Filed Pursuant to Rule 424(b)(2)
Registration No. 333-75576
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 30, 2002)

8,650,000 Shares

Atmos Energy Corporation

Common Stock


          Atmos Energy Corporation is selling all of the shares.

          The shares trade on the New York Stock Exchange under the symbol “ATO.” On July 13, 2004, the last sale price of the shares as reported on the New York Stock Exchange was $24.91 per share.

          Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page S-7 of this prospectus supplement.

                 

Per Share Total


Public offering price
    $24.75       $214,087,500  
Underwriting discount
    $.99       $8,563,500  
Proceeds, before expenses, to Atmos
    $23.76       $205,524,000  

          The underwriters may also purchase up to an additional 1,289,393 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus supplement to cover overallotments.

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

          The shares will be ready for delivery on or about July 19, 2004.

Merrill Lynch & Co.
  JPMorgan
  Lehman Brothers
  UBS Investment Bank
  A.G. Edwards
  Edward Jones

The date of this prospectus supplement is July 13, 2004.

          We have not, and the underwriters have not, authorized any other person to provide you with any information or to make any representations not contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer of any securities other than the shares. This document is in two parts. The first part is this prospectus supplement, which describes specific terms of this offering and other matters relating to us and our financial condition. The second part is the accompanying prospectus, dated January 30, 2002, which gives more general information about securities we have offered from time to time, some of which may not apply to the shares we are currently offering. If the description of this offering or our operations varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus, as well as the information contained in any document incorporated by reference, is accurate as of the date of each such document only.

 


Prospectus Supplement

         
Page

  Incorporation by Reference
    ii  
  Cautionary Statement Regarding Forward-Looking Statements
    iii  
  Prospectus Supplement Summary
    S-1  
  Risk Factors
    S-7  
  Use of Proceeds
    S-10  
  Market Price of Common Stock and Dividends
    S-10  
  Capitalization
    S-11  
  The TXU Gas Acquisition
    S-12  
  Unaudited Pro Forma Combined Financial Information
    S-16  
  Our Business
    S-26  
  Description of Common Stock
    S-32  
  Underwriting
    S-36  
  Legal Matters
    S-39  
  Experts
    S-39  
Prospectus
  Cautionary Statement Regarding Forward-Looking Statements
    ii  
  Atmos Energy Corporation
    1  
  Use of Proceeds
    1  
  Ratio of Earnings to Fixed Charges
    2  
  Securities We May Issue
    2  
  Description of Debt Securities
    3  
  Description of Common Stock
    18  
  Plan of Distribution
    20  
  Legal Matters
    21  
  Experts
    21  
  Where You Can Find More Information
    22  
  Incorporation of Certain Documents by Reference
    22  


          The distribution of this prospectus supplement and the accompanying prospectus, and the offering of the shares, may be restricted by law in certain jurisdictions. You should inform yourself about, and observe, any of these restrictions. This prospectus supplement and the accompanying prospectus do not constitute, and may not be used in connection with, an offer or solicitation by anyone in any jurisdiction in which the offer or solicitation is not authorized, or in which the person making the offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make the offer or solicitation.

i


INCORPORATION BY REFERENCE

          The SEC allows us to “incorporate by reference” information in this prospectus supplement and the accompanying prospectus that we have filed with it. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this prospectus supplement and the accompanying prospectus, except for any information that is superseded by information that is included directly in this document. We incorporate by reference the documents listed below and any future filings we make with the SEC under sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the termination of this offering. These additional documents include periodic reports, such as annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (other than information furnished under Item 9 or 12, which is deemed not to be incorporated by reference in this prospectus supplement or the accompanying prospectus), as well as proxy statements. You should review these filings as they may disclose a change in our business, prospects, financial condition or other affairs after the date of this prospectus supplement. The information that we file later with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and before the termination of this offering will automatically update and supersede previous information included or incorporated by reference in this prospectus supplement and the accompanying prospectus.

          This prospectus supplement and the accompanying prospectus incorporate by reference the documents listed below that we have filed with the SEC but have not been included or delivered with this document. These documents contain important information about us and our financial condition.

  Our annual report on Form 10-K for the year ended September 30, 2003;
 
  Our proxy statement dated December 29, 2003;
 
  Our quarterly reports on Form 10-Q for the quarterly periods ended December 31, 2003 and March 31, 2004; and
 
  Our current reports on Form 8-K filed with the SEC on January 22, 2004 and July 7, 2004 and our current report on Form 8-K/A filed with the SEC on July 2, 2004.

          You may obtain a copy of any of these filings, or any of our future filings, from us without charge by requesting it in writing or by telephone at the following address or telephone number:

Atmos Energy Corporation

1800 Three Lincoln Centre
5430 LBJ Freeway
Dallas, Texas 75240
Attention: Susan C. Kappes
(972) 934-9227

ii


 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

          Statements contained or incorporated by reference in this prospectus supplement that are not statements of historical fact are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933. Forward-looking statements are based on management’s beliefs as well as assumptions made by, and information currently available to, management. Because such statements are based on expectations as to future results and are not statements of fact, actual results may differ materially from those stated. Important factors that could cause future results to differ include, but are not limited to:

  successful completion, financing and integration of our pending acquisition of the operations of TXU Gas Company and other acquisitions we have made or may make in the future;
 
  adverse weather conditions, such as warmer-than-normal weather in our utility service territories or colder-than-normal weather that could adversely affect our natural gas marketing activities;
 
  national, regional and local economic conditions;
 
  increased competition from other energy suppliers and alternative forms of energy;
 
  regulatory trends and decisions, including deregulation initiatives and the impact of rate proceedings before various state regulatory commissions;
 
  changes in the availability and prices of natural gas, including the volatility of natural gas prices;
 
  effects of inflation;
 
  market risks beyond our control affecting our risk management activities, including market liquidity, commodity price volatility and counterparty creditworthiness;
 
  our ability to continue to access the capital markets; and
 
  other factors discussed in this prospectus supplement and our other filings with the SEC.

All of these factors are difficult to predict and many are beyond our control. Accordingly, while we believe 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. When used in our documents or oral presentations, the words “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “objective,” “plan,” “projection,” “seek,” “strategy” or similar words are intended to identify forward-looking statements. We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. For further factors you should consider, please refer to the “Risk Factors” section beginning on page S-7 of this prospectus supplement and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in our annual report on Form 10-K for the year ended September 30, 2003 and in our quarterly reports on Form 10-Q for the quarterly periods ended December 31, 2003 and March 31, 2004.


          The terms “we,” “our,” “us” and “Atmos” refer to Atmos Energy Corporation and its subsidiaries unless the context suggests otherwise. The term “you” refers to a prospective investor. The abbreviations “Mcf,” “MMcf” and “Bcf” mean thousand cubic feet, million cubic feet and billion cubic feet, respectively.

          Except as otherwise indicated, all information in this prospectus supplement assumes that the underwriters have not exercised their overallotment option.

iii


 
PROSPECTUS SUPPLEMENT SUMMARY

          You should read the following summary in conjunction with the more detailed information contained elsewhere in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference in this prospectus supplement and the accompanying prospectus.

Atmos Energy Corporation

          Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as other natural gas nonutility businesses. 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 utility divisions, which cover service areas located 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 nonutility businesses, we provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers in 18 states. We own or hold an interest in natural gas storage fields in Kansas, Kentucky, Louisiana and Mississippi that we use to supply natural gas to our customers. We market natural gas to industrial and agricultural customers primarily in West Texas and to industrial customers in Louisiana. We also construct electric power generating plants and associated facilities for municipalities and industrial customers to meet their peak-load demands.

          Our operations are divided into three segments:

  the utility segment, which includes our related natural gas distribution and sales operations;
 
  the natural gas marketing segment, which includes a variety of natural gas management services; and
 
  our other nonutility segment, which includes our storage services and our electric power generating plant construction services.

          Our overall strategy is to:

  continue our growth through completing and integrating the acquisition of the operations of TXU Gas Company, described under the caption “The TXU Gas Acquisition”;
 
  improve the quality and consistency of earnings growth, while operating our natural gas utility and nonutility businesses exceptionally well; and
 
  enhance and strengthen a culture built on our core values.

          Over the last five years, we have grown through several acquisitions, including our acquisition in April 2001 of the remaining 55% interest in Woodward Marketing, L.L.C. that we did not already own, our acquisition in July 2001 of the assets of Louisiana Gas Service Company and our acquisition in December 2002 of Mississippi Valley Gas Company.

          We have experienced 20 consecutive years of increasing dividends and consistent earnings growth after giving effect to our acquisitions. We have achieved this record of growth while operating our utility operations efficiently by managing our operating and maintenance expenses, leveraging our technology, such as our 24-hour call center, to achieve more efficient operations, focusing on regulatory rate proceedings to increase revenue as our costs increased, and mitigating weather-related risks through weather-normalized rates in many of our service areas. Additionally, we have strengthened our nonutility business by ceasing speculative trading activities and actively pursuing opportunities to increase the amount of storage available to us.

S-1


          Our core values include focusing on our employees and customers while conducting our business with honesty and integrity. We are strengthening our culture through ongoing communication with our employees and enhanced employee training.

The TXU Gas Acquisition

          On June 17, 2004, our subsidiary, LSG Acquisition Corporation, entered into a definitive agreement with TXU Gas Company to acquire the natural gas distribution and pipeline operations of TXU Gas.

          The TXU Gas operations we are acquiring are regulated businesses engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas. TXU Gas provides gas distribution services to over 1.4 million residential and business customers in Texas, including the Dallas/ Fort Worth metropolitan area. TXU Gas owns and operates a system consisting of 6,162 miles of gas transmission and gathering lines and five underground storage reservoirs, all within Texas. The acquisition would increase the number of customers we serve in our distribution business to over 3.1 million and make us one of the largest publicly traded companies in the United States whose primary business is the transmission and distribution of natural gas and the provision of related services. It would also make us one of the largest intrastate pipeline operators in Texas.

          The purchase price, excluding transaction costs, for the acquisition is $1.925 billion, which is payable in cash. The price is subject to adjustment if at the time of closing the working capital of TXU Gas is less or more than approximately $121 million. The price is also subject to increase by the amount of any capital expenditures made by TXU Gas prior to closing that exceed its budgeted amounts. We are not assuming any indebtedness in the transaction. TXU Gas has agreed to repay or redeem all of its existing indebtedness and its preferred stock and to retain or pay certain other liabilities under the terms of the acquisition agreement.

          We have received a commitment from Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters in this offering, and one of its affiliates to provide a senior unsecured credit facility in the amount of $1.925 billion to finance, or backstop the issuance of commercial paper to finance, this acquisition. We refer to this facility as the bridge financing facility. We intend to use the net proceeds of this offering, along with borrowings under this bridge financing facility, to pay the purchase price for the TXU Gas acquisition. The commitment is subject to the absence of a material adverse effect on our business and assets (after giving effect to the acquisition), the absence of any new adverse information that would materially impair the syndication of the bridge financing facility and other specified conditions. The bridge financing facility would mature 364 days after the closing date of the acquisition. The amount of the bridge financing facility would be reduced to the extent we obtain acquisition financing, such as the proceeds of this offering, prior to the closing of the acquisition. We intend to seek long-term debt and additional common equity financings after the closing of this acquisition to refinance the bridge financing facility.

          We expect the acquisition to close by the end of the calendar year 2004; however, this acquisition is subject to several conditions, including regulatory approvals and clearance by antitrust authorities. This offering is not contingent on the successful completion of the TXU Gas acquisition.

          In this prospectus supplement, we refer to TXU Gas Company as TXU Gas and our acquisition of the operations of TXU Gas as the TXU Gas acquisition. For more information on the terms of the TXU Gas acquisition and the bridge financing facility, see “The TXU Gas Acquisition.” For more information on the operations of TXU Gas, see “The TXU Gas Acquisition — TXU Gas.”

S-2


 
Summary Consolidated Historical Financial Data

(in thousands, except per share data)

Atmos Energy Corporation

          The following table presents summary consolidated financial data for the periods and as of the dates indicated for Atmos Energy Corporation. The summary consolidated financial data for our fiscal years ended September 30, 2003, 2002 and 2001 are derived from our audited consolidated financial statements, which are incorporated by reference in this prospectus supplement from our annual report on Form 10-K for the year ended September 30, 2003. Some prior year amounts have been reclassified to conform with the current year presentation. The summary consolidated financial data for the six months ended March 31, 2004 and 2003 are derived from our unaudited consolidated financial statements, which are also incorporated by reference into this prospectus supplement from our quarterly report on Form 10-Q for the quarterly period ended March 31, 2004. Please note that because of seasonal and other factors, the results of operations for the six-month periods presented below are not indicative of results of operations for the entire fiscal years.

          The information in the following table is only a summary and does not provide all of the information contained in our financial statements. Therefore, you should read the information presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended September 30, 2003, and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2004, each of which is incorporated by reference in this prospectus supplement.

                                           
 
Six Months Ended
March 31, Year Ended September 30,


2004 2003 2003 2002 2001





(unaudited)
Income Statement Data
                                       
 
Operating revenues
  $ 1,881,101     $ 1,874,574     $ 2,799,916     $ 1,650,964     $ 1,725,481  
 
Gross profit
    365,179       340,134       534,976       431,140       375,208  
 
Operating expenses
    196,224       179,632       347,136       275,809       244,927  
 
Operating income
    168,955       160,502       187,840       155,331       130,281  
 
Cumulative effect of accounting change, net of income tax benefit
          (7,773 )     (7,773 )            
 
Net income
    87,846       74,325       71,688       59,656       56,090  
 
Diluted net income per share before cumulative effect of accounting change, net of tax
  $ 1.69     $ 1.86     $ 1.71     $ 1.45     $ 1.47  
 
Diluted net income per share
  $ 1.69     $ 1.68     $ 1.54     $ 1.45     $ 1.47  
 
Cash dividends paid per share
  $ .61     $ .60     $ 1.20     $ 1.18     $ 1.16  
                                               
As of March 31, As of September 30,


2004 2003 2003 2002 2001





(unaudited)
Balance Sheet Data
                                       
 
Total assets (1)
  $ 2,821,192     $ 2,651,643     $ 2,626,913     $ 2,061,135     $ 2,110,214  
 
Debt
                                       
   
Long-term debt
  $ 864,624     $ 864,228     $ 863,918     $ 670,463     $ 692,399  
   
Short-term debt (2)
    8,093       38,857       127,940       167,771       221,942  
     
     
     
     
     
 
     
Total debt
  $ 872,717     $ 903,085     $ 991,858     $ 838,234     $ 914,341  
   
Shareholders’ equity
  $ 932,849     $ 707,729     $ 857,517     $ 573,235     $ 583,864  


(1)   Beginning in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2004, for the unaudited balance sheet as of March 31, 2004 and all previous periods, we have reclassified our regulatory removal obligation from accumulated depreciation to a liability. The amounts presented above for total assets reflect this reclassification for all periods presented.
 
(2)   Short-term debt is comprised of current maturities of long-term debt and short-term debt.

S-3


TXU Gas Company

          The following table presents summary historical consolidated financial data of TXU Gas Company for the periods and as of the dates indicated. The common equity of TXU Gas is owned entirely by TXU Corp. We derived the summary historical consolidated financial data for the fiscal years ended December 31, 2003, 2002 and 2001 from the audited consolidated financial statements of TXU Gas, which are incorporated by reference in this prospectus supplement from our current report on Form 8-K filed with the SEC on July 7, 2004. We derived the summary historical consolidated financial data for the three months ended March 31, 2004 and 2003 from the unaudited consolidated financial statements of TXU Gas, which are also incorporated by reference in this prospectus supplement from our current report on Form 8-K filed with the SEC on July 7, 2004. Because of seasonal and other factors, the results of operations for the three-month periods are not indicative of results of operations for the entire fiscal years.

          Please note that the summary consolidated financial data of TXU Gas presented below, and the consolidated financial statements for TXU Gas incorporated by reference in this prospectus supplement, reflect the entire assets and operations of TXU Gas. However, under the terms of the TXU Gas acquisition, we are only acquiring the natural gas distribution and pipeline operations of TXU Gas. Please refer to “The TXU Gas Acquisition” and the “Unaudited Pro Forma Combined Financial Information” for more information.

          The information in the following table is only a summary and does not provide all of the information contained in the financial statements of TXU Gas. Therefore, you should read the information presented below in conjunction with the historical consolidated financial statements and related notes of TXU Gas for the fiscal years ended December 31, 2003, 2002 and 2001 and for the quarterly periods ended March 31, 2004 and 2003, which are included in our current report on Form 8-K filed with the SEC on July 7, 2004 and incorporated by reference in this prospectus supplement. See “Incorporation by Reference.”

                                           
 
Three Months Ended
March 31, Year Ended December 31,


2004 2003 2003 2002 2001





(unaudited)
Income Statement Data
                                       
 
Operating revenues
  $ 508,217     $ 621,395     $ 1,344,106     $ 980,568     $ 1,229,513  
 
Operating expenses
    118,618       105,659       453,279       407,962       428,595  
 
Operating income
    63,456       85,396       100,285       70,621       41,912  
 
Net income
    38,160       49,548       41,016       (12,810 )     28,712  
                                               
As of March 31, As of December 31,


2004 2003 2003 2002 2001





(unaudited)
Balance Sheet Data
                                       
 
Total assets (1)
  $ 2,226,311     $ 2,320,223     $ 2,327,954     $ 2,297,430     $ 4,551,221  
 
Debt
                                       
   
Long-term debt (1)
  $ 430,193     $ 430,421     $ 430,285     $ 580,466     $ 708,090  
   
Short-term debt
          150,000       150,000       125,000       200,000  
     
     
     
     
     
 
     
Total debt
  $ 430,193     $ 580,421     $ 580,285     $ 705,466     $ 908,090  
 
Shareholder’s equity
  $ 916,339     $ 877,352     $ 879,033     $ 827,804     $ 1,060,105  


(1)   As a result of the implementation of Financial Accounting Standards Board Interpretation No. 46 — “Consolidation of Variable Interest Entities” in December 2003, a wholly owned subsidiary financing trust that issued preferred securities is no longer consolidated. Total asset and long-term debt amounts have been restated for all periods to include an investment in the wholly owned subsidiary financing trust and subordinated debentures issued by TXU Gas that are the sole assets of the trust.

S-4


 
Summary Unaudited Pro Forma Combined Financial Information

(in thousands, except per share data)

          The following table presents summary unaudited pro forma combined financial information for the periods and as of the dates indicated. This information is based on our historical consolidated financial statements and TXU Gas’s historical financial statements, adjusted to give effect to the TXU Gas acquisition, this offering and the proposed financing for the TXU Gas acquisition. The unaudited pro forma combined income statement information for the six months ended March 31, 2004 and for the twelve months ended September 30, 2003 each give effect to the TXU Gas acquisition, this offering and the proposed financing for the acquisition as if each had occurred on October 1, 2002. The unaudited pro forma combined balance sheet information as of March 31, 2004 gives effect to the TXU Gas acquisition, this offering and the proposed financing for the acquisition as if each had occurred on March 31, 2004. The summary unaudited pro forma combined financial information does not give effect to the anticipated refinancing of the bridge financing facility with long-term debt and common equity financings, which would dilute or reduce the unaudited pro forma combined earnings per share presented below. The summary unaudited pro forma combined financial information presented below is not necessarily indicative of either our future results following the TXU Gas acquisition or the results that might have been recorded if the TXU Gas acquisition and related financing transactions had been consummated on such dates.

          The summary unaudited pro forma combined financial information below should be read in conjunction with “Unaudited Pro Forma Combined Financial Information.” See “The TXU Gas Acquisition” for a description of the TXU Gas acquisition and the proposed financing transaction that we expect to enter into in connection with the TXU Gas acquisition.

                   
 
Six Months Ended Year Ended
March 31, 2004 September 30, 2003 (1)


(unaudited)
Income Statement Data
               
 
Operating revenues
  $ 2,734,578     $ 4,126,293  
 
Gross profit
    686,645       1,070,811  
 
Operating expenses
    406,666       755,748  
 
Operating income
    279,979       315,063  
 
Net income
    137,383       120,381  
 
Diluted net income per share
  $ 2.26     $ 2.18  
                       
 
As of
March 31, 2004

(unaudited)
Balance Sheet Data
               
 
Total assets
  $ 4,998,908          
 
Debt
               
   
Long-term debt
  $ 864,624          
   
Short-term debt (2)
    1,737,228          
     
         
     
Total debt
  $ 2,601,852          
 
Shareholders’ equity
  $ 1,137,973          


(1)   The results for TXU Gas used to prepare the unaudited pro forma combined income statement information for the year ended September 30, 2003 are derived from TXU Gas’s statement of income for the year ended December 31, 2003. See “— Summary Consolidated Historical Financial Data — TXU Gas Company.”
 
(2)   Short-term debt is comprised of current maturities of long-term debt and short-term debt.

S-5


 
 
The Offering

 
Common stock offered by us 8,650,000 shares
 
Shares outstanding after the offering 60,885,980 shares
 
Use of proceeds We estimate that our net proceeds from this offering, without exercise of the overallotment option and after deducting the underwriting discount and commissions and estimated offering expenses payable by us, will be approximately $205.1 million. We intend to use these net proceeds, together with borrowings under the bridge financing facility, to consummate the TXU Gas acquisition. If we do not consummate the TXU Gas acquisition, we intend to use these net proceeds for working capital and other general corporate purposes, including capital spending and purchases of natural gas, which would otherwise have been financed with short-term debt under our commercial paper program, or for other acquisitions. See “Use of Proceeds.”
 
NYSE symbol ATO

          The number of shares outstanding after the offering is based on our shares outstanding on March 31, 2004 and excludes 1,703,746 shares then reserved for issuance under outstanding options and share unit awards. This number assumes that the underwriters’ overallotment option is not exercised. If the overallotment option is exercised, we will issue and sell up to an additional 1,289,393 shares.

          See “Risk Factors” beginning on page S-7 and other information included and incorporated by reference in this prospectus supplement for a discussion of the factors you should consider carefully before deciding to invest in our common stock.

