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 December 31, 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 February 1, 1999.
Class Shares Outstanding
----- ------------------
No Par Value 30,653,887
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
December 31, September 30,
1998 1998
------------- -------------
ASSETS
Property, plant and equipment $1,466,670 $1,446,420
Less accum. depreciation and amort. 542,466 528,560
---------- ----------
Net property, plant and equipment 924,204 917,860
Current assets
Cash and cash equivalents 14,720 4,735
Accounts receivable, net 118,309 34,887
Inventories of supplies and mdse. 14,815 15,219
Gas stored underground 49,746 48,909
Prepayments 3,508 3,630
---------- ----------
Total current assets 201,098 107,380
Deferred charges and other assets 120,751 116,150
---------- ----------
$1,246,053 $1,141,390
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock $ 153 $ 152
Additional paid-in capital 278,174 271,637
Retained earnings 106,509 99,369
---------- ----------
Total shareholders' equity 384,836 371,158
Long-term debt 390,426 398,548
---------- ----------
Total capitalization 775,262 769,706
Current liabilities
Current maturities of long-term debt 17,961 57,783
Notes payable 167,994 66,400
Accounts payable 80,786 44,742
Taxes payable 12,783 12,736
Customers' deposits 11,470 12,029
Other current liabilities 25,363 30,369
---------- ----------
Total current liabilities 316,357 224,059
Deferred income taxes 82,393 80,213
Deferred credits and other liabilities 72,041 67,412
---------- ----------
$1,246,053 $1,141,390
========== ==========
See accompanying notes to condensed consolidated financial
statements.
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three months ended December 31,
-------------------------------
1998 1997
-------- --------
Operating revenues $210,227 $295,331
Purchased gas cost 119,019 195,730
-------- --------
Gross profit 91,208 99,601
Operating expenses
Operation 35,878 36,041
Maintenance 2,671 2,481
Depreciation and amortization 13,600 11,908
Taxes, other than income 7,371 8,219
-------- --------
Total operating expenses 59,520 58,649
-------- --------
Operating income 31,688 40,952
Other income 1,720 763
Interest charges, net 9,073 9,309
-------- --------
Income before income taxes 24,335 32,406
Income taxes 8,955 12,284
-------- --------
Net income $ 15,380 $ 20,122
======== ========
Basic net income per share $ .51 $ .68
======== ========
Diluted net income per share $ .50 $ .68
======== ========
Cash dividends per share $ .275 $ .265
======== ========
Weighted average
shares outstanding:
Basic 30,273 29,569
======== ========
Diluted 30,516 29,749
======== ========
See accompanying notes to condensed consolidated financial
statements.
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three months ended
December 31,
--------------------
1998 1997
-------- --------
Cash Flows From Operating Activities
Net income $ 15,380 $ 20,122
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization
Charged to depreciation and
amortization 13,600 11,908
Charged to other accounts 1,020 801
Deferred income taxes 2,180 (173)
Net change in operating assets and
liabilities (53,027) (48,476)
-------- --------
Net cash used by operating activities (20,847) (15,818)
Cash Flows From Investing Activities
Capital expenditures (19,900) (24,525)
Retirements of property, plant and
equipment (1,064) 197
-------- --------
Net cash used in investing activities (20,964) (24,328)
Cash Flows From Financing Activities
Net increase in notes payable 101,594 51,807
Cash dividends paid (8,392) (7,890)
Repayment of long-term debt (47,944) (6,126)
Issuance of common stock 6,538 5,390
-------- --------
Net cash provided by
financing activities 51,796 43,181
-------- --------
Net increase in cash and cash equivalents 9,985 3,035
Cash and cash equivalents at beginning
of period 4,735 6,016
-------- --------
Cash and cash equivalents at end
of period $ 14,720 $ 9,051
======== ========
See accompanying notes to condensed consolidated financial
statements.
