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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended September 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from __________ to ____________
Commission File Number 1-10042
ATMOS ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS AND VIRGINIA 75-1743247
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Three Lincoln Centre, Suite 1800
5430 LBJ Freeway, Dallas, Texas 75240
(Address of principal executive offices (Zip code)
Registrant's telephone number, including area code: (972) 934-9227
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock, No Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark 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 [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $738,585,541 as of November 25, 1997. On November 25,
1997 the registrant had 29,770,088 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement filed for the
annual meeting of shareholders on February 11, 1998 are incorporated by
reference into Part III.
Cautionary Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this Annual
Report on Form 10-K contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 or Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Report including, but not limited to, those contained in the
following sections, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and Notes 2, 5, and 11 of notes to
consolidated financial statements, regarding the Company's financial position,
business strategy and plans and objectives of management of the Company for
future operations, are forward-looking statements made in good faith by the
Company. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. 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 the
Company's operations, markets, services, rates, recovery of costs, availability
of gas supply, and other factors. These risks and uncertainties include, but are
not limited to, economic, competitive, governmental, weather, technological and
other factors.
PART I
ITEM 1. BUSINESS
Atmos Energy Corporation (the "Company") was organized under the laws
of the State of Texas in 1983 as a subsidiary of Pioneer Corporation ("Pioneer")
for the purposes of owning and operating Pioneer's natural gas distribution
business in Texas. Immediate ly following the transfer of such business, which
had been opera ted by Pioneer and its predecessors since 1906, Pioneer distrib
uted the outstanding stock of the Company, then known as Energas Company, to
Pioneer shareholders. In September 1988, the Company changed its name from
Energas Company to Atmos Energy Corporation. As a result of its merger with
United Cities Gas Company in July 1997, the Company became incorporated in the
Commonwealth of Virginia as well as the State of Texas.
The Company distributes and sells natural gas and propane to
approximately 1.02 million residential, commercial, industrial, agricultural,
and other customers. The Company distributes and sells natural gas to
approximately 985,000 customers in 802 cities, towns, and communities in service
areas located in Texas, Louisiana, Kentucky, Colorado, Kansas, Illinois,
Tennessee, Iowa, Virginia, Georgia, South Carolina and Missouri. The Company
also transports gas for others through parts of its distribution system. It
also distributes propane to approximately 29,000 customers in Kentucky, North
Carolina, Tennessee and Virginia.
The Company's Texas distribution system is operated through its
Energas Company division (the "Energas Division") and covers an area having a
population of approximately 950,000 people. The economy of the area is based
primarily on oil and gas production and agriculture. The principal cities
served by the Energas Division include Amarillo, Lubbock, Midland, and Odessa.
At September 30, 1997, the Company served 311,571 customers in Texas.
The Company's Louisiana distribution system is operated through its
Trans Louisiana Gas Company division (the "Trans La Division") and covers an
area having a population of approximately 250,000 people. The economy of the
area is based primarily on oil and gas production, agriculture, and food
processing. The principal cities served by the Trans La Division are Lafayette,
Pineville, and Natchitoches. At September 30, 1997, the Company served 80,053
customers in Louisiana.
The Company's Kentucky distribution system is operated through its
Western Kentucky Gas Company division (the "Western Kentucky Division") and
covers an area having a population of approximately 680,000 people. The economy
of the area is based primarily on industry and agriculture. The principal
cities served by the Western Kentucky Division include Bowling Green, Owensboro,
and Paducah. At September 30, 1997, the Company served 173,958 customers in
Kentucky.
The Company's distribution systems in Colorado and parts of Kansas and
Missouri are operated through its Greeley Gas Company division (the "Greeley Gas
Division") and covers an area having a combined population of approximately
228,000 people. The economies of the areas served are based on oil and gas
production, agriculture and resort business. The principal cities served by the
Greeley Gas Division include Greeley, Durango and Lamar, Colorado and Bonner
Springs, Herington and Ulysses, Kansas. At September 30, 1997 the Greeley Gas
Division served 113,185 customers.
The Company operates natural gas distribution systems in Georgia,
Illinois, Iowa, South Carolina, Tennessee, Virginia, Kansas and Missouri through
its United Cities Gas Company division (the "United Cities Division") and covers
an area having a combined population of approximately 6,695,000 people. The
economies of the areas served include customers engaged in the manufacture of
asphalt, automobiles, auto parts, chemicals, electronics, food products, metals,
textiles and wire, among others. The division also serves several colleges and
a major army base. The principal cities and counties served by the United
Cities Division include Franklin and Murfreesboro, Tennessee; Wyandotte and
Johnson Counties in Kansas; Hannibal, Missouri; and Gainesville and Columbus,
Georgia. At September 30, 1997, the United Cities Division served 306,681
natural gas customers.
2
The Company also operates certain non-utility businesses through
various wholly-owned subsidiaries. One subsidiary, United Cities Gas Storage
Company ("UCG Storage"), provides natural gas storage services. It owns natural
gas storage fields in Kentucky and Kansas to supplement natural gas used by
customers in those states.
Another subsidiary, UCG Energy Corporation ("UCG Energy"), leases
appliances, real estate and equipment, and vehicles to the United Cities
Division and others, and owns a small interest in a partnership engaged in
exploration and production activities. UCG Energy also owns a 45% interest in
Woodward Marketing, L.L.C. ("WMLLC"), a gas marketing business incorporated in
Texas. WMLLC provides gas marketing services to industrial customers,
municipalities and local distribution companies, including the United Cities
Division. UCG Energy utilized equity accounting, effective January 1, 1995, for
this acquisition. The excess of the purchase price over the value of the net
tangible assets, amounting to approximately $5,400,000, was allocated to
intangible assets consisting of customer contracts and goodwill, which are being
amortized over ten and twenty years, respectively. In accordance with the
purchase agreement, if certain earnings targets are met, an additional payment
of up to $1,000,000 may be paid over a five-year period.
UCG Energy also owns United Cities Propane Gas of Tennessee, Inc. (the
"Propane Division"), which is engaged in the retail distribution of propane (LP)
gas, the wholesale supply and transportation of LP gas, the transportation of
certain products for other companies and the direct merchandising and repair of
propane gas appliances. Each of approximately 15 town operations has its own
storage facility with a total company storage capacity of 2,119,000 gallons. As
of September 30, 1997, the Propane Division served 29,097 customers in
Tennessee, Kentucky, North Carolina and Virginia. During the three-year period
ended September 30, 1997, the Propane Division added approximately 8,000
customers through acquisitions of four propane distribution companies and a
propane transport company.
The natural gas and propane distribution industries are subject to a
number of factors, many of which affect the Company from time to time. These
include (i) the ongoing need to obtain adequate and timely rate relief from
regulatory authorities to recover costs of service and earn a fair return on
invested capital; (ii) inherent seasonality of the business; (iii) competition
with alternate fuels; (iv) competition with other gas sources for industrial
customers, including the ability of some customers to bypass the Company's
facilities, which could result in loss of revenues and reduction in the
Company's net income; and (v) possible volatility in the supply and price of
natural gas and propane.
3
ACQUISITIONS AND MERGERS
Since its organization in 1983, the Company has sought to expand its
customer base and to diversify the weather patterns, local economic conditions,
and regulatory environments to which its operations are subject. As part of
this strategy, the Company acquired Trans Louisiana Gas Company, Inc. ("TLG") in
January 1986, Western Kentucky Gas Utility Corporation in December 1987, Greeley
Gas Company ("GGC") in December 1993, Oceana Heights Gas Company of Thibodaux,
Louisiana in November 1995 and United Cities Gas Company ("UCGC") in July 1997.
The Company continues to consider and pursue, where appropriate, additional
acquisitions of natural gas distribution properties and other business
opportunities. For further information regarding the UCGC merger, see Note 2 of
notes to consolidated financial statements.
UTILITY AND NON-UTILITY DATA
The following table summarizes certain information regarding the
operation of the utility and non-utility businesses of the Company for each of
the three years in the period ended September 30, 1997. Prior periods have been
restated to reflect the pooling of interests with UCGC on July 31, 1997.
Utility Non-utility Total
---------- ----------- ----------
(In thousands)
1997
Operating revenues $ 864,720 $42,115 $ 906,835
Net income 20,463 3,375 23,838
Identifiable assets 1,015,818 72,493 1,088,311
1996
Operating revenues $ 837,125 $49,566 $ 886,691
Net income 36,740 4,411 41,151
Identifiable assets 926,935 83,675 1,010,610
1995
Operating revenues $ 707,680 $41,875 $ 749,555
Net income 24,618 4,190 28,808
Identifiable assets 829,849 71,099 900,948
The utility business is comprised of the Company's five utility
divisions: Energas Division, Greeley Gas Division, Trans La Division, United
Cities Division and Western Kentucky Division. It includes regulated as well as
certain nonregulated utility businesses such as irrigation, transportation and
gas marketing activities in the utility divisions' respective service areas.
4
The non-utility business includes the operations of UCG Storage and
UCG Energy, which includes a 45% interest in WMLLC (a gas marketer), the propane
business and leasing of real estate, vehicles and appliances.
OPERATING STATISTICS
The table on the following page reflects the pooled operating
statistics of Atmos and the United Cities Division for fiscal 1997 and the
restated operating statistics for the previous four years on a pooled basis. It
is followed by two tables of utility sales and operating statistics by business
unit for 1997 and 1996, respectively. These two tables are followed by tables
of non-utility net income and propane statistics for 1997, 1996 and 1995.