S-6


 
RISK FACTORS

          You should consider carefully all of the information that is included or incorporated by reference in this prospectus supplement before investing in our common stock. In particular, you should evaluate the uncertainties and risks referred to or described below, which may adversely affect our business, financial condition or results of operations. Additional uncertainties and risks that are not presently known to us or that we currently deem immaterial, including those associated with the TXU Gas acquisition, may also adversely affect our business, financial condition or results of operations.

Factors Affecting Our Company and Our Industry

          The factors affecting our company and our industry that could impact our business, financial condition or results of operations include those factors described in this prospectus supplement and in the information incorporated by reference in this prospectus supplement. In particular, please refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors that May Affect Our Future Performance” in our annual report on Form 10-K for the year ended September 30, 2003, which is incorporated by reference in this prospectus supplement, and those factors listed in this prospectus supplement in “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of some of the factors that could affect our future operations or performance.

Risks Relating to the TXU Gas Acquisition

          In addition to the factors affecting our company and our industry, the risks outlined below relating to the TXU Gas acquisition could also adversely affect our business, financial condition or results of operations.

 
Our completion of the TXU Gas acquisition depends upon the receipt of financing under the proposed bridge financing facility whose terms and conditions are not fully negotiated.

          We have received a commitment from Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters for this offering, and one of its affiliates to provide the financing required for the TXU Gas acquisition through the bridge financing facility. Although we believe the terms of the commitment are suitable for our financing requirements in connection with the TXU Gas acquisition, we still must negotiate the final terms and the definitive documentation for the bridge financing facility. The pricing anticipated for the bridge financing facility would increase if the bridge financing facility cannot be syndicated on the terms contemplated by the commitment letter. Additionally, other terms and conditions of the bridge financing facility may not be as currently anticipated. Our obligations under the agreement for the TXU Gas acquisition are not conditioned upon our entering into the bridge financing facility on particular terms or completing the financing under the bridge financing facility. If we fail to enter into the bridge financing facility or it does not close, we would be required to seek alternative sources of financing for the TXU Gas acquisition. For regulatory and other reasons, we may not be successful in obtaining alternative financing on reasonable terms, if at all. If we could not obtain alternative sources of financing, we would be unable to complete the TXU Gas acquisition and would breach our obligations under the acquisition agreement.

 
We may not be able to refinance the bridge financing facility when required or on reasonable terms.

          The bridge financing facility will be limited to a term of 364 days from the closing of the TXU Gas acquisition. As a result, we will be required to find long-term financing to refinance the bridge financing facility prior to its maturity. We intend to refinance the bridge financing facility with the proceeds we receive from long-term debt and additional common equity financings. The issuance of additional debt and common stock will require regulatory approvals in several of the states in which we operate and the filing of one or more registration statements with the SEC. There can be no assurance that we will obtain the necessary regulatory approvals to issue additional securities or that we will be able to issue long-term debt or common stock on reasonable terms, if at all. If we fail to refinance the bridge

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financing facility when it becomes due, it would be an event of default under the terms of the bridge financing facility that could result in the acceleration of the repayment of our other indebtedness and force us, at significant expense, to refinance all or a portion of our indebtedness or sell a portion of our business to repay our indebtedness. As a result, the value of the shares of common stock offered hereby could be materially impaired.

          In addition, holders of about 2.4 million shares of our common stock have registration rights that require us to register their shares for sale or that may allow them to participate in equity offerings under future registration statements. This may restrict our ability to raise capital through the issuance of common stock. Moreover, depending on future market conditions, sales of additional common stock would be dilutive to our shareholders, including investors who purchase shares of common stock in this offering.

 
Our indebtedness and leverage will increase materially with the TXU Gas acquisition.

          Assuming completion of this offering, the TXU Gas acquisition and the related financing, we will incur at least $1.7 billion of short-term debt through the bridge financing facility. On a pro forma basis, this would have increased our total debt, as of March 31, 2004, from $872.7 million to $2.6 billion and increased our ratio of total debt to capitalization (including short-term debt and current maturities of long-term debt), as of March 31, 2004, from 48.3% to 69.6%, after giving effect to the acquisition, this offering and the bridge financing, but not to our intention to refinance a portion of the bridge financing facility with additional common equity financings. This ratio could be greater depending on our working capital requirements during the upcoming winter heating season as we may make additional short-term borrowings to fund natural gas purchases. This increase could limit our flexibility in planning for, or reacting to, changes in our business or economic conditions. This increase may also result in a decline in our credit ratings. Following our announcement of the proposed TXU Gas acquisition, rating agencies placed us on negative credit watch and are currently reviewing our ratings. A decline in our ratings would increase our cost of capital and could limit our access to the credit markets. It could also increase the cost or reduce the extent of our commodity hedging activities. 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 the anticipated costs of our bridge financing facility. In addition, the borrowing capacity of our gas marketing affiliate would be reduced.

 
We may not be able to implement the TXU Gas acquisition successfully.

          The TXU Gas acquisition is larger than any of the nine other acquisitions we have made since 1986. In addition to operating the TXU Gas distribution system as our largest division, we will manage pipeline operations on a scale greater than in the past. As a consequence, we may experience the need for additional management attention and resources or unanticipated challenges or delays in integrating the TXU Gas operations into our business. In addition, employees important to the TXU Gas operations we are acquiring may decide not to continue employment with us. If these events occur, the acquired operations may not achieve the results or otherwise perform as expected.

 
The TXU Gas operations are subject to their own risks, which we may not be able to manage successfully.

          The financial results of the TXU Gas operations we are acquiring are subject to many of the same factors that affect our financial condition and results of operations, including weather sensitivity, extensive federal, state and local regulation, increasing gas costs, competition, market risks and national, regional and local economic conditions.

          In addition, the TXU Gas distribution operations we are acquiring do not have weather normalized rates. This means we would not be able to increase customers’ bills to offset lower gas usage when the weather is warmer than normal. As a result, the financial results for the TXU Gas operations we are acquiring may be adversely affected in the event of a warmer than normal heating season unless we are able to obtain weather normalization adjustments from the Texas regulatory authorities.

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          The TXU Gas transmission operations we are acquiring include interconnected natural gas transmission lines, underground storage reservoirs, compressor stations and related properties within Texas. The operation of these transmission facilities also involves risks. These include the possibility of breakdown or failure of equipment or pipelines, the impact of unusual or adverse weather conditions or other natural events and the risk of performance below expected levels of throughput or efficiency. Breakdown or reduced performance of a transmission facility may prevent the facility from performing under applicable sales agreements which, in certain situations, could result in termination of those agreements or incurring a liability for liquidated damages. Insurance, warranties, indemnities or performance guarantees may not cover any or all of the liquidated damages, lost revenues or increased expenses associated with a breakdown or reduction in performance of a transmission facility. If we are unsuccessful in managing these risks, our business, financial condition and results of operations could be adversely affected.

 
Our failure to complete the TXU Gas acquisition could adversely affect our financial condition.

          The consummation of the TXU Gas acquisition depends on several factors, some of which are outside our control. For example, the acquisition and the bridge financing facility require the approval of regulatory authorities in three of the states in which we operate. Under the terms of the acquisition agreement, if we are unable to obtain these approvals by December 31, 2004, TXU Gas will have the right to terminate the acquisition agreement and require us to pay $15 million in satisfaction of our obligations under the acquisition agreement.

 
We have only limited recourse under the acquisition agreement for losses relating to the TXU Gas acquisition.

          The diligence conducted in connection with the TXU Gas acquisition and the indemnification provided in the acquisition agreement may not be sufficient to protect us from, or compensate us for, all losses resulting from the acquisition or TXU Gas’s prior operations. For example, under the terms of the acquisition agreement, the first $15 million of many indemnifiable losses are to be borne by us, and the agreement provides for sharing of losses with respect to unknown environmental matters that may affect the assets we are acquiring after we have borne $10 million in costs relating to such matters. In addition, under the terms of the acquisition agreement, the maximum aggregate amount of such losses for which TXU Gas will indemnify us is approximately $192.5 million. A material loss associated with the TXU Gas acquisition for which there is not adequate indemnification could negatively affect our results of operations, our financial condition and our reputation in the industry and reduce the anticipated benefits of the acquisition.

 
There may be other risks or costs resulting from the TXU Gas acquisition that are not known to us.

          We may not be aware of all of the risks associated with the TXU Gas acquisition. Any discovery of adverse information concerning the assets that we are acquiring after the closing of the acquisition could be material and, in many cases, would be subject to only limited rights of recovery. In addition, following completion of the TXU Gas acquisition, we will likely have to make capital expenditures, which may be significant, but which amount has not been fixed, to enhance or integrate the assets and operations we acquire.

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USE OF PROCEEDS

          We expect that we will receive net proceeds from this offering of approximately $205.1 million ($235.8 million if the underwriters’ overallotment option is exercised in full), after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering, along with borrowings under the bridge financing facility, to pay the $1.925 billion purchase price for the TXU Gas acquisition. We intend to pay the other expenses associated with the TXU Gas acquisition through short-term debt borrowings. For more information on the operations of TXU Gas we are acquiring and the bridge financing facility, please see “The TXU Gas Acquisition.”

          Until the closing of the TXU Gas acquisition, we may use a portion of the net proceeds of this offering for working capital and other general corporate purposes. Pending application of the net proceeds, we intend to invest the net proceeds of this offering in short-term cash equivalent investments. If we do not consummate the acquisition, we intend to use the net proceeds of this offering for working capital and other general corporate purposes, including capital spending and purchases of natural gas, which would otherwise have been financed with short-term debt under our commercial paper program, or for other acquisitions.

 
MARKET PRICE OF COMMON STOCK AND DIVIDENDS

          Our common stock is listed on the New York Stock Exchange under the symbol “ATO.” The following table indicates the high and low closing prices of our common stock, as reported by the New York Stock Exchange, and the dividends that we paid per share during the periods indicated.

                           
 
Cash
High Low Dividends Paid



Quarter Ended or Ending
                       
 
September 30, 2004 (through July 13, 2004)
  $ 25.80     $ 24.91        
 
June 30, 2004
    25.60       24.38     $ .305  
 
March 31, 2004
    26.86       24.32       .305  
 
December 31, 2003
    24.99       24.15       .305  
Quarter Ended
                       
 
September 30, 2003
  $ 25.07     $ 23.20     $ .300  
 
June 30, 2003
    25.45       21.43       .300  
 
March 31, 2003
    24.20       20.95       .300  
 
December 31, 2002
    23.63       20.70       .300  
Quarter Ended
                       
 
September 30, 2002
  $ 22.75     $ 18.37     $ .295  
 
June 30, 2002
    24.46       21.25       .295  
 
March 31, 2002
    24.20       20.26       .295  
 
December 31, 2001
    22.10       19.46       .295  

          The last reported sale price of our common stock on the New York Stock Exchange on July 13, 2004 was $24.91 per share.

          The quarterly dividends of $.305 per share paid during the first three quarters of fiscal 2004 would indicate an annual dividend rate for fiscal 2004 of $1.22 per share. We do not expect to change our current dividend policy as a result of the TXU Gas acquisition or the related financings. However, additional dividends for fiscal 2004 have not been declared and dividends on our shares of common stock are payable at the discretion of our board of directors out of legally available funds. Future payments of dividends, and the amounts of these dividends, will depend on our financial condition, results of operations, capital requirements and other factors.

