division,
Mississippi Valley Gas Company 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' six 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.

23

ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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, our
utility divisions have entered into contracts with Atmos Energy Marketing to
manage a significant portion of their underground storage facilities. Atmos
Energy Marketing has acted as agent in obtaining hedging agreements for our
utility divisions that protect them and our utility customers from unusually
large winter period gas price increases.

24

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Board of Directors
Atmos Energy Corporation

We have reviewed the accompanying condensed consolidated balance sheet of
Atmos Energy Corporation as of March 31, 2003 and the related condensed
consolidated statements of income for the three-month periods and six-month
periods ended March 31, 2003 and 2002 and the condensed consolidated statements
of cash flows for the six-month periods ended March 31, 2003 and 2002. These
financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Atmos Energy
Corporation as of September 30, 2002, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein) and in our report dated November 8, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of September 30, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

Dallas, Texas
May 12, 2003

25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

The statements contained in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Report are forward-looking statements made in good faith by the
Company and are intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995. When used
in this Report, or any other of the Company's documents or oral presentations,
the words "anticipate," "expect," "estimate," "plans," "believes," "objective,"
"forecast," "goal" or similar words are intended to identify forward-looking
statements. Such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the statements relating to the Company's strategy,
operations, markets, services, rates, recovery of costs, availability of gas
supply and other factors. These risks and uncertainties include the following:
adverse weather conditions such as warmer than normal weather in the Company's
service territories; national, regional and local 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 future
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. A discussion of these risks
and uncertainties may be found in the Company's Form 10-K for the year ended
September 30, 2002. 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.

INTRODUCTION

The following discussion should be read in conjunction with the condensed
consolidated financial statements in this Quarterly Report on Form 10-Q and
Management's Discussion and Analysis in our Annual Report on Form 10-K for the
year ended September 30, 2002.

Atmos Energy Corporation and its subsidiaries are primarily engaged in the
natural gas utility business as well as certain non-utility businesses. 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, L.L.C., Woodward
Marketing, L.L.C. and Trans Louisiana Industrial Gas Company, Inc.; and our
other non-utility segment, which includes all of our other non-utility
operations.

Our utility business distributes natural gas through sales and
transportation arrangements to approximately 1.7 million residential,
commercial, public authority and industrial customers. Our utility business is
composed of six regulated utility divisions: Atmos Energy Colorado-Kansas
Division, Atmos Energy Kentucky Division, Atmos Energy Louisiana Division, Atmos
Energy Mid-States Division, Mississippi Valley Gas Company Division and Atmos
Energy Texas Division. The service areas of our divisions are located in
Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Mississippi,
Missouri, Tennessee, Texas and Virginia. Our utility business is subject to
regulation by state and/or local authorities in each of the states in which we
operate. Our business is primarily affected by seasonal weather patterns,
competitive factors within the energy industry and economic conditions in the
areas that we serve. We also transport natural gas for others through our
distribution system.

Our natural gas marketing and other non-utility segments, which are
organized under Atmos Energy Holdings, Inc., have operations in 18 states. Atmos
Energy Marketing, L.L.C., together with its wholly-owned subsidiaries, comprise
our natural gas marketing segment. Atmos Energy Marketing provides a variety of
natural gas management services to natural gas utility systems, municipalities
and industrial natural gas

26

consumers in several states and to our Colorado-Kansas, Kentucky, Louisiana and
Mid-States divisions. These services primarily consist 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.

We provide natural gas storage services and own or hold an interest in
natural gas storage fields in Kansas, Kentucky, Louisiana and Mississippi to
supplement natural gas used by customers in Kansas, Kentucky, Louisiana,
Mississippi, Tennessee and other states. We construct and operate electrical
peaking power generating plants and associated facilities and may enter into
agreements to either lease or sell such plants. In addition, we market natural
gas to agricultural customers primarily in West Texas.

WEATHER AND SEASONALITY

Our utility business and irrigation sales business are seasonal and
dependent on 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 lower net income or net losses during the
period from April through September of each year. Sales to industrial customers
are much less weather sensitive. Sales to agricultural customers, who typically
use natural gas to power irrigation pumps during the period from March through
September, are affected by rainfall amounts and the price of natural gas.

