INTRODUCTION

The following discussion should be read in conjunction with the condensed consolidated financial statements in this Quarterly Report on Form 10-Q and Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended September 30, 2008.

Cautionary Statement for the Purposes of the Safe Harbor under the Private Securities Litigation Reform Act of 1995

The statements contained in this Quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Report are forward-looking statements made in good faith by us and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. When used in this Report, or any other of 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. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements relating to our strategy, operations, markets, services, rates, recovery of costs, availability of gas supply and other factors. These risks and uncertainties, which are discussed in more detail in our Annual Report on Form 10-K for the year ended September 30, 2008, include the following: our ability to continue to access the credit markets to satisfy our liquidity requirements; the impact of recent economic conditions on our customers; increased costs of providing pension and postretirement health care benefits and increased funding requirements; market risks beyond our control affecting our risk management activities including market liquidity, commodity price volatility, increasing interest rates and counterparty creditworthiness; regulatory trends and decisions, including the impact of rate proceedings before various state regulatory commissions; increased federal regulatory oversight and potential penalties; the impact of environmental regulations on our business; the concentration of our distribution, pipeline and storage operations in Texas; adverse weather conditions; the effects of inflation and changes in the availability and price of natural gas; the capital-intensive nature of our gas distribution business; increased competition from energy suppliers and alternative forms of energy; the inherent hazards and risks involved in operating our gas distribution business, natural disasters, terrorist activities or other events; and other risks and uncertainties discussed herein, all of which are difficult to predict and many of which 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. Further, we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

Atmos Energy and our subsidiaries are engaged primarily in the regulated natural gas distribution and transportation and storage businesses as well as other nonregulated natural gas businesses. We distribute natural gas through sales and transportation arrangements to approximately 3.2 million residential, commercial, public authority and industrial customers throughout our six regulated natural gas distribution divisions, which cover service areas located in 12 states. In addition, we transport natural gas for others through our distribution system.

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

We operate the Company through the following four segments:

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

• the regulated transmission and storage segment, which includes the regulated pipeline and storage operations of the Atmos Pipeline - Texas Division,

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

• the pipeline, storage and other segment, which is comprised of our nonregulated natural gas gathering, transmission and storage services.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities. We based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates, including those related to risk management and trading activities, allowance for doubtful accounts, legal and environmental accruals, insurance accruals, pension and postretirement obligations, deferred income taxes and the valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. Actual results may differ from such estimates.

Our critical accounting policies used in the preparation of our consolidated financial statements are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 and include the following:

• Regulation

• Revenue Recognition

• Allowance for Doubtful Accounts

• Derivatives and Hedging Activities

• Impairment Assessments

• Pension and Other Postretirement Plans

Our critical accounting policies are reviewed quarterly by the Audit Committee. There were no significant changes to these critical accounting policies during the three months ended December 31, 2008.

RESULTS OF OPERATIONS

The following table presents our consolidated financial highlights for the three
months ended December 31, 2008 and 2007:


                                                 Three Months Ended
                                                     December 31
                                           2008                      2007
                                        (In thousands, except per share data)

     Operating revenues             $         1,716,332       $         1,657,510
     Gross profit                               395,212                   369,638
     Operating expenses                         232,018                   211,129
     Operating income                           163,194                   158,509
     Miscellaneous expense                         (301 )                     (93 )
     Interest charges                            38,991                    36,817
     Income before income taxes                 123,902                   121,599
     Income tax expense                          47,939                    47,796
     Net income                     $            75,963       $            73,803
     Diluted net income per share   $              0.83       $              0.82

Our consolidated net income during the three months ended December 31, 2008 and 2007 was earned in each of our business segments as follows:

                                                          Three Months Ended
                                                              December 31
                                                    2008         2007        Change
                                                            (In thousands)

     Natural gas distribution segment             $ 50,133     $ 40,164     $   9,969
     Regulated transmission and storage segment      7,661        9,847        (2,186 )
     Natural gas marketing segment                  10,575       20,600       (10,025 )
     Pipeline, storage and other segment             7,594        3,192         4,402

     Net income                                   $ 75,963     $ 73,803     $   2,160

The following tables segregate our consolidated net income and diluted earnings per share between our regulated and nonregulated operations: