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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 1-10042

Atmos Energy Corporation

(Registrant’s telephone number, including area code)

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

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

          Number of shares outstanding of each of the issuer’s classes of common stock, as of January 30, 2004.

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PART 1. FINANCIAL INFORMATION

ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements

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ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to condensed consolidated financial statements

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ATMOS ENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements

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ATMOS ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

      AEM provides a variety of natural gas management services to municipalities, natural gas utility systems and industrial natural gas consumers primarily in the southeastern and midwestern states and to our Colorado-Kansas, Kentucky, Louisiana and Mid-States divisions. These services primarily consist of furnishing natural gas supplies at fixed and market-based prices, contract negotiation and administration, load forecasting, gas storage acquisition and management services, transportation services, peaking sales and balancing services, capacity utilization strategies and gas price hedging through the use of derivative products.

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

      Finally, prior to January 20, 2004, United Cities Propane Gas, Inc., a wholly-owned subsidiary of AEH, owned an approximate 19 percent membership interest in U.S. Propane L.P. (USP), a joint venture formed in February 2000 with other utility companies. As of December 31, 2003, USP owned all of the general

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

      Principles of consolidation — The accompanying condensed consolidated financial statements include the accounts of Atmos Energy Corporation and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated. Additionally, we accounted for our investment in USP under the equity method of accounting for investments.

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

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

      Regulation — Our utility operations are subject to regulation with respect to rates, service, maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate. Our accounting policies recognize the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions. Regulated utility operations are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) 71, Accounting for the Effects of Certain Types of Regulation. This statement requires cost-based, rate-regulated entities that meet certain criteria to reflect the authorized recovery of costs due to regulatory decisions in their financial statements. As a result, certain costs are permitted to be capitalized rather than expensed because they can be recovered through rates.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      Revenue recognition — Sales of natural gas to our utility customers are billed on a monthly cycle basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes. We follow the revenue accrual method of accounting for utility segment revenues whereby revenues applicable to gas delivered to customers, but not yet billed under the cycle billing method, are estimated and accrued and the related costs are charged to expense.

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

      Accounts receivable and allowance for doubtful accounts — Accounts receivable consist of natural gas sales to residential, commercial, industrial, municipal, agricultural and other customers. For the majority of our receivables, we establish an allowance for doubtful accounts based on an aging of those receivable balances. We apply percentages to each aging category based on our collections experience. On certain other receivables where we are aware of a specific customer’s inability or reluctance to pay, we record an allowance for doubtful accounts against amounts due to reduce the net receivable balance to the amount we reasonably expect to collect. However, if circumstances change, our estimate of the recoverability of accounts receivable could be different. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of natural gas prices and general economic conditions. Our allowance for doubtful accounts as of December 31, 2003 and September 30, 2003 was $13.8 million and $13.1 million.

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

based on discounted cash flows to estimate the fair value of our reporting units. These calculations are dependent on several subjective factors including the timing of future cash flows, future growth rates and the discount rate. An impairment charge is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.

      Intangible assets are amortized over their useful lives ranging from 3 to 10 years. These assets are reviewed for impairment as impairment indicators arise. When such events or circumstances are present, we assess the recoverability of intangible assets by determining whether the carrying value will be recovered through the expected future cash flows. In the event the sum of the expected future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. To date, no impairment has been recognized.

      Derivatives and Hedging Activities — Our derivative and hedging activities are tailored to the segment to which they relate. We record our derivatives as a component of risk management assets and liabilities, which are classified as current or noncurrent, based upon the anticipated settlement date of the underlying derivative. These assets and liabilities are recorded as components of other current assets, deferred charges and other assets, other current liabilities or deferred credits and other liabilities depending on the expiration or maturity date of the instrument.