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 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 three-month period
ended December 31, 1998 are not indicative of expected results of
operations for the year ending September 30, 1999. 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 1998 Annual Report
on Form 10-K. The condensed consolidated balance sheet of Atmos
as of December 31, 1998, the related condensed consolidated
statements of income for the three-months ended December 31, 1998
and 1997, and the condensed consolidated statements of cash flows
for the three-months ended December 31, 1998 and 1997, included
herein have been subjected to a review by Ernst & Young LLP, the
Company's independent accountants, whose review report is included
herein.
Common stock - As of December 31, 1998, the Company had
75,000,000 shares of common stock, no par value (stated at $.005
per share), authorized and 30,624,356 shares outstanding. At
September 30, 1998, the Company had 30,398,319 shares outstanding.
2. Rates
The Company's ratemaking activity over the three-year period
ended September 30, 1998 was discussed in Note 3 of notes to
consolidated financial statements in the Company's Form 10-K for
the year ended September 30, 1998. The status of ratemaking
activity has not changed since September 30, 1998.
3. Contingencies
For a review of the status of the Company's litigation and
environmental matters as of September 30, 1998, please refer to
Note 5 of notes to consolidated financial statements in the
Company's Form 10-K for the year ended September 30, 1998.
Material contingencies and new developments since September 30,
1998 are discussed below.
Litigation
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 $15.0 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 Atmos 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 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 has
appealed the verdict and intends to aggressively pursue obtaining
reversal of the judgment. However, the Company cannot assess, at
this time, the likelihood of the judgment being reversed on
appeal. The Company is in the process of reviewing its insurance
coverage with respect to this case. To date, the insurance
companies have denied coverage and one company has filed a
declaratory action to determine its obligations under the policy.
The Company does not expect the final outcome of this case to have
a material adverse effect on the financial condition, the results
of operations or cash flows of the Company, because in the
Company's opinion, it is more likely than not that the amount of
punitive damages ultimately awarded will be substantially reduced.
In Colorado, the Greeley 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 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 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. The plaintiffs appealed
the case to the Colorado Supreme Court, but on January 11, 1999,
the Court declined to hear the plaintiff's petition. The Company
does not expect the final outcome of this case to have a material
adverse effect on the financial condition, the results of
operations or the cash flows of the Company because the Company
believes it has adequate insurance and reserves to cover any
damages that may ultimately be awarded.
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 cash flows of the
Company.
Guarantees
The Company's wholly-owned subsidiary, UCG Energy, and
Woodward Marketing, Inc. ("WMI"), sole members of Woodward
Marketing, L.L.C. ("WMLLC"), act as guarantors of up to $12.5
million of balances outstanding under a $30.0 million bank credit
facility for WMLLC. UCG Energy guarantees the payment of up to
$5.6 million of borrowings under this facility. A balance of $8.0
million was outstanding under this credit facility at December 31,
1998. UCG Energy and WMI also act as joint and several guarantors
on certain accounts payable for gas purchases. UCG Energy has
agreed to guarantee payables of WMLLC up to $40.0 million of
natural gas purchases and transportation services from suppliers.
WMLLC payable balances outstanding that were subject to these
guarantees amounted to $16.3 million at December 31, 1998.
Environmental Matters
Atmos is the owner or previous owner of manufactured gas
plant sites which were used to supply gas prior to availability of
natural gas. The gas manufacturing process resulted in certain by-
products and residual materials including coal tar. The
manufacturing process used by the Company was an acceptable and
satisfactory process at the time such operations were being
conducted. Under current environmental protection laws and
regulations, the Company may be responsible for response actions
with respect to such materials, if response actions are necessary.
Atmos, through its United Cities Division, owns or owned
former manufactured gas plant sites in Johnson City and Bristol,
Tennessee and Hannibal, Missouri. United Cities Gas Company
("UCGC") and the Tennessee Department of Environment and
Conservation entered into a consent order effective January 23,
1997, for the purpose of facilitating the investigation, removal
and remediation of the Johnson City site. UCGC began the
implementation of the consent order in the first calendar quarter
of 1997.
The Company is unaware of any information which suggests that
the Bristol site gives rise to a present health or environmental
risk as a result of the manufactured gas process or that any
response action will be necessary. The Tennessee Regulatory
Authority granted UCGC permission to defer, until its next rate
case, all costs incurred in Tennessee in connection with state and
federally mandated environmental control requirements.
