ATMOS ENERGY CORP (Form: 10-K)

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

Form 10-K


(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended September 30, 2007
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 1-10042

Atmos Energy Corporation

(Exact name of registrant as specified in its charter)


Texas and Virginia		75-1743247
(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)
Three Lincoln Centre, Suite 1800 5430 LBJ Freeway, Dallas, Texas		75240 (Zip code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:

(972) 934-9227

Securities registered pursuant to Section 12(b) of the Act:


		Name of Each Exchange
Title of Each Class		on Which Registered

Common stock, No Par Value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the common voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2007, was $2,715,259,243.

As of November 20, 2007, the registrant had 89,749,755 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed for the Annual Meeting of Shareholders on February 6, 2008 are incorporated by reference into Part III of this report.

TABLE OF CONTENTS


			Page

Glossary of Key Terms				3

PART I
	Item 1.	Business		4
	Item 1A.	Risk Factors		20
	Item 1B.	Unresolved Staff Comments		24
	Item 2.	Properties		24
	Item 3.	Legal Proceedings		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27
	Item 6.	Selected Financial Data		30
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		60
	Item 8.	Financial Statements and Supplementary Data		62
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		117
	Item 9A.	Controls and Procedures		117
	Item 9B.	Other Information		119

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		119
	Item 11.	Executive Compensation		119
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		119
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		119
	Item 14.	Principal Accountant Fees and Services		120

PART IV
	Item 15.	Exhibits and Financial Statement Schedules		120
Form of Award Agreement of Restricted Stock With Time-Lapse Vesting
Form of Award Agreement of Performance-Based Restricted Stock Units
Statement of Computation of Ratio of Earnings to Fixed Charges
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications

GLOSSARY OF KEY TERMS


AEC		Atmos Energy Corporation
AEH		Atmos Energy Holdings, Inc.
AEM		Atmos Energy Marketing, LLC
AES		Atmos Energy Services, LLC
APB		Accounting Principles Board
APS		Atmos Pipeline and Storage, LLC
ATO		Trading symbol for Atmos Energy Corporation common stock on the New York Stock Exchange
Bcf		Billion cubic feet
COSO		Committee of Sponsoring Organizations of the Treadway Commission
EITF		Emerging Issues Task Force
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN		FASB Interpretation
Fitch		Fitch Ratings, Ltd.
FSP		FASB Staff Position
GRIP		Gas Reliability Infrastructure Program
Heritage		Heritage Propane Partners, L.P.
iFERC		Inside FERC
KPSC		Kentucky Public Service Commission
LGS		Louisiana Gas Service Company and LGS Natural Gas Company, which were acquired July 1, 2001
LPSC		Louisiana Public Service Commission
LTIP		1998 Long-Term Incentive Plan
Mcf		Thousand cubic feet
MDWQ		Maximum daily withdrawal quantity
MMcf		Million cubic feet
Moody’s		Moody’s Investor Services, Inc.
MPSC		Mississippi Public Service Commission
MVG		Mississippi Valley Gas Company, which was acquired December 3, 2002
NYMEX		New York Mercantile Exchange, Inc.
NYSE		New York Stock Exchange
RRC		Railroad Commission of Texas
RSC		Rate Stabilization Clause
S&P		Standard & Poor’s Corporation
SEC		United States Securities and Exchange Commission
SFAS		Statement of Financial Accounting Standards
TXU Gas		TXU Gas Company, which was acquired on October 1, 2004
USP		U.S. Propane, L.P.
VCC		Virginia Corporation Commission
WNA		Weather Normalization Adjustment

PART I

The terms “we,” “our,” “us,” “Atmos” and “Atmos Energy” refer to Atmos Energy Corporation and its subsidiaries, unless the context suggests otherwise.


ITEM 1.	*Business*

Overview

Atmos Energy Corporation, headquartered in Dallas, Texas, is engaged primarily in the regulated natural gas distribution and transmission and storage businesses as well as other nonregulated natural gas businesses. We are one of the country’s largest natural-gas-only distributors based on number of customers and one of the largest intrastate pipeline operators in Texas based upon miles of pipe. As of September 30, 2007, we distributed natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers through our six regulated natural gas distribution divisions, which covered service areas in 12 states. Our primary service areas are located in Colorado, Kansas, Kentucky, Louisiana, Mississippi, Tennessee and Texas. We have more limited service areas in Georgia, Illinois, Iowa, Missouri and Virginia. In addition, we transport natural gas for others through our distribution system.

Through our nonregulated businesses, we primarily provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers in 22 states and natural gas transportation and storage services to certain of our natural gas distribution divisions and to third parties.

We were organized under the laws of Texas in 1983 as Energas Company for the purpose of owning and operating the natural gas distribution business of Pioneer Corporation in Texas. In September 1988, we changed our name to Atmos Energy Corporation. As a result of the merger with United Cities Gas Company in July 1997, we also became incorporated in Virginia.

Operating Segments

Through August 31, 2007, our operations were divided into four segments:


	•	the utility segment , which included our regulated natural gas distribution and related sales operations,

	•	the natural gas marketing segment , which included a variety of nonregulated natural gas management services,

	•	the pipeline and storage segment , which included our regulated and nonregulated natural gas transmission and storage services and

	•	the other nonutility segment , which included all of our other nonregulated nonutility operations.

During the fourth quarter of fiscal 2007, we completed a series of organizational changes and began reporting the results of our operations under the following new segments, effective September 1, 2007:


	•	The natural gas distribution segment , formerly referred to as the utility segment, includes our regulated natural gas distribution and related sales operations.

	•	The regulated transmission and storage segment includes the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division. These operations were previously included in the former pipeline and storage segment.

	•	The natural gas marketing segment remains unchanged and includes a variety of nonregulated natural gas management services.

	•	The pipeline, storage and other segment primarily is comprised of our nonregulated natural gas transmission and storage services, which were previously included in the former pipeline and storage segment.

Strategy

Our overall strategy is to:


	•	deliver superior shareholder value,

	•	improve the quality and consistency of earnings growth, while operating our regulated and nonregulated businesses exceptionally well and

	•	enhance and strengthen a culture built on our core values.

Over the last five fiscal years, we have primarily grown through two significant acquisitions, our acquisition in December 2002 of Mississippi Valley Gas Company (MVG) and our acquisition in October 2004 of the natural gas distribution and pipeline operations of TXU Gas Company (TXU Gas).

We have experienced over 20 consecutive years of increasing dividends and earnings growth after giving effect to our acquisitions. We have achieved this record of growth while efficiently managing our operating and maintenance expenses and leveraging our technology, such as our 24-hour call centers, to achieve more efficient operations. In addition, we have focused on regulatory rate proceedings to increase revenue to recover rising costs and mitigated weather-related risks through weather-normalized rates in most of our service areas. We have also strengthened our nonregulated businesses by increasing gross profit margins, expanding commercial opportunities in our regulated transmission and storage segment and actively pursuing opportunities to increase the amount of storage available to us.

Our core values include focusing on our employees and customers while conducting our business with honesty and integrity. We continue to strengthen our culture through ongoing communications with our employees and enhanced employee training.

Natural Gas Distribution Segment Overview

Our natural gas distribution segment consisted of the following six regulated divisions during the year ended September 30, 2007:


	•	Atmos Energy Mid-Tex Division,

	•	Atmos Energy Kentucky/Mid-States Division,

	•	Atmos Energy Louisiana Division,

	•	Atmos Energy West Texas Division,

	•	Atmos Energy Mississippi Division and

	•	Atmos Energy Colorado-Kansas Division

Our natural gas distribution business is a seasonal business. Gas sales to residential and commercial customers are greater during the winter months than during the remainder of the year. The volumes of gas sales during the winter months will vary with the temperatures during these months.

