UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
1800 Three Lincoln Centre
5430 LBJ Freeway, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 934-9227
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Number of shares outstanding of each of the issuer's classes of
common stock, as of August 3, 1998.
Class Shares Outstanding
----- ------------------
No Par Value 30,251,410
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
June 30, September 30,
1998 1997
------------ ------------
ASSETS
Property, plant and equipment $1,410,911 $1,332,672
Less accum. depreciation and amort. 522,631 483,545
---------- ----------
Net property, plant and equipment 888,280 849,127
Current assets
Cash and cash equivalents 8,288 6,016
Accounts receivable, net 40,229 71,217
Inventories of supplies and mdse. 14,701 12,333
Gas stored underground 30,065 48,122
Prepayments 5,195 6,017
---------- ----------
Total current assets 98,478 143,705
Deferred charges and other assets 130,080 95,479
---------- ----------
$1,116,838 $1,088,311
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock $ 151 $ 148
Additional paid-in capital 266,919 251,174
Retained earnings 111,324 75,938
---------- ----------
Total shareholders' equity 378,394 327,260
Long-term debt 249,859 302,981
---------- ----------
Total capitalization 628,253 630,241
Current liabilities
Current maturities of long-term debt 57,527 15,201
Notes payable to banks 169,250 167,300
Accounts payable 40,936 62,626
Taxes payable 19,234 416
Customers' deposits 12,961 15,098
Other current liabilities 43,544 52,582
---------- ----------
Total current liabilities 343,452 313,223
Deferred income taxes 87,636 87,828
Deferred credits and other liabilities 57,497 57,019
---------- ----------
$1,116,838 $1,088,311
========== ==========
See accompanying notes to condensed consolidated financial
statements.
- 2 -
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three months ended June 30,
-----------------------------
1998 1997
-------- --------
Operating revenues $137,311 $143,713
Purchased gas cost 79,945 84,167
-------- --------
Gross profit 57,366 59,546
Operating expenses
Operation 27,280 34,853
Maintenance 2,660 3,114
Depreciation and amortization 12,332 11,809
Taxes, other than income 7,212 7,295
Income taxes (benefit) 951 (2,124)
-------- --------
Total operating expenses 50,435 54,947
-------- --------
Operating income 6,931 4,599
Other income 2,536 824
Interest charges, net 7,791 8,442
-------- --------
Net income (loss) $ 1,676 $ (3,019)
======== ========
Basic net income (loss)
per share $ .06 $ (.10)
======== ========
Diluted net income (loss)
per share $ .06 $ (.10)
======== ========
Cash dividends per share $ .265 $ .252
======== ========
Weighted average
shares outstanding:
Basic 29,910 29,464
======== ========
Diluted 29,941 29,507
======== ========
See accompanying notes to condensed consolidated financial
statements.
- 3 -
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Nine months ended
June 30,
--------------------
1998 1997
-------- --------
Operating revenues $721,192 $786,974
Purchased gas cost 440,254 505,911
-------- --------
Gross profit 280,938 281,063
Operating expenses
Operation 96,548 116,588
Maintenance 7,429 8,852
Depreciation and amortization 36,116 34,874
Taxes, other than income 24,808 25,607
Income taxes 35,945 27,500
-------- --------
Total operating expenses 200,846 213,421
-------- --------
Operating income 80,092 67,642
Other income 5,540 3,926
Interest charges 26,436 25,806
-------- --------
Net income $ 59,196 $ 45,762
======== ========
Basic net income per share $ 1.99 $ 1.56
======== ========
Diluted net income per share $ 1.98 $ 1.55
======== ========
Cash dividends per share $ .795 $ .755
======== ========
Weighted average shares outstanding
Basic 29,739 29,361
======= ======
Diluted 29,948 29,506
======= ======
See accompanying notes to condensed consolidated financial
statements.
- 4 -
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine months ended
June 30,
-------------------
1998 1997
-------- --------
Cash Flows From Operating Activities
Net income $59,196 $ 45,762
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization
Charged to depreciation and
amortization 36,116 34,874
Charged to other accounts 4,327 2,870
Deferred income taxes (192) 5,412
Net change in operating assets and
liabilities (671) 8,852
-------- --------
Net cash provided by
operating activities 98,776 97,770
Cash Flows From Investing Activities
Capital expenditures (82,533) (81,969)
Retirements of property, plant and
equipment 2,937 (3,326)
-------- --------
Net cash used in investing activities (79,596) (85,295)
Cash Flows From Financing Activities
Net increase (decrease) in notes
payable to banks 1,950 (25,374)
Cash dividends paid (23,810) (22,221)
Issuance of long-term debt 1,000 40,000
Repayment of long-term debt (11,796) (13,510)
Issuance of common stock 15,748 7,080
-------- --------
Net cash used by financing activities (16,908) (14,025)
-------- --------
Net increase (decrease) in cash and
cash equivalents 2,272 (1,550)
Cash and cash equivalents at beginning
of period 6,016 8,757
-------- --------
Cash and cash equivalents at end
of period $ 8,288 $ 7,207
======== ========
See accompanying notes to condensed consolidated financial
statements.