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 Division, agreed 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 removal
action was conducted and completed in August 1998 and the site
evaluation will be completed in 1999. The Company has requested an
Accounting Authority Order from the Missouri Public Service
Commission ("MSPC") that would authorize it to defer its response
costs related to the Hannibal site. On July 7, 1998, the MPSC
Staff recommended that the MPSC approve the application.
As of December 31, 1998, the Company had incurred and
deferred for recovery $1.1 million, including $258,000 related to
an insurance recoverability study for all the manufactured gas
sites, and $750,000 associated with the preliminary survey and
invasive study of the Johnson City, Hannibal and Bristol sites.
Atmos is currently conducting an investigation pursuant to a
Consent Order between the Kansas Department of Health and
Environment and UCGC. The Order provides for the investigation,
and a possible response action, for mercury contamination at gas
pipeline sites which utilize or formerly utilized mercury meter
equipment in Kansas. As of December 31, 1998, the Company had
identified approximately 720 sites where mercury may have been
used and had incurred and deferred $100,000 for recovery. In
addition, based upon available current information, the Company
accrued and deferred for recovery an additional $280,000 for the
investigation of these sites. The Kansas Corporation Commission
has authorized the Company to defer these costs and seek recovery
in a future rate case.
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 results of operations, financial condition
or cash flows of the Company.
4. Short-term debt
At December 31, 1998, the Company had committed, short-term,
unsecured bank credit facilities totaling $262.0 million, of which
$240.0 million was unused. The Company also had aggregate
uncommitted lines of credit totaling $80.0 million, of which $46.8
million was unused.
The Company implemented a $250.0 million commercial paper
program in October 1998. It is supported by a $250.0 million
short-term, unsecured credit facility. At December 31, 1998, the
Company had $112.8 million of commercial paper outstanding.
5. Statements of cash flows
Supplemental disclosures of cash flow information for the
three-month periods ended December 31, 1998 and 1997 are presented
below.
Three months ended
December 31,
---------------------
1998 1997
------ ------
(In thousands)
Cash paid for
Interest $12,275 $12,685
Income taxes 3,983 211
6. 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. Reconciliations of the numerators and denominators of
the basic and diluted per-share computations for net income for
the three months ended December 31, 1998 are as follows:
For the three months ended
December 31, 1998
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(In thousands, except per share amounts)
Basic EPS:
Income available to
common stockholders $15,380 30,273 $.51
=====
Effect of dilutive securities:
Restricted stock - 228
Stock options - 15
------- ------
Diluted EPS:
Income available to
common stockholders and
assumed conversions $15,380 30,516 $.50
======= ====== =====
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 December 31, 1998, and the
related condensed consolidated statements of income and cash flows
for the three-month periods ended December 31, 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 state
ments 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 December 31, 1998, and for
the three-month periods ended December 31, 1998 and 1997 for them
to be in conformity with generally accepted 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, 1998, 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 10, 1998, 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, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
February 10, 1999
Dallas, Texas
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 1998 Annual Report to
Shareholders and the Company's Annual Report on Form 10-K for the
year ended September 30, 1998.
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 for the Purposes of the Safe Harbor under the
Private Securities Litigation Reform Act of 1995
The matters discussed or incorporated by reference in this
Quarterly Report may contain "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934.
All statements other than statements of historical facts included
in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the 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 and are intended to qualify for the
safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. When used in this Report or in any
of the Company's other documents or oral presentations, the words
"anticipate," "expect," "estimate," "plans," "believes,"
"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 and
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 that the expectations
reflected in the forward-looking statements are reasonable, there
can be no assurance that such expectations will be realized or
will approximate actual results.
Ratemaking Activity
As of December 31, 1998, the Company did not have any general
rate cases currently pending. The Trans La Division does have a
hearing scheduled before the Louisiana Public Service Commission
in April 1999 for the Louisiana Commission to consider the Trans
La Division's rate of return.