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CAPITALIZATION

          The following table presents our short-term debt and capitalization as of March 31, 2004:

  on an actual basis;
 
  on an adjusted basis, giving effect to the issuance and sale of 8,650,000 shares at the public offering price of $24.75, after deducting the underwriting discount and commissions and estimated offering expenses payable by us, as if this offering occurred on March 31, 2004; and
 
  on a pro forma adjusted basis, giving effect to this offering, the borrowing under the bridge financing facility and the application of the estimated net proceeds of this offering and such borrowing to consummate the TXU Gas acquisition, as if these transactions all occurred on March 31, 2004.

          You should read this table in conjunction with the unaudited consolidated financial statements and related notes included in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2004, which is incorporated by reference in this prospectus supplement. For more information on the terms of the TXU Gas acquisition and the bridge financing facility, see “The TXU Gas Acquisition.”

                               
 
As of March 31, 2004

Pro Forma
Actual As Adjusted As Adjusted



(in thousands except share data)
Cash and cash equivalents
  $ 114,983     $ 320,107     $ 114,983  
     
     
     
 
Short-term debt
                       
 
Bridge financing facility (1)
  $     $     $ 1,719,876  
 
Current portion of long-term debt
    8,093       8,093       8,093  
 
Other short-term debt (2)
                9,259  
     
     
     
 
   
Total short-term debt
  $ 8,093     $ 8,093     $ 1,737,228  
     
     
     
 
Long-term debt, less current portion
  $ 864,624     $ 864,624     $ 864,624  
Shareholders’ equity
                       
 
Common stock, no par value (stated at $.005 per share); 100,000,000 shares authorized; 52,235,980 shares issued and outstanding, actual; 60,885,980 shares issued and outstanding, as adjusted (3)
  $ 261     $ 304     $ 304  
 
Additional paid-in capital
    753,770       958,851       958,851  
 
Retained earnings
    178,769       178,769       178,769  
 
Accumulated other comprehensive income
    49       49       49  
     
     
     
 
   
Total shareholders’ equity
    932,849       1,137,973       1,137,973  
     
     
     
 
     
Total capitalization (4)
  $ 1,797,473     $ 2,002,597     $ 2,002,597  
     
     
     
 


(1)   The amount of borrowings under the bridge financing facility is expected to be approximately $1.7 billion, which is the TXU Gas acquisition purchase price of $1.925 billion less the estimated net proceeds of this offering. If the underwriters exercise their overallotment option, our borrowings under the bridge financing facility would be correspondingly reduced.
 
(2)   Reflects an assumed short-term borrowing to pay estimated costs and expenses of approximately $9.3 million associated with the TXU Gas acquisition and the bridge financing facility.
 
(3)   The number of shares of common stock issued and outstanding excludes 1,703,746 shares of our common stock then issuable upon exercise of outstanding options and share unit awards and up to 1,289,393 shares then issuable upon the exercise of the underwriters’ overallotment option.
 
(4)   Total capitalization excludes the bridge financing facility, the current portion of long-term debt and other short-term debt.

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THE TXU GAS ACQUISITION

Description of the TXU Gas Acquisition

          On June 17, 2004, our wholly owned subsidiary, LSG Acquisition Corporation, entered into a definitive agreement with TXU Gas Company to acquire substantially all of its operations. TXU Gas is a subsidiary of TXU Corp., a public company. The following is a summary of the material provisions of the agreement. This summary is qualified in its entirety by reference to the agreement, which is included as an exhibit to our current report on Form 8-K, filed with the SEC on July 7, 2004, and incorporated by reference in this prospectus supplement. See “Incorporation by Reference.”

          Principal Terms. The agreement provides for the acquisition of the natural gas distribution and pipeline operations of TXU Gas and the assumption of certain liabilities related to those operations. Although the TXU Gas acquisition is structured as a merger between LSG Acquisition and TXU Gas, TXU Gas will, following the merger, be a surviving entity and remain a subsidiary of TXU Corp. Accordingly, we will treat the TXU Gas acquisition as an asset acquisition for accounting purposes. The purchase price, excluding transaction costs, for the acquisition is $1.925 billion, which is payable in cash. The price is subject to a decrease or increase if at the time of closing the working capital of TXU Gas, as defined in the acquisition agreement, is less or more than approximately $121 million. The purchase price is also subject to increase by the amount of any capital expenditures made by TXU Gas prior to closing that exceed its budgeted amounts. We are not assuming any indebtedness of TXU Gas in connection with the acquisition. Under the terms of the agreement, TXU Gas has agreed to repay or redeem all of its existing indebtedness and its preferred stock. We have guaranteed our subsidiary’s obligations under the agreement and expect to merge our subsidiary into us immediately after the closing. TXU Corp. will provide a guarantee of TXU Gas’s payment obligations under the acquisition agreement at the time of the closing.

          Representations and Warranties. TXU Gas has made representations and warranties as to its historical financial statements, material liabilities, operation in the ordinary course and absence of any material adverse change in its assets or business. It has also provided a representation and warranty as to the compliance of its recent SEC filings with the applicable SEC requirements. Other representations and warranties address its permits, title to assets, material contracts, environmental matters, regulatory matters, labor matters, benefits matters, tax matters, insurance matters, transactions with affiliates and other matters.

          Indemnification. TXU Gas has agreed to indemnify us against a breach of specified representations and warranties for a period of 15 months after closing for aggregate losses that exceed $15 million. However, TXU Gas has also agreed to retain all liabilities relating to pre-closing tax and employee matters, environmental liabilities that are related to its former manufactured gas plants, which we are not acquiring, or that are not related to the assets we are acquiring. The indemnity from TXU Gas relating to these retained liabilities is without limit as to time or amount. In addition, for three years after the closing, we have agreed to share any environmental liabilities associated with the assets acquired that are not disclosed in the acquisition agreement. In this regard, TXU Gas will indemnify us against environmental liabilities involving at least $1 million once these liabilities exceed $10 million in the aggregate and TXU Gas will pay 50% of the amount of these liabilities between $10 million and $20 million and 100% of these liabilities thereafter. The maximum aggregate indemnity payable by TXU Gas on account of these representations and warranties or environmental liabilities associated with the assets being acquired is approximately $192.5 million.

          Employees. We have agreed to offer to employ all employees of TXU Gas as of the closing of the acquisition, including a limited number of employees transferred to TXU Gas prior to the closing who are involved in the TXU Gas operations we are acquiring. The initial positions and base salaries of the TXU Gas employees who accept employment with us will be comparable to the positions and base salaries held by them immediately prior to the closing of the TXU Gas acquisition, and we have agreed that the employees’ base salaries will not be reduced for at least one year after the closing of the TXU Gas

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acquisition. The other terms of employment and employee benefit plans applicable for the TXU Gas employees that accept employment with us will be generally comparable to our similarly situated non-union gas utility employees.

          Regulatory Approvals. The agreement contains customary closing conditions, including clearance under the Hart-Scott-Rodino Act antitrust notification procedures and the absence of a material adverse effect on the assets or business of TXU Gas. In addition, our obligation to close is subject to our receipt of satisfactory regulatory approvals in Virginia, Missouri and Iowa and the absence of pending or threatened actions or proceedings by specified regulatory authorities in Texas that would materially and adversely affect our ability to conduct the acquired operations in all material respects as now conducted by TXU Gas.

          Termination of the Agreement. Both parties must use their reasonable efforts to take the actions required to consummate the acquisition as contemplated by the agreement. However, we are not required to agree to any material burden in order to obtain any required regulatory consent or approval. If we have not obtained our three state regulatory approvals by December 31, 2004 and the other conditions to closing have been satisfied, TXU Gas may terminate the agreement and require us to pay $15 million in full satisfaction of our obligations under the agreement. In addition, we or TXU Gas may terminate the agreement if the applicable closing conditions are not satisfied or waived by December 31, 2004. The closing date may be extended for up to 90 days to the extent required for TXU Gas to repair any material casualty loss before closing.

          Transition Services. At closing, TXU Gas and some of its affiliates will enter into transition service agreements with us to provide call center, meter reading, customer billing, collections, information reporting, software, accounting, administrative and other services traditionally provided to TXU Gas. The initial term of each of these agreements is for one year from closing. During the initial term, any particular service may be terminated on 90 days’ notice and, after the initial term, the agreements continue on a month to month basis and are terminable on 30 days’ notice. The agreements require us to pay the service providers’ costs for the services.

          Closing. We expect to close the TXU Gas acquisition by the end of calendar year 2004.

TXU Gas Company

          The TXU Gas operations we are acquiring are regulated businesses engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas.

          TXU Gas provides gas distribution service through 26,431 miles of distribution mains. TXU Gas purchases, distributes and sells natural gas to over 1.4 million residential and business customers in approximately 550 cities and towns, including the 11-county Dallas/ Fort Worth metropolitan area. The distribution service rates that TXU Gas charges its residential and business customers have been generally established by the municipal governments of the cities and towns served, with the Texas Railroad Commission having appellate, or in some instances, primary jurisdiction. The majority of TXU Gas’s residential and business customers use natural gas for heating, and their needs are directly affected by the mildness or severity of the heating season.

          TXU Gas owns and operates interconnected natural gas transmission lines, five underground storage reservoirs (including a salt dome facility), 20 compressor stations and related properties, all within Texas. With a system consisting of 6,162 miles of transmission and gathering lines, TXU Gas is one of the largest intrastate pipeline operators in Texas. Through these facilities, it transports natural gas to its distribution system and other customers.

          The gas distribution and transmission lines of TXU Gas have been constructed over lands of others pursuant to easements or along public highways, streets and rights-of-way as permitted by law.

          TXU Gas is wholly intrastate in character and performs distribution utility operations and pipeline transportation services in the State of Texas subject to regulation by municipalities in Texas and the Texas

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Railroad Commission. TXU Gas owns no certificated interstate transmission facilities subject to the jurisdiction of the Federal Energy Regulatory Commission (known as the FERC) under the Natural Gas Act, has no sales for resale under the rate jurisdiction of the FERC and does not perform any transportation service that is subject to FERC jurisdiction under the Natural Gas Act.

          In May 2003, TXU Gas filed, for the first time, a system-wide rate case for its distribution and pipeline operations. The case was filed in all incorporated cities served by the distribution operations, and at the Texas Railroad Commission for the pipeline business and for unincorporated areas served by the distribution operations. All of the cities took action on the case, and TXU Gas appealed their actions to the Texas Railroad Commission. Although significant portions of the relief requested by TXU Gas were denied, on May 25, 2004, the Texas Railroad Commission ruled that TXU Gas could increase its charges to its pipeline and distribution customers by approximately $11.7 million per year.

          For more information on TXU Gas, please see the historical consolidated financial statements and related notes of TXU Gas for the years ended December 31, 2003, 2002 and 2001 and for the quarterly period ended March 31, 2004, which are included in our current report on Form 8-K filed with the SEC on July 7, 2004 and incorporated by reference in this prospectus supplement. See “Incorporation by Reference.”