- 5 -
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. Unaudited interim financial information
In the opinion of management, all material adjustments
necessary for a fair presentation have been made to the unaudited
interim period financial statements. Such adjustments consisted
only of normal recurring accruals. Because of seasonal and other
factors, the results of operations for the nine-month period
ended June 30, 1998 are not indicative of expected results of
operations for the year ending September 30, 1998. These interim
financial statements and notes are condensed as permitted by the
instructions to Form 10-Q, and should be read in conjunction with
the audited consolidated financial statements of Atmos Energy
Corporation ("Atmos" or the "Company") in its 1997 Annual Report
on Form 10-K. The condensed consolidated balance sheet of Atmos
as of June 30, 1998, the related condensed consolidated
statements of income for the three-month and nine-month periods
ended June 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the nine-month periods ended June
30, 1998 and 1997, included herein have been subjected to a
review by Ernst & Young LLP, the Company's independent
accountants, whose report is included herein.
Common stock - As of June 30, 1998, the Company had
75,000,000 shares of common stock, no par value (stated at $.005
per share), authorized and 30,216,559 shares outstanding. At
September 30, 1997 it had 29,642,437 shares outstanding.
2. Business Combination
As discussed in Note 2 of notes to consolidated financial
statements in the Company's Form 10-K for the year ended
September 30, 1997, on July 31, 1997, Atmos acquired by means of
a merger all of the assets and liabilities of United Cities Gas
Company ("UCGC"). The transaction was accounted for as a pooling
of interests. Therefore, financial statements for prior periods
have been restated to reflect the merger. Certain UCGC account
balances for prior periods have been reclassified to conform
UCGC's classifications to Atmos' presentation.
3. Rates
The Company's ratemaking activity over the three-year period
ended September 30, 1997 was discussed in Note 3 of notes to
consolidated financial statements in the Company's Form 10-K for
the year ended September 30, 1997. The status of such activity
at June 30, 1998 has not changed, except as discussed below.
- 6 -
In fiscal 1997, the Colorado Office of Consumer Counsel
filed a complaint with the Colorado Public Utilities Commission
("Colorado Commission") requesting a $3.5 million reduction in
the annual revenues in Colorado of Greeley Gas Company ("the
Greeley Gas Division"). On December 17, 1997, a hearing was held
at the Colorado Commission presenting a Stipulation and Agreement
reached by the Greeley Gas Division and the Colorado Office of
Consumer Counsel. It settled the Consumer Counsel's complaint
against the Greeley Gas Division for a $1.6 million reduction in
annual revenues. The Stipulation and Agreement became effective
in late January 1998. The reduction will decrease the estimated
annual gross profit of the Greeley Gas Division by approximately
4% and the gross profit of Atmos by approximately .5%.
4. Contingencies
For a review of the status of the Company's litigation and
environmental matters as of September 30, 1997, please refer to
Note 5 of notes to consolidated financial statements in the
Company's Form 10-K for the year ended September 30, 1997.
Material contingencies and new developments since September 30,
1997 are discussed below.
Litigation
On March 15, 1991, suit was filed in the 15th Judicial
District Court of Lafayette Parish, Louisiana, by the "Lafayette
Daily Advertiser" and others against Trans Louisiana Gas Company
("Trans La Division"), Trans Louisiana Industrial Gas Company,
Inc. ("TLIG"), a wholly owned subsidiary of the Company, and
Louisiana Intrastate Gas Corporation and certain of its
affiliates ("LIG"). LIG is the Company's primary supplier of
natural gas in Louisiana and is not otherwise affiliated with the
Company.
The plaintiffs purported to represent a class consisting of
all residential and commercial gas customers in the Trans La
Division's service area. Among other things, the lawsuit alleged
that the defendants violated the antitrust laws of the state of
Louisiana by manipulating the cost-of-gas component of the Trans
La Division's gas rate to the purported customer class, thereby
causing such purported class members to pay a higher rate. The
plaintiffs made no specific allegation of an amount of damages.
The case was concluded when the Court entered its final approval
of the settlement and the suit was dismissed with prejudice at a
fairness hearing on December 15, 1997.
In Colorado, the Greeley Gas Division is a defendant in
several lawsuits filed as a result of a fire in a building in
Steamboat Springs, Colorado on February 3, 1994. The plaintiffs
claim that the fire resulted from a leak in a severed gas service
line owned by the Greeley Gas Division. On January 12, 1996, the
jury awarded the plaintiffs approximately $2.5 million in
compensatory damages and approximately $2.5 million in punitive
damages. The jury assessed the Company with liability for all of
- 7 -
the damages awarded. The Company appealed the judgment to the
Colorado Court of Appeals. On June 11, 1998, the Colorado Court
of Appeals reversed the trial court verdict and ordered a new
trial.
In March 1997, Western Kentucky Gas Company ("Western
Kentucky Division") was named as a defendant in a lawsuit in the
District Court in Danville, Kentucky, as a result of an explosion
and fire at a residence in Danville, Kentucky on March 4, 1997.
The plaintiffs, Lisa Benedict, et al, who were leasing the
residence, suffered serious burns in the accident and have
alleged that the Western Kentucky Division was negligent in
installing and servicing gas lines at the residence. The
plaintiffs, who are also suing the landlord/owner of the house,
have asked for punitive damages and compensatory damages in the
case. A trial date of November 9, 1998 has been set. The
Company cannot assess, at this time, the likelihood of success in
this case. However, the Company believes it has adequate
insurance and reserves to cover any damages that may be awarded.