The effects of weather that is above or below normal are offset partially
in the Tennessee and Georgia jurisdictions served by the Mid-States Division, in
the Mississippi jurisdiction served by the Mississippi Valley Gas Company
Division and in the Kentucky jurisdiction served by the Kentucky Division
through weather normalization adjustments (WNA). The Tennessee Regulatory
Authority, the Georgia Public Service Commission, the Mississippi Public Service
Commission and the Kentucky Public Service Commission have approved WNA. WNA,
effective from October through May each year in Georgia, November through May
each year in Mississippi and November through April each year in Tennessee and
Kentucky, allow us 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. Weather in our WNA service areas was colder than normal for the
three and six month periods ended March 31, 2003. The net effect of WNA,
excluding Mississippi, was a decrease in revenues of $0.9 million for the three
months ended March 31, 2003, compared with an increase of $2.9 million for the
three months ended March 31, 2002. For the six months ended March 31, 2003, the
net effect of WNA, excluding Mississippi, was a decrease in revenues of $2.7
million compared with an increase of $5.7 million for the six months ended March
31, 2002. Approximately 658,000 or 39 percent of our meters in service are
located in Tennessee, Georgia, Mississippi and Kentucky. We do not have WNA in
our other service areas.

In June 2001, we purchased a three-year weather insurance policy with an
option to cancel the third year of coverage. The policy is for our Texas and
Louisiana operations and covers the entire heating season of October through
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 quarter ended December 31, 2001, we
recognized $5.9 million in income relating to this insurance policy. During the
quarter ended March 31, 2002, weather was colder than normal resulting in the
reversal of the $5.9 million income that was recognized earlier. Because weather
was not at least seven percent warmer than normal, no income was recognized
under this insurance policy during the three months and six months ended March
31, 2003. Amortization expense of $1.9 million and $2.5 million was recognized
during the first and second quarters of our 2002 and 2003 fiscal years. In April
2003, we canceled the third year of coverage on this policy primarily as a
result of rate relief in Louisiana and prospects for WNA in Texas. The remaining
amount of prepaid cost, less cash received for early termination of this policy,
will be written off in the third quarter of fiscal 2003 resulting in a pretax
charge of approximately $0.6 million.
27

GAS SUPPLY

We receive gas deliveries in our utility operations through 36 pipeline
transportation companies, both interstate and intrastate, to satisfy our sales
requirements under contracts which anticipate no interruptions. The pipeline
transportation agreements are uninterruptible and many of them have pipeline
no-notice storage service, which provides for daily balancing between system
requirements and physical quantities requested by our customers.

We own or hold an interest in and operate numerous natural gas storage
facilities in Kentucky, Kansas, Louisiana and Mississippi 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.

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, Louisiana and
Mississippi have a combined maximum daily output capacity of approximately
392,000 Mcf.

We purchase our gas supply from various producers and marketers. Supply
arrangements are contracted on an uninterruptible basis with various terms and
at market prices.

For the 2002-2003 heating season, we covered approximately 51 percent of
our anticipated flowing gas requirements through a combination of storage,
financial hedges and fixed forward contracts at a weighted average cost of less
than $4.00 per Mcf. This provided a measure of protection to us and our
customers against potential sharp increases in the price of natural gas during
the 2002-2003 heating season.

COMPLETION OF ACQUISITION OF MISSISSIPPI VALLEY GAS COMPANY

On December 3, 2002, we completed the acquisition of Mississippi Valley Gas
Company, a privately held utility, for approximately $150.0 million, which
consisted of approximately $74.7 million in cash and 3,386,287 unregistered
shares of our common stock. In addition, we paid $70.9 million to repay
outstanding debt of Mississippi Valley Gas Company. Our Mississippi Valley Gas
Company Division provides natural gas distribution service to approximately
282,000 residential, industrial and other customers located primarily in the
northern and central regions of Mississippi.

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 (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." This statement requires cost-based, rate-regulated
entities that meet certain criteria to reflect the authorized recovery of costs
due to regulatory decisions in their financial statements. As a result, certain
costs are permitted to be capitalized rather than expensed because they can be
recovered through rates.

28

Risk management assets and liabilities, 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.

On October 25, 2002, through the issuance of Emerging Issues Task Force
(EITF) Issue No. 02-03, the EITF rescinded Issue No. 98-10 "Accounting for
Energy Trading and Risk Management Activities" thereby precluding mark-to-market
accounting for inventory and energy trading contracts that are not derivatives.
During the quarter ended December 31, 2002, energy trading contracts entered
into on or before October 25, 2002 were marked to market pursuant to the
provisions of EITF Issue No. 98-10. Energy trading contracts entered into after
October 25, 2002 were prospectively accounted for pursuant to the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Prior to December 31, 2002, we had recorded $12.9 million of unrealized
income in accordance with EITF Issue No. 98-10. Beginning January 1, 2003, all
energy trading contracts are being accounted for pursuant to the provisions of
SFAS No. 133. On January 1, 2003, we reversed the unrealized income on storage
contracts and certain full requirements contracts as a cumulative effect of a
change in accounting principle. The cumulative effect of the change in
accounting principle was reported in accordance with Accounting Principles Board
(APB) Opinion No. 20, "Accounting Changes." Further, many of our index priced
contracts qualify for the normal purchases and sales exception under SFAS No.
133 and are not marked to market for changes in value subsequent to December 31,
2002. Generally our fixed price contracts and our portfolio of options, swaps
and futures contracts will continue to be accounted for at fair value. In
addition, effective January 1, 2003, we designated a portion of our futures
contracts as fair value hedges of the natural gas marketing segment's gas
inventory. Accordingly, the inventory was adjusted to cost as of January 1, 2003
as part of the cumulative effect adjustment, but subsequent changes in fair
value will be recognized as an adjustment to the carrying value of the hedged
inventory. The cumulative noncash charge in the second quarter of fiscal 2003
was $7.8 million, net of $5.1 million of applicable income tax benefit. As
performance under these inventory, storage and transportation contracts is
completed, the applicable income will be recognized.