Year 2000 issues
The Year 2000 issues arose because many computer systems and
software applications as well as embedded computer chips in plant
and equipment currently in use were constructed using an
abbreviated date field that eliminates the first two digits of the
year. On January 1, 2000, these systems, applications and
embedded computer chips may incorrectly recognize the date as
January 1, 1900. Accordingly, many computer systems and software
applications, as well as embedded chips, may incorrectly process
financial and operating information or fail to process such
information completely. The Company recognized this problem and
is addressing its potential effects on its computer systems,
software applications and plant and equipment.
State of readiness
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 is headed by an
officer of the Company and consists of representatives from all
business units and shared services units of the Company. 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 risks associated with
the Year 2000 issues.
The Company has also obtained an assessment from an
independent consulting firm, who specializes in such matters, of
the risks posed for the Company and its business units by the Year
2000 issues, 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
issues. Such assessment also includes the risks associated with
the Company's embedded technologies such as micro-controllers or
microchips embedded in non-information technology-related
equipment.
With respect to information technology ("IT") systems, 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. Concerning
non-IT systems, including embedded technology, the Company has
conducted an inventory of and is reviewing and evaluating all of
its 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 distribution and storage systems. In addition,
several members of the Year 2000 Project Team have completed
training on an American Gas Association-sponsored database
relating to testing of embedded technology. This database will
help expedite the review and compliance efforts related to
embedded technology.
The Company's Year 2000 plan includes specific timetables for
the following categories of tasks for each of its shared services
units and business units with respect to both IT systems and
embedded technology as follows:
-Identification of Year 2000 issues--substantially
completed;
-Prioritization of Year 2000 issues-substantially
completed
-Estimation of total Year 2000-related costs--substantially
completed;
-Implementation of Year 2000 solutions--in process and to be
completed by May 31, 1999;
-Testing of Year 2000 solutions--in process and to be
completed by September 30, 1999;
-Certification of Year 2000 compliance by third party
vendors and suppliers--in process and to be completed by
September 30, 1999;
-Monitoring of all systems for changes in current systems
that would require changes in Year 2000 plan--in process
and to be completed by September 30, 1999;
-Development of Year 2000 contingency plans--in process and
to be completed by March 31, 1999; and
-Final Year 2000 tests--to be conducted starting September
30, 1999.
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, 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 issues. The expected date of completion of
these procedures is September 30, 1999.
Costs to address Year 2000 issues
As of December 31, 1998, the Company had incurred a total of
approximately $300,000 in fees and expenses in connection with its
Year 2000 efforts. The Company currently expects to spend no more
than $1.0 million directly on its Year 2000 efforts by December
31, 1999. As part of its normal systems upgrade in the ordinary
course of business, the Company is in the process of replacing its
customer information system, accounting and financial reporting
system, and human resources system with systems that happen to be
Year 2000 compliant. However, the installation of these systems
was not accelerated in an attempt to deal with the Year 2000
issues.
Risks of Year 2000 issues and contingency plans
The Company has identified what it believes are its most
reasonably likely worst case Year 2000 scenarios. These scenarios
are (i) interference with the Company's ability to receive and
deliver gas to customers; (ii) interference with the Company's
ability to communicate with customers; and (iii) the temporary
inability to send invoices to and receive payments from customers.
The most reasonably likely worst case scenario associated
with the Year 2000 issues is the Company's inability to continue
to transport and distribute gas to its customers without
interruption. In the event the Company and/or its suppliers and
vendors are unable to remediate the Year 2000 issues prior to
January 1, 2000, operations of the Company could be significantly
impacted. In order to address this worst case scenario, the
Company is developing contingency plans to continue operations
through manual intervention and other procedures should it become
necessary to do so. Such procedures are expected to include back-
up power supply for its critical distribution and storage
operations and, if necessary, curtailment of supply. The
Company's storage capacity could be used to supplement system
supply in the event its suppliers can not make deliveries. The
Company expects to complete its operational contingency plans by
March 31, 1999.