5
ATMOS ENERGY CORPORATION
FIVE-YEAR OPERATING STATISTICS
Year ended September 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
NUMBER OF CUSTOMERS, at
end of year
Residential 870,747 860,229 834,376 825,310 789,360
Commercial 92,703 91,960 90,093 93,250 86,124
Industrial (including agricultural) 17,217 19,403 19,762 20,219 9,564
Public authority and other 4,781 4,716 4,982 4,949 3,267
---------- -------- -------- -------- ----------
Total natural gas customers 985,448 976,308 949,213 943,728 888,315
Propane 29,097 26,108 23,359 21,693 20,498
---------- --------- -------- -------- ----------
Total Customers 1,014,545 1,002,416 972,572 965,421 908,813
========== ========= ======== ======== ==========
HEATING DEGREE DAYS, (2)
Actual 3,909 4,043 3,706 3,855 4,080
Percent of normal 98% 101% 93% 97% 102%
SALES VOLUMES - MMcf (3)
Residential 75,214 77,001 69,666 72,561 74,818
Commercial 37,382 38,247 34,921 35,250 36,307
Industrial (including agricultural) 46,417 57,863 57,290 57,638 50,537
Public authority and other 5,195 5,182 4,779 5,242 4,403
---------- --------- -------- -------- ----------
Total 164,208 178,293 166,656 170,691 166,065
TRANSPORTATION VOLUMES - MMcf (3) 48,800 44,146 47,647 47,882 51,665
---------- --------- -------- -------- ----------
TOTAL VOLUMES DELIVERED - MMcf (3) 213,008 222,439 214,303 218,573 217,730
========== ========= ======== ======== ==========
PROPANE - Gallons (000's) 32,975 40,723 28,854 23,175 20,180
========== ========= ======== ======== ==========
OPERATING REVENUES (000's)
Gas Revenues
Residential $ 452,864 $ 409,039 $337,768 $375,450 $ 372,770
Commercial 193,302 186,032 150,949 165,883 165,611
Industrial (including agricultural) 168,386 187,693 171,591 188,791 160,410
Public authority and other 23,898 21,738 18,185 22,463 18,315
---------- --------- -------- -------- ----------
Total gas revenues 838,450 804,502 678,493 752,587 717,106
Transportation Revenues 19,885 18,872 19,813 21,325 21,937
Other Revenue 6,385 13,751 9,374 6,879 8,014
---------- --------- -------- -------- ----------
Total utility revenues 864,720 837,125 707,680 780,791 747,057
Non-utility revenues
Propane revenues 33,194 34,730 22,124 18,510 16,506
Other revenues 8,921 14,836 19,751 27,001 31,330
---------- --------- -------- -------- ----------
Total non-utility revenues 42,115 49,566 41,875 45,511 47,836
---------- --------- -------- -------- ----------
Total operating revenues $ 906,835 $ 886,691 $749,555 $826,302 $ 794,893
========== ========= ======== ======== ==========
AVERAGE SALES PRICE/Mcf
Residential $ 6.02 $ 5.31 $ 4.85 $ 5.17 $ 4.98
Commercial 5.17 4.86 4.32 4.71 4.56
Industrial (including agricultural) 3.63 3.24 3.00 3.28 3.17
Public authority and other 4.60 4.19 3.81 4.29 4.16
Total 5.11 4.51 4.07 4.41 4.32
AVERAGE COST OF GAS/Mcf SOLD 3.51 3.15 2.70 3.10 3.04
AVERAGE TRANSPORTATION REVENUES/Mcf .41 .43 .42 .45 .42
See footnotes on page 7.
6
UTILITY SALES AND STATISTICAL DATA BY BUSINESS UNIT - 1997(1)
Year ended September 30, 1997
--------------------------------------------------------------------
Western Greeley United Total
Energas Trans La Kentucky Gas Cities Utility
--------- --------- -------- -------- ------- ---------
UTILITY CUSTOMERS, at end of year
Residential 268,518 73,546 154,219 99,472 274,992 870,747
Commercial 25,234 5,409 17,706 13,328 31,026 92,703
Industrial (including agricultural) 15,589 120 460 385 663 17,217
Public authority and other 2,230 978 1,573 - - 4,781
-------- -------- -------- -------- -------- ----------
Total 311,571 80,053 173,958 113,185 306,681 985,448
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS, (2)
Actual 3,553 1,523 4,178 6,195 3,980 3,909
Normal 3,531 1,771 4,333 6,274 4,070 3,990
Percent of normal 100% 86% 96% 99% 98% 98%
SALES VOLUMES - MMcf (3)
Residential 24,292 3,558 13,543 10,227 23,595 75,215
Commercial 7,912 1,383 6,070 6,731 15,286 37,382
Industrial (including agricultural) 19,084 1,872 6,128 1,907 17,425 46,416
Public authority and other 2,689 951 1,555 - - 5,195
-------- -------- -------- -------- -------- ----------
Total 53,977 7,764 27,296 18,865 56,306 164,208
TRANSPORTATION VOLUMES - MMcf (3) 4,479 624 22,398 3,275 18,024 48,800
-------- -------- -------- -------- -------- ----------
TOTAL VOLUMES HANDLED - MMcf (3) 58,456 8,388 49,694 22,140 74,330 213,008
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues (000's) $234,310 $ 51,866 $144,139 $ 91,341 $343,064 $ 864,720
Gross plant (000's) $322,774 $108,822 $175,793 $137,489 $501,972 $1,246,850
Net plant (000's) $208,289 $ 78,354 $105,393 $ 83,371 $314,591 $ 789,998
Miles of pipe 13,214 2,241 3,638 3,864 7,945 30,902
Employees (4) 534 154 330 250 1,031 2,299
Communities served 92 41 163 123 383 802
(1) Atmos' utility business is comprised of the five utility divisions listed in
the table above. Their operations include the regulated local distribution
companies and certain unregulated gas marketing subsidiaries located in their
respective service areas. The Energas plant balances include certain shared
services utilty amounts.
(2) A heating degree day is equivalent to each degree that the average of the
high and the low temperatures for a day is below 65 degrees. The greater the
number of heating degree days, the colder the climate. Heating degree days are
used in the natural gas industry to measure the relative coldness of weather
experienced and to compare relative temperatures between one geographic area and
another. Normal degree days is based on 30-year average National Weather
Service data for selected locations.
(3) Volumes are reported as metered in million cubic feet ("MMcf").
(4) This excludes 218 and 235 Atmos shared services employees and 162 and 143
non-utility employees in United Cities in 1997 and 1996, respectively.
7
UTILITY SALES AND STATISTICAL DATA BY BUSINESS UNIT - 1996 (1)
Year ended September 30, 1996
--------------------------------------------------------------------
Western Greeley United Total
Energas Trans La Kentucky Gas Cities Utility
--------- --------- -------- -------- ------- ---------
UTILITY CUSTOMERS, at end of year
Residential 266,805 73,414 151,798 97,653 270,559 860,229
Commercial 24,950 5,392 17,334 13,230 31,054 91,960
Industrial (including agricultural) 17,780 118 467 401 637 19,403
Public authority and other 2,219 956 1,541 - - 4,716
-------- -------- -------- -------- -------- ----------
Total 311,754 79,880 171,140 111,284 302,250 976,308
======== ======== ======== ======== ======== ==========
HEATING DEGREE DAYS, system average (2)
Actual 3,331 1,980 4,610 5,912 4,322 4,043
Normal 3,528 1,760 4,376 6,234 4,070 3,990
Percent of normal 94% 113% 105% 95% 106% 101%
SALES VOLUMES (2)
Residential 22,842 4,205 14,694 9,829 25,458 77,028
Commercial 7,426 1,490 6,351 6,252 16,706 38,225
Industrial (including agricultural) 24,978 1,707 10,726 1,028 18,207 56,646
Public authority and other 2,529 962 1,685 1,218 - 6,394
-------- -------- -------- -------- -------- ----------
Total 57,775 8,364 33,456 18,327 60,371 178,293
TRANSPORTATION VOLUMES (3) 5,694 562 16,936 3,342 17,612 44,146
-------- -------- -------- -------- -------- ----------
TOTAL VOLUMES HANDLED (3) 63,469 8,926 50,392 21,669 77,983 222,439
======== ======== ======== ======== ======== ==========
OTHER STATISTICS
Operating revenues (000's) $203,409 $ 53,288 $153,203 $ 73,844 $353,381 $ 837,125
Gross plant (000's) $278,180 $103,809 $158,918 $125,531 $476,855 $1,143,293
Net plant (000's) $168,014 $ 74,816 $ 96,252 $ 74,485 $301,699 $ 715,266
Miles of pipe 13,163 2,090 3,570 3,817 7,523 30,163
Employees (4) 609 167 373 268 1,068 2,485
Communities served 92 41 163 123 383 802
See footnotes on page 7.
8
The non-utility business is comprised of the operations of UCG Storage and UCG
Energy. Their net income for 1997, 1996 and 1995 is recapped below:
1997 1996 1995
------- ------ ------
(In thousands)
Non-utility net income:
Propane $ (89) $1,276 $1,123
Rental 1,109 1,237 1,693
Interest in WMLLC and other 1,616 1,092 634
Storage 739 806 740
------ ------ ------
Total $3,375 $4,411 $4,190
====== ====== ======
The Company's Propane Division sells and transports propane to both
wholesale and retail customers. Propane statistics for 1997, 1996 and 1995 are
shown below. The division sold 33 million gallons of propane in 1997 as
compared with 41 million gallons in 1996. The decrease in volume was the result
of winter weather that was 7% warmer than normal in 1997.