      We use a combination of storage and financial hedges to protect us and our customers against unusually large winter period gas price increases. Our financial hedges are accounted for under the mark-to-market method pursuant to SFAS 133, Accounting for Derivative Instruments and Hedging Activities. However, because these costs will ultimately be recovered through our rates, current period changes in the assets and liabilities from risk management activities are recorded as a component of deferred gas costs in accordance with SFAS 71 and recognized in purchased gas cost in the income statement when the related costs are recovered through our rates. Accordingly, there is no earnings impact as a result of the use of these financial instruments.

      The principal business of AEM is the overall management of natural gas requirements for municipalities, local gas utility companies and industrial customers located primarily in the southeastern and midwestern United States. AEM also supplies our regulated operations with a portion of our natural gas requirements on a competitive bid basis.

      In the management of natural gas requirements for municipalities and other local utilities, AEM sells physical natural gas to customers for future delivery. AEM manages margins and limits risk exposure on the sale of natural gas inventory or the offsetting fixed-price purchase or sale commitments for physical quantities of natural gas through the use of financial derivatives, including forwards, over-the-counter and exchange-traded options and swap contracts with counterparties. Over-the-counter swap agreements require AEM to receive or make payments based on the difference between a fixed price and the market price of natural gas on the settlement date. Options held to manage price risk provide the right, but not the requirement, to buy or sell energy commodities at a fixed price. AEM links these financial derivatives to physical delivery of natural gas and typically balances its derivative positions at the end of each trading day. We manage our business to maintain no open positions. However, at any point in time, AEM may not have completely offset its risk on these activities and limited net open positions related to our physical storage may occur on a short-term basis. These open trading positions are monitored daily.

      Physical trading involves utilizing physical assets (storage and transportation) to sell and deliver gas to customers or to take a position in the market based on anticipated price movement. In addition to the price

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risk of any net open position at the end of each trading day, the financial exposure that results from intra-day fluctuations of gas prices and the potential for daily price movements constitutes a risk of loss since the price of natural gas purchased or sold for future delivery at the beginning of the day may not be hedged until later in the day.

      Those futures contracts that are designated as fair value hedges in accordance with SFAS 133 are recorded at fair value on the balance sheet with an offsetting adjustment to the underlying item being hedged. Those financial contracts that are not designated as hedges are recorded on the balance sheet at fair value with current period changes in these contracts recorded as net gains or losses in our natural gas marketing revenue on the consolidated statement of income. Generally, any price risk related to fixed price forward contracts that are marked to market through earnings is mitigated by offsetting futures contracts that are also marked to market through earnings. Any mark-to-market gains or losses on affiliate contracts are eliminated in consolidation.

      Changes in the valuation of assets and liabilities arising from risk management activities primarily result from changes in the valuation of the portfolio of contracts, maturity and settlement of contracts and newly originated transactions. Market prices and models used to value these transactions reflect our best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the contracts. Values are adjusted to reflect the potential impact of an orderly liquidation of our positions over a reasonable period of time under present market conditions. Changes in market prices directly affect our estimate of the fair value of these transactions.

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

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

      The only component of accumulated other comprehensive loss relates to unrealized holding losses associated with certain available for sale investments.

      Stock-based compensation plans — We have two stock-based compensation plans that provide for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, restricted stock and performance-based stock to officers and key employees: the 1998 Long-Term Incentive Plan and the Long-Term Stock Plan for the Mid-States Division. Non-employee directors are also eligible to receive such stock-based compensation under the 1998 Long-Term Incentive Plan. The objectives of these

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plans include attracting and retaining the best personnel, providing for additional performance incentives and promoting our success by providing employees with the opportunity to acquire common stock.

      As permitted by SFAS 123, Accounting for Stock-Based Compensation we account for these plans under the intrinsic value method described in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Under this method, no compensation cost for stock options is recognized for stock option awards granted at or above fair market value.

      Awards of restricted stock are generally valued at the market price of the Company’s common stock on the date of grant. The unearned compensation is amortized to operation and maintenance expense over the vesting period of the restricted stock.

      Had compensation expense for our stock options issued under the Long-Term Incentive Plan been reco