Financing for the Acquisition

          We have received a commitment from Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the underwriters in this offering, and its affiliate Merrill Lynch Capital Corporation to provide a senior unsecured credit facility in the amount of $1.925 billion to finance, or backstop the issuance of commercial paper to finance, the TXU Gas acquisition. The following is a brief summary of the material terms of the commitment letter. This summary is qualified in its entirety by reference to the commitment letter, which is filed as an exhibit to our current report on Form 8-K, filed with the SEC on July 7, 2004, and incorporated by reference in this prospectus supplement.

          The commitment is subject to the absence of a material adverse effect on our business and assets after giving effect to the acquisition, the absence of any new adverse information affecting us, TXU Gas or the TXU Gas acquisition that would materially impair the syndication of the bridge financing facility, and other specified conditions. The commitment does not contain other conditions relative to diligence or market conditions.

          The bridge financing facility provided for in the commitment would be available at the time of the closing of the TXU Gas acquisition upon satisfaction of its conditions. The amount of the bridge financing facility would be reduced to the extent we obtain acquisition financing prior to the closing of the TXU Gas acquisition, such as the proceeds of this offering. The bridge financing facility would mature 364 days after the closing date of the acquisition. We would be required to reduce the indebtedness outstanding under the bridge financing facility to the extent of the net cash proceeds from the sales of debt and equity securities after the closing of the acquisition, with exceptions for sales of commercial paper, purchase money financings and other sales to be agreed upon. Availability under the bridge financing facility would expire on December 31, 2004, unless the date for closing of the acquisition is extended under the merger agreement to allow TXU Gas to repair any casualty.

          We plan to fund the acquisition through commercial paper borrowings, if economically practicable, the rate for which will be based on prevailing commercial paper pricing. In such event, the bridge financing facility would serve as a backup liquidity facility for our commercial paper borrowings. Should the commercial paper market be unavailable to us, we would draw directly upon the bridge financing facility. The pricing under the bridge financing facility would be tied to our credit ratings at Standard & Poor’s Rating Services or Moody’s Investors Service. Under the bridge financing facility, in addition to any commitment and utilization fees, the pricing for funding to which LIBOR is applicable could range from 0.625% per year over LIBOR at our current ratings level to 1.25% per year over LIBOR at the lowest investment-grade rating. In the absence of an investment-grade credit rating, the pricing would be 1.75% per year over LIBOR.

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          Other conditions to the availability under the bridge financing facility include the negotiation of reasonably satisfactory definitive financing documentation and the renewal of our existing commercial paper facility, which matures on July 26, 2004. We have begun the process of renewing our existing commercial paper facility, which is subject to customary conditions, and expect to complete this renewal prior to the commercial paper facility’s expiration date. Like the commercial paper facility, the bridge financing facility would require compliance with a maximum ratio of debt to capitalization, which may be higher than the ratio specified in our existing commercial paper facility, and continued compliance with specified affirmative and negative covenants.

          We intend to seek long-term debt and additional common equity financings to refinance the bridge financing facility before its maturity. We have hedged the Treasury yield component for $675 million of this future long-term debt financing.

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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

          The following unaudited pro forma combined financial statements are based on our historical consolidated financial statements and TXU Gas’s historical financial statements, each incorporated by reference in this prospectus supplement, adjusted to give effect to the TXU Gas acquisition, this offering and the proposed bridge financing for the TXU Gas acquisition. The unaudited pro forma combined statement of income for the six months ended March 31, 2004 and for the twelve months ended September 30, 2003 gives effect to the TXU Gas acquisition, this offering and the bridge financing for this acquisition as if each had occurred on October 1, 2002. The unaudited pro forma combined balance sheet as of March 31, 2004 gives effect to the TXU Gas acquisition, this offering and the bridge financing for this acquisition, as if each had occurred on March 31, 2004. The unaudited pro forma combined financial information does not give effect to the anticipated refinancing of the bridge financing facility with long-term debt and additional common equity financings.

          The unaudited pro forma combined financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable but are subject to change. In our opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro forma combined financial statements do not purport to represent what our results of operations or financial position would actually have been had the TXU Gas acquisition, this offering and the bridge financing for the acquisition occurred on such dates or to project our results of operations or financial position for any future date or period. The unaudited pro forma combined financial statements include adjustments that reflect our preliminary estimates of the allocation of the purchase price to the acquired assets and assumed liabilities of TXU Gas. The preliminary purchase price allocation is subject to change as more detailed analyses are completed and additional information related to the fair values of TXU Gas’s assets and liabilities assumed in the TXU Gas acquisition become available. Final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein. The unaudited pro forma combined financial statements also include the receipt of the estimated net proceeds of this offering, the incurrence of the indebtedness under the bridge financing facility and related fees and expenses. The unaudited pro forma combined financial statements do not reflect any operating efficiencies and cost savings that we may achieve with respect to the combined entities nor any expense associated with achieving these benefits. Further, the pro forma combined financial statements do not give any effect to the interest income that may be derived from investing the proceeds of this offering in short-term cash equivalent investments between the closing of the offering and the closing of the TXU Gas acquisition.

          The historical financial statements of TXU Gas are based on TXU Gas’s historical financial statements as filed with the SEC. To prepare the unaudited pro forma combined statement of income for the year ended September 30, 2003, we used our consolidated statement of income for the twelve months ended September 30, 2003 and TXU Gas’s statement of income for the twelve months ended December 31, 2003. To prepare the unaudited pro forma combined statement of income for the six months ended March 31, 2004, we used our consolidated statement of income for the six months ended March 31, 2004 and derived TXU Gas’s statement of income for the six months ended March 31, 2004 using TXU Gas’s unaudited statement of income for the three months ended March 31, 2004 and its audited statement of income for the twelve months ended December 31, 2003, which are incorporated by reference in this prospectus supplement, and TXU Gas’s unaudited statement of income for the nine months ended September 30, 2003, which is not incorporated by reference in this prospectus supplement.

          You should read the following unaudited pro forma combined financial information in conjunction with our audited and unaudited consolidated financial statements and the related notes incorporated by reference in this prospectus supplement and TXU Gas’s audited and unaudited financial statements and related notes, which are included in our current report on Form 8-K filed with the SEC on July 7, 2004 and incorporated by reference in this prospectus supplement. See “Incorporation by Reference.”

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UNAUDITED PRO FORMA COMBINED BALANCE SHEET

As of March 31, 2004
                                     
Historical Historical Pro Forma
Atmos TXU Gas Adjustments Pro Forma




(in thousands)
ASSETS
                               
Property, plant and equipment
  $ 2,552,376     $ 1,981,410     $ (197,277 )(a)(c)   $ 4,336,509  
Less accumulated depreciation and amortization
    891,040       291,428       78,506  (a)(b)(c)     1,260,974  
     
     
     
     
 
 
Net property, plant and equipment
    1,661,336       1,689,982       (275,783 )     3,075,535  
Current assets
                               
 
Cash and cash equivalents
    114,983       4,592       (4,592 )(a)     114,983  
 
Accounts receivable, net
    396,879       7,855       94,889  (a)     499,623  
 
Gas stored underground
    74,570       106,391             180,961  
 
Other current assets
    54,057       55,632       (38,968 )(a)(d)     70,721  
     
     
     
     
 
   
Total current assets
    640,489       174,470       51,329       866,288  
Goodwill and intangible assets
    275,873       305,280       228,220  (c)     809,373  
Deferred charges and other assets
    243,494       56,579       (52,361 )(a)     247,712  
     
     
     
     
 
        $ 2,821,192     $ 2,226,311     $ (48,595 )   $ 4,998,908  
     
     
     
     
 
 
CAPITALIZATION AND LIABILITIES                
Shareholders’ equity
                               
 
Preferred stock
  $     $ 75,000     $ (75,000 )(a)   $  
 
Common stock
    261       4       39  (c)(d)     304  
 
Additional paid-in capital
    753,770       815,521       (610,440 )(d)     958,851  
 
Retained earnings
    178,769       29,701       (29,701 )(c)     178,769  
 
Accumulated other comprehensive income (loss)
    49       (3,887 )     3,887  (c)     49  
     
     
     
     
 
   
Shareholders’ equity
    932,849       916,339       (711,215 )     1,137,973  
Long-term debt
    864,624       430,193       (430,193 )(a)     864,624  
     
     
     
     
 
   
Total capitalization
    1,797,473       1,346,532       (1,141,408 )     2,002,597  
Current liabilities
                               
 
Accounts payable and accrued liabilities
    365,996       296,263       (234,525 )(a)     427,734  
 
Other current liabilities
    171,822       97,450       (56,136 )(a)     213,136  
 
Short-term debt
                1,729,135  (d)     1,729,135  
 
Current maturities of long-term debt
    8,093                   8,093  
     
     
     
     
 
   
Total current liabilities
    545,911       393,713       1,438,474       2,378,098  
Deferred income taxes
    234,355       218,398       (218,398 )(c)     234,355  
Regulatory cost of removal obligation
    104,152       131,352             235,504  
Deferred credits and other liabilities
    139,301       136,316       (127,263 )(a)(b)     148,354  
     
     
     
     
 
        $ 2,821,192     $ 2,226,311     $ (48,595 )   $ 4,998,908  
     
     
     
     
 

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

S-17


 

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

For the Six Months Ended March 31, 2004
                                     
Historical Historical Pro Forma
Atmos TXU Gas Adjustments Pro Forma




(in thousands, except per share data)
Operating revenues
                               
 
Utility segment
  $ 1,168,770     $ 858,984     $ (5,507 )(e)   $ 2,022,247  
 
Natural gas marketing segment
    891,047                   891,047  
 
Other nonutility segment
    14,282                   14,282  
 
Intersegment eliminations
    (192,998 )                 (192,998 )
     
     
     
     
 
      1,881,101       858,984       (5,507 )     2,734,578  
Purchased gas cost
                               
 
Utility segment
    840,884       532,011             1,372,895  
 
Natural gas marketing segment
    861,687                   861,687  
 
Other nonutility segment
    6,008                   6,008  
 
Intersegment eliminations
    (192,657 )                 (192,657 )
     
     
     
     
 
          1,515,922       532,011             2,047,933  
     
     
     
     
 
Gross profit
    365,179       326,973       (5,507 )     686,645  
Operating expenses
                               
 
Operation and maintenance
    116,009       144,195       (15,063 )(e)(f)     245,141  
 
Depreciation and amortization
    46,611       37,876       (4,626 )(e)(f)(g)     79,861  
 
Taxes, other than income
    33,604       47,884       176  (e)     81,664  
     
     
     
     
 
   
Total operating expenses
    196,224       229,955       (19,513 )     406,666  
     
     
     
     
 
Operating income
    168,955       97,018       14,006       279,979  
Miscellaneous income
    5,663       3,465       (4,330 )(e)     4,798  
Interest charges
    33,495       18,308       11,952  (e)(h)     63,755  
     
     
     
     
 
Income (loss) before income taxes
    141,123       82,175       (2,276 )     221,022  
Income tax expense
    53,277       26,352       4,010  (i)     83,639  
     
     
     
     
 
Net income (loss)
  $ 87,846     $ 55,823     $ (6,286 )   $ 137,383  
     
     
     