PROPANE STATISTICS:
1997 1996 1995
------- ------- -------
(In thousands)
Sales
Retail $19,201 $21,434 $15,932
Wholesale 10,349 13,296 6,192
------- ------- -------
29,550 34,730 22,124
Cost of sales 20,084 23,832 13,038
------- ------- -------
Gross profit $ 9,466 $10,898 $ 9,086
======= ======= =======
Gross margin % of sales 32.0% 31.4% 41.1%
Gallons 32,975 40,723 28,854
GAS SALES
The Company's natural gas distribution business is seasonal and highly
dependent on weather conditions in the Company's 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 such sales during the winter
months will vary with the temperatures during such months. The seasonal nature
of the Company's sales to residential and commercial customers is offset
partially by the Company's sales in the
9
spring and summer months to its agricultural customers in Texas, Colorado and
Kansas who utilize natural gas to operate irrigation equipment. The Company
also has weather normalization adjustments in its rate jurisdictions in
Tennessee and Georgia, which serve approximately 170,000 customers. The
Company's management believes that the Company has lessened its sensitivity to
weather risk by diversifying its operations into geographic areas having
different weather patterns.
In addition to weather, the Company's revenues are affected by the
cost of natural gas and economic conditions in the areas that the Company
serves. Higher gas costs, which the Company is generally able to pass through
to its customers under purchased gas adjustment clauses, may cause customers to
conserve, or, in the case of industrial customers, to use alternative energy
sources.
In recent years, natural gas market conditions have changed. Natural
gas prices to distributors have become more volatile and the number of competing
marketers of natural gas has increased. The Company's gas marketing subsidiaries
purchase gas to address requirements for large volume customers in certain
highly competitive markets.
In certain instances, customers purchase gas directly from others
instead of from the Company and the Company transports such gas through its
distribution systems to the customers' facilities for a fee. Although
transportation of customer-owned gas reduces the Company's operating revenues
and corresponding purchased gas cost, the transportation revenues received by
the Company may offset the loss to gross profit.
The Company's distribution systems have experienced aggregate peak day
deliveries of approximately 1.5 billion cubic feet ("Bcf") per day. The Company
has the ability to curtail deliveries to certain customers under the terms of
interruptible contracts and applicable state statutes or regulations which
enables it to maintain its deliveries to high priority customers. The Company
has not imposed curtailment in its Energas Division since the Company began
independent operations in 1983 or in its Trans La Division since the Company
acquired TLG in 1986. The Western Kentucky Division curtailed deliveries to
certain interruptible customers during exceptionally cold periods in December
1989, January 1994 and during the winter of 1996. Neither the Greeley Gas
Division nor its predecessor, GGC, have curtailed deliveries to its sales
customers since prior to 1980. The United Cities Division curtails interruptible
service customers from time to time each year in accordance with the
interruptible contracts and tariffs.
10
GAS SUPPLY
The Western Kentucky Division's gas supply is delivered by the
following pipelines: Texas Gas, Tennessee Gas, Trunkline and ANR, except that a
small percentage of the requirements are being purchased directly from
intrastate producers that are connected directly to its distribution system.
During 1997, the Western Kentucky Division purchased its supply from various
producers and marketers including Texaco Gas Marketing, Union Pacific Fuels,
Vastar Gas Marketing, Duke Energy, LG&E Natural and Natural Gas Clearinghouse.
The United Cities Division is served by thirteen interstate pipelines.
The majority of the volumes are transported through East Tennessee Pipeline,
Southern Natural Gas and Williams Natural Gas. During 1997, the United Cities
Division purchased its supply from various producers and marketers including
TransCanada, Texaco Gas Marketing, Woodward Gas Marketing, and Williams Energy
Service Company.
Colorado Interstate Gas Company, Williams Natural Gas, Public Service
Company of Colorado, and Northwest Pipeline are the principal transporters of
the Greeley Gas Division's requirements. Additionally, the Greeley Gas Division
purchased substantial volumes from producers that are connected directly to its
distribution system. During 1997, the Greeley Gas Division's primary suppliers
were Union Pacific Fuels, Williams Energy Service Company, Duke Energy,
Interenergy and WESTAR.
The Energas Division receives sales and transportation service from
various KN affiliates. Also, the Company purchases a significant portion of its
supply from Pioneer Natural Resources (formerly Mesa) which is connected
directly to the Company's Amarillo, Texas distribution system. During 1997,
other major suppliers included Texaco Gas Marketing, Enron, and Natural Gas
Clearinghouse.
Louisiana Intrastate Gas Company ("LIG"), Acadian Pipeline, Koch
Gateway and Texas Gas Transmission Company pipelines delivered most of the Trans
La Division's requirements. The Trans La Division purchased its supply from
various producers and marketers including Acadiana Gas Marketing, Koch Gas
Marketing, LL&E and Engage Energy.
The Company owns and operates numerous natural gas storage facilities
in Kentucky and Kansas which are used to help meet customer requirements during
peak demand periods and to reduce the need to contract for additional pipeline
capacity to meet such peak demand periods. Additionally, the Company operates
various propane plants and a liquid natural gas ("LNG") plant for peak shaving
purposes. The Company also contracts for storage service in underground storage
facilities of many of the interstate pipelines serving it. See "Item 2.
Properties" for further information regarding the peak shaving facilities.
11
The United Cities Division normally injects gas into pipeline storage
systems and UCG Storage's storage system during the summer months and withdraws
it in the winter months. At the present time, the underground storage
facilities of UCG Storage have a maximum daily output capability of
approximately 45,000 Mcf.
The United Cities Division has the ability to serve approximately 60%
of its peak day load through the use of company owned storage facilities,
storage contracts with its suppliers and peaking facilities throughout the
system. This ability provides the operational flexibility and security of
supply required to meet the needs of the highly weather sensitive residential
and commercial market.
REGULATION AND RATES
Regulation. In the Energas Division, the governing body of each
municipality served by the Company 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. The Company
operates pursuant to non-exclusive franchises granted by the municipalities it
serves, which franchises are subject to renewal from time to time. The
franchises granted to the Company permit it to conduct natural gas distribution
within the municipalities' incorporated limits. The Railroad Commission of 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. In Texas, rates for large industrial customers are routinely
set by contract negotiation between the Company and its customers pursuant to
statutory standards and are filed with and subject to the governmental authority
of the municipalities or the Railroad Commission, depending on whether the
customer is located inside or outside the limits of a municipality.
Historically, the Company's rates for large industrial customers have been
accepted as filed. Agricultural sales in Texas are not regulated, except that
prices for agricultural sales cannot exceed the prices the Company charges the
majority of its commercial or other similar large-volume users in Texas.
The Trans La Division is regulated by the Louisiana Public Service
Commission ("Louisiana Commission"), which regulates utility services, rates,
and other matters. In most of the parishes and incorporated areas in which the
Company operates in Louisiana, it does so pursuant to a non-exclusive franchise
granted by the governing authority of each parish or incorporated area. The
franchise gives the Company the general privilege to operate its gas
distribution business in, as well as the right to install its distribution lines
along the roadways of, the parish or the incorporated area. Direct sales of
natural gas to industrial customers in Louisiana who utilize the gas for fuel or
12
in manufacturing processes and sales of natural gas for vehicle fuel are exempt
from regulation.
The Western Kentucky Division is regulated by the Kentucky Public
Service Commission ("Kentucky Commission"), which regulates utility services,
rates, issuances of securities, and other matters. The Company operates in the
various incorporated cities served by it in Kentucky pursuant to non-exclusive
franchises granted by such cities. The franchises grant to the Company the
right to operate its gas distribution business in the city and to install its
distribution lines and related equipment in and along the city's public rights-
of-way. Sales of natural gas for use as vehicle fuel in Kentucky are not
subject to regulation.
The Greeley Gas Division is regulated by the Colorado Public Utilities
Commission ("Colorado Commission"), the Kansas Corporation Commission, and the
Missouri Public Service Commis sion with respect to accounting, rates and
charges, operating matters, and the issuance of securities. The Company
operates in the various incorporated cities served by it in the states of
Colorado, Kansas and Missouri under terms of non-exclusive franchises granted by
the various cities. The franchises grant to the Company, among other things,
the right to install and operate its gas distribution system within the city
limits. Most of the Greeley Gas Division's wholesale gas suppliers are
regulated by various federal and state commissions.
In each state in which the United Cities Division operates, its rates,
services and operations as a natural gas distribution company are subject to
general regulation by the state public service commission. Its pipeline
suppliers, but not the United Cities Division or the other utility divisions,
are subject to regulation by the Federal Energy Regulatory Commission ("FERC").
The United Cities Division's rates, which vary in its different regulatory
jurisdictions, are determined by its cost of purchased gas, rate of return, type
of service and volume of use by the customer. In addition, the issuance of
securities by the Company is subject to approval by the state commissions,
except in South Carolina and Iowa. Missouri only regulates the issuance of
secured debt. The United Cities Division operates in each community, where
necessary, under a franchise granted by the municipality for a fixed term of
years. To date it has been able to renew franchises and expects to continue to
do so in the future.
The Company is also subject to regulation by the United States
Department of Transportation with respect to safety requirements in the
operation and maintenance of its gas distribution facilities. The Company's
distribution operations are also subject to various state and federal laws
regulating environmental matters. From time to time the Company receives
inquiries regarding various environmental matters. The Company believes that
its properties and operations substantially comply with and are operated in
substantial conformity with applicable
13
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, if adversely
determined, would have a material adverse effect on the Company.
Rates. Approximately 89% of the Company's revenues in fis cal 1997
was derived from sales at rates set by or subject to approval by local or state
authorities. The method of determin ing regulated rates varies among the
twelve states in which the Company has utility operations. As a general rule,
the regulatory authority reviews the Company's rate request and establishes a
rate structure intended to generate revenue sufficient to cover the Company's
costs of doing business and provide a reasonable return on invested capital.