In addition to seasonality, financial results for this segment are affected by the cost of natural gas and economic conditions in the areas that we serve. Higher gas costs, which we are generally able to pass through to our customers under purchased gas adjustment clauses, may cause customers to conserve or, in the case of industrial customers, to use alternative energy sources. Higher gas costs may also adversely impact our accounts receivable collections, resulting in higher bad debt expense and may require us to increase borrowings under our credit facilities resulting in higher interest expense.

The effect of weather that is above or below normal is substantially offset through weather normalization adjustments, known as WNA, which are now approved by the regulatory authorities for over 90 percent of residential and commercial meters in our service areas. WNA allows us to increase customers’ bills to offset lower gas usage when weather is warmer than normal and decrease customers’ bills to offset higher gas usage when weather is colder than normal.

As of September 30, 2007 we had WNA for our residential and commercial meters in the following service areas for the following periods:


Georgia		October — May
Kansas		October — May
Kentucky		November — April
Louisiana		December — March
Mississippi		November — April
Tennessee		November — April
Texas: Mid-Tex		November — April
Texas: West Texas		October — May
Virginia		January — December

Our supply of natural gas is provided by a variety of suppliers, including independent producers, marketers and pipeline companies and withdrawals of gas from proprietary and contracted storage assets. Additionally, the natural gas supply for our Mid-Tex Division includes peaking and spot purchase agreements.

Supply arrangements are contracted from our suppliers on a firm basis with various terms at market prices. The firm supply consists of both base load and swing supply (peaking) quantities. Base load quantities are those that flow at a constant level throughout the month and swing supply quantities provide the flexibility to change daily quantities to match increases or decreases in requirements related to weather conditions.

Currently, all of our natural gas distribution divisions, except for our Mid-Tex Division, utilize 37 pipeline transportation companies, both interstate and intrastate, to transport our natural gas. The pipeline transportation agreements are firm and many of them have “pipeline no-notice” storage service which provides for daily balancing between system requirements and nominated flowing supplies. These agreements have been negotiated with the shortest term necessary while still maintaining our right of first refusal. The natural gas supply for our Mid-Tex Division is delivered by our Atmos Pipeline — Texas Division.

Except for local production purchases, we select our natural gas suppliers through a competitive bidding process by requesting proposals from suppliers that have demonstrated that they can provide reliable service. We select these suppliers based on their ability to deliver gas supply to our designated firm pipeline receipt points at the lowest cost. Major suppliers during fiscal 2007 were Anadarko Energy Services, BP Energy Company, Chesapeake Energy Marketing, Inc., ConocoPhillips Company, Devon Gas Services, L.P., Enbridge Marketing (US) L.P., National Fuel Marketing Company, LLC, ONEOK Energy Services Company L.P., Tenaska Marketing and Atmos Energy Marketing, LLC, our natural gas marketing subsidiary.

The combination of base load, peaking and spot purchase agreements, coupled with the withdrawal of gas held in storage, allows us the flexibility to adjust to changes in weather, which minimizes our need to enter into long-term firm commitments. We estimate our peak-day availability of natural gas supply to be approximately 4.2 Bcf. The peak-day demand for our natural gas distribution operations in fiscal 2007 was on February 15, 2007, when sales to customers reached approximately 3.4 Bcf.

To maintain our deliveries to high priority customers, we have the ability, and have exercised our right, to curtail deliveries to certain customers under the terms of interruptible contracts or applicable state statutes or regulations. Our customers’ demand on our system is not necessarily indicative of our ability to meet current or anticipated market demands or immediate delivery requirements because of factors such as the physical limitations of gathering, storage and transmission systems, the duration and severity of cold weather, the availability of gas reserves from our suppliers, the ability to purchase additional supplies on a short-term basis and actions by federal and state regulatory authorities. Curtailment rights provide us the flexibility to meet the human-needs requirements of our customers on a firm basis. Priority allocations imposed by federal and state regulatory agencies, as well as other factors beyond our control, may affect our ability to meet the demands of our customers. We anticipate no problems with obtaining additional gas supply as needed for our customers.

The following briefly describes our six natural gas distribution divisions. We operate in our service areas under terms of non-exclusive franchise agreements granted by the various cities and towns that we serve. At

September 30, 2007, we held 1,106 franchises having terms generally ranging from five to 35 years. A significant number of our franchises expire each year, which require renewal prior to the end of their terms. We believe that we will be able to renew our franchises as they expire. Additional information concerning our natural gas distribution divisions is presented under the caption “Operating Statistics”.

Atmos Energy Mid-Tex Division. Our Mid-Tex Division serves approximately 550 communities in the north-central, eastern and western parts of Texas, including the Dallas/Fort Worth Metroplex. This division currently operates under one system-wide rate structure. However, the governing body of each municipality we serve has original jurisdiction over all gas distribution rates, operations and services within its city limits, except with respect to sales of natural gas for vehicle fuel and agricultural use. The Railroad Commission of Texas (RRC) has exclusive appellate jurisdiction over all rate and regulatory orders and ordinances of the municipalities and exclusive original jurisdiction over rates and services to customers not located within the limits of a municipality. This division participates in Texas’ Gas Reliability Infrastructure Program (GRIP), which allows us to include in rate base annually approved capital costs incurred in the prior calendar year. The program also requires us to file a complete rate case at least once every five years.

Atmos Energy Kentucky/Mid-States Division. Our Kentucky/Mid-States Division operates in more than 420 communities across Georgia, Illinois, Iowa, Kentucky, Missouri, Tennessee and Virginia. The service areas in these states are primarily rural; however, this division serves Franklin, Tennessee, which is less than 20 miles from downtown Nashville. We update our rates in this division through periodic formal rate filings made with each state’s public service commission.

Atmos Energy Louisiana Division. In Louisiana, we serve nearly 300 communities, including the suburban areas of New Orleans, the metropolitan area of Monroe and western Louisiana. Direct sales of natural gas to industrial customers in Louisiana, who use gas for fuel or in manufacturing processes, and sales of natural gas for vehicle fuel are exempt from regulation and are recognized in our natural gas marketing segment. Our rates in this division are updated annually through a stable rate filing without filing a formal rate case.

Atmos Energy West Texas Division. Our West Texas Division serves approximately 80 communities in West Texas, including the Amarillo, Lubbock and Midland areas. Like our Mid-Tex Division, each municipality we serve has original jurisdiction over all gas distribution rates, operations and services within its city limits. Similarly, the West Texas Division also participates in GRIP, which requires us to file a complete rate case at least once every five years.

Atmos Energy Mississippi Division. In Mississippi, we serve about 110 communities throughout the northern half of the state, including the Jackson metropolitan area. Our rates in the Mississippi Division are updated annually through a stable rate filing without filing a formal rate case.

Atmos Energy Colorado-Kansas Division. Our Colorado-Kansas Division serves approximately 170 communities throughout Colorado and Kansas and in the southwestern corner of Missouri, including Olathe, Kansas, and Greeley, Colorado. Olathe is a southern suburb of Kansas City, near the Missouri border. Greeley is located 20 miles outside of Denver. We update our rates in this division through periodic formal rate filings made with each state’s public service commission.

The following table provides a jurisdictional rate summary for our regulated operations. This information is for regulatory purposes only and may not be representative of our actual financial position.