In November 1997, a jury in Plaquemine, Louisiana awarded
Brian L. Heard General Contractor, Inc., ("Heard") a total of
$177,929 in actual damages and $15 million in punitive damages
resulting from a lawsuit by Heard against the Trans La Division,
the successor in interest to Oceana Heights Gas Company, which
the Company acquired in November 1995. The trial judge also
awarded interest on the total judgment amount. The claims are
for events that occurred prior to the time the Company acquired
Oceana Heights Gas Company. Heard claimed damages associated
with delays he allegedly incurred in constructing a sewer system
in Iberville Parish, Louisiana. Heard filed the suit against the
Trans La Division and two other defendants, alleging that gas
leaks had caused delays in Heard s completion of a sewer project,
resulting in lost business opportunities for the contractor
during 1994. The Company believes that the gas leaks claimed in
the lawsuit were minor leaks, common in normal operations of gas
systems, and were repaired in accordance with standard industry
practices and did not cause the damages claimed.
The jury awarded punitive damages under a prior Louisiana
statute that allowed punitive damages to be awarded in cases
involving hazardous substances, which, as defined in the statute,
included natural gas. Although not retroactive, the Louisiana
legislature repealed the statute in 1996. The Company does not
believe that punitive damages are applicable in the case and
should not be awarded because there were no direct damages caused
by natural gas. The Company is appealing the verdict and
aggressively pursuing the reversal of the judgment. However, the
Company cannot assess, at this time, the likelihood of the
judgment being reversed on appeal. The Company is still in the
process of reviewing its insurance coverage with respect to this
case. However, the Company does not expect the final outcome of
this case to have a material adverse effect on the financial
condition, results of operations or net cash flows of the
Company.
- 8 -
From time to time, other claims are made and lawsuits are
filed against the Company arising out of the ordinary business of
the Company. In the opinion of the Company's management,
liabilities, if any, arising from these other claims and lawsuits
are either covered by insurance, adequately reserved for by the
Company or would not have a material adverse effect on the
financial condition, results of operations, or net cash flows of
the Company.
Environmental Matters
The United Cities Division owned a former manufactured gas
plant site in Americus, Georgia. On May 14, 1997, the Georgia
Environmental Protection Division requested that UCGC enter into
a proposed voluntary consent order for the remediation of the
Americus site. Subsequently, the other responsible parties at
the site advised UCGC that they would be willing to enter into a
"cashout" settlement for a one-time payment by the Company of
$250,000. A Settlement Agreement wherein the Company agreed to
pay $250,000 for a "cashout" settlement was entered into by the
parties on December 16, 1997. The agreement contains a Covenant
not to sue, an indemnification provision from the other parties
and gives the other parties all responsibility for investigation
and environmental response actions of the site. As of June 30,
1998, the Company had paid $250,000 pursuant to the Settlement
Agreement and deferred such amount for future recovery.
Atmos has requested an Accounting Authority Order from the
Missouri Public Service Commission that would authorize it to
defer its response costs related to the Company's former
manufactured gas plant located in Hannibal, Missouri. On July 7,
1998, the Commission Staff recommended that the Commission
approve the application.
On July 22, 1998, Atmos entered into an Abatement Order on
Consent with the Missouri Department of Natural Resources
addressing the former manufactured gas plant located in Hannibal,
Missouri. Atmos, through its United Cities Gas Company division,
agrees in the Order to perform a removal action, a subsequent
site evaluation and to reimburse the response costs incurred by
the State of Missouri in connection with the property.
The Company addresses other environmental matters from time
to time in the regular and ordinary course of its business.
Management expects that future expenditures related to response
action at any site will be recovered through rates or insurance,
or shared among other potentially responsible parties.
Therefore, the costs of responding to these sites are not
expected to materially affect the financial condition, results of
operations, or net cash flows of the Company.
5. Short-term debt
At June 30, 1998, the Company had committed, short-term,
unsecured bank credit facilities totaling $187,000,000, of which
- 9 -
$75,000,000 was unused. The Company also had aggregate
uncommitted lines of credit totaling $130,000,000, of which
$78,000,000 was unused.
6. Statements of cash flows
Supplemental disclosures of cash flow information for the
nine-month periods ended June 30, 1998 and 1997 are presented
below.
Nine months ended
June 30,
1998 1997
------ ------
(In thousands)
Cash paid for
Interest $31,491 $26,168
Income taxes 14,880 12,201
7. Earnings per share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the
Statement 128 requirements. Adoption of Statement 128 did not
change the fully diluted earnings per share amounts for the
three-month and nine-month periods ended June 30, 1997.