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 March 31, 2003, we had $275.0 million of goodwill, $240.3
million of which was attributable to our utility segment, $22.6 million was
attributable to our natural gas marketing segment and $12.1 million was
attributable to our other non-utility segment. The goodwill in our utility
segment resulted from our acquisitions of the assets of Louisiana Gas Service
Company in July 2001 and Mississippi Valley Gas Company in December 2002. We
evaluate our goodwill balances for impairment each year during our second fiscal
quarter or as impairment indicators arise. Our evaluation during the quarter
ended March 31, 2003 resulted in no impairment. We use a present value technique
based on discounted cash flows to estimate the fair value of our reporting
groups. 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 the portfolio of
plan assets. The discount rate used to compute the present value of plan
liabilities generally is based on rates of high grade corporate bonds with
maturities similar to the average period over which benefits will be paid.

29

FINANCIAL CONDITION

For the six months ended March 31, 2003, our operating activities provided
cash of $183.8 million compared to providing cash of $252.9 million during the
six months ended March 31, 2002. The decrease was primarily the result of a
larger increase in accounts receivable over the same period a year ago, an
increase in deferred gas costs and decreases in cash held on deposit in margin
accounts and other current liabilities. This decrease was partially offset by a
larger decrease in gas stored underground and a larger increase in accounts
payable over the same period a year ago. Net income increased primarily due to
higher gross profit partially offset by lower gas trading margin and higher
operating expenses.

For the six months ended March 31, 2003, our investing activities used cash
of $147.0 million compared with cash used of $77.4 million for the six months
ended March 31, 2002. Capital expenditures were $72.7 million during the six
months ended March 31, 2003 compared to $60.9 million for the six months ended
March 31, 2002. Capital expenditures for fiscal 2003, excluding acquisitions,
are expected to be approximately $150.0 million to $160.0 million compared to
actual capital expenditures of $132.3 million for fiscal 2002. Capital projects
for fiscal 2003 include expenditures for additional mains, services, meters and
equipment and approximately $24.0 million for Mississippi Valley Gas Company
Division capital expenditures. Capital expenditures for fiscal 2003 are financed
from internally generated funds and financing activities as discussed below. For
the six months ended March 31, 2003, investing activities included $74.7 million
for the cash portion of the Mississippi Valley Gas Company acquisition completed
in December 2002. For the six months ended March 31, 2002, investing activities
included $15.7 million for the acquisition of Kentucky-based market area storage
and associated pipeline facility assets, certain natural gas purchase and sales
contracts and the outstanding common stock of Southern Resources, Inc.

For the six months ended March 31, 2003, our financing activities used cash
of $20.5 million compared with cash used of $187.6 million for the six months
ended March 31, 2002. For the six-month period ended March 31, 2003, short-term
debt decreased $116.1 million compared with a decrease of $158.7 million for the
six months ended March 31, 2002. The decrease for the six months ended March 31,
2003 was due to the repayment of short-term debt with the proceeds of our
January 2003 debt offering, discussed below, partially offset by the need for
additional working capital funds as a result of higher gas prices and weather
that was colder than the same period a year ago. Repayments of long-term debt
totaled $69.1 million for the six months ended March 31, 2003 compared with
$13.7 million for the six months ended March 31, 2002. During the six months
ended March 31, 2003, we received $147.0 million from our credit facility which
was used for the initial funding of the cash portion of the Mississippi Valley
Gas Company acquisition in December 2002 and to repay Mississippi Valley Gas'
outstanding debt. For the six months ended March 31, 2003, we repaid $70.9
million of outstanding Mississippi Valley Gas debt in connection with the
acquisition in December 2002 as discussed above. For the six months ended March
31, 2003, we received net proceeds from the issuance of long-term debt of $249.3
million. The net proceeds from the issuance of this long-term debt were used to
repay the $147.0 million we received from our credit facility which was used to
fund the cash portion of the Mississippi Valley Gas Company acquisition, to
repay outstanding debt and for general corporate purposes. We paid $26.2 million
in cash dividends during the six months ended March 31, 2003 compared with
dividends of $24.2 million during the six months ended March 31, 2002. This
change reflects increases in the quarterly dividend rate and in the number of
shares outstanding. During the six months ended March 31, 2003, we issued
3,948,773 shares of common stock. Of these, 3,386,287 shares were issued in
December 2002 for the stock portion of the Mississippi Valley Gas Company
acquisition.