		Effective			Authorized	Authorized
		Date of Last		Rate Base	Rate of	Return on
Division	Jurisdiction	Rate Action		(thousands) ⁽¹⁾	Return ⁽¹⁾	Equity ⁽¹⁾

Atmos Pipeline — Texas	Texas		5/24/04	$417,111	8.258%	10.00%
Colorado-Kansas	Colorado		7/1/05	84,711	8.95%	11.25%
	Kansas		3/1/04	(2)	(2)	(2)
Kentucky/Mid-States	Georgia		12/20/05	62,380	7.57%	10.13%
	Illinois		11/1/00	24,564	9.18%	11.56%
	Iowa		3/1/01	5,000	(2)	11.00%
	Kentucky		8/1/07	(2)	(2)	(2)
	Missouri		3/4/07	(2)	(2)	(2)
	Tennessee		11/4/07	186,506	8.03%	10.48%
	Virginia		8/1/04	30,672	8.46% - 8.96%	9.50% - 10.50%
Louisiana	Trans LA		4/1/07	96,848	(2)	10.00% - 10.80%
	LGS		7/1/07	207,587	(2)	10.40%
Mid-Tex	Texas		4/1/07	1,043,857	7.903%	10.00%
Mississippi	Mississippi		1/1/05	196,801	8.23%	9.80%
West Texas	Amarillo		9/1/03	36,844	9.88%	12.00%
	Lubbock		3/1/04	43,300	9.15%	11.25%
	West Texas		5/1/04	87,500	8.77%	10.50%

Bad

Performance-

Authorized Debt/

Debt

Based Rate

Customer

Division

Jurisdiction

Equity Ratio

Rider ⁽³⁾

WNA

Program ⁽⁴⁾

Meters

Atmos Pipeline — Texas

Texas

50/50

N/A

Colorado-Kansas

Colorado

52/48

109,860

Kansas

(2)

Yes

127,824

Kentucky/Mid-States

Georgia

55/45

Yes

70,606

Illinois

67/33

23,342

Iowa

57/43

4,455

Kentucky

(2)

Yes

177,988

Missouri

(2)

No ⁽⁵

⁾

59,672

Tennessee

56/44

Yes

133,715

Virginia

52/48

Yes

23,721

Louisiana

Trans LA

52/48

Yes

79,985

LGS

52/48

Yes

277,497

Mid-Tex

Texas

52/48

Yes

1,518,119

Mississippi

47/53

Yes

270,980

West Texas

Amarillo

50/50

Yes

69,772

Lubbock

50/50

Yes

73,672

West Texas

50/50

Yes

165,919


⁽¹⁾		The rate base, authorized rate of return and authorized return on equity presented in this table are those from the last base rate case for each jurisdiction. These rate bases, rates of return and returns on equity are not necessarily indicative of current or future rate bases, rates of return or returns on equity.

⁽²⁾		A rate base, rate of return, return on equity or debt/equity ratio was not included in the respective state commission’s final decision.


⁽³⁾		The bad debt rider allows us to recover from ratepayers the gas cost portion of uncollectible accounts.

⁽⁴⁾		The performance-based rate program provides incentives to natural gas utility companies to minimize purchased gas costs by allowing the utility company and its customers to share the purchased gas cost savings.

⁽⁵⁾		The Missouri jurisdiction has a straight-fixed variable rate design which decouples gross profit margin from customer usage patterns.

Natural Gas Distribution Sales and Statistical Data


	Year Ended September 30
	2007			2006			2005 ⁽¹⁾			2004			2003 ⁽¹⁾

METERS IN SERVICE, end of year
Residential		2,893,543			2,886,042			2,862,822			1,506,777			1,498,586
Commercial		272,081			275,577			274,536			151,381			151,008
Industrial		2,339			2,661			2,715			2,436			3,799
Agricultural		10,991			8,714			9,639			8,397			9,514
Public authority and other		8,173			8,205			8,128			10,145			9,891

Total meters		3,187,127			3,181,199			3,157,840			1,679,136			1,672,798

INVENTORY STORAGE BALANCE — Bcf		58.0			59.9			54.7			27.4			23.9

HEATING DEGREE DAYS ⁽²⁾
Actual (weighted average)		2,879			2,527			2,587			3,271			3,473
Percent of normal		100	%		87	%		89	%		96	%		101	%
SALES VOLUMES — MMcf ⁽³⁾
Gas Sales Volumes
Residential		166,612			144,780			162,016			92,208			97,953
Commercial		95,514			87,006			92,401			44,226			45,611
Industrial		22,914			26,161			29,434			22,330			23,738
Agricultural		3,691			5,629			3,348			4,642			7,884
Public authority and other		8,596			8,457			9,084			9,813			9,326

Total gas sales volumes		297,327			272,033			296,283			173,219			184,512
Transportation volumes		135,109			126,960			122,098			87,746			70,159

Total throughput		432,436			398,993			418,381			260,965			254,671

OPERATING REVENUES (000’s) ⁽³⁾
Gas Sales Revenues
Residential	$	1,982,801		$	2,068,736		$	1,791,172		$	923,773		$	873,375
Commercial		970,949			1,061,783			869,722			400,704			367,961
Industrial		195,060			276,186			229,649			155,336			151,969
Agricultural		28,023			40,664			27,889			31,851			48,625
Public authority and other		86,275			103,936			86,853			77,178			65,921

Total gas sales revenues		3,263,108			3,551,305			3,005,285			1,588,842			1,507,851
Transportation revenues		59,813			62,215			59,996			31,714			30,461
Other gas revenues		35,844			37,071			37,859			17,172			15,770

Total operating revenues	$	3,358,765		$	3,650,591		$	3,103,140		$	1,637,728		$	1,554,082

Average transportation revenue per Mcf	$	0.44		$	0.49		$	0.49		$	0.36		$	0.43
Average cost of gas per Mcf sold	$	8.09		$	10.02		$	7.41		$	6.55		$	5.76
Employees		4,472			4,402			4,327			2,742			2,817

See footnotes following these tables.

Natural Gas Distribution Sales and Statistical Data By Division


	Year Ended September 30, 2007
				Kentucky/						West						Colorado-
	Mid-Tex			Mid-States			Louisiana			Texas			Mississippi			Kansas			Other ⁽⁴⁾			Total

METERS IN SERVICE
Residential		1,398,274			434,529			334,467			270,557			240,073			215,643			—			2,893,543
Commercial		119,660			54,964			23,015			25,460			27,461			21,521			—			272,081
Industrial		185			927			—			521			619			87			—			2,339
Agricultural		—			—			—			10,685			—			306			—			10,991
Public authority and other		—			2,623			—			2,140			2,827			583			—			8,173

Total		1,518,119			493,043			357,482			309,363			270,980			238,140			—			3,187,127

HEATING DEGREE DAYS ⁽²⁾
Actual		2,332			3,831			1,638			3,537			2,759			5,732			—			2,879
Percent of normal		100	%		97	%		105	%		99	%		101	%		104	%		—			100	%
SALES VOLUMES — MMcf ⁽³⁾
Gas Sales Volumes
Residential		78,140			25,900			13,292			18,882			13,314			17,084			—			166,612
Commercial		50,752			16,137			7,138			7,671			6,859			6,957			—			95,514
Industrial		3,946			7,439			—			3,521			7,672			336			—			22,914
Agricultural		—			—			—			3,079			—			612			—			3,691
Public authority and other		—			1,454			—			2,297			3,386			1,459			—			8,596

Total		132,838			50,930			20,430			35,450			31,231			26,448			—			297,327
Transportation volumes		49,337			46,852			6,841			21,709			2,072			8,298			—			135,109

Total throughput		182,175			97,782			27,271			57,159			33,303			34,746			—			432,436

OPERATING MARGIN (000’s) ⁽³⁾	$	433,279		$	151,442		$	108,908		$	90,285		$	94,866		$	73,904		$	—		$	952,684
OPERATING EXPENSES (000’s) ⁽³⁾
Operation and maintenance	$	171,416		$	61,029		$	34,805		$	34,187		$	47,318		$	30,026		$	394		$	379,175
Depreciation and amortization	$	82,524		$	34,439		$	20,941		$	14,026		$	10,886		$	14,372		$	—		$	177,188
Taxes, other than income	$	107,476		$	13,813		$	8,969		$	21,036		$	13,437		$	7,114		$	—		$	171,845
Impairment of long-lived assets	$	3,289		$	—		$	—		$	—		$	—		$	—		$	—		$	3,289
OPERATING INCOME (000’s) ⁽³⁾	$	68,574		$	42,161		$	44,193		$	21,036		$	23,225		$	22,392		$	(394	)	$	221,187
CAPITAL EXPENDITURES (000’s)	$	140,037		$	59,641		$	40,752		$	27,031		$	20,643		$	21,395		$	17,943		$	327,442
PROPERTY, PLANT AND EQUIPMENT, NET (000’s)	$	1,356,453		$	656,920		$	345,535		$	258,622		$	241,796		$	264,629		$	127,189		$	3,251,144
OTHER STATISTICS, at year end
Miles of pipe		28,324			12,081			8,216			14,603			6,496			6,642			—			76,362
Employees		1,415			633			422			340			409			269			984			4,472

See footnotes following these tables.