Reconciliations of the numerators and denominators of the basic
and diluted per-share computations for net income for the three-
month and nine-month periods ended June 30, 1998 and 1997 are as
follows:
- 10 -
For the three months ended
June 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands)
Basic EPS:
Income available to
common stockholders $ 1,676 29,910 $ 0.06
=======
Effect of dilutive securities:
Restricted stock - 24
Stock options - 7
------- ------
Diluted EPS:
Income available to
common stockholders and
assumed conversions $ 1,676 29,941 $ 0.06
======= ====== =======
For the three months ended
June 30, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands)
Basic EPS:
Income (loss)available to
common stockholders $(3,019) 29,464 $(.10)
======
Effect of dilutive securities:
Restricted stock - 26
Stock options - 17
------- ------
Diluted EPS:
Income (loss) available to
common stockholders and
assumed conversions $(3,019) 29,507 $(.10)
======= ====== ======
- 11 -
For the nine months ended
June 30, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands)
Basic EPS:
Income available to common
stockholders $59,196 29,739 $1.99
=====
Effect of dilutive securities:
Restricted stock - 195
Stock options - 14
------- ------
Diluted EPS:
Income available to common
stockholders and assumed
conversions $59,196 29,948 $1.98
======= ====== =====
For the nine months ended
June 30, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands)
Basic EPS:
Income available to common
stockholders $45,762 29,361 $1.56
=====
Effect of dilutive securities:
Restricted stock - 128
Stock options - 17
------- ------
Diluted EPS:
Income available to common
stockholders and assumed
conversions $45,762 29,506 $1.55
======= ====== =====
8. Subsequent event
In July 1998, the Company closed funding on a $150,000,000 debt
offering of its debentures which mature in 2028. This is the first public
debt program in which Atmos has been engaged. The coupon rate for the
debentures is 6.75%, and the net interest cost to Atmos is 6.89%. Net
proceeds were used to repay Atmos' short-term debt. These debt securities
were issued subsequent to June 30, 1998 and are not reflected in the
accompanying financial statements.
- 12 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Atmos Energy Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Atmos Energy Corporation as of June 30, 1998, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended June 30, 1998 and 1997 and the condensed consolidated statements of
cash flows for the nine-month periods ended June 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements at June 30, 1998, and for the three-month and nine-month periods
ended June 30, 1998 and 1997 for them to be in conformity with generally ac-
cepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Atmos Energy Corporation as of
September 30, 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated November 11, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of September 30, 1997, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from
which it has been derived.
ERNST & YOUNG LLP
Dallas, Texas
July 23, 1998
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the
condensed consolidated financial statements contained in this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis contained in
the Company's 1997 Annual Report to Shareholders and the Company's Annual
Report on Form 10-K for the year ended September 30, 1997.
The Company distributes and sells natural gas and propane to
residential, commercial, industrial and agricultural customers in thirteen
states. Such 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,
competitive factors within the energy industry, and economic conditions in
the areas that the Company serves.
Cautionary Statement under the Private Securities Litigation Reform Act of
1995
The matters discussed or incorporated by reference in this Quarterly
Report on Form 10-Q 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 Quarterly Report including, but not
limited to, those contained in the following sections, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
and Note 4 of notes to condensed 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. When used in this
Report or in any of the Company's other documents or oral presentations, the
words "anticipate," "report," "objective," "forecast," "goal" or similar
words are intended to identify forward-looking statements. Such forward-
looking statements are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
statements relating to 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, national, regional
and local economic competitive conditions, regulatory and business trends
and decisions, technological developments, Year 2000 issues, inflation
rates, weather conditions, and other uncertainties, all of which are
difficult to predict and many of which are beyond the control of the
Company. Accordingly, while the Company believes these forward-looking
statements to be reasonable, there can be no assurance that they will
approximate actual experience or that the expectations derived from them
will be realized.
Ratemaking Activity
In December 1997, the Company and the Colorado Office of Consumer
Counsel presented a Stipulation and Agreement to the Colorado Commission to
settle the Consumer Counsel's $3.5 million rate reduction complaint against
- 14 -
the Greeley Gas Division. It was approved by the Colorado Commission,
effective in late January 1998. The Stipulation and Agreement provides for
a reduction of approximately $1.6 million in annual revenues in Colorado.
The reduction will decrease the estimated annual gross profit of the Greeley
Gas Division by approximately 4% and the gross profit of Atmos by
approximately .5%.
Year 2000 Related Issues
The Year 2000 problem is the result of computer programs written using
two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations, including,
among other things the inability to process transactions, send invoices, or
engage in similar normal business activities. The Year 2000 problem
threatens to cause disruption to essential government services,
telecommunications, and other essential industries, and creates a risk of
commercial disruption even for companies that have completely corrected
their own computer programs.
In October 1996, the Company established its Year 2000 Project Team
with the mission of ensuring that all critical systems, facilities and
processes are identified, analyzed for Year 2000 compliance, corrected if
necessary, and tested if changes are necessary. The Year 2000 Project Team
consists of representatives from all business units and several strategic
departments of the Company. The Board of Directors of the Company receives
regular briefings regarding the Year 2000 problem from the Year 2000 Project
Team. The Company, including all of its departments and business units, has
a Year 2000 strategy in place and has begun the implementation of the Year
2000 plan to manage and minimize its Year 2000 risks. For example, the
Company has completed awareness presentations and conducted internal
interviews with personnel across the Company concerning the Year 2000
problem.
The Company has also obtained an assessment from an outside consulting
firm who specializes in such matters of the risks posed for it and its
business units by the Year 2000 problem, including an assessment of its
risks in every area involving the use of computer technology and an
assessment of the business and legal risks created for the Company by the
Year 2000 problem. Such assessment also includes the risks associated with
the Company's so-called embedded technologies such as microcontrollers or
microchips embedded in non-information technology-related equipment. For
example, the Company's utility business units own remote terminal units
that measure and monitor the flow of natural gas through their gas systems.
The Company is also participating in a study being conducted nationally by
an engineering firm with respect specifically to embedded technologies.
The Company has conducted an inventory of and is evaluating and
reviewing its application software on all platforms such as the mainframe,
local area network and personal computers. In addition, the Company has
also conducted an inventory of and is reviewing and evaluating all of its
system software, networks, telecommunications, security access and building
control systems, forms, reports and other business processes and activities
as well as the equipment and facilities utilized in the Company's gas
- 15 -
distribution and storage systems. The Company is also conducting a review of
its insurance coverage as it may be affected by the Year 2000 problem.