     
 
Per share data
                               
 
Basic income per share
  $ 1.70                     $ 2.28  
     
                     
 
 
Diluted income per share
  $ 1.69                     $ 2.26  
     
                     
 
Weighted average shares outstanding:
                               
 
Basic
    51,666               8,650       60,316  
     
                     
 
 
Diluted
    52,057               8,650       60,707  
     
                     
 

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

S-18


 

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

For the Twelve Months Ended September 30, 2003
                                     
Historical Historical Pro Forma
Atmos TXU Gas Adjustments Pro Forma




(in thousands, except per share data)
Operating revenues
                               
 
Utility segment
  $ 1,554,082     $ 1,344,106     $ (17,729 )(e)   $ 2,880,459  
 
Natural gas marketing segment
    1,668,493                   1,668,493  
 
Other nonutility segment
    21,630                   21,630  
 
Intersegment eliminations
    (444,289 )                 (444,289 )
     
     
     
     
 
          2,799,916       1,344,106       (17,729 )     4,126,293  
Purchased gas cost
                               
 
Utility segment
    1,062,679       790,542             1,853,221  
 
Natural gas marketing segment
    1,644,328                   1,644,328  
 
Other nonutility segment
    1,540                   1,540  
 
Intersegment eliminations
    (443,607 )                 (443,607 )
     
     
     
     
 
          2,264,940       790,542             3,055,482  
     
     
     
     
 
Gross profit
    534,976       553,564       (17,729 )     1,070,811  
Operating expenses
                               
 
Operation and maintenance
    205,090       287,811       (36,554 )(e)(f)     456,347  
 
Depreciation and amortization
    87,001       74,054       (9,251 )(e)(f)(g)     151,804  
 
Taxes, other than income
    55,045       91,414       1,138  (e)     147,597  
     
     
     
     
 
   
Total operating expenses
    347,136       453,279       (44,667 )     755,748  
     
     
     
     
 
Operating income
    187,840       100,285       26,938       315,063  
Miscellaneous income
    2,191       3,658       (4,361 )(e)     1,488  
Interest charges
    63,660       40,862       19,658  (e)(h)     124,180  
     
     
     
     
 
Income before income taxes
    126,371       63,081       2,919       192,371  
Income tax expense
    46,910       19,287       5,793  (i)     71,990  
     
     
     
     
 
Net income (loss)
  $ 79,461     $ 43,794     $ (2,874 )   $ 120,381  
     
     
     
     
 
Per share data
                               
 
Basic income per share
  $ 1.72                     $ 2.19  
     
                     
 
 
Diluted income per share
  $ 1.71                     $ 2.18  
     
                     
 
Weighted average shares outstanding:
                               
 
Basic
    46,319               8,650       54,969  
     
                     
 
 
Diluted
    46,496               8,650       55,146  
     
                     
 

The accompanying notes are an integral part of the unaudited pro forma combined financial statements.

S-19


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 
1. Basis of Presentation

          The unaudited pro forma combined financial statements give effect to the TXU Gas acquisition and the proposed financing for this acquisition, including this offering and the bridge financing facility.

          The cash purchase price to be paid to TXU Gas for the assets to be acquired is $1.925 billion. For purposes of the unaudited combined pro forma financial statements, we have assumed that the purchase price will not be adjusted on account of any working capital or capital expenditures adjustments provided in the acquisition agreement. We expect to incur $7.5 million in related transaction costs for a total purchase price of $1.933 billion. See “The TXU Gas Acquisition” for more information on the TXU Gas acquisition.

          We have prepared the unaudited combined pro forma financial statements, based on our sale of 8,650,000 shares of our common stock at a price of $24.75 per share resulting in net proceeds of $205.1 million, after deducting $9.0 million of estimated offering related costs, including the underwriting discount and commissions.

          To finance the TXU Gas acquisition, we will use the proceeds of this offering and the bridge financing facility. The bridge financing facility will either serve as a backup liquidity facility for our commercial paper or as a loan facility, in either case in an amount sufficient to finance the remainder of the purchase price. The term of the bridge financing facility is 364 days from the date that the acquisition closes. We will pay a commitment fee on unused amounts under the bridge financing facility that is based on our credit rating. We estimate that this fee will be 0.15% per year. If we use the bridge financing facility to backstop our commercial paper, we will also pay floating interest rates on our commercial paper that will be determined by our credit ratings, investor demand and then current market conditions. We anticipate that these interest rates would be lower than the rate we would pay if we use the bridge financing facility as a loan facility. Therefore, for purposes of these unaudited pro forma combined financial statements, we assume that we will use the bridge financing facility as a loan facility. In that event, we would pay a floating interest rate based on LIBOR plus a margin and a utilization fee that are each based on our credit rating. We estimate that the effective interest rate will be 3.5% per year, including amortization of deferred financing costs and other fees. Depending on the capital markets and other factors, we expect to refinance the bridge financing facility with long-term debt and additional common equity financings after the closing of the TXU Gas acquisition and prior to the maturity of the bridge financing facility. The unaudited pro forma combined financial statements only give effect to the bridge financing facility and this offering and do not give effect to any commercial paper issuance or any subsequent debt and common equity issuance as the terms of those issuances cannot be reasonably estimated at this time. Further, the unaudited pro forma combined financial statements do not give effect to any short-term interest income that may be earned on the proceeds of this offering between the closing of this offering and the closing of the TXU Gas acquisition.

          The TXU Gas acquisition will be accounted for as an asset purchase with Atmos acquiring substantially all of the assets of TXU Gas. For more information on the assets and liabilities of TXU Gas that will not be acquired see Note 2.

          The unaudited pro forma combined balance sheet assumes this offering, the TXU Gas acquisition and the bridge financing facility all closed on March 31, 2004. The unaudited pro forma combined statements of income assume this offering, the TXU Gas acquisition and the bridge financing facility all closed on October 1, 2002, the first day of our 2003 fiscal year. The historical amounts used as the basis for the unaudited pro forma combined financial statements have been derived from the historical financial statements as follows:

  Unaudited pro forma combined balance sheet. Both the Atmos and TXU Gas historical amounts are derived from the respective company’s unaudited balance sheets as of March 31, 2004 incorporated by reference in this prospectus supplement.

S-20


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (continued)

  Unaudited pro forma combined statements of income. The Atmos historical amounts are derived from our audited income statement for the year ended September 30, 2003 and the unaudited income statement for the six months ended March 31, 2004, both of which are incorporated by reference in this prospectus supplement.

  As TXU Gas uses a calendar year end and Atmos uses a September 30 fiscal year end, for purposes of the unaudited pro forma combined statement of income for the twelve months ended September 30, 2003, TXU Gas’s audited income statement for the twelve months ended December 31, 2003 has been used, which is incorporated by reference in this prospectus supplement.
 
  For purposes of the unaudited pro forma combined statement of income for the six months ended March 31, 2004, TXU Gas’s actual six months ended March 31, 2004 have been used. The historical amounts for TXU Gas for the six months ended March 31, 2004 are derived by subtracting the corresponding amounts in TXU Gas’s unaudited income statement for the nine months ended September 30, 2003 from the corresponding amounts in TXU Gas’s audited income statement for the twelve months ended December 31, 2003 and then adding the corresponding amounts in TXU Gas’s unaudited income statement for the three months ended March 31, 2004. TXU Gas’s audited income statement for the twelve months ended December 31, 2003 and its unaudited income statement for the three months ended March 31, 2004 are incorporated by reference into this prospectus supplement. TXU Gas’s income statement for the nine months ended September 30, 2003 is not included or incorporated by reference in this prospectus supplement.
 
  The following table illustrates how the historical amounts for TXU Gas for the six months ended March 31, 2004 were derived:

                                     
 
(a) (b) (c) (a) - (b) + (c)
Twelve Months Nine Months Three Months Six Months
Ended Ended Ended Ended
December 31, September 30, March 31, March 31,
2003 2003 2004 2004




(in thousands)
Operating revenues
  $ 1,344,106     $ 993,339     $ 508,217     $ 858,984  
Purchased gas cost
    790,542       584,674       326,143       532,011  
     
     
     
     
 
 
Gross profit
    553,564       408,665       182,074       326,973  
Operating expenses
                               
 
Operation and maintenance
    287,811       212,785       69,169       144,195  
 
Depreciation and amortization
    74,054       55,264       19,086       37,876  
 
Taxes, other than income
    91,414       73,893       30,363       47,884  
     
     
     
     
 
   
Total operating expenses
    453,279       341,942       118,618       229,955  
     
     
     
     
 
Operating income
    100,285       66,723       63,456       97,018  
Miscellaneous income
    3,658       2,735       2,542       3,465  
Interest charges
    40,862       30,960       8,406       18,308  
     
     
     
     
 
Income before income taxes
    63,081       38,498       57,592       82,175  
Income tax expense
    19,287       12,367       19,432       26,352  
     
     
     
     
 
Net income
  $ 43,794     $ 26,131     $ 38,160     $ 55,823  
     
     
     
     
 

          The unaudited pro forma combined income statement for the twelve months ended September 30, 2003 excludes the cumulative effect of an accounting change which was recognized by Atmos for the adoption of EITF Consensus 02-03 in 2003, which resulted in a charge of $7.8 million, net of tax. Further,

S-21


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (continued)

the unaudited pro forma combined income statements exclude a charge of $2.8 million, net of tax, for a discontinued operation that was recognized by TXU Gas in the fourth quarter of calendar 2003. As previously discussed, due to the differing year ends used to prepare the unaudited pro forma combined statements of income, TXU Gas’s fourth quarter of calendar 2003 is reflected in the unaudited pro forma combined income statements for both the twelve months ended September 30, 2003 and the six months ended March 31, 2004.

 
2. Pro Forma Adjustments

          The respective pro forma adjustments are explained below beside the corresponding footnote.

          (a) Adjusts the historical balance sheet of TXU Gas for the assets and liabilities Atmos will not acquire. As previously discussed, we are acquiring substantially all the assets of TXU Gas. However, TXU Gas is retaining its utility asset management services subsidiary, its cash position, certain vehicles and other insignificant assets and operations. Further, we are not assuming any of TXU Gas’s debt, preferred stock, employee benefit liabilities, intercompany assets or liabilities and other insignificant liabilities.

          While we are not assuming the existing employee benefit liabilities of TXU Gas, we have agreed to include the acquired employees in our benefit plans and for purposes of determining the annual service cost give them credit for their years of service as TXU Gas employees. The employees are not receiving a retroactive adjustment for prior service; only their prospective annual service cost will be affected by their prior service. We believe the historical benefit costs recognized by TXU Gas will approximate our benefit costs, and no pro forma adjustment has been recognized for the transition of these employees to the Atmos benefit plans.

          TXU Gas’s accounts receivable at March 31, 2004 had $94.9 million of intercompany payables netted against its third party receivables as a result of its intercompany securitization program. This adjustment reflects the elimination of that intercompany payable as well as the elimination of TXU Gas’s intercompany long-term debt.