	Year Ended September 30, 2006
				Kentucky/						West						Colorado-
	Mid-Tex			Mid-States			Louisiana			Texas			Mississippi			Kansas			Other ⁽⁴⁾			Total

METERS IN SERVICE
Residential		1,390,450			436,406			330,694			273,520			241,406			213,566			—			2,886,042
Commercial		122,263			54,914			23,108			25,984			27,868			21,440			—			275,577
Industrial		205			921			—			808			643			84			—			2,661
Agricultural		—			—			—			8,402			—			312			—			8,714
Public authority and other		—			2,671			—			2,166			2,825			543			—			8,205

Total		1,512,918			494,912			353,802			310,880			272,742			235,945			—			3,181,199

HEATING DEGREE DAYS ⁽²⁾
Actual		1,697			3,932			1,319			3,561			2,757			5,466			—			2,527
Percent of normal		72	%		98	%		78	%		100	%		102	%		99	%		—			87	%
SALES VOLUMES — MMcf ⁽³⁾
Gas Sales Volumes
Residential		65,012			24,314			12,131			15,609			12,601			15,113			—			144,780
Commercial		45,558			15,854			6,944			6,309			6,440			5,901			—			87,006
Industrial		4,784			8,775			—			3,933			8,250			419			—			26,161
Agricultural		—			—			—			5,010			—			619			—			5,629
Public authority and other		—			1,463			—			1,962			3,642			1,390			—			8,457

Total		115,354			50,406			19,075			32,823			30,933			23,442			—			272,033
Transportation volumes		47,608			46,525			6,310			15,135			1,702			9,680			—			126,960

Total throughput		162,962			96,931			25,385			47,958			32,635			33,122			—			398,993

OPERATING MARGIN (000’s) ⁽³⁾	$	412,334		$	157,013		$	98,502		$	93,693		$	92,515		$	71,000		$	—		$	925,057
OPERATING EXPENSES (000’s) ⁽³⁾
Operation and maintenance	$	154,412		$	58,022		$	40,741		$	33,332		$	44,533		$	28,235		$	(1,756	)	$	357,519
Depreciation and amortization	$	74,375		$	33,808		$	21,201		$	13,690		$	10,596		$	13,578		$	(2,755	)	$	164,493
Taxes, other than income	$	111,844		$	15,290		$	8,788		$	21,509		$	14,110		$	6,663		$	—		$	178,204
Impairment of long-lived assets	$	—		$	—		$	—		$	22,947		$	—		$	—		$	—		$	22,947
OPERATING INCOME (000’s) ⁽³⁾	$	71,703		$	49,893		$	27,772		$	2,215		$	23,276		$	22,524		$	4,511		$	201,894
CAPITAL EXPENDITURES (000’s)	$	134,762		$	54,952		$	32,218		$	27,374		$	15,389		$	19,466		$	23,581		$	307,742
PROPERTY, PLANT AND EQUIPMENT, NET (000’s)	$	1,262,516		$	627,875		$	328,310		$	253,086		$	226,690		$	252,584		$	132,240		$	3,083,301
OTHER STATISTICS, at year end
Miles of pipe		27,856			11,952			8,214			14,831			6,415			6,601			—			75,869
Employees		1,458			636			412			341			437			263			855			4,402

Notes to preceding tables:


⁽¹⁾		The operational and statistical information includes the operations of the Mississippi Division since the December 3, 2002 acquisition date and the Mid-Tex Division since the October 1, 2004 acquisition date.

⁽²⁾		A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the natural gas industry to measure the relative coldness of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on National Weather Service data for selected locations. For service areas that have weather normalized operations, normal degree days are used instead of actual degree days in computing the total number of heating degree days.

⁽³⁾		Sales volumes, revenues, operating margins, operating expense and operating income reflect segment operations, including intercompany sales and transportation amounts.

⁽⁴⁾		The Other column represents our shared services unit, which provides administrative and other support to the Company. Certain costs incurred by this unit are not allocated.

Regulated Transmission and Storage Segment Overview

Our regulated transmission and storage segment consists of the regulated pipeline and storage operations of our Atmos Pipeline — Texas Division. The Atmos Pipeline — Texas Division transports natural gas to our Mid-Tex Division, transports natural gas for third parties and manages five underground storage reservoirs in Texas. We also provide ancillary services customary in the pipeline industry including parking arrangements, lending and sales of inventory on hand. Parking arrangements provide short-term interruptible storage of gas on our pipeline. Lending services provide short-term interruptible loans of natural gas from our pipeline to meet market demands. These operations represent one of the largest intrastate pipeline operations in Texas with a heavy concentration in the established natural gas-producing areas of central, northern and eastern Texas, extending into or near the major producing areas of the Texas Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins located in Texas are believed to contain a substantial portion of the nation’s remaining onshore natural gas reserves. This pipeline system provides access to all of these basins.

Regulated Transmission and Storage Sales and Statistical Data


	Year Ended September 30
	2007		2006		2005		2004 ⁽¹⁾		2003 ⁽¹⁾

CUSTOMERS, end of year
Industrial		65		67		66		—		—
Other		196		178		191		—		—

Total		261		245		257		—		—

PIPELINE TRANSPORTATION VOLUMES — MMcf ⁽²⁾		699,006		581,272		554,452		—		—
OPERATING REVENUES (000’s) ⁽²⁾	$	163,229	$	141,133	$	142,952		—		—
Employees, at year end		54		85		78		—		—


⁽¹⁾		Atmos Pipeline — Texas was acquired on October 1, 2004, the first day of our fiscal 2005 year.

⁽²⁾		Transportation volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.

Natural Gas Marketing Segment Overview

Our natural gas marketing activities are conducted through Atmos Energy Marketing (AEM), which is wholly-owned by Atmos Energy Holdings, Inc. (AEH), a wholly-owned subsidiary of AEC, which operates in 22 states. AEM provides a variety of natural gas management services to municipalities, natural gas utility systems and industrial natural gas consumers primarily in the southeastern and midwestern states and to our Colorado-Kansas, Kentucky/Mid-States and Louisiana divisions. These services primarily consist of furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of derivative instruments. We use proprietary and customer-owned transportation and storage assets to provide the various services our customers request. As a result, our revenues arise from the types of commercial transactions we have structured with our customers and include the value we extract by optimizing the storage and transportation capacity we own or control as well as revenues for services we deliver.

To optimize the storage and transportation capacity we own or control, we participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve our customers by identifying the lowest cost alternative within the natural gas supplies, transportation and markets to which we have access. Additionally, we engage in natural gas storage transactions in which we seek to find and profit from the pricing differences that occur over time. We purchase physical natural gas and then sell financial contracts at favorable prices to lock in a gross profit margin. Through the use of transportation and storage services and derivative contracts, we are able to capture gross profit margin through

the arbitrage of pricing differences in various locations and by recognizing pricing differences that occur over time.

AEM’s management of natural gas requirements involves the sale of natural gas and the management of storage and transportation supplies under contracts with customers generally having one to two year terms. AEM also sells natural gas to some of its industrial customers on a delivered burner tip basis under contract terms from 30 days to two years.

Natural Gas Marketing Sales and Statistical Data


	Year Ended September 30
	2007		2006		2005		2004		2003

CUSTOMERS, end of year
Industrial		677		679		559		638		644
Municipal		68		73		69		80		94
Other		281		289		211		237		202

Total		1,026		1,041		839		955		940

INVENTORY STORAGE BALANCE — Bcf		19.3		15.3		8.2		5.2		17.6
NATURAL GAS MARKETING SALES VOLUMES — MMcf ⁽¹⁾		423,895		336,516		273,201		265,090		294,785
OPERATING REVENUES (000’s) ⁽¹⁾	$	3,151,330	$	3,156,524	$	2,106,278	$	1,618,602	$	1,668,493


⁽¹⁾		Sales volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.