Substantially all of the sales rates charged by the Company to its
customers fluctuate with the cost of gas purchased by the Company. Rates
established by regulatory authorities are adjusted for increases and decreases
in the Company's purchased gas cost through automatic purchased gas adjustment
mechanisms. Therefore, while the Company's operating revenues may fluctuate,
gross profit (which is defined as operating revenues less purchased gas cost) is
generally not eroded or enhanced because of gas cost increases or decreases.
The Georgia Commission and Tennessee Regulatory Authority have
approved Weather Normalization Adjustments ("WNAs") that allow the United Cities
Division to increase the base rate portion of customers' bills when weather is
warmer than normal and decrease the base rate when weather is colder than
normal. The net effect of the WNAs was an increase (decrease) in revenues of
$2,643,000, $(2,612,000) and $1,030,000 in 1997, 1996 and 1995, respectively.
14
The following table sets forth the major rate requests made by the
Company during the most recent five years and the action taken on such requests:
Effective Amount Amount
Jurisdiction Date Requested Received
------------ ------------ ----------- ----------
Texas
West Texas System 11/18/94 $2,581,000 $1,702,000(a)
11/01/96 7,676,000 5,800,000(a)
Amarillo 11/25/92 4,398,000 2,130,000
Louisiana 03/01/93 (b) 730,000(b)
03/01/94 (b) 1,058,000(b)
03/01/95 (b) 1,071,000(b)
Kentucky 11/01/95 7,665,000 2,300,000(c)
03/01/96 1,000,000(c)
Colorado 05/01/94 4,527,000 3,246,000
Kansas 12/01/93 2,604,000 2,088,000(d)
09/01/95 4,230,000 2,700,000(e)
Missouri 10/14/95 1,100,000 903,000
South Carolina 02/07/95 341,000 253,000
Tennessee 11/15/95 3,951,000 2,227,000
Iowa 05/17/96 750,000 410,000
Georgia 12/02/96 5,003,000 3,160,000
Illinois 07/09/97 1,234,000 428,000
Virginia 09/29/95 810,000 103,000
(a) These increases include $200,000 and $500,000 applicable to areas outside
the city limits which became effective in January 1995 and April 1997,
respectively.
(b) A September 1992 rate order approved a Rate Stabilization Clause ("RSC") for
three years which provided for an annual adjustment of rates to reflect
changes in expenses and investment. The RSC provided the Company the
opportunity to earn a return on common equity between 11.75% and 12.25%.
(c) The Kentucky rate order provided an increase of $2,300,000, lowered
depreciation rates effective November 1, 1995 and provided an additional
$1,000,000 beginning March 1, 1996. The order also included a provision for
a pilot demand side management program which could cost up to $450,000
annually.
(d) This increase is applicable to the service area of the Greeley Gas Division.
(e) This increase is applicable to the service area of the United Cities
Division.
15
COMPETITION
The Company is not currently in significant direct competition with
any other distributors of natural gas to residential and commercial customers
within its service areas. However, the Company does compete with other natural
gas suppliers and suppliers of alternate fuels for sales to industrial and
agricultural customers.
The Company competes in all aspects of its business with alternative
energy sources, including, in particular, electrici ty. Competition for the
residential and commercial customers is increasing. Promotional incentives,
improved equipment efficien cies, and promotional rates all contribute to the
acceptability of electric equipment. In the United Cities Division, #2 and #6
fuel oil are the primary competition for industrial customers. In addition,
certain customers, primarily industrial, may have the ability to by-pass the
Company's distribution system by connecting directly with a pipeline.
Beginning in 1985, changes in the federal regulatory environment
through FERC orders and conditions related to markets and gas supply in the
United States have brought increased competition into the natural gas industry.
In 1993, FERC Order 636 was implemented by the interstate pipelines that serve
the United Cities and Western Kentucky Divisions, but FERC policies have not had
a direct impact upon the Company's Energas, Greeley Gas and Trans La Divisions
which are primarily supplied by intrastate pipelines. However, competition for
large volume customers in the United Cities and Western Kentucky Divisions and
other service areas has increased as a result of FERC Order 636. The Company has
sought regulatory approvals for competitive pricing on a case by case basis.
The Company participates in the operation of public refueling
facilities for the sale of compressed natural gas ("CNG") for vehicular use.
The most recent of these were opened in Greeley, Colorado in September 1996, at
West Texas A&M University in Canyon, Texas in August 1995, and in Owensboro,
Kentucky in April 1995. Prior to that time, the Company provided CNG for
vehicular use only in limited situations (such as for school buses in certain
school districts and for the fleet vehicles of certain businesses). With the
opening of these public refueling stations the Company began competing with
gasoline for vehicular fuel sales. All of these facilities, except those in
Greeley, Colorado and at West Texas A&M, are located at existing local gasoline
stations.
The United Cities Division has received approval from all the
regulatory authorities in the states in which it operates, except Iowa, to place
into effect a negotiated tariff rate which allows the United Cities Division to
maintain industrial loads at lower margin rates. Iowa has rules which allow for
flexible rates. These rates are competitive with the price of alternative
fuels. In addition, certain industrial customers have changed
16
from firm to interruptible rate schedules in order to obtain natural gas at a
lower cost. Additionally, the United Cities Division has received approval from
all state regulatory authorities to provide transportation service of customer-
owned gas.
UCG Energy's propane subsidiary is in competition with other suppliers
of propane, natural gas and electricity. Competition exists in the areas of
price and service. The wholesale cost of propane is subject to fluctuations
primarily based on demand, availability of supply and product transportation
costs.
UCG Energy, through its 45% interest in WMLLC, competes with other
natural gas brokers in obtaining natural gas supplies for customers. UCG Energy
also competes with other rental companies.
UCG Storage charges rates to the United Cities Division that are
subject to review by the various commissions in the states within which the
storage service is provided. Therefore, UCG Storage's rates must be competitive
with other storage facilities. UCG Storage also stores natural gas for WMLLC.
As a result, UCG Storage is in competition with other companies that store
natural gas as to rates charged and deliverability of natural gas. Storage
agreements between UCG Storage and the United Cities Division give it first
priority to any storage services.
Employees
At September 30, 1997, the Company employed 2,679 persons. See
"Utility Sales and Statistical Data by Business Unit - 1997" for the number of
employees by business unit. As discussed in Management's Discussion and
Analysis, the Company is in the process of downsizing and restructuring in
connection with the integration of UCGC and its Customer Service Initiative.
The projected complement at the end of fiscal 1998 is currently estimated at
2,223 persons.
ITEM 2. PROPERTIES
The Company owns an aggregate of 30,902 miles of underground
distribution and transmission mains throughout its gas distribution systems.
These mains are located on easements or right-of-ways granted to the Company,
which generally provide for perpetual use. The Company maintains its pipelines
through a program of continuous inspection and repair and believes that its
pipeline system is in good condition. The Company also owns and operates nine
peak shaving plants with a total capacity of approximately 1,050,000 gallons
that can produce an equivalent of 19,459 Mcf daily and an LNG storage facility
with a capacity of 500,000 Mcf which can inject a daily volume of 30,000 Mcf in
the system, as well as underground storage fields which are used to supplement
the supply of natural gas in periods of peak demand. It has seven underground
gas storage facilities in Kentucky and four in Kansas that have a total storage
capacity of
17
approximately 21.1 Bcf. However, approximately 10.0 Bcf of gas in the storage
facilities must be retained as cushion gas to maintain reservoir pressure. The
maximum daily delivery capability of the storage facilities is approximately 154
MMcf.
Substantially all of the Company's properties in its Greeley Gas
Division and United Cities Division with recorded values of approximately $83.4
million and $314.6 million, respectively, are subject to liens under First
Mortgage Bonds assumed by the Company in its mergers with GGC and UCGC. At
September 30, 1997, the liens secured $17.0 million of outstanding 9.4% Series J
First Mortgage Bonds due May 1, 2021, and $113.0 million of outstanding Series
N, P, Q, R, S, T, U and V First Mortgage Bonds due at various dates from 2004
through 2022.
In 1996 the Company consolidated its administrative offices in Dallas,
Texas under one lease. The Company also maintains field offices throughout its
distribution system, substantially all of which are located in leased premises.
Net non-utility property at September 30, 1997 amounted to
approximately $19.5 million for propane equipment, $17.4 million for underground
storage facilities, and $19.7 million for rental buildings and equipment.
The Company holds franchises granted by the incorporated cities and
towns that it serves. At September 30, 1997, the Company held 413 such
franchises having terms generally ranging from five to 25 years. The Company
believes that each of its franchises will be renewed.
ITEM 3. LEGAL PROCEEDINGS
See Note 5 of notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of September 30,
1997, regarding the executive officers of the Company. It is followed by a
brief description of the business experience of each executive officer during
the past five years.
Years of
Name Age Service Office Currently Held
---- --- -------- ---------------------
Robert W. Best 50 - Chairman, President and Chief Executive Officer
Larry J. Dagley 49 - Executive Vice President and Chief Financial Officer
J. Charles Goodman 36 13 Executive Vice President of Operations
Donald E. James 50 16 Senior Vice President of Public Affairs
Mary S. Lovell 46 9 Senior Vice President of Utility Services
Glen A. Blanscet 40 12 Vice President, General Counsel and Corporate Secretary
Wynn D. McGregor 44 9 Vice President, Human Resources
Robert W. Best was named Chairman, President and Chief Executive
Officer and was appointed to the Board of Directors in March 1997. He
previously served as Senior Vice President -regulated businesses, for
Consolidated Natural Gas Company of Pittsburgh, Pennsylvania, since January
1996, responsible for its transmission and distribution companies. He
previously served as President of Texas Gas Transmission Company of Owensboro,
Kentucky, and Houston, Texas, from 1985 to 1995, and from 1992 to 1995 he was
President of Transco Gas Pipeline.