With respect to the communications with customers, which is
heavily reliant on services provided by third parties, the Company
is in the process of evaluating Year 2000 compliance by such third
parties and will be developing contingency plans to address any
worst case scenarios that may be determined after such evaluations
are complete. Concerning the billing and payment systems, as
previously discussed, the Company is in the process of replacing
its customer information system, accounting and financial
reporting system, and human resources system with systems that are
Year 2000 compliant, which should substantially diminish the risk
of Year 2000 issues. Nevertheless, the Company will be developing
contingency plans by March 31, 1999 in case the billing and
payment systems prove not to be Year 2000 compliant.
Despite the Company's efforts, there can be no assurance that
all material risks associated with Year 2000 issues relating to
systems within its control will have been adequately identified
and corrected before the end of 1999. However, as the result of
its Year 2000 plan and the replacement of the customer information
system, accounting and financial reporting system, and human
resources system in 1999, the Company does not believe that in the
aggregate, Year 2000 issues with respect to both its own IT and
non-IT systems will be material to its business, operations or
financial condition. On the other hand, while the Company is in
the process of researching the Year 2000 readiness of its
suppliers and vendors, the Company can make no representation
regarding the Year 2000 compliance status of systems or parties
outside its control, and currently cannot assess the effect on it
of any non-compliance by such systems or parties.
All statements concerning Year 2000 issues other than
historical statements, including, without limitation, estimated
costs and the projected timetable of Year 2000 compliance,
constitute "forward-looking statements," as defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements should be read in conjunction with the Company's
disclosures under the heading "Cautionary Statement for the
Purposes of the Safe Harbor under the Private Securities
Litigation Reform Act of 1995" at the beginning of Management's
Discussion and Analysis.
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 three months ended December 31, 1998 was
15% warmer than normal and 22% warmer than weather in the
corresponding period of the prior year. This caused total
throughput to decrease 9.3 billion cubic feet ("Bcf") or 14%. The
Company has weather normalization adjustments ("WNAs") in Georgia
and Tennessee, where it serves approximately 170,000 customers or
approximately 17% of the Company'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
the WNAs was to increase revenues approximately $2.0 million for
the three months ended December 31, 1998, as compared with a
decrease of approximately $1.6 million for the three months ended
December 31, 1997. The Company does not have WNAs in its other
service areas.
FINANCIAL CONDITION
For the three months ended December 31, 1998 net cash used by
operating activities totaled $20.8 million compared with $15.8
million for the three months ended December 31, 1997. Net income
decreased $4.7 million to $15.4 million for the three months ended
December 31, 1998 from $20.1 million for the three months ended
December 31, 1997. Depreciation and amortization increased $1.9
million in 1998 because of utility property additions placed in
service during the past year. Net operating assets and liabilities
increased $53.0 million for the three months ended December 31,
1998 compared with an increase of $48.5 million for the three
months ended December 31, 1997. This increase in net operating
assets and liabilities resulted primarily from the large
fluctuations in accounts receivable and accounts payable that
occur when entering and leaving the winter or heating season.
Major cash flows used in investing activities for the three
months ended December 31, 1998 included capital expenditures of
$19.9 million compared with $24.5 million for the three months
ended December 31, 1997. The capital expenditures budget for
fiscal 1999 is currently $86.8 million, including $7.9 million for
completing the Customer Service Initiative ("CSI"), as compared
with actual capital expenditures of $135.0 million in fiscal 1998.
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 1999. These expenditures will be financed from
internally generated funds and financing activities.
For the three months ended December 31, 1998, cash flows
provided by financing activities amounted to $51.8 million as
compared with $43.2 million for the three months ended December
31, 1997. During the three-month period, commercial paper and
notes payable to banks increased $101.6 million, as compared with
an increase of $51.8 million in the three months ended December
31, 1997, due to short-term borrowings for repayment of $40.0
million of long-term notes due in November 1998 and seasonal
factors. Payments of long-term debt totaled $47.9 million for the
three months ended December 31, 1998, as compared with $6.1
million for the three months ended December 31, 1997. The Company
paid $8.4 million in cash dividends during the three months ended
December 31, 1998, compared with dividends of $7.9 million paid
during the three months ended December 31, 1997. This reflects
increases in the quarterly dividend rate and in the number of
shares outstanding. In the three months ended December 31, 1998,
the Company issued 226,037 shares of common stock. The following
table presents the number of shares issued under the various plans
for the three-month periods ended December 31, 1998 and 1997.