Pipeline, Storage and Other Segment Overview

Our pipeline, storage and other segment primarily consists of the operations of Atmos Pipeline and Storage, LLC (APS), Atmos Energy Services, LLC (AES) and Atmos Power Systems, Inc., which are each wholly-owned by AEH.

APS owns or has an interest in underground storage fields in Kentucky and Louisiana. We use these storage facilities to reduce the need to contract for additional pipeline capacity to meet customer demand during peak periods. Additionally, beginning in fiscal 2006, APS initiated activities in the natural gas gathering business. As of September 30, 2007, these activities were limited in nature.

AES, through December 31, 2006, provided natural gas management services to our natural gas distribution operations, other than the Mid-Tex Division. These services included aggregating and purchasing gas supply, arranging transportation and storage logistics and ultimately delivering the gas to our natural gas distribution service areas at competitive prices. Effective January 1, 2007, our shared services function began providing these services to our natural gas distribution operations. AES continues to provide limited services to our natural gas distribution divisions, and the revenues AES receives are equal to the costs incurred to provide those services.

Through Atmos Power Systems, Inc., we have constructed electric peaking power-generating plants and associated facilities and lease these plants through lease agreements that are accounted for as sales under generally accepted accounting principles.

Through January 2004, United Cities Propane Gas, Inc., a wholly-owned subsidiary of Atmos Energy Holdings, Inc., owned an approximate 19 percent membership interest in U.S. Propane L.P. (USP), a joint venture formed in February 2000 with other utility companies to own a limited partnership interest in Heritage Propane Partners, L.P. (Heritage), a publicly-traded marketer of propane through a nationwide retail distribution network. During fiscal 2004, we sold our interest in USP and Heritage. As a result of these transactions, we no longer have an interest in the propane business.

Pipeline, Storage and Other Sales and Statistical Data


	Year Ended September 30
	2007		2006		2005		2004		2003

OPERATING REVENUES (000’s) ⁽¹⁾	$	33,400	$	25,574	$	15,639	$	23,151	$	23,151
PIPELINE TRANSPORTATION VOLUMES — MMcf ⁽¹⁾		7,710		9,712		7,593		9,395		11,648
INVENTORY STORAGE BALANCE — Bcf		2.0		2.6		1.8		2.3		2.3


⁽¹⁾		Transportation volumes and operating revenues reflect segment operations, including intercompany sales and transportation amounts.

Ratemaking Activity

Overview

The method of determining regulated rates varies among the states in which our natural gas distribution divisions operate. The regulatory authorities have the responsibility of ensuring that utilities under their jurisdictions operate in the best interests of customers while providing utility companies the opportunity to earn a reasonable return on their investment. Generally, each regulatory authority reviews rate requests and establishes a rate structure intended to generate revenue sufficient to cover the costs of doing business and to provide a reasonable return on invested capital.

Rates established by regulatory authorities often include cost adjustment mechanisms that (i) are subject to significant price fluctuations compared to the utility’s other costs, (ii) represent a large component of the utility’s cost of service and (iii) are generally outside the control of the utility.

Purchased gas mechanisms represent a common form of cost adjustment mechanism. Purchased gas adjustment mechanisms provide gas utility companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case because they provide a dollar-for-dollar offset to increases or decreases in natural gas distribution gas costs. Therefore, although substantially all of our natural gas distribution operating revenues fluctuate with the cost of gas that we purchase, natural gas distribution gross profit (which is defined as operating revenues less purchased gas cost) is generally not affected by fluctuations in the cost of gas.

Additionally, some jurisdictions have introduced performance-based ratemaking adjustments to provide incentives to natural gas utilities to minimize purchased gas costs through improved storage management and use of financial hedges to lock in gas costs. Under the performance-based ratemaking adjustment, purchased gas costs savings are shared between the utility company and its customers.

Current Ratemaking Strategy

Our current rate strategy focuses on seeking rate designs that reduce or eliminate regulatory lag and separate the recovery of our approved margins from customer usage patterns due to weather-related variability, declining use per customer and energy conservation, also known as decoupling. Additionally, we are seeking to stratify rates to benefit low income households and to recover the gas cost portion of our bad debt expense.

Improving rate design is a long-term process. In the interim, we are addressing regulatory lag issues by directing discretionary capital spending to jurisdictions that permit us to recover our investment timely and file rate cases on a more frequent basis to minimize the regulatory lag to keep our actual returns more closely aligned with our allowed returns.

Recent Ratemaking Activity

Approximately 97 percent of our natural gas distribution revenues in the fiscal years ended September 30, 2007, 2006 and 2005 were derived from sales at rates set by or subject to approval by local or state authorities. Of that amount, approximately 90 percent of our rate increases over the last three fiscal years have been obtained through rate making mechanisms that allow us to automatically refresh our rates without filing a formal rate case. Net annual revenue increases resulting from ratemaking activity totaling $40.1 million, $39.0 million and $6.3 million became effective in fiscal 2007, 2006 and 2005 as summarized below:


	Increase (Decrease) to Revenue
	For the Year Ended September 30
Rate Action	2007			2006			2005
	(In thousands)

GRIP filings	$	25,624		$	34,320		$	1,802
Stable rate filings		11,628			3,326			4,525
Rate case filings		4,221			(191	)		—
Other rate activity		(1,359	)		1,565			—

	$	40,114		$	39,020		$	6,327

Additionally, the following ratemaking efforts were initiated during fiscal 2007 but had not been completed as of September 30, 2007:


Division	Rate Action	Jurisdiction	Revenue Requested
			(In thousands)

Colorado-Kansas	Rate Case	Kansas	$	4,978
Kentucky/Mid-States	Rate Case ⁽¹⁾	Tennessee		11,055
Mid-Tex	Rate Case	Texas		51,945

			$	67,978


⁽¹⁾		The Tennessee rate case was settled in October 2007, resulting in an increase in annual revenue of $4.0 million and a $4.1 million reduction in depreciation expense.

Our recent ratemaking activity is discussed in greater detail below.

GRIP Filings

As discussed above in the “Natural Gas Distribution Segment Overview,” GRIP allows natural gas utility companies the opportunity to include in their rate base annually approved capital costs incurred in the prior calendar year. The following table summarizes our GRIP filings with effective dates during the years ended September 30, 2007, 2006 and 2005:


			Incremental Net		Additional
			Utility Plant		Annual		Effective
Division	Calendar Year		Investment		Revenue		Date
			(In thousands)		(In thousands)

2007 GRIP:
Atmos Pipeline — Texas		2006	$	88,938	$	13,202		9/14/07
Mid-Tex		2006		62,375		12,422		9/14/07

Total 2007 GRIP			$	151,313	$	25,624

2006 GRIP:
Mid-Tex ⁽¹⁾		2005	$	62,156	$	11,891		9/1/06
West Texas		2005		3,802		—		9/1/06
Atmos Pipeline — Texas		2005		21,486		3,286		8/1/06
West Texas		2004		22,597		3,802		5/4/06
Mid-Tex ⁽¹⁾		2004		28,903		6,731		2/1/06
Atmos Pipeline — Texas		2004		10,640		1,919		1/1/06
Mid-Tex ⁽¹⁾		2003		32,518		6,691		10/1/05

Total 2006 GRIP			$	182,102	$	34,320

2005 GRIP:
Atmos Pipeline — Texas		2003	$	11,038	$	1,802		4/1/05

Total 2005 GRIP			$	11,038	$	1,802

GRIP pending approval:
West Texas		2006	$	7,022	$	1,234		(2	)

Total			$	7,022	$	1,234


⁽¹⁾		The order issued by the RRC in the Mid-Tex rate case required an immediate refund of amounts collected from the Mid-Tex Division’s 2003-2005 GRIP filings of approximately $2.9 million. This refund is not reflected in the amounts in the table above.