Larry J. Dagley was named Executive Vice President and Chief Financial
Officer effective May 1, 1997. From August 1995 to May 1997, he served as
Senior Vice President and Chief Financial Officer of Pacific Enterprises, a Los
Angeles, California based utility holding company whose principal subsidiary is
Southern California Gas Co., the nation's largest gas distribution utility.
From 1985 until joining Pacific Enterprises, he served as Senior Vice President
and Controller (1985-1993) and Senior Vice President and Chief Financial Officer
(1993-1995) of Transco Energy Company, a Houston, Texas based natural gas
pipeline company. Prior to joining Transco, Mr. Dagley was an audit partner
with Arthur Andersen & Co., where he supervised audits and financial consulting
engagements in the energy industry.
J. Charles Goodman was named Executive Vice President, Operations in
April 1995. He previously served as President of the Company's Trans La Gas
Division from February 1993 until April 1995 and as Chief Engineer from February
1989 until February 1993.
19
Donald E. James was named Senior Vice President - Public Affairs in
May 1995. He previously served as Senior Vice President and General Counsel
from January 1994 to May 1995, Senior Vice President - General Counsel and
Corporate Secretary from May 1993 until August 1993, and Senior Vice President
and General Counsel from May 1989 until May 1993.
Mary S. Lovell was named Senior Vice President, Utility Services in
May 1995. She previously served as Vice President, Rates and Regulatory Affairs
from August 1990 to May 1995.
Glen A. Blanscet was named Vice President, General Counsel and
Corporate Secretary in May 1995. He previously served as Assistant General
Counsel and Corporate Secretary from January 1994 to May 1995, and Assistant
General Counsel from July 1988 to December 1993.
Wynn D. McGregor was named Vice President, Human Resources in January
1994. He previously served the Company as Director of Human Resources from
February 1991 to December 1993 and as Manager, Compensation and Employment from
December 1987 to January 1991.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock trades on the New York Stock Exchange under the trading
symbol "ATO". The high and low sale prices and dividends paid per share of the
Company's common stock for fiscal 1997 and 1996 are listed below. Dividends
paid for 1997 and 1996 have been restated to reflect the merger of Atmos and
UCGC accounted for as a pooling of interests. Atmos' actual dividends paid in
fiscal 1997 were $.25 for each of the first three quarters and $.255 for the
fourth quarter, and $.24 per quarter for each quarter of fiscal 1996. The high
and low prices listed are the actual closing NYSE quotes for Atmos shares.
1997 1996
----------------------------- --------------------------
Dividends Dividends
High Low paid High Low paid
Quarter ended: -------- ----- ---- ------ ------ -----
December 31 $ 24 3/4 $ 22 5/8 $.251 $23 $18 $.245
March 31 26 1/4 22 1/8 .252 23 21 .245
June 30 25 1/2 22 1/2 .252 31 22 3/4 .245
September 30 27 7/8 24 1/2 .255 30 5/8 20 7/8 .245
----- -----
$1.01 $ .98
===== =====
See Note 7 of notes to consolidated financial statements for
restriction on payment of dividends. The number of record holders of the
Company's common stock on September 30, 1997 was 29,867.
20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and
should be read in conjunction with the consolidated financial statements
included herein. Amounts for 1997 reflect the pooled operations of Atmos and
the United Cities Division. Prior year amounts have been restated for the
pooling.
Year ended September 30,
----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------
(In thousands, except per share data)
Operating revenues $ 906,835 $ 886,691 $749,555 $826,302 $794,893
========== ========== ======== ======== ========
Net income $ 23,838 $ 41,151 $ 28,808 $ 26,772 $ 29,694
========== ========== ======== ======== ========
Net income per share $ .81 $ 1.42 $ 1.06 $ 1.05 $ 1.21
========== ========== ======== ======== ========
Cash dividends per share $ 1.01 $ .98 $ .96 $ .91 $ .82
========== ========== ======== ======== ========
Total assets at end of year $1,088,311 $1,010,610 $900,948 $829,385 $786,739
========== ========== ======== ======== ========
Long-term debt at end of year $ 302,981 $ 276,162 $294,463 $282,647 $257,696
========== ========== ======== ======== ========
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section provides management's discussion of Atmos Energy
Corporation's ("the Company" or "Atmos") financial condition, cash flows and
results of operations with specific information on liquidity, capital resources
and results of operations. It includes management's interpretation of such
financial results, the major factors expected to affect future operating
results, and future investment and financing plans. This discussion should be
read in conjunction with the Company's consolidated financial statements and
notes thereto. For financial and operating statistics, please see the tables of
restated and pooled data included herein.
Cautionary Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this Annual
Report on Form 10-K contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 or Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Report including, but not limited to, those contained in this
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", regarding the Company's financial position, business strategy
and plans and objectives of management of the Company for future operations, are
forward-looking statements made in good faith by the Company. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. 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 the Company's
operations, markets, services, rates, recovery of costs, availability of gas
supply, and other factors. These risks and uncertainties include, but are not
limited to, economic, competitive, governmental, weather, technological and
other factors.
Organization
The Company distributes, sells and transports natural gas and propane
to residential, commercial, industrial and agricultural customers in thirteen
states. The natural gas distribution business is operated through its five
utility divisions, rather than as a holding company. Such utility business is
subject to regulation by state and/or local authorities in each of the states in
which the Company operates. In addition, the Company's business is affected by
seasonal weather patterns, competition within the energy industry, and economic
conditions in the areas that the Company serves.
22
With the completion of the merger with United Cities Gas Company this
year, Atmos is the 12th largest natural gas distribution utility company in
terms of total customers in the country, and the fifth largest pure natural gas
utility. Since its organization in 1983, the Company has sought to expand its
customer base and to diversify the weather patterns, local economic conditions,
and regulatory environments in which it operates. As part of this strategy, the
Company has completed major acquisitions in 1986, 1987, 1993 and 1997. In
addition to growing through acquisitions, the Company's strategy includes
building the Atmos team, running the utility operations exceptionally well,
increasing the size and market share of the non-utility operations (gas
marketing and propane), and developing plans to participate in retail energy
services behind the meter.
In connection with its merger with United Cities Gas Company, as
discussed in Note 2 of notes to consolidated financial statements, the Company
acquired certain non-utility subsidiaries which contributed approximately 14% of
1997 net income and offer potential growth opportunities.
One non-utility subsidiary, UCG Storage, was formed in 1989 to provide
natural gas storage services. In 1989, a natural gas storage field was
purchased in Kentucky to supplement natural gas used by customers in Tennessee.
In addition, natural gas storage fields located in Kansas were sold to UCG
Storage and are used to supplement natural gas requirements of Kansas customers.
The other non-utility subsidiary, UCG Energy, incorporated in 1965,
leases appliances, real estate and equipment, and vehicles to the United Cities
Division and others. UCG Energy also owns a 45% interest in WMLLC of Houston,
Texas, which provides natural gas services to industrial customers,
municipalities and local distribution companies in the Southeast and Midwest,
including the United Cities Division. Management services include contract
negotiation and administration, load forecasting, nominations and scheduling,
storage acquisition, capacity utilization and pricing/risk management. WMLLC
was formed in 1995.
UCG Energy has two wholly-owned subsidiaries, United Cities Propane
Gas of Tennessee, Inc. and UCG Leasing, Inc. United Cities Propane Gas of
Tennessee, Inc. is engaged in the retail and wholesale distribution and
transportation of propane (LP) gas. As of September 30, 1997, the propane
operation served 29,097 customers in Kentucky, North Carolina, Tennessee and
Virginia. UCG Leasing, Inc. was incorporated under the laws of Georgia in 1987
and leases vehicles, equipment and real estate to the United Cities Division. A
table of non-utility net income for 1997, 1996 and 1995 appears on page 9
herein.
23
Acquisitions and Mergers
The Company has expanded its customer base and sought to diversify the
regulations, weather patterns and local economic conditions to which it is
subject through acquisitions in fiscal years 1997, 1994, 1987, and 1986. The
Company plans to continue its acquisition strategy to add new customers and
service areas for both natural gas and propane. It has an excellent track record
of acquiring LDC operations that provide diversity in weather, regulatory
patterns, economies and markets. It has achieved synergies and benefits quickly,
while preserving brand equity.
Ratemaking Activity
Rates and regulatory initiatives are at the heart of Atmos' utility
operations and are important to both shareholders and customers. Atmos'
objective is to achieve rates that provide for fair returns for its shareholders
while having these rates at low, competitive levels for its customers. As the
energy environment and industry change, the process for setting rates in the
future may also need to change. In that regard, the Company is participating in
a performance-based rates experimental program in Tennessee, which is designed
to reward the Company for performing better than certain benchmarks relating to
purchased gas cost. A similar program is underway in Georgia. Atmos believes
that performance-based rate programs benefit customers and reward efficient
service providers like Atmos, and Atmos intends to seek gas cost incentive
arrangements and incentive rates in every jurisdiction possible.
The Company received rate increases totaling $9.4 million, $6.8 million,
and $5.8 million effective in fiscal 1997, 1996 and 1995, respectively. For
further information regarding these rate increases please see Note 3 "Rates" in
notes to consolidated financial statements.