Three months ended
December 31,
---------------------
1998 1997
-------- --------
Shares issued:
Restricted Stock Grant Plan 60,000 111,250
Employee Stock Ownership Plan 20,892 16,649
Direct Stock Purchase Plan 143,458 68,169
Outside Directors Stock-for-Fee Plan 437 630
United Cities Long-term Stock Plan 1,250 11,800
------- -------
Total shares issued 226,037 208,498
======= =======
The Company believes that internally generated funds, its
short-term credit facilities, commercial paper program 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 1999. At December 31, 1998
the Company had $262.0 million in committed short-term credit
facilities, $240.0 million of which was unused. The committed
lines of credit are renewed or renegotiated at least annually. At
December 31, 1998, the Company also had $80.0 million of
uncommitted short-term lines of credit, of which $46.8 million was
unused. At December 31, 1998, the Company had $112.8 million
outstanding under the $250.0 million commercial paper program. The
Company's commercial paper is rated A-2 by Standard and Poor's and
P-2 by Moody's.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998, COMPARED WITH THREE MONTHS
ENDED DECEMBER 31, 1997
Operating revenues decreased by 29% to $210.2 million for the
three months ended December 31, 1998 from $295.3 million for the
three months ended December 31, 1997. The most significant factor
contributing to the decrease in operating revenues was a 19%
decrease in sales volumes. During the quarter ended December
1998, temperatures were 22% warmer than in the corresponding
quarter of the prior year, and were 15% warmer than the 30-year
normal weather for the quarter. The total volume of gas sold and
transported for the three months ended December 31, 1998 was 55.3
billion cubic feet ("Bcf") compared with 64.6 Bcf for the three
months ended December 31, 1997. Decreased sales due to warmer
weather were partially offset by weather normalization adjustments
in Tennessee and Georgia, which provided approximately $2.0
million of additional revenues as compared with a reduction of
$1.6 million in the quarter ended December 31, 1997. The average
sales price per Mcf sold decreased $.71 to $4.73 primarily due to
a decrease in the average cost of gas. The average cost of gas
per Mcf sold decreased 24% to $2.84 for the three months ended
December 31, 1998 from $3.76 for the three months ended December
31, 1997 due to increased supply availability in the current
market.
Gross profit decreased by 8% to $91.2 million for the three
months ended December 31, 1998, from $99.6 million for the three
months ended December 31, 1997. The decrease in gross profit was
primarily due to the decrease in volumes sold to weather sensitive
customers. Changes in cost of gas do not directly affect gross
profit.
Operating expenses increased 1% to $59.5 million for the
three months ended December 31, 1998 from $58.6 million for the
three months ended December 31, 1997. The major factor
contributing to the increase in operating expenses in the quarter
ended December 31, 1998 was increased depreciation as a result of
additional utility plant placed in service in the past year. 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 decreased 23% for the three months ended
December 31, 1998 to $31.7 million from $41.0 million for the
three months ended December 31, 1997. The decrease in operating
income resulted primarily from decreased operating revenues, as
mentioned above.
Other income increased $1.0 million for the three months
ended December 31, 1998 compared with the three months ended
December 31, 1997 primarily due to an increase in the earnings
from the Company's 45% interest in Woodward Marketing LLC.
Propane statistics for the three months ended December 31,
1998 and 1997 are included in the "Consolidated Operating
Statistics" table which appears at the end of Management's
Discussion and Analysis. The propane operations sold 6.1 million
gallons of propane for the three months ended December 31, 1998,
as compared with 8.3 million gallons for the three months ended
December 31, 1997. The decrease of $3.1 million in propane
revenues for the three months ended December 31, 1998 compared
with the same period last year was the result of a combination of
factors including exiting the propane transportation business, 24%
warmer weather and a lower average sales price due to
comparatively lower cost of supply. Propane customers at December
31, 1998 increased 9,336, or 32%, as compared with December 31,
1997.
Income taxes decreased $3.3 million in the quarter ended
December 31, 1998 compared with the corresponding quarter of the
prior year due to decreased pre-tax income.
Net income decreased for the three months ended December 31,
1998 by $4.7 million to $15.4 million from $20.1 million for the
three months ended December 31, 1997. This decrease in net income
resulted primarily from the decrease in sales volumes due to
unusually warm winter weather, as discussed above.
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
Three months ended
December 31,
-----------------------
1998 1997
--------- ---------
METERS IN SERVICE, end of period
Residential 902,284 885,726
Commercial 94,976 95,576
Public authority and other 6,552 4,837
Industrial (including agricultural) 16,247 17,091
--------- ---------
Total meters 1,020,059 1,003,230
Propane customers 38,741 29,405
--------- ---------
Total 1,058,800 1,032,635
========= =========
Sales volumes -- MMcf(1)
Residential 21,114 26,466
Commercial 10,126 12,549
Public authority and other 2,193 1,884
Industrial (including agricultural) 7,439 9,334
------- ------
Total 40,872 50,233
Transportation volumes -- MMcf(1) 14,438 14,341
------- ------
TOTAL THROUGHPUT - MMcf (1) 55,310 64,574
======= ======
Propane - Gallons (000's) 6,138 8,311
======= ======
OPERATING REVENUES (000's)
Gas sales revenues
Residential $111,209 $155,111
Commercial 47,294 69,217
Public authority and other 9,119 8,950
Industrial (including agricultural) 25,780 40,111
-------- --------
Total gas sales revenues 193,402 273,389
Transportation revenues 6,805 6,835
Other gas revenues 1,207 1,842
-------- --------
Total utility revenues 201,414 282,066
Non-utility revenues
Propane revenues 7,295 10,443
Other revenues 1,518 2,822
-------- --------
Total non-utility revenues 8,813 13,265
-------- --------
Total operating revenues $210,227 $295,331
======== ========
Average gas sales revenues per Mcf $ 4.73 $ 5.44
Average transportation revenue per Mcf $ .47 $ .48
Average cost of gas per Mcf sold $ 2.84 $ 3.76
(1) Volumes are reported as metered in million cubic feet
("MMcf").
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
(continued)
HEATING DEGREE DAYS
Three months ended
Weather December 31,
Sensitive -------------------------
Service Area Customers % 1998 1997 Normal
- ---------------- ----------- ----- ----- ------
Energas 30% 1,232 1,632 1,402
Trans La 8% 530 796 661
Western Kentucky 18% 1,300 1,713 1,613
Greeley Gas 20% 1,899 2,157 2,133
United Cities 24% 1,131 1,565 1,420
----
System Average 100% 1,284 1,655 1,517
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
All of the Company's long-term debt is fixed-rate and, therefore,
does not expose the Company to the risk of earnings or cash flow
loss due to changes in market interest rates. At December 31,
1998, the Company is not engaged in other contracts which would
cause exposure to the risk of material earnings or cash flow loss
due to changes in market commodity prices, foreign currency
exchange rates, or interest rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 of notes to consolidated financial statements herein
for a description of legal proceedings.
Item 5. Other Information
David L. Bickerstaff, Vice President and Controller, resigned from
his position with the Company in December 1998 to pursue career
opportunities outside the Company. Donald P. Burman, Treasurer,
accepted the new position of Assistant Controller. This officer's
duties will include directing the daily operations of the
Accounting Department. J. Patrick Reddy, Vice President, Corporate
Development, accepted the position of Treasurer.
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.
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: February 12, 1999 By: /s/ DONALD P. BURMAN
------------------------------
Donald P. Burman
Assistant Controller
(Chief Accounting Officer and
duly authorized signatory)
EXHIBITS INDEX
Item 6(a)
Exhibit Page
Number Description Number
- ------- ----------- -------
15 Letter regarding unaudited interim
financial information
27 Financial Data Schedule for Atmos Energy
Corporation for the three months ended
December 31, 1998