⁽²⁾		The West Texas 2006 GRIP filing is pending authorization from the RRC and the cities.

Stable Rate Filings

As an instrument to reduce regulatory lag, a stable rate filing is a regulatory mechanism designed to allow us to refresh our rates on a periodic basis without filing a formal rate case. As discussed above in the “Natural Gas Distribution Segment Overview,” we currently have stable rate filings in our Louisiana and Mississippi Divisions. The following table summarizes our recent stable rate filings:

Additional

Annual

Effective

Division

Jurisdiction

Test Year Ended

Revenue

Date

(In thousands)

2007 Stable Rate Filings:

Mississippi

6/30/07

—

11/1/07

Louisiana

LGS

12/31/06

665

7/1/07

Louisiana

Transla

9/30/06

1,445

4/1/07

Louisiana

LGS

12/31/05

9,518

8/1/06

Total 2007 Stable Rate Filings

11,628

2006 Stable Rate Filings:

Mississippi

6/30/06

—

11/1/06

Louisiana

LGS

12/31/03

3,326

2/1/06

Total 2006 Stable Rate Filings

3,326

2005 Stable Rate Filings:

Mississippi

9/30/04

4,300

2/2/05

Louisiana

LGS

12/31/02

225

10/1/04

Total 2005 Stable Rate Filings

4,525

Rate Case Filings

A rate case is a formal request from Atmos Energy to a state’s commission to increase rates that are charged to customers. Rate cases may also be initiated when the regulatory authorities request us to justify our rates. This process is referred to as a “show cause” action. Adequate rates are intended to provide for recovery of the Company’s costs as well as a fair rate of return to our shareholders as well as ensure that we continue to deliver reliable, reasonably priced natural gas service to our customers. The following table summarizes our recent rate cases:


		Increase
		(Decrease)
		in Annual			Effective
Division	State	Revenue			Date
		(In thousands)

2007 Rate Case Filings:
Kentucky/Mid-States	Kentucky ⁽¹⁾	$	5,500			8/1/07
Mid-Tex	Texas ⁽²⁾		4,793			4/1/07
Kentucky/Mid-States	Missouri ⁽³⁾		—			3/4/07
Kentucky/Mid-States	Tennessee		(6,072	)		12/15/06

Total 2007 Rate Case Filings		$	4,221

2006 Rate Case Filings:
Kentucky/Mid-States	Georgia	$	409			11/22/05
Mississippi	Mississippi		(600	)		10/1/05

Total 2006 Rate Case Filings		$	(191	)

See footnotes on the following page.


⁽¹⁾		In February 2005, the Attorney General of the State of Kentucky filed a complaint with the Kentucky Public Service Commission (KPSC) alleging that our rates were producing revenues in excess of reasonable levels. In June 2007, the KPSC issued an order dismissing the case. In December 2006, the Company filed a rate application for an increase in base rates. Additionally, we proposed to implement a process to review our rates annually and to collect the bad debt portion of gas costs directly rather than through the base rate. In July 2007, the KPSC approved a settlement we had reached with the Attorney General for an increase in annual revenues of $5.5 million effective August 1, 2007.

⁽²⁾		In March 2007, the RRC issued an order, which increased the Mid-Tex Division’s annual revenues by approximately $4.8 million beginning April 2007 and established a permanent WNA based on 10-year average weather effective for the months of November through April of each year. The RRC also approved a cost allocation method that eliminated a subsidy received from industrial and transportation customers and increased the revenue responsibility for residential and commercial customers. However, the order also required an immediate refund of amounts collected from our 2003 — 2005 GRIP filings of approximately $2.9 million and reduced our total return to 7.903 percent from 8.258 percent, based on a capital structure of 48.1 percent equity and 51.9 percent debt with a return on equity of 10 percent.

⁽³⁾		The Missouri Commission issued an order in March 2007 approving a settlement with rate design changes, including revenue decoupling through the recovery of all non-gas cost revenues through fixed monthly charges and no rate increase.

Other Ratemaking Activity

The following table summarizes other ratemaking activity during the years ended September 30, 2007, 2006 and 2005:

Increase

(Decrease)

Effective

Division

Jurisdiction

Rate Activity

in Revenue

Date

(In thousands)

2007 Other Rate Activity:

Mid-Tex

Texas

GRIP Refund

(2,887

)

4/1/07

Colorado-Kansas

Kansas

Ad Valorem Tax

1,528

1/1/07

2007 Other Rate Activity

(1,359

)

2006 Other Rate Activity:

Colorado-Kansas

Kansas

Ad Valorem Tax

1,565

1/1/06

2006 Other Rate Activity

1,565

In December 2006, the Louisiana Public Service Commission issued a staff report allowing the deferral of $4.3 million in operating and maintenance expenses in our Louisiana Division to allow recovery of all incremental operation and maintenance expense incurred in fiscal 2005 and 2006 in connection with our Hurricane Katrina recovery efforts.

In September 2006, our Mid-Tex Division filed its annual gas cost reconciliation with the RRC. The filing reflects approximately $24 million in refunds of amounts that were overcollected from customers between July 2005 and June 2006. The Mid-Tex Division received approval to refund these amounts over a six-month period, which began in November 2006. The ruling had no impact on the gross profit for the Mid-Tex Division.

In May 2007, our Mid-Tex Division filed a 36-month gas contract review filing. This filing is mandated by prior RRC orders and covers the prudence of gas purchases made from November 2003 through October 2006, which total approximately $2.7 billion. An agreed-upon procedural schedule has been filed with the RRC, which established a hearing schedule beginning in December 2007.

In August 2007, our Colorado-Kansas Division agreed with the Colorado Office of Consumer Counsel and the staff of the Colorado Public Utility Commission to issue a one-time credit to our Colorado customers of $1.1 million on customer bills in January 2008.

Other Regulation

Each of our natural gas distribution divisions is regulated by various state or local public utility authorities. We are also subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of our gas distribution facilities. In addition, our distribution operations are also subject to various state and federal laws regulating environmental matters. From time to time we receive inquiries regarding various environmental matters. We believe that our properties and operations substantially comply with and are operated in substantial conformity with applicable safety and environmental statutes and regulations. There are no administrative nor judicial proceedings arising under environmental quality statutes pending or known to be contemplated by governmental agencies which would have a material adverse effect on us or our operations. Our environmental claims have arisen primarily from former manufactured gas plant sites in Tennessee, Iowa and Missouri.

The Federal Energy Regulatory Commission (FERC) allows, pursuant to Section 311 of the Natural Gas Policy Act, gas transportation services through our Atmos Pipeline — Texas assets “on behalf of” interstate pipelines or local distribution companies served by interstate pipelines, without subjecting these assets to the jurisdiction of the FERC.

Competition

Although our natural gas distribution operations are not currently in significant direct competition with any other distributors of natural gas to residential and commercial customers within our service areas, we do compete with other natural gas suppliers and suppliers of alternative fuels for sales to industrial and agricultural customers. We compete in all aspects of our business with alternative energy sources, including, in particular, electricity. Electric utilities offer electricity as a rival energy source and compete for the space heating, water heating and cooking markets. Promotional incentives, improved equipment efficiencies and promotional rates all contribute to the acceptability of electrical equipment. The principal means to compete against alternative fuels is lower prices, and natural gas historically has maintained its price advantage in the residential, commercial and industrial markets. However, higher gas prices, coupled with the electric utilities’ marketing efforts, have increased competition for residential and commercial customers. In addition, AEM competes with other natural gas brokers in obtaining natural gas supplies for our customers.