Weather and Seasonality
The Company's natural gas and propane distribution businesses are seasonal
due to weather conditions in the Company's service areas. Sales are affected by
winter heating season requirements. Sales to agricultural customers (who use
natural gas as fuel in the operation of irrigation pumps) during the period from
April through September are affected by rainfall amounts. These factors
generally result in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. For further seasonality information, please see the Supplementary
Quarterly Financial Data following the notes to consolidated financial
statements herein.
24
The Georgia Public Service Commission and the Tennessee Regulatory
Authority have approved Weather Normalization Adjustments ("WNAs"). The WNAs,
effective October through May each year in Georgia and November through April
each year in Tennessee, allow the United Cities Division to increase the base
rate portion of customers' bills when weather is warmer than normal and decrease
the base rate when weather is colder than normal. The net effect of the WNAs
was an increase/(decrease) in revenues of $2,643,000, ($2,612,000) and
$1,030,000 in 1997, 1996 and 1995, respectively.
The Company has not sought weather normalization clauses in its other rate
jurisdictions because of the effect of its geographical diversification strategy
and the potential for increased profits in unusually cold years.
Environmental Matters
The Company is involved in certain environmental matters as discussed in
Note 5 "Contingencies" of notes to consolidated financial statements.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
To assist in management's discussion of results of operations, the
following table presents the effects for fiscal years 1997, 1996 and 1995 of
certain non-recurring charges as well as weather which affected reported
results.
1997 1996 1995
-------------- --------------- --------------
Per Per Per
Amount Share Amount Share Amount Share
------ ----- ------ ----- ------ -----
(In thousands, except per share data)
Net income as
reported $23,838 $ .81 $41,151 $1.42 $28,808 $1.06
Non-recurring charges:
Management reorganization 2,800 .10 - - - -
Reserve for potential sharing of
merger and integration costs 12,630 .43 - - - -
------- ----- ------- ----- ------- -----
Normalized net income except for
effects of weather 39,268 1.34 41,151 1.42 28,808 1.06
Effects of weather 3,571 .12 (1,838) (.06) 5,000 .18
------- ----- ------- ----- ------- -----
Normalized net income $42,839 $1.46 $39,313 $1.36 $33,808 $1.24
======= ===== ======= ===== ======= =====
25
Net income as reported
The Company reported net income of $23.8 million, or $.81 per share,
on operating revenues of $906.8 million for the fiscal year ended September 30,
1997. The 1997 net income includes the effects of non-recurring after-tax
charges related to management reorganization ($2.8 million or $.10 per share)
and reserves related to the UCGC merger and integration ($12.6 million or $.43
per share). Excluding the effect of these charges, the Company's net income
would have been $39.3 million or $1.34 per share in 1997, compared with $41.2
million, or $1.42 per share for 1996. The 1997 results include United Cities Gas
Company, which merged with Atmos effective July 31, 1997, and prior year
operating results have been restated to reflect the pooling of interests
accounting which was used for the merger.
Non-recurring charges
The Company completed a management reorganization in 1997 and recorded
a charge of $4.4 million ($2.8 million after-tax) in related costs.
The cost of the UCGC merger and integration totaled approximately $17
million for the transaction costs and $32 million for the separation and other
costs. There are substantial longer term benefits to the Company's customers
and shareholders from the merger of the two companies, which the Company expects
to result in cost savings over the next 10 years totaling about $375 million.
The Company believes a significant amount of the costs to achieve these benefits
will be recovered through rates and future operating efficiencies of the
combined operations. Therefore, the Company recorded as regulatory assets the
costs of the merger and integration of UCGC. However, the Company has
established a reserve of approximately $20 million ($12.6 million after-tax), to
account for costs that may not be recovered. The Company recorded these costs
in the fourth quarter of fiscal year 1997 when the merger was completed,
separation plans were approved by the board of directors and announcements were
made to employees. For further information regarding the merger please see Note
2 of notes to consolidated financial statements.
Effects of weather
Annual sales volumes and revenues vary in relation to winter heating
degree days and summer irrigation demand. The Company has weather normalization
adjustments in its rates in Georgia and Tennessee, but not in the other 10
states in which it has natural gas distribution operations. The estimated
effect on net income of weather different from 30-year normals is included in
the previous table. The decline in net income, excluding the charges and
reserves, was the result of the effects of warmer than normal weather during the
winter months, which negatively impacted gas throughput and sales as well as
propane sales. In addition, the spring months were wetter than normal, which
adversely impacted
26
irrigation gas utilization. Normal weather conditions would have added $.12 per
share to net income.
Rates
The negative effects of weather were partially offset by rate
increases implemented in fiscal 1996 and 1997 in jurisdictions in Texas,
Kentucky, Illinois, Georgia, Iowa, Tennessee, Missouri and Virginia. Rate
increases contributed approximately $8 million to gross profit in 1997.
The following table summarizes heating degree days and
volumes delivered for 1997, 1996 and 1995.
Year ended September 30,
--------------------------
1997 1996 1995
---- ---- ----
HEATING DEGREE DAYS
Actual 3,909 4,043 3,706
Percent of normal 98% 101% 93%
SALES VOLUMES - MMcf
Residential 75,214 77,001 69,666
Commercial 37,382 38,247 34,921
Industrial (including agricultural) 46,417 57,863 57,290
Public authority and other 5,195 5,182 4,779
-------- -------- --------
Total 164,208 178,293 166,656
TRANSPORTATION VOLUMES - MMcf 48,800 44,146 47,647
-------- -------- --------
TOTAL VOLUMES DELIVERED - MMcf 213,008 222,439 214,303
======== ======== ========
PROPANE - Gallons (000's) 32,975 40,723 28,854
======== ======== ========
Total operating revenues (000's) $906,835 $886,691 $749,555
======== ======== ========
Operating revenues increased approximately 2% to $906.8 million in
1997 from $886.7 million in 1996 due to an increase of 13% in the average sales
price per thousand cubic feet ("Mcf") of gas sold, which more than offset a 4%
decrease in total volumes delivered. The increase in sales price reflects an
increase in the commodity cost of gas which is passed through to end users and
rate increases implemented in 1996 and 1997. Average gas sales revenues per Mcf
increased by $.60 to $5.11 in 1997, while the average cost of gas per Mcf sold
increased $.36 to $3.51 in 1997. The number of meters in service increased to
985,448 at September 30, 1997 compared with 976,308 at September 30, 1996. Sales
to weather sensitive residential, commercial and public authority customers
decreased approximately 2.6 billion cubic feet ("Bcf") in 1997 while sales and
transportation volumes delivered to industrial and agricultural customers
decreased approximately 6.8 Bcf. Total sales and transportation volumes
delivered decreased 4.2% to 213.0 Bcf in 1997, as compared with 222.4 Bcf in
1996. The decrease was primarily due to lower
27
irrigation demand as a result of cooler, wetter summer weather in West Texas.
Gross profit increased by approximately 2% to $329.7 million in 1997
from $324.4 million in 1996. The primary factor contributing to the higher
gross profit was annual rate increases totalling approximately $16.2 million
implemented in fiscal 1997 and 1996 in Texas, Kentucky, Tennessee, Iowa,
Missouri, Georgia, and Illinois. This was partially offset by a decrease of 9.4
Bcf or 4.2% due to the effect of warmer than normal weather and decreased
irrigation demand as a result of cooler, wetter summer weather in 1997.
Operating expenses, excluding income taxes, increased $31.2 million or 13% to
$263.0 million in 1997. The $25.5 million increase in operation expense was due
primarily to the non-recurring $20.0 million reserve for potential sharing of
merger and integration costs, and the $4.4 million charge for management
reorganization. The $3.6 million increase in depreciation was due to utility
plant additions placed in service in 1996 and 1997. Income taxes decreased to
$14.3 million for 1997 from $23.3 million for 1996. The primary reason for the
decrease was lower pre-tax profits. The effective tax rate increased slightly to
37.5% in 1997 from 36.2% in 1996. This was primarily due to increased state
income tax rates in 1997. Also, prior to the merger in 1997, UCGC's income was
subject to a slightly lower federal tax rate because of the graduated rate
structure. Operating income decreased in 1997 by approximately $17.0 million or
24% to $52.3 million. The decrease in operating income resulted primarily from
the non-recurring charges included in 1997 operating expenses as discussed
above.
Net income decreased in 1997 by approximately 42% to $23.8 million
from $41.2 million in the prior year. This $17.3 million decrease in net income
resulted from the $17.0 million decrease in operating income and a $1.9 million
increase in interest expense, which were partially offset by a $1.6 million
increase in other income. The increase in interest expense was due to higher
average debt outstanding in 1997 than in 1996. The $1.6 million increase in
other income for 1997 was primarily due to a $1.1 million increase in income
from the Company's investment in Woodward Marketing LLC, a Houston gas marketing
company. Net income per share decreased to $.81 for 1997 from $1.42 for 1996.
Average shares outstanding increased 1% to 29,409,000 shares in 1997 from 1996.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
Operating revenues increased 18% to $886.7 million in 1996 from $749.6
million in 1995 due to weather that was 9% colder than in 1995 and an 11%
increase in the average sales price per Mcf sold. Average gas sales revenues
per Mcf increased from 1995 by $.44 to $4.51 in 1996, while the average cost of
gas per Mcf sold increased $.45 to $3.15 in 1996. The total number of natural
gas and propane customers increased to 1,002,416 at September 30, 1996 compared
with 972,572 at September 30, 1995.