30

The following table shows the number of shares issued for the six-month
periods ended March 31, 2003 and 2002:

We believe that internally generated funds, our credit facilities, our
commercial paper program and access to the public debt and equity capital
markets will provide necessary working capital and liquidity for capital
expenditures and other cash needs for the remainder of fiscal 2003.

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 March
31, 2003, $29.7 million of commercial paper was outstanding. We have a second
unsecured facility in place for $18.0 million. At March 31, 2003, there were no
borrowings 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 was used to provide initial
funding for the cash portion of the Mississippi Valley Gas Company acquisition
and to repay Mississippi Valley Gas Company's existing debt. A total of $147.0
million was borrowed under this credit facility during the first quarter. This
amount was refinanced in January 2003 with a portion of the proceeds of our
$250.0 million debt offering.

Our Woodward Marketing subsidiary has a $210.0 million uncommitted demand
working capital credit facility. Atmos Energy Holdings, Inc. and Atmos Energy
Marketing, L.L.C., our wholly-owned subsidiaries, are guarantors of all amounts
outstanding under this facility. At March 31, 2003, no amount was outstanding
under this credit facility, although letters of credit totaling $179.0 million
reduced the amount available. 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 March 31, 2003 was $31.0 million. During the
quarter ended March 31, 2003, Woodward Marketing was not in technical compliance
with one of the covenants contained in this uncommitted demand credit facility.
Woodward Marketing has obtained a waiver for the period of non-compliance. This
credit facility expires on March 31, 2004.

We also have an unsecured short-term uncommitted credit line for $20.0
million. There were no borrowings under this uncommitted credit facility at
March 31, 2003. This uncommitted line is renewed or renegotiated at least
annually with varying terms and we pay no fee for the availability of the line.
Borrowings under this line are made on a when- and as-available basis at the
discretion of the bank. This facility is also used for working capital purposes.

In addition, Woodward Marketing has up to $100.0 million for its
non-utility business available from Atmos Energy Holdings. At March 31, 2003,
$42.0 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.

31

In December 2001, we filed a shelf registration statement with the
Securities and Exchange Commission (SEC) to issue, from time to time, up to
$600.0 million in new common stock and/or debt. The registration statement was
declared effective by the SEC on January 30, 2002. On January 16, 2003, we
issued $250.0 million of 5 1/8% Senior Notes due 2013 under the registration
statement reducing the amount available to $350.0 million. The net proceeds were
used to repay debt under an acquisition credit facility used to finance our
acquisition of Mississippi Valley Gas Company, which closed in December 2002, as
well as for general corporate purposes, including repayment of short-term debt
under our commercial paper program. The remaining proceeds were used to repay
unsecured senior notes held by institutional lenders.

The availability of funds under our credit facilities is subject to
conditions specified therein, which we currently meet. These conditions include
our compliance with financial covenants and the continued accuracy of
representations and warranties contained in these agreements.

We are required by the financial covenants in our $300.0 million credit
facility to maintain a ratio of total debt to total capitalization of no greater
than 70 percent. As of March 31, 2003, we were in compliance with this leverage
ratio requirement.

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

Our internally generated funds may change in the future due to a number of
factors, some of which we cannot control. These include regulatory changes, the
price for our products and services, the demand for such products and services,
margin requirements resulting from significant changes in commodity prices,
operational risks and other factors.

Our credit ratings directly affect our ability to obtain short-term and
long-term financing, in addition to the cost of such financing. In determining
our credit ratings, the rating agencies consider a number of quantitative
factors, including debt to total capitalization, operating cash flow relative to
outstanding debt, operating cash flow coverage of interest and pension
liabilities and funding status. In addition, the rating agencies consider
qualitative factors such as consistency of our earnings over time, the quality
of our management and business strategy, the risk associated with our utility
and non-utility businesses and the regulatory structures that govern our rates
in the states where we operate.

Our debt is rated by three rating agencies: Standard & Poor's Corporation
(S&P), Moody's Investors Service (Moody's) and Fitch Ratings, Inc. (Fitch). Our
current debt ratings are as follows:

Our credit ratings may be revised or withdrawn at any time by the rating
agencies, and each rating should be evaluated independently of any other rating.
There can be no assurance that a rating will remain in effect for any given
period of time or that a rating will not be lowered, or withdrawn entirely, by a
rating agency if, in its judgment, circumstances so warrant.