Employees

At September 30, 2007, we had 4,653 employees, consisting of 4,526 employees in our regulated operations and 127 employees in our nonregulated operations.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports, and amendments to those reports, that we file with or furnish to the Securities and Exchange Commission (SEC) are available free of charge at our website, www.atmosenergy.com , as soon as reasonably practicable, after we electronically file these reports with, or furnish these reports to, the SEC. We will also provide copies of these reports free of charge upon request to Shareholder Relations at the address and telephone number appearing below:

Shareholder Relations

Atmos Energy Corporation

P.O. Box 650205

Dallas, Texas 75265-0205

972-855-3729

Corporate Governance

In accordance with and pursuant to relevant related rules and regulations of the SEC as well as corporate governance-related listing standards of the New York Stock Exchange (NYSE), the Board of Directors of the Company has established and periodically updated our Corporate Governance Guidelines and Code of Conduct, which is applicable to all directors, officers and employees of the Company. In addition, in accordance with and pursuant to such NYSE listing standards, our Chief Executive Officer, Robert W. Best, has certified to the New York Stock Exchange that he was not aware of any violation by the Company of NYSE corporate governance listing standards. The Board of Directors has also periodically updated the charters for each of its Audit, Human Resources and Nominating and Corporate Governance Committees. All of the foregoing documents are posted on the Corporate Governance page of our website. We will also provide copies of such information free of charge upon request to Shareholder Relations at the address listed above.


ITEM 1A.	*Risk Factors*

Our financial and operating results are subject to a number of factors, many of which are not within our control. Although we have tried to discuss key risk factors below, please be aware that other risks may prove to be important in the future. These factors include the following:

We are subject to regulation by each state in which we operate that affect our operations and financial results.

Our natural gas distribution and regulated transmission and storage businesses are subject to various regulated returns on our rate base in each jurisdiction in which we operate. We monitor the allowed rates of return and our effectiveness in earning such rates and initiate rate proceedings or operating changes as we believe are needed. In addition, in the normal course of the regulatory environment, assets may be placed in service and historical test periods established before rate cases can be filed that could result in an adjustment of our returns. Once rate cases are filed, regulatory bodies have the authority to suspend implementation of the new rates while studying the cases. Because of this process, we must suffer the negative financial effects of having placed assets in service without the benefit of rate relief, which is commonly referred to as “regulatory lag”. In addition, rate cases involve a risk of rate reduction, because once rates have been approved, they are still subject to challenge for their reasonableness by appropriate regulatory authorities. Our debt and equity financings are also subject to approval by regulatory bodies in several states, which could limit our ability to take advantage of favorable market conditions.

Our business could also be affected by deregulation initiatives, including the development of unbundling initiatives in the natural gas industry. Unbundling is the separation of the provision and pricing of local distribution gas services into discrete components. It typically focuses on the separation of the distribution and gas supply components and the resulting opening of the regulated components of sales services to alternative unregulated suppliers of those services. Although we believe that our enhanced technology and distribution system infrastructures have positively positioned us, we cannot provide assurance that there would be no significant adverse effect on our business should unbundling or further deregulation of the natural gas distribution service business occur.

Our operations are exposed to market risks that are beyond our control which could adversely affect our financial results.

Our risk management operations are subject to market risks beyond our control including market liquidity, commodity price volatility and counterparty creditworthiness.

Although we maintain a risk management policy, we may not be able to completely offset the price risk associated with volatile gas prices or the risk in our natural gas marketing and pipeline and storage segments, which could lead to volatility in our earnings. Physical trading also introduces price risk on any net open positions at the end of each trading day, as well as volatility resulting from intra-day fluctuations of gas prices and the potential for daily price movements between the time natural gas is purchased or sold for future delivery and the time the related purchase or sale is hedged. Although we manage our business to maintain no

open positions, there are times when limited net open positions related to our physical storage may occur on a short-term basis. The determination of our net open position as of the end of any particular trading day requires us to make assumptions as to future circumstances, including the use of gas by our customers in relation to our anticipated storage and market positions. Because the price risk associated with any net open position at the end of such day may increase if the assumptions are not realized, we review these assumptions as part of our daily monitoring activities. Net open positions may increase volatility in our financial condition or results of operations if market prices move in a significantly favorable or unfavorable manner because the timing of the recognition of profits or losses on the hedges for financial accounting purposes usually do not match up with the timing of the economic profits or losses on the item being hedged. This volatility may occur with a resulting increase or decrease in earnings or losses, even though the expected profit margin is essentially unchanged from the date the transactions were consummated. Further, if the local physical markets in which we trade do not move consistently with the NYMEX futures market, we could experience increased volatility in the financial results of our natural gas marketing and pipeline and storage segments.

Our natural gas marketing and pipeline, storage and other segments manage margins and limit risk exposure on the sale of natural gas inventory or the offsetting fixed-price purchase or sale commitments for physical quantities of natural gas through the use of a variety of financial derivatives. However, contractual limitations could adversely affect our ability to withdraw gas from storage, which could cause us to purchase gas at spot prices in a rising market to obtain sufficient volumes to fulfill customer contracts. We could also realize financial losses on our efforts to limit risk as a result of volatility in the market prices of the underlying commodities or if a counterparty fails to perform under a contract. In addition, adverse changes in the creditworthiness of our counterparties could limit the level of trading activities with these parties and increase the risk that these parties may not perform under a contract.

We are also subject to interest rate risk on our commercial paper borrowings. In recent years, we have been operating in a relatively low interest-rate environment with both short and long-term interest rates being relatively low compared to historical interest rates. However, in the last three years, the Federal Reserve has taken actions that have generally resulted in increases in short-term interest rates. Future increases in interest rates could adversely affect our future financial results.

The concentration of our distribution, pipeline and storage operations in the State of Texas has increased the exposure of our operations and financial results to economic conditions and regulatory decisions in Texas.

As a result of our acquisition of the distribution, pipeline and storage operations of TXU Gas in October 2004, over 50 percent of our natural gas distribution customers and most of our pipeline and storage assets and operations are located in the State of Texas. This concentration of our business in Texas means that our operations and financial results are subject to greater impact than before from changes in the Texas economy in general and regulatory decisions by state and local regulatory authorities.

Adverse weather conditions could affect our operations.

Beginning in the 2006-2007 winter heating season, we have had weather-normalized rates for over 90 percent of our residential and commercial meters, which has substantially mitigated the adverse effects of warmer-than-normal weather for meters in those service areas. However, our natural gas distribution and regulated transmission and storage operating results may continue to vary somewhat with the actual temperatures during the winter heating season. In addition, sustained cold weather could adversely affect our natural gas marketing operations as we may be required to purchase gas at spot rates in a rising market to obtain sufficient volumes to fulfill some customer contracts.

The execution of our business plan could be affected by an inability to access capital markets.

We rely upon access to both short-term and long-term capital markets to satisfy our liquidity requirements. Adverse changes in the economy or these markets, the overall health of the industries in which we

operate and changes to our credit ratings could limit access to these markets, increase our cost of capital or restrict the execution of our business plan.

Our long-term debt is currently rated as “investment grade” by Standard & Poor’s Corporation (S&P), Moody’s Investors Services, Inc. (Moody’s) and Fitch Ratings, Ltd. (Fitch), the three credit rating agencies that rate our long-term debt securities. There can be no assurance that these rating agencies will maintain investment grade ratings for our long-term debt. If we were to lose our investment-grade rating, the commercial paper markets and the commodity derivatives markets could become unavailable to us. This would increase our borrowing costs for working capital and reduce the borrowing capacity of our gas marketing affiliate. In addition, if our commercial paper ratings were lowered, it would increase the cost of commercial paper financing and could reduce or eliminate our ability to access the commercial paper markets. If we were unable to issue commercial paper at reasonable rates, we would likely borrow under our bank credit facilities to meet our working capital needs, which would likely increase the cost of our working capital financing.

Inflation and increased gas costs could adversely impact our customer base and customer collections and increase our level of indebtedness.

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

Rapid increases in the price of purchased gas, which has occurred in recent years, cause us to experience a significant increase in short-term debt. We must pay suppliers for gas when it is purchased, which can be significantly in advance of when these costs may be recovered through the collection of monthly customer bills for gas delivered. Increases in purchased gas costs also slow our natural gas distribution collection efforts as customers are more likely to delay the payment of their gas bills, leading to higher than normal accounts receivable. This could result in higher short-term debt levels, greater collection efforts and increased bad debt expense.