The Company's Year 2000 plan includes specific timetables for
categories of tasks for each of its departments and business units as
follows: (a) Identification of Year 2000 issues--substantially completed;
(b) Prioritization of Year 2000 issues--substantially completed; (c)
Implementation of Year 2000 solutions--in process and due by December 31,
1998; (d) Testing of Year 2000 solutions--in process and due by December 31,
1999; (e) Certification of Year 2000 compliance by third party vendors and
suppliers--in process and due by December 31, 1999; (f) Monitoring of all
systems for changes in current systems that would require changes in Year
2000 plan--in process and due by December 31, 1999; and (g) Development of
Year 2000 contingency plans--in process and due by October 31, 1998.
The Company is also currently in the process of conducting an inventory
and review of computer systems provided by outside vendors. The Year 2000
Project Team is contacting all vendors to coordinate their Year 2000
compliance schedules with those of the Company. The Company is requiring
vendors who provide mission critical goods or services to submit to the
Company their compliance plans and to certify compliance in order to
continue to do business with the Company. As discussed above, the Company
is also in the process of testing vendor products that provide mission
critical goods or services to ensure their Year 2000 compliance. In
addition, the Company has identified its key suppliers, including gas
suppliers, and is communicating with them for the purpose of evaluating the
status of their solutions to their respective Year 2000 problems.
As of June 30, 1998, the Company had incurred a total of less than
$100,000 in fees and expenses in connection with its Year 2000 efforts. The
Company currently expects to spend no more than $500,000 on its Year 2000
efforts by December 31, 1999. At the present time, the Company does not
expect that such expenditures will have a material impact on the Company's
business, results of operations, or financial condition.
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. Weather for the nine
months ended June 30, 1998 was 4% warmer than normal and 2% warmer than
weather in the corresponding period of the prior year. This caused sales
volumes to weather sensitive customers to decrease 3.9 billion cubic feet
("Bcf") or 3.6%. The Company has weather normalization adjustments ("WNAs")
in Georgia and Tennessee, where it serves approximately 170,000 customers or
approximately 53% of the United Cities Division's total customers and
revenues. The WNAs increase the base rate when weather is warmer than
normal and decrease it when weather is colder than normal. The effect of
- 16 -
the WNAs was to increase revenues approximately $.7 million for the nine
months ended June 30, 1998, as compared with an increase of approximately
$2.6 million for the nine-month period ended June 30, 1997. The Company
does not have WNAs in its other service areas.
FINANCIAL CONDITION
For the nine months ended June 30, 1998 net cash provided by operating
activities totaled $98.8 million compared with $97.8 million for the nine
months ended June 30, 1997. Net income increased $13.4 million to $59.2
million for the nine months ended June 30, 1998 from $45.8 million for the
nine months ended June 30, 1997. Depreciation and amortization increased
$2.7 million in 1998 because of utility property additions placed in service
during the past year. Net operating assets and liabilities increased $.7
million for the nine months ended June 30, 1998 compared with a decrease of
$8.9 million for the nine months ended June 30, 1997. This decrease in net
operating assets and liabilities resulted primarily from large fluctuations
in accounts receivable, accounts payable and inventories of gas in
underground storage that occur when entering and leaving the winter or
heating season. It also reflected an increase of $34.6 million in deferred
charges and other assets related to costs incurred in connection with the
Company's customer service initiative and the integration of the United
Cities Division into Atmos.
Major cash flows used in investing activities for the nine months ended
June 30, 1998 included capital expenditures of $82.5 million compared with
$82.0 million for the nine months ended June 30, 1997. The capital
expenditures budget for fiscal 1998 is currently $109.1 million, including
$37.0 million for completing the Customer Service Initiative ("CSI"), as
compared with actual capital expenditures of $122.3 million in fiscal 1997.
Other budgeted capital projects include major expenditures for mains,
services, meters, vehicles and computer software and equipment. The CSI
project includes a new Customer Information System, a call center, and
related business process and infrastructure changes which are planned to be
placed in operation in fiscal 1998 and 1999. These expenditures will be
financed from internally generated funds and financing activities.
For the nine months ended June 30, 1998, cash flows used by financing
activities amounted to $16.9 million as compared with $14.0 million for the
nine months ended June 30, 1997. During the nine month period, notes
payable to banks increased $2.0 million, as compared with a decrease of
$25.4 million in the nine months ended June 30, 1997, due to seasonal
factors and the refinancing of short-term debt with proceeds from the
issuance of $40.0 million of long-term debt in the quarter ended December
31, 1996. The debt issued in November 1996 consisted of $40.0 million of
6.09% term notes, payable in November 1998. Payments of long-term debt
totaled $11.8 million for the nine months ended June 30, 1998. Such
payments consisted of a $3.0 million installment on the Company's 9.76%
Senior Notes, a $2.0 million installment on the Company's 11.2% Senior
Notes, an installment of $2.0 million on the Company's 8.69% Series N First
Mortgage Bonds, an installment of $2.1 million on the Company's 11.32%
Series R First Mortgage Bonds, and installments totaling $2.7 million on
various non-utility notes. The Company paid $23.8 million in cash dividends
during the nine months ended June 30, 1998, compared with dividends of $22.2
million paid during the nine months ended June 30, 1997. This reflects
- 17 -
increases in the quarterly dividend rate and in the number of shares
outstanding. In the nine months ended June 30, 1998, the Company issued
574,122 shares of common stock, of which 32,235 were for the Employee Stock
Ownership Plan ("ESOP"), 373,401 were for the Direct Stock Purchase Plan
("DSPP"), 1,736 for the Outside Directors Stock-for-Fee Plan, 111,250 for
the Restricted Stock Grant Plan and 55,500 pursuant to the exercise of stock
options under the Long Term Stock Plan for the United Cities Division. In
the nine months ended June 30, 1997, the Company issued 264,085 shares of
common stock under its various plans.