On January 10, 2003, S&P changed the outlook on our long-term debt rating
from "stable" to "negative." In its press release explaining this action, S&P
cited, among other factors, their concern that we have not made significant
progress in reducing our debt to total capitalization ratio. Moody's and Fitch
each continue to maintain a "stable" outlook for our ratings.

We do not have any trigger events in our debt instruments that are tied to
changes in specified credit ratings or stock price, and we have not entered into
any transactions that would require us to issue equity based on our credit
rating or other trigger events. At March 31, 2003, we are in compliance with all
existing debt provisions.

32

The following tables provide information about contractual obligations and
commercial commitments at March 31, 2003.

Our Pension Account Plan was underfunded at September 30, 2002 primarily
due to negative investment returns from plan assets during fiscal 2002, lump sum
distributions to participants and a decrease in interest rates. A minimum
pension liability of $63.6 million before applicable income taxes was recorded
as of September 30, 2002, which decreased shareholders' equity by $39.4 million.

Because of the Pension Account Plan's underfunded status, we must fund the
Plan by a minimum of $5.4 million to meet ERISA requirements, which funding must
occur no later than June 30, 2003. However, if funding is done only at this
minimum level, future funding requirements likely would increase substantially
over the next several years, assuming that no significant improvement occurs in
the investment returns from the plan assets or no significant increase in
interest rates. We are in the process of determining the amount to be funded
currently, taking into consideration possible increases in funding requirements
as well as the appropriate balance between cash and Atmos common stock.

The projected pension liability and future funding requirements for the
Plan are subject to change, depending upon the actuarial value of plan assets
from time to time and future benefit obligations as of each subsequent actuarial
calculation date.

RISK MANAGEMENT AND TRADING ACTIVITIES

We conduct our risk management activities through both our utility and
natural gas marketing segments. The following table shows our risk management
assets and liabilities by segment at March 31, 2003.

In accordance with SFAS No. 71 "Accounting for the Effects of Certain Types
of Regulation", current period changes in the assets and liabilities from risk
management activities related to our utility segment are recorded as deferred
gas costs on the condensed consolidated balance sheet as these costs ultimately
will be recovered from ratepayers. Accordingly, there is no earnings impact as a
result of the use of these financial

33

instruments. Upon maturity, the contracts are recognized in purchased gas cost
on the condensed consolidated statement of income.

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 in our natural gas marketing segment.

On October 25, 2002, through the issuance of EITF Issue No. 02-03, the EITF
rescinded Issue No. 98-10 "Accounting for Energy Trading and Risk Management
Activities" thereby precluding mark-to-market accounting for our natural gas
marketing segment inventory and energy trading contracts that are not
derivatives. Beginning January 1, 2003, energy trading contracts are being
accounted for pursuant to the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The cumulative effect of the
change in accounting principle was reported in accordance with APB Opinion No.
20, "Accounting Changes." The cumulative noncash charge in the second quarter of
fiscal 2003 was $7.8 million. As performance under these inventory, storage and
transportation contracts is completed, the applicable income will be recognized.
Originally, $6.0 million was expected to be realized in net income in fiscal
2003, $1.2 million in fiscal 2004 and $0.6 million thereafter. However, as
discussed below, actual results to date are less than originally estimated, due
to the extreme market volatility.

Under the mark-to-market method of accounting, contracts are reflected at
fair value, inclusive of future servicing costs and valuation adjustments, with
resulting unrealized gains and losses recorded as assets or liabilities from
risk management activities on the condensed consolidated balance sheet. Current
period changes in the assets and liabilities from risk management activities are
recognized as net gains or losses on the condensed consolidated statement of
income. Changes in the mark-to-market valuation of assets and liabilities from
risk management activities primarily result 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 an orderly liquidation of our positions 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. For those futures
contracts designated as fair value hedges, the market adjustment is offset by
the adjustment to the carrying value of the inventory.

The following table shows the components of the change in fair value of our
natural gas marketing energy trading contract activities for the three months
ended March 31, 2003 (in thousands).

Fair value of contracts at December 31, 2002................ $ 2,980
Contracts realized/settled................................ 8,763
Fair value of new contracts............................... 1,773
Other changes in value.................................... 3,545
Cumulative effect of accounting change.................... (8,799)
-------
Fair value of contracts at March 31, 2003................... $ 8,262
=======

The following table shows the components of the change in fair value of our
natural gas marketing energy trading contract activities for the six months
ended March 31, 2003 (in thousands).

Fair value of contracts at September 30, 2002............... $ 6,651
Contracts realized/settled................................ 11,577
Fair value of new contracts............................... 4,631
Other changes in value.................................... (5,798)
Cumulative effect of accounting change.................... (8,799)
-------
Fair value of contracts at March 31, 2003................... $ 8,262
=======

34

The fair value of our natural gas marketing energy trading contracts at
March 31, 2003, is segregated below, by time period and fair value source.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002

Net income for the three months ended March 31, 2003 was $48.5 million
compared to $41.4 million in the same period last year.

The primary factors that impact our results of operations are seasonal
weather patterns, competitive factors in the energy industry and economic
conditions in our service areas. Our second fiscal quarter historically has been
our most critical earnings quarter with an average of 76 percent of our net
income having been earned in the second quarter during the three most recently
completed fiscal years.

Gross profit -- Gross profit primarily consists of gas service margins
generated by our six utility operating divisions from the sale of natural gas to
approximately 1.7 million residential, commercial, industrial, agricultural and
other customers in the twelve states that comprise our utility service areas.
Gross profit increased to $200.6 million for the three months ended March 31,
2003 from $149.9 million for the three months ended March 31, 2002. The increase
in gross profit primarily was due to the additional gross profit resulting from
the Mississippi Valley Gas Company acquisition in December 2002. Also adding to
the increase in gross profit was a $3.9 million increase in our base charges
primarily in Louisiana as a result of our annual rate stabilization clause
filing which became effective in November 2002. These increases were partially
offset by a $0.9 million decrease in gross profit from WNA, excluding
Mississippi. Weather in our WNA service areas was colder than normal for the
three months ended March 31, 2003. We have WNA in Tennessee, Georgia,
Mississippi and Kentucky. Changes in the cost of gas impact revenue but do not
directly affect gross profit of our utility business because the fluctuations in
gas prices are passed through to the customer.

Throughput is a measure of the volume of natural gas that moved through our
system and consists of natural gas sold to our customers and natural gas that is
transported for others. Total throughput generated by our utility business was
100.8 billion cubic feet (Bcf) during the current quarter compared to 82.6 Bcf
during the same quarter last year. The increase in throughput primarily resulted
from volumes associated with the assets of Mississippi Valley Gas Company
acquired in December 2002. Total throughput during the current quarter from the
Mississippi Valley Gas Company Division was 16.6 Bcf. There was no throughput
from the Mississippi Valley Gas Company Division in our results during the
second quarter of last year because that period was prior to the date of our
acquisition of that division.

Gas trading margin -- Our gas trading margin consists of both realized and
unrealized components. Our gas trading margin income was $2.4 million for the
three months ended March 31, 2003 compared to income of $9.6 million for the
three months ended March 31, 2002. For the three months ended March 31, 2003, we
incurred a realized loss of $10.1 million in gas trading margin from the sale of
94.4 Bcf of natural gas to our customers compared to realized income of $31.5
million in gas trading margin from the sale of 82.0 Bcf of natural gas for the
three months ended March 31, 2002.

35

At times, we maintain a net open position related to our physical storage
when we believe that future changes in prices and market conditions may result
in profitable positions. Net open positions may result in an adverse impact on
our financial condition or results of operations if the market price does not
react in the manner or direction that we expected. Our risk management control
policy contains limits associated with the overall size of open positions.

Our natural gas marketing segment's performance during the second quarter
was adversely affected by a shorter than expected physical position because we
were unable to withdraw planned volumes from storage and therefore were required
to buy gas at market prices in a rising market to meet contractual requirements
with customers. We were unable to withdraw such volumes from storage due to
contractual and regulatory limitations relating to our storage facilities. Our
inability to withdraw gas from storage also prevented the matching of unwinding
our financial spreads to capture storage margins and therefore cover the
cumulative costs of the discount we incurred for use of the storage capacity.

The structure of certain asset management contracts we recently acquired
results in increased price risk when there is sustained cold weather. Customers
increased their demand due to cold weather and we were required to purchase gas
to cover the unplanned incremental customer requirements at market prices in a
rising market. Only a portion of these costs can be passed through to customers.

We are taking steps to eliminate or minimize any future negative impact of
the events that caused the lower-than-expected earnings from our natural gas
marketing segment during the second quarter. We plan to negotiate new contracts
which transfer the risk of volatile gas prices to our customers and provide
higher margins and we will investigate the possibility of acquiring high
deliverability storage to increase supply during sustained periods of cold
weather.

Operating expenses -- Operating expenses increased 30 percent to $95.1
million for the three months ended March 31, 2003 from $73.2 million for the
three months ended March 31, 2002. Operation and maintenance expense increased
primarily due to the addition of $10.7 million relating to the Mississippi
Valley Gas Company acquisition in December 2002 and a $4.9 million increase in
the provision for doubtful accounts as a result of higher revenues. Taxes other
than income taxes increased $7.7 million primarily due to additional franchise,
payroll and property taxes associated with the Mississippi Valley Gas assets
acquired in December 2002.