Our growth in the future may be limited by the nature of our business, which requires extensive capital spending.

We must continually build additional capacity in our natural gas distribution system to maintain the growth in the number of our customers. The cost of adding this capacity may be affected by a number of factors, including the general state of the economy and weather. Our cash flows from operations generally are sufficient to supply funding for all our capital expenditures including the financing of the costs of new construction along with capital expenditures necessary to maintain our existing natural gas system. Due to the timing of these cash flows and capital expenditures, we often must fund at least a portion of these costs through borrowing funds from third party lenders, the cost of which is dependent on the interest rates at the time. This in turn may limit our ability to connect new customers to our system due to constraints on the amount of funds we can invest in our infrastructure.

Our operations are subject to increased competition.

In the residential and commercial customer markets, our natural gas distribution operations compete with other energy products, such as electricity and propane. Our primary product competition is with electricity for heating, water heating and cooking. Increases in the price of natural gas could negatively impact our competitive position by decreasing the price benefits of natural gas to the consumer. This could adversely impact our business if as a result, our customer growth slows, reducing our ability to make capital expenditures, or if our customers further conserve their use of gas, resulting in reduced gas purchases and customer billings.

In the case of industrial customers, such as manufacturing plants and agricultural customers, adverse economic conditions, including higher gas costs, could cause these customers to use alternative sources of energy, such as electricity, or bypass our systems in favor of special competitive contracts with lower per-unit costs. Our regulated transmission and storage operations currently face limited competition from other existing intrastate pipelines and gas marketers seeking to provide or arrange transportation, storage and other services for customers. However, competition may increase if new intrastate pipelines are constructed near our existing facilities.

The cost of providing pension and postretirement health care benefits is subject to changes in pension fund values, changing demographics and actuarial assumptions and may have a material adverse effect on our financial results.

We provide a cash-balance pension plan and postretirement healthcare benefits to eligible full-time employees. Our costs of providing such benefits is subject to changes in the market value of our pension fund assets, changing demographics, including longer life expectancy of beneficiaries and an expected increase in the number of eligible former employees over the next five to ten years, and various actuarial calculations and assumptions. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates and interest rates and other factors. These differences may result in a significant impact on the amount of pension expense or other postretirement benefit costs recorded in future periods.

We are subject to environmental regulations which could adversely affect our operations or financial results.

We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local governmental authorities relating to protection of the environment and health and safety matters, including those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and waste, the clean-up of contaminated sites, groundwater quality and availability, plant and wildlife protection, as well as work practices related to employee health and safety. Environmental legislation also requires that our facilities, sites and other properties associated with our operations be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Failure to comply with these laws, regulations, permits and licenses may expose us to fines, penalties or interruptions in our operations that could be significant to our financial results. In addition, existing environmental regulations may be revised or our operations may become subject to new regulations. Such revised or new regulations could result in increased compliance costs or additional operating restrictions which could adversely affect our business, financial condition and results of operations.

Distributing and storing natural gas involve risks that may result in accidents and additional operating costs.

Our natural gas distribution business involves a number of hazards and operating risks that cannot be completely avoided, such as leaks, accidents and operational problems, which could cause loss of human life, as well as substantial financial losses resulting from property damage, damage to the environment and to our operations. We do have liability and property insurance coverage in place for many of these hazards and risks. However, because our pipeline, storage and distribution facilities are near or are in populated areas, any loss of human life or adverse financial results resulting from such events could be large. If these events were not fully covered by insurance, our financial position and results of operations could be adversely affected.

Natural disasters, terrorist activities or other significant events could adversely affect our operations or financial results.

Natural disasters are always a threat to our assets and operations. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural gas that could affect our operations. Also, companies in our industry may face a heightened risk of exposure to actual acts of terrorism, which could subject our operations to increased risks. As a result, the availability of insurance

covering such risks may be more limited, which could increase the risk that an event could adversely affect future financial results.


ITEM 1B.	*Unresolved Staff Comments*

Not applicable.


ITEM 2.	*Properties*

Distribution, transmission and related assets

At September 30, 2007, our natural gas distribution segment owned an aggregate of 76,362 miles of underground distribution and transmission mains throughout our gas distribution systems. These mains are located on easements or rights-of-way which generally provide for perpetual use. We maintain our mains through a program of continuous inspection and repair and believe that our system of mains is in good condition. Our regulated transmission and storage segment owned 6,290 miles of gas transmission and gathering lines and our pipeline, storage and other segment owned 73 miles of gas transmission and gathering lines.

Storage Assets

We own underground gas storage facilities in several states to supplement the supply of natural gas in periods of peak demand. The following table summarizes certain information regarding our underground gas storage facilities:


							Maximum
							Daily
			Cushion		Total		Delivery
	Usable Capacity		Gas		Capacity		Capability
State	(Mcf)		(Mcf) ⁽¹⁾		(Mcf)		(Mcf)

Natural Gas Distribution Segment
Kentucky		4,442,696		6,322,283		10,764,979		109,100
Kansas		3,239,000		2,300,000		5,539,000		45,000
Mississippi		2,211,894		2,442,917		4,654,811		48,000
Georgia		450,000		50,000		500,000		30,000

Total		10,343,590		11,115,200		21,458,790		232,100
Regulated Transmission and Storage Segment — Texas		39,128,475		13,128,025		52,256,500		1,235,000
Pipeline, Storage and Other Segment
Kentucky		3,492,900		3,295,000		6,787,900		71,000
Louisiana		438,583		300,973		739,556		56,000

Total		3,931,483		3,595,973		7,527,456		127,000

Total		53,403,548		27,839,198		81,242,746		1,594,100


⁽¹⁾		Cushion gas represents the volume of gas that must be retained in a facility to maintain reservoir pressure.

Additionally, we contract for storage service in underground storage facilities on many of the interstate pipelines serving us to supplement our proprietary storage capacity. The following table summarizes our contracted storage capacity:


				Maximum
		Maximum		Daily
		Storage		Withdrawal
		Quantity		Quantity
Segment	Division/Company	(MMBtu)		(MMBtu) ⁽¹⁾

Natural Gas Distribution Segment
	Colorado-Kansas Division		4,237,243		108,232
	Kentucky/Mid-States Division		15,302,867		287,831
	Louisiana Division		2,689,695		163,692
	Mississippi Division		4,033,649		168,039
	West Texas Division		1,225,000		56,000

Total			27,488,454		783,794
Natural Gas Marketing Segment	Atmos Energy Marketing, LLC		11,874,654		271,167
Pipeline, Storage and Other Segment	Trans Louisiana Gas Pipeline, Inc.		1,050,000		60,000

Total Contracted Storage Capacity			40,413,108		1,114,961


⁽¹⁾		Maximum daily withdrawal quantity (MDWQ) amounts will fluctuate depending upon the season and the month. Unless otherwise noted, MDWQ amounts represent the MDWQ amounts as of November 1, which is the beginning of the winter heating season.

Other facilities

Our natural gas distribution segment owns and operates one propane peak shaving plant with a total capacity of approximately 180,000 gallons that can produce an equivalent of approximately 3,300 Mcf daily.

Offices

Our administrative offices and corporate headquarters are consolidated in a leased facility in Dallas, Texas. We also maintain field offices throughout our distribution system, the majority of which are located in leased facilities. Our nonregulated operations are headquartered in Houston, Texas, with offices in Houston and other locations, primarily in leased facilities.


ITEM 3.	*Legal Proceedings*

See Note 13 to the consolidated financial statements.


ITEM 4.	*Submission of Matters to a Vote of Security Holders*

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007.


			Years of
Name	Age		Service		Office Currently Held

Robert W. Best		60		10	Chairman, President and Chief Executive Officer
Kim R. Cocklin		56		1	Senior Vice President, Utility Operations
Louis P. Gregory		52		7	Senior Vice President and General Counsel
Mark H. Johnson		48