The Company believes that internally generated funds, its short-term
credit facilities and access to the debt and equity capital markets will
provide necessary working capital and liquidity for capital expenditures and
other cash needs for the remainder of fiscal 1998. At June 30, 1998 the
Company had $187.0 million in committed short-term credit facilities, $75.0
million of which was unused. The committed lines of credit are renewed or
renegotiated at least annually. At June 30, 1998, the Company also had
$130.0 million of uncommitted short-term lines of credit, of which $78.0
million was unused.
Subsequent to June 30, 1998, the Company issued a total of $150,000,000
in unsecured debentures in the form of a global debenture certificate at an
annual coupon interest rate of 6 3/4% with a maturity of 30 years (the
"Debentures"). The Debentures are unsecured obligations of the Company and
will rank equally and ratably with all other unsecured indebtedness of the
Company. The net proceeds from the sale of the Debentures will be used for
the repayment of short-term debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998, COMPARED WITH THREE MONTHS ENDED JUNE 30,
1997
Operating revenues decreased by 4% to $137.3 million for the three
months ended June 30, 1998 from $143.7 million for the three months ended
June 30, 1997. The most significant factor contributing to the decrease in
operating revenues was a 12% decrease in sales volumes. During the quarter
ended June 30, 1998, temperatures were 34% warmer than in the corresponding
quarter of the prior year, and were 4% warmer than the 30-year normal
weather for the quarter. The total volume of gas sold and transported for
the three months ended June 30, 1998 was 38.3 billion cubic feet ("Bcf")
compared with 39.8 Bcf for the three months ended June 30, 1997. Sales
volumes to weather sensitive customer classes were lower for the quarter
ended June 30, 1998 than for the corresponding period of the prior year due
to the warmer weather. Sales volumes to industrial (including agricultural)
customers increased due to higher demand by agricultural customers. The
average sales price per Mcf sold increased $.30 to $5.01 primarily due to an
increase in the average cost of gas. The average cost of gas per Mcf sold
increased 8% to $3.24 for the three months ended June 30, 1998 from $2.99
for the three months ended June 30, 1997 due to decreased supply
availability in the current market.
Gross profit decreased by 4% to $57.4 million for the three months
ended June 30, 1998, from $59.5 million for the three months ended June 30,
1997. The decrease in gross profit was primarily due to the decrease in
- 18 -
volumes sold to weather sensitive customers. The reduced sales to weather-
sensitive customers more than offset increased sales to agricultural
customers and increased transportation revenues. Changes in cost of gas do
not directly affect gross profit.
Operating expenses, excluding income taxes, decreased 13% to $49.5
million for the three months ended June 30, 1998 from $57.1 million for the
three months ended June 30, 1997. The major factors contributing to the
decrease in operation and maintenance expenses in the 1998 quarter were
savings from restructuring and the integration of United Cities, as well as
higher administrative and general expenses in the 1997 quarter. The
decrease in taxes other than income taxes was related to taxes on decreased
revenues and payroll taxes related to the reduced labor force. Operating
income increased 51% for the three months ended June 30, 1998 to $6.9
million from $4.6 million for the three months ended June 30, 1997. The
increase in operating income resulted from decreased operating expenses, as
mentioned above. Income taxes increased $3.1 million in the quarter ended
June 30, 1998 compared with the corresponding quarter of the prior year due
primarily to increased pre-tax income.
Other income increased $1.7 million for the three months ended June 30,
1998 compared with the three months ended June 30, 1997 primarily due to an
increase in the earnings from the Company's 45 percent interest in Woodward
Marketing LLC and a gain of approximately $.5 million on the sale of an
airplane owned by UCGC.
Interest expense decreased $.7 million, or 8%, for the three months
ended June 30, 1998 compared with the three months ended June 30, 1997 due
primarily to approximately $1.0 million of interest capitalized in
connection with the Customer Service Initiative in process. Net income
increased for the three months ended June 30, 1998 by $4.7 million from a
loss of $3.0 million for the three months ended June 30, 1997. This
increase in net income resulted primarily from the decrease in operating
expenses discussed above.