28
Sales to weather sensitive residential, commercial and public authority
customers increased approximately 11.0 Bcf in 1996 while sales and
transportation volumes delivered to industrial and agricultural customers
decreased 2.9 Bcf. Total volumes delivered increased 4% to 222.4 Bcf in 1996,
as compared with 214.3 Bcf in 1995. Revenues from gas sales to weather
sensitive customers increased $109.9 million to $616.8 million in fiscal 1996
due to an 11% increase in average sales price and a 10% increase in volumes sold
in 1996. The increase in volumes sold was due to weather 1% colder than normal
in 1996, as compared with 7% warmer than normal weather in 1995. Revenues from
gas sold and transported to industrial and agricultural customers increased
$15.2 million due to a $.24 per Mcf or 8% increase in sales price, despite a
slight decrease in volumes delivered.
Gross profit increased by approximately 8% to $324.4 million in 1996
from $300.2 million in 1995. The primary factor contributing to the higher
gross profit in 1996 was higher volumes sold to weather-sensitive customers due
to colder weather. The companywide average margin (sales price per Mcf less
cost of gas per Mcf) did not change significantly in 1996. Operating expenses,
excluding income taxes, increased only slightly to $231.8 million in 1996 from
$228.2 million in 1995. Income taxes increased to $23.3 million in 1996 from
$16.5 million in 1995. The primary reason for the increase was higher pre-tax
profits. The effective tax rate decreased slightly to 36.2% in 1996 from 36.5%
in 1995. Operating income increased in 1996 by approximately 25% to $69.3
million from $55.4 million in 1995. The increase in operating income resulted
primarily from the increase in 1996 gross profit, partially offset by increases
in operating expenses, primarily income taxes, as discussed above.
Net income increased in 1996 from 1995 by approximately 43% to $41.2
million from $28.8 million in the prior year. This increase in net income
resulted primarily from the increase in operating income, which was partially
offset by a $1.5 million increase in interest expense. This increase in
interest expense was caused by an increase in weighted average short-term debt
outstanding in 1996. Net income per share increased to $1.42 for 1996 from
$1.06 for 1995. Average shares outstanding increased 7% to 28,978,000 in 1996.
CAPITAL RESOURCES AND LIQUIDITY (See "Consolidated Statements of Cash Flows")
Because of the pooling of interests of Atmos, which has a September 30
fiscal year end, with UCGC, which had a December 31 year end, the activities of
UCGC for the quarter ended December 31, 1996 are included in the restated 1996
consolidated statement of cash flows and not the 1997 consolidated statement of
cash flows. As a result, amounts in the 1997 consolidated statement of cash
flows as reported are different than they would have been, had they included a
full 12 month's activity for UCGC.
29
The following pro forma condensed consolidated statement of cash flows
reflects activities of both Atmos and UCGC for the full 12 months ended
September 30, 1997.
(In thousands)
Cash flows from operating activities:
Net income $ 23,838
Depreciation 47,494
Other (11,054)
---------
Net cash provided by operating
activities 60,278
Net cash used in investing activities (131,286)
Cash flows from financing activities:
Increase in notes payable, net 63,600
Issuance of long-term debt 40,000
Repayment of long-term debt (16,037)
Issuance of common stock 10,482
Cash dividends paid (29,778)
---------
Net cash provided by financing
activities 68,267
---------
Decrease in cash (2,741)
Cash at beginning of year 8,757
---------
Cash at end of year $ 6,016
=========
Cash Flows from Operating Activities
Cash flows from operating activities as reported in the consolidated
statement of cash flows totaled $68.7 million for 1997 compared with $91.7
million for 1996 and $79.1 million for 1995. Due to non-recurring charges
recorded in 1997 and deducting UCGC's net income for the quarter ended December
31, 1996, the Company reported lower net income for the 1997 Statement of Cash
Flows as compared with 1996 and 1995. Depreciation for the full 12 months of
fiscal 1997 was $2.2 million higher than for 1996 because of increasing utility
plant in service. Using 1997 beginning balances for UCGC as of December 31,
1996 resulted in large swings in certain seasonal asset and liability accounts
like accounts receivable and accounts payable. Gas stored underground increased
in 1996 because of higher gas cost, but was lower in 1997 and 1995 because of
substantially lower gas prices during the summers of 1997 and 1995 when the
storage reservoirs were being refilled. The changes in deferred charges and
other assets and other current liabilities in 1997 were related to merger and
integration costs accrued and the related regulatory assets recorded in the
fourth quarter of 1997. See "Consolidated
30
Statements of Cash Flows" for other changes in assets and liabilities.
Cash Flows from Investing Activities
A substantial portion of the Company's cash resources is used to fund its
ongoing construction program in order to provide natural gas services to a
growing customer base. Net cash used in investing activities totaled $121.1
million in 1997 compared with $111.9 million in 1996 and $101.4 million in 1995.
During 1995, UCGC completed construction of a twenty-eight mile main which
connects two of its fastest growing distribution systems located in Middle
Tennessee and is designed to provide the Company's current customers with the
lowest possible priced gas through increased gas supply flexibility. Included
in the 1995 capital expenditures stated above is $5.7 million related to this
project. Capital expenditures in fiscal 1997 amounted to $122.3 million
(including $26.0 million for the Customer Service Initiative ("CSI")) compared
with $117.6 million in 1996 and $103.9 million in 1995. Currently budgeted
capital expenditures for 1998 total $109.1 million and include approximately
$41.5 million for completing CSI, as well as funds for additional mains,
services, meters, and vehicles. The CSI project includes application software,
related technology infrastructure and business process changes. Benefits
related to the CSI project include enabling the Company's ability to deliver its
vision by positioning for the future, using best practices in the industry,
timely integration of new acquisitions and resolution of Year 2000 issues.
Capital expenditures for fiscal 1998 are planned to be financed from internally
generated funds and financing activities, as discussed below.
31
The following table reflects the Company's capitalization, including
short-term debt except for the portion related to current storage gas.
1997 1996
--------------- ---------------
(In thousands)
Working capital
Short-term debt(1) $ 48,122 $ 43,350
======== ========
Short-term debt 119,178 15.6% 85,138 12.0%
Long-term debt 318,182 41.6% 292,841 41.4%
Shareholders' equity 327,260 42.8% 329,582 46.6%
-------- ---- -------- ----
Total capitalization $764,620 100% $707,561 100%
======== ==== ======== ====
(1) Includes short-term borrowings associated with working gas inventories.
As of the end of fiscal 1997, the debt to capitalization ratio had
increased to 57.2% from 53.4% in 1996. The increase was primarily due to
increased cash requirements related to merger and integration costs and CSI
investments in 1997, as well as the effects of the charges and reserves
previously discussed. The Company plans to decrease the debt to capitalization
ratio to nearer its target of 50% over the next three years through cash flow
generated from operations, issuance of new common stock under its Direct Stock
Purchase Plan and ESOP, recovery of CSI and merger/integration costs and
possibly from the sale of certain real estate assets.
Future capital requirements
Short-term borrowings are expected to continue to increase somewhat in
fiscal 1998 due to budgeted capital expenditures discussed above and scheduled
maturities of long-term debt of $15.2 million. The Company has access to $35.0
million available under its committed lines of credit and $159.9 million
available under its uncommitted lines.
Forward looking cash requirements beyond fiscal 1998 include capital
expenditures and possible contingencies and environmental matters as discussed
in the notes to consolidated financial statements. The Company plans to fund
future requirements through internally generated cash flows, credit facilities
and its access to the public debt and equity capital markets.
Cash Flows from Financing Activities
Net cash provided by financing activities totaled $47.3 million for 1997
compared with $22.0 million for 1996 and $26.1 million for 1995. Financing
activities during these periods included issuance of common stock, dividend
payments, short-term
32
borrowings from banks under the Company's credit lines, and issuance and
repayments of long-term debt.
Cash dividends paid. The Company paid $26.4 million in cash dividends
during 1997 (excluding dividends of $3.4 million paid by UCGC in the quarter
ended December 31, 1996) compared with $28.5 million in 1996 and $26.2 million
in 1995. Prior to the UCGC merger in July 1997, Atmos increased its actual
annual dividend rate by $.04 in each of the 3 years presented. Including fiscal
1998, the Company has increased its dividend rate for ten consecutive years.
Short-term financing activities. At September 30, 1997, the Company had
committed lines of credit totaling $187.0 million, $35.0 million of which was
unused, in order to provide for short-term cash requirements. These credit
facilities are negotiated at least annually. At September 30, 1997, the Company
also had uncommitted short-term credit lines of $170.0 million, of which $159.9
million was unused. During 1997, notes payable increased $38.8 million, after
the application of $40.0 million proceeds from the issuance of long-term debt to
reduce notes payable, compared with an increase of $62.7 million during 1996 and
a decrease of $38.5 million in 1995. The decrease in fiscal 1995 was primarily
due to repayment of short-term debt with most of the proceeds from the issuance
of $67.0 million of long-term debt.
Long-term financing activities. In November 1996, the Company issued $40.0
million of 6.09% unsecured notes due in November 1998 to a bank. The proceeds
were used to refinance short-term debt. Long-term debt payments totaled $14.7
million, $20.7 million, and $10.3 million for the years ended September 30,
1997, 1996 and 1995, respectively. The amount for 1997 excludes repayments of
$1.4 million by UCGC in the quarter ended December 31, 1996. Payments of long-
term debt in 1997 consisted of $9.0 million of installments on the Company's
various unsecured Senior Notes, a $2.0 million installment on the 8.69% Series N
First Mortgage Bonds, and installments on various term notes and other long-term
obligations totaling $3.7 million. Payments of long-term debt in 1996 and 1995
likewise consisted of annual installments under the various loan documents. No
long-term debt was issued in 1996. In the first quarter of 1995, the Company
entered into note purchase agreements totaling $40.0 million with two insurance
companies and issued $20.0 million of unsecured Senior Notes at 8.07% payable in
annual installments of $4.0 million beginning October 31, 2002 through October
31, 2006 with semiannual interest payments and $20.0 million of unsecured Senior
Notes at 8.26% payable in annual installments of $1,818,182 beginning October
31, 2004 through October 31, 2014 with semiannual interest payments. In 1995
UCGC issued $22.0 million of medium-term notes under a shelf registration
statement and a $5.0 million term note for its propane company. The $27.0
million proceeds of these notes were used by UCGC to repay short-term
borrowings, retire long-term debt, finance the Company's construction program
and for other corporate purposes.