          The following is a summary of the assets and liabilities to be retained by TXU Gas: (in thousands)

           
 
Cash
  $ 4,592  
Accounts receivable
    (94,889 )
Other current assets
    19,487  
Other non-current assets
    52,361  
Preferred stock
    (75,000 )
Long-term debt
    (430,193 )
Accounts payable and accrued liabilities
    (234,525 )
Other current liabilities
    (56,136 )
Deferred income taxes
    (805 )
Deferred credits and other liabilities
    (206,849 )
     
 
 
Total
  $ (1,021,957 )
     
 

          (b) Adjusts the unaudited pro forma combined balance sheet for the decision TXU Gas received from the Texas Railroad Commission in a system-wide rate case on May 25, 2004. The decision disallowed certain assets and liabilities for ratemaking purposes. The decision in the rate case was available and considered by us as we finalized our offer for the operations of TXU Gas and thus directly related to the acquisition. The amounts represent the adjustments we expect TXU Gas will recognize in its financial

S-22


 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (continued)

statements prior to the closing of the TXU Gas acquisition. The following summarizes the effect on the unaudited pro forma combined balance sheet for the anticipated effects of the rate case (in thousands):

           
Property, plant and equipment
  $ (79,390 )
Deferred credits and other liabilities
    79,586  
     
 
 
Total
  $ 196  
     
 

          (c) The purchase price for the acquired assets and assumed liabilities has been allocated as follows: (in thousands)

           
 
Cash purchase price
  $ 1,925,000  
Transaction costs and expenses
    7,540  
     
 
 
Total purchase price
  $ 1,932,540  
     
 
Net property, plant and equipment
  $ 1,414,199  
Accounts receivable
    102,744  
Gas stored underground
    106,391  
Other current assets
    14,945  
Goodwill and intangible assets
    533,500  
Deferred charges and other assets
    4,218  
Accounts payable and accrued liabilities
    (61,738 )
Other current liabilities
    (41,314 )
Regulatory cost of removal obligation
    (131,352 )
Deferred credits and other liabilities
    (9,053 )
     
 
 
Total
  $ 1,932,540  
     
 

          This adjustment also reverses TXU Gas’s remaining equity ($1.8 billion) after adjustment for the retained assets and liabilities and rate case and its deferred income taxes ($196.4 million) and goodwill ($305.3 million). As an asset purchase, our initial basis in the acquired assets and liabilities will be the same for both book and tax purposes. Thus, there are no deferred taxes related to the TXU Gas acquisition.

          The sale of TXU Gas’s assets was held through a competitive bid process. We believe the resulting goodwill is recoverable given the expected synergies we can achieve as a result of the acquisition. To that end, the TXU Gas acquisition significantly expands our existing utility operations in Texas. The North Texas operations of TXU Gas bridge our geographic operations between our existing utility operations in West Texas and Louisiana. TXU Gas’s headquarters and service area are centered in Dallas, Texas, which is also the location of our corporate headquarters. Further, the addition of the regulated pipelines in North Texas may create additional gas marketing and other opportunities for our non-regulated subsidiaries, which include gas marketing and storage operations. We believe we will take several years to realize these synergies. Further, for the initial year of the integration, we have entered into agreements with TXU Gas and other affiliates of TXU Gas to provide transition services at cost. Thus, for the initial year of the transition, we do not expect significant changes to the acquired operations’ cost structure, and no pro forma adjustment has been recognized for any synergies, economies of scale and cost savings we may achieve.

          The amount allocated to property, plant and equipment represents our estimate of the fair value of the assets acquired. We have based that estimate on the amount we believe will ultimately be approved as rate base for rate setting purposes.

S-23


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (continued)

          (d) Reflects the receipt of the proceeds ($205.1 million) of this offering, net of $9.0 million in estimated underwriting discount and commissions and fees and expenses related to this offering, our receipt of the proceeds from the bridge financing facility ($1.7 billion) and the additional short-term debt borrowings of $9.3 million we expect to make to pay estimated costs and expenses associated with the TXU Gas acquisition. For purposes of the combined pro forma financial statements, we have assumed we will draw on the bridge financing facility and not finance any portion of the purchase price with the issuance of commercial paper. We expect to incur $1.7 million in deferred financing costs related to the bridge financing facility. Further, for purposes of the unaudited pro forma combined financial statements, we have assumed that the underwriters will not exercise their overallotment option.

          (e) Reflects the elimination of the income statement effects of the assets and liabilities retained by TXU Gas, including TXU Gas retained subsidiaries, which were substantially comprised of its utility asset management services operations.

          (f) Reflects the elimination of certain income statement effects of the disallowance of certain assets and liabilities in TXU Gas’s rate case on May 25, 2004. TXU Gas has estimated that the rate case will prospectively increase its revenue from its utility operations by approximately $11.7 million. However, as the effect on demand of increased rates cannot be precisely determined, no pro forma adjustment to revenues or operating expenses has been recognized in the unaudited pro forma combined income statements other than for the specific items that were disallowed in the rate case.

          (g) Reflects the anticipated change in depreciation and amortization given the change in basis to property, plant and equipment caused by purchase accounting.

          (h) Adjusts the historical interest expense to reflect the anticipated interest expense related to the bridge financing facility, assuming an effective interest rate of 3.5% (see Note 1 — Basis of Presentation), and the elimination of TXU Gas’s interest expense.

          (i) Adjusts tax expense to reflect Atmos’s effective tax rate and for the effect of the pro forma adjustments.

S-24


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (continued)
 
3. Earnings Per Share

          The following tables reconcile our historical earnings per share calculation to the unaudited pro forma combined earnings per share calculation (in thousands):

 
               
Six months ended March 31, 2004:
       
 
Atmos historical net income
  $ 87,846  
 
TXU Gas pro forma net income for assets acquired
    49,537  
     
 
     
Pro forma net income
  $ 137,383  
     
 
 
Atmos historical weighted average shares outstanding
    51,666  
 
Shares to be issued in offering
    8,650  
     
 
     
Denominator for pro forma basic earnings per share
    60,316  
 
Effect of dilutive securities:
       
   
Restricted stock
    132  
   
Stock options
    259  
     
 
     
Denominator for pro forma diluted earnings per share
    60,707  
     
 
Twelve months ended September 30, 2003:
       
 
Atmos historical net income
  $ 79,461  
 
TXU Gas pro forma net income for assets acquired
    40,920  
     
 
     
Pro forma net income
  $ 120,381  
     
 
 
Atmos historical weighted average shares outstanding
    46,319  
 
Shares to be issued in offering
    8,650  
     
 
     
Denominator for pro forma basic earnings per share
    54,969  
 
Effect of dilutive securities:
       
   
Restricted stock
    109  
   
Stock options
    68  
     
 
     
Denominator for pro forma diluted earnings per share
    55,146  
     
 

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OUR BUSINESS

          Atmos Energy Corporation and its subsidiaries are engaged primarily in the natural gas utility business as well as other natural gas nonutility businesses. 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 utility divisions, which cover service areas located 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 nonutility businesses, we provide natural gas management and marketing services to municipalities, other local gas distribution companies and industrial customers in 18 states. We own or hold an interest in natural gas storage fields in Kansas, Kentucky, Louisiana and Mississippi that we use in supplying natural gas to our customers. We market natural gas to industrial and agricultural customers primarily in West Texas and to industrial customers in Louisiana. Finally, we construct electric power generating plants and associated facilities for municipalities and industrial customers to meet their peak-load demands.

          Our operations are divided into three segments:

  the utility segment, which includes our related natural gas distribution and sales operations;
 
  the natural gas marketing segment, which includes a variety of natural gas management services; and
 
  our other nonutility segment, which includes our storage services and our electric power generating plant construction services.

Utility Segment Overview

          We operate our utility segment through six regulated natural gas utility divisions. Effective October 1, 2002, we united our gas distribution utility operations under the Atmos Energy brand. The following are our six natural gas utility divisions and their former operating names:

  Atmos Energy Colorado-Kansas Division (formerly Greeley Gas Company);
 
  Atmos Energy Kentucky Division (formerly Western Kentucky Gas Company);
 
  Atmos Energy Louisiana Division (formerly Atmos Energy Louisiana Gas Company);
 
  Atmos Energy Mid-States Division (formerly United Cities Gas Company);
 
  Atmos Energy Texas Division (formerly Energas Company); and
 
  Mississippi Valley Gas Company Division (acquired in December 2002).

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

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

          The effects of weather that is above or below normal are partially offset through weather normalization adjustments, or WNA, in certain of our service areas. WNA allows us to increase the base rate portion of customers’ bills when weather is warmer than normal and decrease the base rate when  

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weather is colder than normal. As of March 31, 2004, we had, or had received regulatory approvals for, WNA in the following service areas for the following periods, which covered approximately 1.1 million or 64% of our meters in service:
     
Tennessee
  November — April
Georgia
  October — May
Mississippi
  November — May
Kentucky
  November — April
Kansas
  October — May
Amarillo, Texas (1)
  October — May
West Texas (2)
  October — May
Lubbock, Texas (3)
  October — May

 

  (1)   Effective for the 2003-2004 winter heating season
  (2)   Effective for the 2004-2005 winter heating season
  (3)   Effective beginning in April 2004

          We receive gas deliveries in our utility operations through 36 pipeline transportation companies, both interstate and intrastate, to satisfy our sales market requirements. The pipeline transportation agreements are firm and many of them have “pipeline no-notice” storage service which provides for daily balancing between system requirements and nominated flowing supplies. These agreements have been negotiated with the shortest term necessary while still maintaining our right of first refusal.

          We purchase our gas supply from various producers and marketers. Supply arrangements are contracted on a firm basis with various terms at market prices. The firm supply consists of both base load and swing supply quantities. Base load quantities are those that flow at a constant level throughout the month and swing supply quantities provide the flexibility to change daily quantities to match increases or decreases in requirements related to weather conditions. Except for local production purchases, we select suppliers through a competitive bidding process by requesting proposals from suppliers that have demonstrated that they can provide reliable service. We select these suppliers based on their ability to deliver gas supply to our designated firm pipeline receipt points at the lowest cost. Our major suppliers during fiscal 2003 were Anadarko Energy Services, BP Energy Company, Cinergy Marketing and Trading, Duke Energy Trading and Marketing, ONEOK Energy Marketing, Pioneer Natural Resources, Prior Energy Corporation, Reliant Energy Services, Bridgeline Gas Distribution, Tenaska Marketing and Atmos Energy Marketing, L.L.C., one of our natural gas marketing subsidiaries. We do not anticipate problems with obtaining additional gas supply as needed for our customers.

          We also contract for storage service in underground storage facilities on many of the interstate pipelines serving us.

          Our distribution systems have experienced aggregate peak day deliveries of approximately 2.0 Bcf per day. 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, applicable state statutes or regulations.

          The following is a brief description of our six natural gas utility divisions.

          Atmos Energy Colorado-Kansas Division. Our Colorado-Kansas Division operates in Colorado, Kansas and the southwestern corner of Missouri and is regulated by each respective state’s public service commission with respect to accounting, rates and charges, operating matters and the issuance of securities. We operate under terms of non-exclusive franchises granted by the various cities. In May 2003, we received approval for WNA in Kansas which began with the 2003-2004 winter heating season. Colorado Interstate Gas Company, Williams Pipeline-Central, Public Service Company of Colorado and Northwest Pipeline are the principal transporters of the Colorado-Kansas Division’s gas supply requirements. Additionally, the Colorado-Kansas Division purchases substantial volumes from producers that are connected directly to its distribution system.