NINE MONTHS ENDED JUNE 30, 1998, COMPARED WITH NINE MONTHS ENDED JUNE 30,
1997
Operating revenues decreased by 8% to $721.2 million for the nine
months ended June 30, 1998 from $787.0 million for the nine months ended
June 30, 1997. Factors contributing to the lower operating revenues were a
5% decrease in the sales volumes and a 5% decrease in the gas sales revenues
per Mcf. Total volumes delivered decreased only 1% for the nine months
ended June 30, 1998. However, the volume of gas sold decreased 5% or 7.4
Bcf and the volume transported increased 6.0 Bcf compared with the nine
months ended June 30, 1997. This switching of industrial sales customers to
transportation service reduced gross revenues and purchased gas cost. Sales
volumes to weather sensitive customer classes decreased 3.9 Bcf for the nine
months ended June 30, 1998 compared with the corresponding period of the
prior year due to 2% warmer weather. Sales volumes to industrial (including
agricultural) customers were reduced by industrial sales customers switching
to transportation service. Weather in the Company's service areas was 2%
warmer than weather in the corresponding nine-month period of the prior
fiscal year, and it was 4% warmer than 30-year normal weather. The average
sales price per Mcf decreased to $4.91 for the nine months ended June 30,
- 19 -
1998 from $5.16 for the nine months ended June 30, 1997. The decrease in
the average sales price reflects a decrease in the average cost of gas,
partially offset by rate increases. The average cost of gas per Mcf sold
decreased to $3.28 for the nine months ended June 30, 1998 from $3.57 for
the nine months ended June 30, 1997 because of generally lower gas supply
costs.
Gross profit decreased less than 1% to $280.9 million for the nine
months ended June 30, 1998, compared with $281.1 million for the nine months
ended June 30, 1997. The decrease in gross profit due to reduced sales to
weather-sensitive customers was mostly offset by increased sales to
agricultural customers, increased transportation volumes, an increase of
$.08 for the average transportation revenue per Mcf and rate increases in
Texas, Georgia and Illinois.
Operating expenses, excluding income taxes, decreased to $164.9 million
in the nine months ended June 30, 1998, from $185.9 million in the nine
months ended June 30, 1997. The decrease included $20.0 million in
operation expense, $1.4 million in maintenance and $.8 million in taxes
other than income. The principal factors contributing to the decrease in
operation and maintenance expenses were savings realized in connection with
integration and reorganization initiatives and the administrative and
general expenses incurred in the nine months ended June 30, 1997 in
connection with management reorganization. The increase in depreciation
related to utility plant additions placed in service during the past year.
Significant factors in the decrease in taxes other than income taxes were
lower taxes on decreased revenues and payroll taxes related to the reduced
labor force. The provision for income taxes for the nine months ended June
30, 1998 increased $8.4 million from the provision for the corresponding
period of the prior year due to increased pre-tax income. Operating income
increased for the six months ended June 30, 1998 to $80.1 million from $67.6
million for the nine months ended June 30, 1997. The increase in operating
income was primarily related to the decreased operating expenses.
Other income increased $1.6 million for the nine months ended June 30,
1998 compared with the nine months ended June 30, 1997, due primarily to an
increase in the earnings of Woodward Marketing LLC and a gain of
approximately $.5 million on the sale of UCGC's airplane.
Interest charges increased $.6 million, or 2%, due to an increased
amount of debt outstanding during the nine months ended June 30, 1998
compared with the corresponding nine-month period of the prior year. The
Company has capitalized approximatley $3.1 million of interest in connection
with the Customer Service initiative during the nine months ended June 30,
1998. Net income increased 29% for the nine months ended June 30, 1998, to
$59.2 million from $45.8 million for the nine months ended June 30, 1997.
The increase in net income resulted primarily from the decrease in operating
expenses. Dividends per share increased approximately 5% to $.795 for the
nine months ended June 30, 1998. Diluted average shares outstanding
increased 2% primarily due to shares issued under the Direct Stock Purchase
Plan and the Restricted Stock Grant Plan.
- 20 -
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 the
nine-month periods ended June 30, 1998 and 1997. Prior periods have been
restated to reflect the pooling of interests with UCGC on July 31, 1997.
Utility Non-utility Total
------- ----------- ---------
Nine months ended June 30: (In thousands)
1998
Operating revenues $687,686 $33,506 $721,192
Net income 54,413 4,783 59,196
1997
Operating revenues $749,987 $36,987 $786,974
Net income 42,608 3,154 45,762
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.
The non-utility business includes the operations of UCG Storage and UCG
Energy, which includes a 45% interest in Woodward Marketing LLC, Atmos
Propane, and leasing of real estate, vehicles and appliances. The net
income for such operations for the nine-month periods ended June 30, 1998
and 1997 are recapped below:
Nine months ended June 30,
1998 1997
------ --------
(In thousands)
Non-utility net income:
Atmos Propane $ 465 $ 536
Woodward Marketing 2,341 1,593
Leasing and rental 1,207 819
Storage and other 770 206
------ -------
Total $4,783 $3,154
====== =======
Atmos Propane sells and transports propane to both wholesale and retail
customers. Propane statistics for the nine-month periods ended June 30,
1998 and 1997 are included in the "Consolidated Operating Statistics" table
which appears at the end of Management's Discussion and Analysis. The
division sold 27.7 million gallons of propane for the nine-month period
ended June 30, 1998, as compared with 26.9 million gallons for the nine-
month period ended June 30, 1997. The decrease of $3.6 million in propane
revenues for the nine months ended June 30, 1998 compared with the same
period last year was the result of a lower average sales price due to
comparatively lower cost of supply to the division.
- 21 -
Total customers of the Company at June 30, 1998 increased 19,187, or
2%, compared with June 30, 1997.
