PART 1. FINANCIAL INFORMATION

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements

ATMOS ENERGY CORPORATION  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as certain non-utility businesses. Through our natural gas utility business, we distribute natural gas through sales and transportation arrangements to approximately 1.7 million residential, commercial, public authority and industrial customers through our six regulated natural gas utility divisions, which cover the following service areas:

      In addition, we transport natural gas for others through our distribution system. Our utility business is subject to federal and state regulation and/or regulation by local authorities in each of the states in which the utility divisions operate. Our shared services unit is located in Dallas, Texas, and our customer support centers are located in Amarillo, Texas and Metairie, Louisiana.

      Our non-utility businesses are organized under Atmos Energy Holdings, Inc. (AEH) and have operations in 18 states. Through September 30, 2003, Atmos Energy Marketing, LLC, together with its wholly-owned subsidiaries Woodward Marketing, L.L.C. and Trans Louisiana Industrial Gas Company, Inc., comprised our natural gas marketing segment. Effective October 1, 2003, our natural gas marketing segment was reorganized. The operations of Atmos Energy Marketing, LLC and Trans Louisiana Industrial Gas Company, Inc. were merged into Woodward Marketing, L.L.C., which was renamed Atmos Energy Marketing, LLC (AEM).

      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, Louisiana and Mid-States 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 products.

      Our other non-utility businesses consist primarily of the operations of Atmos Pipeline and Storage, L.L.C. and Atmos Power Systems, Inc., which are wholly-owned by AEH. Through Atmos Pipeline and Storage, L.L.C., we own or have an interest in underground storage fields in Kansas, Kentucky and Louisiana. Additionally, Atmos Pipeline and Storage, L.L.C. contracts for storage service in underground storage facilities on many of the interstate pipelines serving us. Through Atmos Power Systems, Inc. we construct and operate electric peaking power generating plants and associated facilities and may enter into agreements to either lease or sell these plants.

      Finally, prior to January 20, 2004, United Cities Propane Gas, Inc., a wholly-owned subsidiary of AEH, 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. As of December 31, 2003, USP owned all of the general

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

partnership interest and approximately 26 percent of the limited partnership interest in Heritage Propane Partners, L.P. a publicly-traded marketer of propane through a nationwide retail distribution network. Through our ownership in USP, we owned an approximate five percent indirect interest in Heritage Propane Partners, L.P. On January 20, 2004, we and our partners in USP completed the previously announced sale of our interest in USP, including the general partnership and limited partnerships in Heritage Propane Partners, L.P., for $130.0 million. We received approximately $24.7 million and will record a $4.4 million pretax book gain in the second quarter of fiscal 2004.

      In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made to the unaudited consolidated interim period financial statements. These consolidated interim period 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 (“Atmos” or “the Company”) in its Annual Report on Form 10-K for the fiscal year ended September 30, 2003. Because of seasonal and other factors, the results of operations for the three month period ended December 31, 2003 are not indicative of expected results of operations for the fiscal year ending September 30, 2004.

      The following presents a summary of certain of our significant accounting policies. A complete description of our significant accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

      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. Additionally, we accounted for our investment in USP under the equity method of accounting for investments.

      Basis of comparison  — Certain prior year amounts have been reclassified to conform with the current year presentation. In conjunction with our adoption of Emerging Issues Task Force (EITF) 02-03, Accounting for Contracts Involved in Energy Trading and Risk Management in fiscal 2003, energy trading contracts resulting in delivery of a commodity where we are the principal in the transaction are included as natural gas marketing sales or purchases. The prior year period has been reclassified to conform with this presentation.

      Use of estimates  — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates include the allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes, risk management and trading activities and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results could differ from those 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) 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.

      We record certain costs as regulatory assets in accordance with SFAS 71 when future recovery through customer rates is considered probable. Regulatory liabilities are recorded when it is probable that revenues will

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

be reduced for amounts that will be credited to customers through the ratemaking process. Significant regulatory assets and liabilities as of December 31, 2003 and September 30, 2003 included the following:

      Revenue recognition  — Sales of natural gas to our utility customers 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 utility segment 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.

      Energy trading contracts resulting in the delivery of natural gas where we are the principal in the transaction are recorded as natural gas marketing sales or purchases at the time of physical delivery. Realized gains and losses from the settlement of financial instruments that do not result in physical delivery of natural gas and unrealized gains and losses from changes in the market value of open contracts are included as components of natural gas marketing revenues. For the three months ended December 31, 2003 and 2002, we included unrealized gains (losses) on open contracts of $4.4 million and ($1.1) million as a component of natural gas marketing revenues.

      Accounts receivable and allowance for doubtful accounts  — Accounts receivable consist of natural gas sales to residential, commercial, industrial, municipal, 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. However, if circumstances change, our estimate of the recoverability of accounts receivable could be different. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices and general economic conditions. Our allowance for doubtful accounts as of December 31, 2003 and September 30, 2003 was $13.8 million and $13.1 million.

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

      Goodwill and intangible assets  — We annually evaluate our goodwill balances for impairment during our second fiscal quarter or more frequently as impairment indicators arise. We use a present value technique

NOTES TO CONDENSED CONSOL