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          Atmos Energy Kentucky Division. Our Kentucky Division operates in Kentucky and is regulated by the Kentucky Public Service Commission, which regulates utility services, rates, issuance of securities and other matters. We operate in the various incorporated cities pursuant to non-exclusive franchises granted by these cities. Sales of natural gas for use as vehicle fuel in Kentucky are unregulated. We have been operating under a performance-based rate program since July 1998, which was extended for another four years in 2002. Under the performance-based program, we and our customers jointly share in any actual gas cost savings achieved when compared to pre-determined benchmarks. Our rates are also subject to WNA. The Kentucky Division’s gas supply is delivered primarily by Williams Pipeline-Texas Gas, Tennessee Gas, Trunkline, Midwestern Pipeline and ANR.

          Atmos Energy Louisiana Division. Our Louisiana Division operates in Louisiana and includes the operations of the assets of Louisiana Gas Service Company acquired in July 2001 and our previously existing Trans La Division. Our Louisiana Division is regulated by the Louisiana Public Service Commission, which regulates utility services, rates and other matters. We operate most of our service areas pursuant to a non-exclusive franchise granted by the governing authority of each area. Direct sales of natural gas to industrial customers in Louisiana, who use gas for fuel or in manufacturing processes, and sales of natural gas for vehicle fuel are exempt from regulation. Louisiana Intrastate Gas Company, Acadian Pipeline, Gulf South and Williams Pipeline-Texas Gas pipelines provide most of the Louisiana Division’s natural gas requirements.

          Atmos Energy Mid-States Division. Our Mid-States Division operates in Georgia, Illinois, Iowa, Missouri, Tennessee and Virginia. In each of these states, our rates, services and operations as a natural gas distribution company are subject to general regulation by each state’s public service commission. We operate in each community, where necessary, under a franchise granted by the municipality for a fixed term of years. In Tennessee and Georgia, we have WNA and a performance-based rate program, which provides incentives for us to find ways to lower gas commodity costs and share the cost savings with our customers. Our Mid-States Division is served by 13 interstate pipelines; however, the majority of the volumes are transported through East Tennessee Pipeline, Southern Natural Gas, Tennessee Gas Pipeline and Columbia Gulf.

          Atmos Energy Texas Division. Our Texas Division operates in Texas in three primary service areas: the Amarillo service area, the Lubbock service area and the West Texas service area. The governing body of each municipality we serve has original jurisdiction over all utility rates, operations and services within its city limits, except with respect to sales of natural gas for vehicle fuel and agricultural use. We operate pursuant to non-exclusive franchises granted by the municipalities we serve, which are subject to renewal from time to time. The Texas Railroad Commission 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. The Texas Division has WNA for its Amarillo service area and has recently received approvals for WNA for its west Texas and Lubbock service areas. Our Texas Division receives transportation service from ONEOK Pipeline. In addition, the Texas Division purchases a significant portion of its natural gas supply from Pioneer Natural Resources which is connected directly to our Amarillo, Texas distribution system.

          Mississippi Valley Gas Company Division. Our Mississippi Valley Gas Company Division, acquired in December 2002, operates in Mississippi and is regulated by the Mississippi Public Service Commission with respect to rates, services and operations. We operate under non-exclusive franchises granted by the municipalities we serve. Since the acquisition, we have been operating under a rate structure that allows us over a five-year period to recover a portion of our integration costs associated with the acquisition, and operations and maintenance costs in excess of an agreed-upon benchmark. In addition, we are required to file for rate adjustments based on our expenses every six months. We also have WNA in Mississippi. This division’s gas supply is delivered by Gulf South Pipeline Company, Tennessee Gas Pipeline Company, Southern Natural Gas Company, Texas Eastern Transmission, Texas Gas Transmission LLC, Trunkline Gas Co. LLC and Enbridge Marketing LP.

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Natural Gas Marketing Segment Overview

          Our natural gas marketing and other nonutility segments, which are organized under Atmos Energy Holdings, Inc., 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, L.L.C. and Trans Louisiana Industrial Gas Company, Inc. were merged into Woodward Marketing, L.L.C., which was renamed Atmos Energy Marketing, LLC.

          Atmos Energy Marketing 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 management through the use of derivative products. 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 fees for services we deliver.

          We participate in transactions in which we combine the natural gas commodity and transportation costs to minimize our costs incurred to serve our customers. Additionally, we participate in natural gas storage transactions in which we seek to find the pricing differences that occur over time. We purchase or sell physical natural gas and then sell or purchase financial contracts at a price sufficient to cover our carrying costs and provide a gross profit margin. Through the use of transportation and storage services and derivatives, 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.

          Atmos Energy Marketing’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. At March 31, 2004, Atmos Energy Marketing had a total of 744 industrial customers and 93 municipal customers. Atmos Energy Marketing 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.

Other Nonutility Segment Overview

          Our other nonutility segment consists primarily of the operations of Atmos Pipeline and Storage, L.L.C., Atmos Power Systems, Inc. and Atmos Energy Services, LLC, which are wholly owned by our subsidiary, Atmos Energy Holdings, Inc. Through Atmos Pipeline and Storage, we own or have an interest in underground storage fields in Kansas, Kentucky and Louisiana. Atmos Pipeline and Storage provides storage services to our customers for a fee and captures pricing arbitrage through the use of derivatives. Through Atmos Power Systems, we construct electric peaking power-generating plants and associated facilities and provide operating services to municipalities and industrial customers. Through Atmos Energy Services, we provide natural gas management services for our own utility operations. Prior to the second quarter of 2004, this entity conducted limited operations. However, beginning April 1, 2004, Atmos Energy Services began providing natural gas supply management services to our utility operations in a limited number of states. We expect to expand these services to substantially all of our utility service areas by the end of fiscal 2004.  

Properties

          Distribution, Transmission and Related Assets. Our utility segment owns an aggregate of 45,267 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

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maintain our mains through a program of continuous inspection and repair and believe that our system of mains is in good condition.

          Our utility segment also holds franchises granted by the incorporated cities and towns that we serve. At March 31, 2004, we held 651 franchises having terms generally ranging from five to 25 years. We believe that each of our franchises will be renewed.

          Storage Assets. Our utility and other nonutility segments have eight underground gas storage facilities in Kentucky, four in Kansas and two in Mississippi. Our total storage capacity is approximately 29.1 Bcf. However, approximately 13.6 Bcf of gas in the storage facilities must be retained as cushion gas to maintain reservoir pressure. The maximum daily delivery capability of these storage facilities is approximately 280,100 Mcf.

          We own a liquefied natural gas storage facility in Georgia with a capacity of 500,000 Mcf, which can inject a daily volume of 30,000 Mcf into the system.

          We also own a 25% interest in a gas storage facility in Napoleonville, Louisiana, with a usable capacity of 438,583 Mcf and 300,973 Mcf of cushion gas. Our maximum daily delivery capability at this facility is approximately 56,000 Mcf.

          Additionally, we contract for storage service in underground storage facilities on many of the interstate pipelines serving us to supplement our proprietary storage capacity. Our total storage capacity under these arrangements is 33.1 Bcf with a total maximum daily delivery capability of 938,550 Mcf.

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

Rates

          The method of determining regulated rates varies among the states in which our natural gas utility divisions operate. The regulators 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 investment. In a general rate case, the applicable regulatory authority, which is typically the state public utility commission, establishes rates which allow a utility company an opportunity to collect revenue from customers to recover the cost of providing utility service.

          Rates established by regulatory authorities are adjusted for increases and decreases in our purchased gas cost through purchased gas adjustment mechanisms. Purchased gas adjustment mechanisms provide gas utility companies a method of recovering purchased gas costs on an ongoing basis without filing a rate case to address all of the utility’s non-gas costs. These mechanisms are commonly utilized when regulatory authorities recognize a particular type of expense, such as purchased gas costs, that (i) is subject to significant price fluctuations compared to the utility’s other costs, (ii) represents a large component of the utility’s cost of service and (iii) is generally outside the control of the gas utility. There is no margin generated through purchased gas adjustments, but they do provide a dollar-for-dollar offset to increases or decreases in utility gas costs. Although substantially all of our utility sales to our customers fluctuate with the cost of gas that we purchase, utility gross profit (which is defined as operating revenues less purchased gas cost) is generally not affected by fluctuations in the cost of gas due to the purchased gas adjustment mechanism. Additionally, certain 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

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performance-based ratemaking adjustment, purchased gas costs savings are shared between the utility and its customers.

          Approximately 97% of our revenues in the fiscal year ended September 30, 2003 and approximately 96% of our revenues in fiscal 2002 were derived from sales at rates set by or subject to approval by local or state authorities.

          Generally, the regulatory authority reviews our rate request and establishes a rate structure intended to generate revenue sufficient to cover our costs of doing business and provide a reasonable return on invested capital.

Other Regulation

          Each of our utility divisions is regulated by various state or local public utility authorities. We are also subject to regulation by the United States Department of Transportation with respect to safety requirements in the operation and maintenance of our gas distribution facilities. Our distribution operations are also subject to various state and federal laws regulating environmental matters. From time to time we receive inquiries regarding various environmental matters. We believe that our properties and operations substantially comply with and are operated in substantial conformity with applicable safety and environmental statutes and regulations. There are no administrative or judicial proceedings arising under environmental quality statutes pending or known to be contemplated by governmental agencies which would have a material adverse effect on us or our operations. All of our environmental claims have arisen out of manufactured gas plant sites in Tennessee, Iowa and Missouri and mercury contamination sites in Kansas. These claims are more fully described in Note 13 to our consolidated financial statements, which are included in our annual report on Form 10-K for the year ended September 30, 2003, which is incorporated by reference in this prospectus supplement.

 
Competition

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

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DESCRIPTION OF COMMON STOCK

          Our authorized capital stock consists of 100,000,000 shares of common stock, of which 52,624,728 shares were outstanding on July 13, 2004. Each of our shares of common stock is entitled to one vote on all matters voted upon by shareholders. Our shareholders do not have cumulative voting rights. Our issued and outstanding shares of common stock are fully paid and nonassessable. There are no redemption or sinking fund provisions applicable to the shares of our common stock, and such shares are not entitled to any preemptive rights. Since we are incorporated in both Texas and Virginia, we must comply with the laws of both states when issuing shares of our common stock.

          Holders of our shares of common stock are entitled to receive such dividends as may be declared from time to time by our board of directors from our assets legally available for the payment of dividends and, upon our liquidation, a pro rata share of all of our assets available for distribution to our shareholders.

          Under the provisions of some of our debt agreements, we have agreed to restrictions on the payment of cash dividends. Under these restrictions, our cumulative cash dividends paid after December 31, 1988 may not exceed the sum of accumulated consolidated net income for periods after December 31, 1988, plus approximately $15.0 million. As of March 31, 2004, approximately $140.3 million was available for the declaration of dividends under these restrictions.

          We recently appointed American Stock Transfer & Trust Company as the registrar and transfer agent for our common stock.

Registration Rights and Other Agreements