June 30,
--------------------------
1998 1997
------------ -----------
Meters-in-service at end of period
Residential 888,015 871,409
Commercial 95,355 93,457
Public authority and other 4,841 4,777
Industrial (including agricultural) 16,399 17,302
--------- ----------
Total natural gas meters 1,004,610 986,945
Propane customers 30,619 29,097
--------- ----------
Total 1,035,229 1,016,042
========= ==========
- 22 -
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
Quarter ended June 30,
1998 1997
Sales volumes -- MMcf(1) ------- -------
Residential 8,206 11,136
Commercial 4,608 5,789
Public authority and other 438 718
Industrial (including agricultural) 11,443 10,471
------- -------
Total 24,695 28,114
Transportation volumes -- MMcf(1) 13,644 11,674
------- -------
Total volumes delivered 38,339 39,788
======= =======
Propane - Gallons (000's) 3,462 3,176
======= =======
Gas sales revenues (000's):
Residential $ 56,643 $ 65,029
Commercial 26,110 28,591
Public authority and other 2,669 3,254
Industrial (including agricultural) 38,303 35,579
-------- --------
Total gas revenues 123,725 132,453
Transportation revenues 7,507 4,563
Other revenues 1,249 1,822
-------- --------
Total utility revenues 132,481 138,838
Non-utility revenues:
Propane revenues 2,720 2,786
Other revenues 2,110 2,089
-------- --------
Total non-utility revenues 4,830 4,875
-------- --------
Total operating revenues $137,311 $143,713
======== ========
Average Gas Sales Revenues per Mcf $ 5.01 $ 4.71
Average Transportation Revenue per Mcf $ .55 $ .39
Cost of Gas per Mcf Sold $ 3.24 $ 2.99
HEATING DEGREE DAYS
Service Weather Sensitive Quarter ended June 30,
Area Customers % 1998 1997 Normal
- -------------- ----------- ----- ----- ------
Energas 30% 271 406 227
Trans La 8% 74 102 42
Western Kentucky 18% 259 482 336
Greeley Gas 11% 743 852 779
United Cities 33% 275 473 314
----
System Average 100% 304 463 318
(1) Volumes are reported as metered in million cubic feet ("MMcf").
- 23 -
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
Nine months ended June 30,
1998 1997
Sales volumes -- MMcf(1) ------- -------
Residential 68,077 70,011
Commercial 32,060 33,754
Public authority and other 4,504 4,767
Industrial (including agricultural) 29,762 33,270
------- -------
Total 134,403 141,802
Transportation volumes -- MMcf(1) 42,733 36,758
------- -------
Total volumes delivered 177,136 178,560
======= =======
Propane - Gallons (000's) 27,742 26,881
======= =======
Gas sales revenues (000's):
Residential $367,208 $405,770
Commercial 162,192 178,630
Public authority and other 18,275 23,115
Industrial (including agricultural) 112,543 124,035
-------- --------
Total gas revenues 660,218 731,550
Transportation revenues 20,763 14,923
Other revenues 6,705 5,335
-------- --------
Total utility revenues 687,686 751,808
Non-utility revenues:
Propane revenues 24,538 28,161
Other revenues 8,968 7,005
-------- --------
Total non-utility revenues 33,506 35,166
-------- --------
Total operating revenues $721,192 $786,974
======== ========
Average Gas Sales Revenues per Mcf $ 4.91 $ 5.16
Average Transportation Revenue per Mcf $ .49 $ .41
Cost of Gas per Mcf Sold $ 3.28 $ 3.57
HEATING DEGREE DAYS
Service Weather Sensitive Nine months ended June 30,
Area Customers % 1998 1997 Normal
- -------------- ----------- ----- ----- ------
Energas 30% 3,665 3,534 3,513
Trans La 8% 1,725 1,523 1,771
Western Kentucky 18% 3,768 4,166 4,304
Greeley Gas 11% 5,893 6,089 6,092
United Cities 33% 3,778 3,962 4,040
----
System Average 100% 3,790 3,884 3,949
(1) Volumes are reported as metered in million cubic feet ("MMcf").
- 24 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of notes to consolidated financial statements herein for a
description of legal proceedings.
Item 5. Other Information
In the event a shareholder intends to present a proposal at the 1999 Annual
Meeting of Shareholders, it must be received at the offices of the Company
no later than August 31, 1998 for inclusion in the Company's Proxy Statement
relating to such meeting. In addition, the Company intends to exercise
discretionary voting authority granted under any proxy with respect to any
matters that may properly come before the meeting, unless written notice of
the matter is received by the Company at its offices no earlier than
November 17, 1998 and no later than December 12, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
A list of exhibits required by Item 601 of Regulation S-K and filed
as part of this report is set forth in the Exhibits Index, which
immediately precedes such exhibits.
(b) Reports on Form 8-K
None.
- 25 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATMOS ENERGY CORPORATION
(Registrant)
Date: August 12, 1998 By: /s/ David L. Bickerstaff
------------------------------
David L. Bickerstaff
Vice President and Controller
(Chief Accounting Officer and
duly authorized signatory)
- 26 -
EXHIBITS INDEX
Item 6(a)
Exhibit Page
Number Description Number
------- ----------- -------
15 Letter regarding unaudited interim
financial information
27.1 Financial Data Schedule for Atmos
Energy Corporation for the nine
months ended June 30, 1998
27.2 Amended Financial Data Schedule for
Atmos Energy Corporation for the
nine months ended June 30, 1997
27.3 Amended Financial Data Schedule for
Atmos Energy Corporation for the six
months ended March 31, 1998
- 27 -