33
The loan agreements pursuant to which the Company's Senior Notes and
First Mortgage Bonds have been issued contain covenants by the Company with
respect to the maintenance of certain debt-to-equity ratios and cash flows, and
restrictions on the payment of dividends. Also see Note 7 of the accompanying
notes to consolidated financial statements.
UCG Energy and Woodward Marketing, Inc. ("WMI"), sole shareholders of
WMLLC, act as guarantors of a $12,500,000 credit facility for WMLLC with a bank.
No balance was outstanding on this credit facility at September 30, 1997. UCG
Energy and WMI also act as joint and several guarantors on certain purchases of
natural gas and transportation services from suppliers by WMLLC. These
outstanding obligations amounted to $12.2 million at September 30, 1997.
Issuance of common stock. The Company issued 400,578, 995,467 and
2,335,785 shares of common stock in 1997, 1996 and 1995, respectively, for its
Direct Stock Purchase Plan, Employee Stock Ownership Plans, Restricted Stock
Grant Plan, Outside Directors Stock-for-Fee Plan, a public offering in 1995,
acquisitions of Oceana Heights and Monarch Gas Company and an interest in
Woodward Marketing LLC. See the Consolidated Statements of Shareholders' Equity
for the number of shares issued under each of the plans and for other
transactions. Please see Note 9 of the accompanying notes to consolidated
financial statements for the number of shares registered and available for
future issuance under each of the Company's plans.
In November 1995 the Company exchanged 313,411 shares of its common
stock valued at approximately $6.4 million in exchange for privately held Oceana
Heights Gas Company of Thibodaux, Louisiana.
In June 1996, in connection with the acquisition of Monarch Gas
Company ("Monarch"), 207,366 shares of UCGC's common stock were exchanged for
the common stock of Monarch. The merger added approximately 2,900 natural gas
customers in the Vandalia, Illinois area. In May 1995, 320,512 shares of UCGC's
common stock valued at $5,000,000 were issued in connection with the purchase of
a 45% interest in Woodward Marketing, LLC ("WMLLC") by UCG Energy. In June 1995
UCGC issued 1,380,000 shares of common stock under a shelf registration
statement in an underwritten public offering with net proceeds from the sale
amounting to approximately $18.9 million.
The Company believes that internally generated funds, its credit facilities
and access to the public debt and equity capital markets will provide necessary
working capital and liquidity for capital expenditures and other cash needs for
1998.
34
Inflation
The Company believes that inflation has caused and will continue to cause
increases in certain operating expenses and has required and will continue to
require assets to be replaced at higher costs. The Company continually reviews
the adequacy of its gas rates in relation to the increasing cost of providing
service and the inherent regulatory lag in adjusting those gas rates.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page no.
Reports of independent auditors 37
Consolidated balance sheets 39
Consolidated statements of income 40
Consolidated statements of shareholders' equity 41
Consolidated statements of cash flows 43
Notes to consolidated financial statements 45
Supplementary data (unaudited) 74
36
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Atmos Energy Corporation
We have audited the accompanying consolidated balance sheets of Atmos
Energy Corporation at September 30, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of United Cities Gas Company, wholly owned by
Atmos Energy Corporation (see Note 2), which statements reflect total assets of
$513,649,000 as of December 31, 1996 and total revenues of $402,947,000 and
$313,735,000 for the years ended December 31, 1996 and 1995. Those statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to data included for United Cities Gas Company is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Atmos Energy Corporation at September 30,
1997 and 1996, and its consolidated results of operations and its cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
November 11, 1997
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Cities Gas Company:
We have audited the accompanying consolidated balance sheet and
consolidated statements of capitalization of United Cities Gas Company (an
Illinois corporation) and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, retained earnings, capital surplus and common
stock and cash flows for each of the two years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of United
Cities Gas Company and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Nashville, Tennessee
February 14, 1997
38
ATMOS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30,
1997 1996
---------- ----------
ASSETS (In thousands, except share data)
Property, plant and equipment $1,301,004 $1,198,557
Construction in progress 31,668 21,217
---------- ----------
1,332,672 1,219,774
Less accumulated depreciation and amort. 483,545 449,563
---------- ----------
Net property, plant and equipment 849,127 770,211
Current assets
Cash and cash equivalents 6,016 11,134
Accounts receivable, less allowance for doubtful accounts
of $2,188 in 1997 and $2,462 in 1996 71,217 103,415
Inventories 12,333 13,895
Gas stored underground 48,122 43,350
Prepayments 6,017 2,809
---------- ----------
Total current assets 143,705 174,603
Deferred charges and other assets 95,479 65,796
---------- ----------
$1,088,311 $1,010,610
========== ==========
CAPITALIZATION AND LIABILITIES
Shareholders' equity
Common stock, no par value (stated at $.005 per share);
authorized 75,000,000 shares; issued and outstanding
1997 - 29,642,437 shares, 1996 - 29,241,859 shares $ 148 $ 146
Additional paid-in capital 251,174 241,658
Retained earnings 75,938 87,778
---------- ----------
Total shareholders' equity 327,260 329,582
Long-term debt 302,981 276,162
---------- ----------
Total capitalization 630,241 605,744
Current liabilities
Current maturities of long-term debt 15,201 16,679
Notes payable to banks 167,300 128,488
Accounts payable 62,626 80,321
Taxes payable 416 11,201
Customers' deposits 15,098 16,812
Other current liabilities 52,582 23,866
---------- ----------
Total current liabilities 313,223 277,367
Deferred income taxes 87,828 72,073
Deferred credits and other liabilities 57,019 55,426
---------- ----------
$1,088,311 $1,010,610
========== ==========
See accompanying notes to consolidated financial statements.
39
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30,
---------------------------------
1997 1996 1995
----------- ---------- --------
(In thousands, except per share data)
Operating revenues $906,835 $886,691 $749,555
Purchased gas cost 577,181 562,279 449,397
-------- -------- --------
Gross profit 329,654 324,412 300,158
Operating expenses
Operation 173,683 148,196 146,624
Maintenance 11,974 11,719 11,350
Depreciation and amortization 45,257 41,666 40,597
Taxes, other than income 32,131 30,254 29,626
Income taxes 14,298 23,316 16,544
-------- -------- --------
Total operating expenses 277,343 255,151 244,741
-------- -------- --------
Operating income 52,311 69,261 55,417
Other income (expense)
Interest and
investment income 5,410 3,867 3,290
Other, net (288) (300) 287
-------- -------- --------
Total other income
(expense) 5,122 3,567 3,577
Interest charges 33,595 31,677 30,186
-------- -------- --------
Net income $ 23,838 $ 41,151 $ 28,808
======== ======== ========
Net income per share $.81 $1.42 $1.06
======== ======== ========
Cash dividends per share $1.01 $.98 $.96
======== ======== ========
Average shares outstanding 29,409 28,978 27,208
======== ======== ========
See accompanying notes to consolidated financial statements.
40
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Common stock
------------------- Additional
Number of Stated paid-in Retained
shares value capital earnings
---------- ------- -------- --------
(In thousands, except share data)
Balance, September 30, 1994 25,910,607 $130 $196,487 $ 70,967
Net income - - - 28,808
Cash dividends ($.96 per share) - - - (26,197)
Common stock issued:
Restricted stock grant plan 13,000 - 202 -
Direct stock purchase plans 388,484 2 5,832 -
ESOP/401(k) plans 233,789 1 4,173 -
Woodward Marketing acq. 320,512 2 4,998 -
Public offering 1,380,000 6 18,893 -
Other - - 45 -
---------- ---- -------- --------
Balance, September 30, 1995 28,246,392 141 230,630 73,578
Net income - - - 41,151
Cash dividends ($.98 per share) - - - (28,478)
Common stock issued:
Restricted stock grant plan 41,700 1 733 -
Direct stock purchase plans 268,124 1 4,563 -
Outside directors stock-for-fee plan 3,389 - 76 -
ESOP 161,477 1 3,641 -
Monarch Gas Co acq. 207,366 1 1,499 933
Oceana Heights acq. 313,411 1 304 594
Other - - 212 -
---------- ---- -------- --------
Balance, September 30, 1996 29,241,859 146 241,658 87,778
(continued)
41
ATMOS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(continued)
Common stock
------------------- Additional
Number of Stated paid-in Retained
shares value capital earnings
---------- ------- -------- --------
(In thousands, except share data)
Balance, September 30, 1996 29,241,859 $146 $241,658 $ 87,778
Net income - - - 23,838
Cash dividends ($1.01 per share) - - - (26,415)
Common stock issued:
Restricted stock grant plan 100,000 1 2,443 -
Direct stock purchase plans 85,243 - 1,888 -
Outside directors stock-for-fee plan 3,008 - 72 -
ESOP/401(k) plans 212,327 1 5,113 -
Less: UCGC net income for the quarter
ended December 31, 1996 - - - (9,263)
---------- ------- -------- --------
Balance, September 30, 1997 29,642,437 $148 $251,174 $ 75,938
========== ======= ======== ========
See accompanying notes to consoli