Operating income -- Operating income increased 25 percent for the three
months ended March 31, 2003 to $107.9 million from $86.3 million for the three
months ended March 31, 2002. The increase in operating income primarily resulted
from the increase in gross profit described above partially offset by a decrease
from our gas trading margin and an increase in operating expenses.

Miscellaneous income (expense) -- Miscellaneous expense for the three
months ended March 31, 2003 was $1.5 million, compared with expense of $6.1
million for the three months ended March 31, 2002. The $4.6 million change
primarily was attributable to the reversal of $5.9 million in income during the
three months ended March 31, 2002 that had been recognized during the three
months ended December 31, 2001 from our weather insurance policy. No income from
our weather insurance policy was recognized during the three months ended March
31, 2003 because weather in the covered service areas did not meet the seven
percent warmer than normal threshold required to recognize income from the
policy. Partially offsetting this change was lower earnings from our equity
earnings in Heritage Propane Partners, L.P. during the three months ended March
31, 2003 compared to the three months ended March 31, 2002.

Interest charges -- Interest charges increased 12 percent for the three
months ended March 31, 2003 to $16.2 million from $14.5 million for the three
months ended March 31, 2002. The increase primarily was due to an increase in
interest charges resulting from a higher average outstanding debt balance.

Cumulative effect of change in accounting principle -- On January 1, 2003,
we recorded a cumulative effect of a change in accounting principle to reflect a
change in the way we account for our storage and transportation contracts.
Previously we accounted for those contracts under EITF 98-10 which required us
to record estimated future gains on our storage and transportation contracts at
the time we entered into the contracts and to mark those contracts to market
value each month. Effective January 1, 2003, we no longer

36

mark those contracts to market. As a result, we expensed $7.8 million, net of
applicable income tax benefit as a cumulative effect of change in accounting
principle.

SIX MONTHS ENDED MARCH 31, 2003, COMPARED WITH SIX MONTHS ENDED MARCH 31, 2002

Net income for the six months ended March 31, 2003 was $74.3 million
compared to $62.0 million in the same period last year.

Gross profit -- Gross profit increased to $333.2 million for the six months
ended March 31, 2003 from $259.2 million for the six months ended March 31,
2002. The increase in gross profit primarily was due to the additional gross
profit resulting from the Mississippi Valley Gas Company acquisition in December
2002 and an increase in volumes sold to weather sensitive customers. Also adding
to gross profit was the $6.8 million increase in our base charges primarily in
Louisiana as a result of our annual rate stabilization clause filing which
became effective in November 2002. These increases were partially offset by a
$2.7 million decrease in revenues from WNA, excluding Mississippi. Changes in
the cost of gas impact revenue but do not directly affect gross profit because
the fluctuations in gas prices are passed through to the customer.

Total throughput was 172.0 Bcf during the six months ended March 31, 2003
compared to 139.7 Bcf during the same period last year. The increase in
throughput primarily resulted from volumes associated with the assets of
Mississippi Valley Gas Company acquired in December 2002 and from weather that
was four percent colder than last year. Total throughput during the six months
ended March 31, 2003 from the Mississippi Valley Gas Company Division was 21.7
Bcf. There was no throughput from the Mississippi Valley Gas Company Division in
our results during the six months ended March 31, 2002 because that period was
prior to the date of our acquisition of that division.

Gas trading margin -- Our gas trading margin consists of both realized and
unrealized components. Our gas trading margin income was $6.9 million for the
six months ended March 31, 2003 compared to income of $16.8 million for the six
months ended March 31, 2002. For the six months ended March 31, 2003, we
incurred a realized loss of $4.4 million in gas trading margin from the sale of
169.4 Bcf of natural gas to our customers compared to a realized gain of $34.4
million in gas trading margin from the sale of 146.3 Bcf of natural gas for the
six months ended March 31, 2002.

At times, we maintain a net open position related to our physical storage
when we believe that future changes in prices and market conditions may result
in profitable positions. Net open positions may result in an adverse impact on
our financial condition or results of operations if the market price does not
react in the manner or direction that we expected. Our risk management control
policy contains limits associated with the overall size of open positions.

Our natural gas marketing segment's performance during the six months ended
March 31, 2003 was adversely affected by a shorter than expected physical
position because we were unable to withdraw planned volumes from storage and
therefore were required to buy gas at market prices in a rising market to meet
contractual requirements with customers. We were unable to withdraw such volumes
from storage due to contractual and regulatory limitations relating to our
storage facilities. Our inability to withdraw gas from storage also prevented
the matching of unwinding our financial spreads to capture storage margins and
therefore cover the cumulative costs of the discount we incurred for use of the
storage capacity.

The structure of certain asset management contracts we recently acquired
results in increased price risk when there is sustained cold weather. Customers
increased their demand due to cold weather and we were required to purchase gas
to cover the unplanned incremental customer requirements at market prices in a
rising market. Only a portion of these costs can be passed through to customers.

We are taking steps to eliminate or minimize any future negative impact of
the events that caused the lower-than-expected earnings from our natural gas
marketing segment during the six months ended March 31, 2003. We plan to
negotiate new contracts which transfer the risk of volatile gas prices to our
customers and provide higher margins and we will investigate the possibility of
acquiring high deliverability storage to increase supply during sustained
periods of cold weather.

37

Operating expenses -- Operating expenses increased 23 percent to $179.6
million for the six months ended March 31, 2003 from $146.2 million for the six
months ended March 31, 2002. Operation and maintenance expense increased
primarily due to the addition of $14.5 million related to the Mississippi Valley
Gas Company acquisition in December 2002 and a $6.6 million increase in the
provision for doubtful accounts as a result of higher revenues. Taxes other than
income taxes increased $10.4 million primarily due to additional franchise,
payroll and property taxes associated with the Mississippi Valley Gas Company
assets acquired in December 2002.

Operating income -- Operating income increased 24 percent for the six
months ended March 31, 2003 to $160.5 million from $129.8 million for the six
months ended March 31, 2002. The increase in operating income primarily resulted
from the increase in gross profit described above partially offset by a decrease
from our gas trading margin and an increase in operating expenses.

Miscellaneous income (expense) -- Miscellaneous income for the six months
ended March 31, 2003 was $2.6 million, compared with expense of $0.7 million for
the six months ended March 31, 2002. The $3.3 million change primarily was
attributable to a $3.9 million gain associated with a sales-type lease of a
distributed electric generation plant which was recognized in the first quarter
of 2003.

38

CONSOLIDATED OPERATING STATISTICS

The following tables show our consolidated operating statistics for the
three-month and six-month periods ended March 31, 2003 and 2002. See Note 8 of
notes to condensed consolidated financial statements for additional information
about operating results of our segments.

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

(1) Adjusted for weather normalized operations.

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

39

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

(1) Adjusted for weather normalized operations.

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

40

The following tables show our utility operating income by division for the
three-month and six-month periods ended March 31, 2003 and 2002. These results
of our utility operating income are presented for financial reporting purposes
and may not be appropriate for rate-making purposes.

41

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information provided in Item
7A of our Annual Report on Form 10-K for the year ended September 30, 2002.

ITEM 4. 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 II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 3 of notes to condensed consolidated financial statements herein
for a description of legal proceedings.

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

At the Annual Meeting of Shareholders of Atmos Energy Corporation on
February 12, 2003, 41,514,920 votes were cast as follows:

The other directors will continue to serve until the expiration of their
terms. The term of the Class III directors, Robert W. Best, Thomas J. Garland,
Phillip E. Nichol and Charles K. Vaughan will expire in 2004. The term of the
Class I directors, Travis W. Bain II, Dan Busbee, Richard K. Gordon and Gene C.
Koonce will expire in 2005. The term of the Class II directors, listed above,
will expire in 2006.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

(b) Reports on Form 8-K

The Company filed a Form 8-K Current Report, Item 2, Other Events,
dated January 13, 2003, announcing that the Company and Banc One Capital
Markets, Inc., on behalf of the underwriters named in Schedule A to that
certain Underwriting Agreement (collectively the "Underwriters"), executed
the

42

Underwriting Agreement in connection with the sale by the Company to the
Underwriters of a total of $250 million of the Company's 5 1/8% Senior
Notes due 2013. Under Item 7, Financial Statements and Exhibits, exhibits
were attached: an Underwriting Agreement dated January 13, 2003, a Global
Security to be dated January 16, 2003, an Opinion and Consent of Gibson,
Dunn & Crutcher LLP dated January 16, 2003 and a Consent of Ernst & Young
LLP dated January 13, 2003.

43

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

ATMOS ENERGY CORPORATION
(Registrant)

By: /s/ JOHN P. REDDY
------------------------------------
John P. Reddy
Senior Vice President
and Chief Financial Officer
(Duly authorized signatory)

Date: May 15, 2003

44

CERTIFICATION

I, Robert W. Best, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly 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 function):

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
quarterly 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: May 15, 2003

45

CERTIFICATION

I, John P. Reddy, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly 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 function):

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
quarterly 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: May 15, 2003

46

EXHIBITS INDEX
ITEM 6(a)

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

* These certifications pursuant to 18 U.S.C. Section 1350 by the Company's Chief
Executive Officer and Chief Financial Officer, furnished as Exhibits 99.1 and
99.2, respectively, to this Quarterly Report on Form 10-Q, will not be deemed
to be filed with the Commission or incorporated by reference into any filing
by the Company under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent that the Company specifically incorporates such
certifications by reference.