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, 2001
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.)
Three Lincoln Centre, Suite 1800
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 January 31, 2002.
<Table>
<Caption>
Class Shares Outstanding
----- ------------------
No Par Value 41,077,144
</Table>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<Table>
<Caption>
December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
ASSETS
Property, plant and equipment $ 2,148,347 $ 2,109,867
Less accumulated depreciation and amortization 792,850 774,469
----------- -----------
Net property, plant and equipment 1,355,497 1,335,398
Current assets
Cash and cash equivalents 12,785 15,263
Cash held on deposit in margin account 47,529 66,666
Accounts receivable, net 233,602 124,046
Inventories 5,595 6,041
Gas stored underground 109,356 89,555
Assets from risk management activities 69,601 95,968
Deferred gas cost 2,509 10,999
Other current assets and prepayments 10,198 15,713
----------- -----------
Total current assets 491,175 424,251
Intangible assets 11,774 12,125
Goodwill 64,941 64,745
Noncurrent assets from risk management activities 30,374 29,771
Deferred charges and other assets 169,785 169,890
----------- -----------
$ 2,123,546 $ 2,036,180
=========== ===========
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Common stock $ 205 $ 204
Additional paid-in capital 494,307 489,948
Retained earnings 103,693 95,132
Accumulated other comprehensive income (loss) (783) (1,420)
----------- -----------
Shareholders' equity 597,422 583,864
Long-term debt 679,057 692,399
----------- -----------
Total capitalization 1,276,479 1,276,263
Current liabilities
Current maturities of long-term debt 20,413 20,695
Short-term debt 207,136 201,247
Accounts payable and accrued liabilities 204,191 84,471
Taxes payable 8,375 11,620
Customers' deposits 30,065 32,351
Liabilities from risk management activities 81,558 119,484
Other current liabilities 34,596 41,161
----------- -----------
Total current liabilities 586,334 511,029
Deferred income taxes 145,731 138,934
Noncurrent liabilities from risk management activities 9,521 7,412
Deferred credits and other liabilities 105,481 102,542
----------- -----------
$ 2,123,546 $ 2,036,180
=========== ===========
</Table>
See accompanying notes to condensed consolidated financial statements
2
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<Table>
<Caption>
Three months ended
December 31
------------------------
2001 2000
--------- ---------
Operating revenues $ 271,342 $ 442,790
Purchased gas cost 161,977 332,842
--------- ---------
Gross profit 109,365 109,948
Gas trading margin 7,163 --
Operating expenses
Operation and maintenance 42,528 35,959
Depreciation and amortization 20,474 15,781
Taxes, other than income 10,080 9,267
--------- ---------
Total operating expenses 73,082 61,007
--------- ---------
Operating income 43,446 48,941
Equity in earnings of Woodward Marketing, L.L.C -- 2,040
Miscellaneous income (expense) 5,401 (2,387)
Interest charges, net 15,992 12,246
--------- ---------
Income before income taxes 32,855 36,348
Income taxes 12,222 13,376
--------- ---------
Net income $ 20,633 $ 22,972
========= =========
Basic net income per share $ .51 $ .70
========= =========
Diluted net income per share $ .50 $ .70
========= =========
Cash dividends per share $ .295 $ .290
========= =========
Weighted average shares outstanding:
Basic 40,837 32,810
========= =========
Diluted 40,922 32,908
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements
3
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<Table>
<Caption>
Three months ended
December 31
-------------------------
2001 2000
--------- ---------
Cash Flows From Operating Activities
Net income $ 20,633 $ 22,972
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization:
Charged to depreciation and
amortization 20,474 15,781
Charged to other accounts 693 750
Deferred income taxes (benefit) 6,421 (4,606)
Other (171) --
Net assets/liabilities from risk management activities (8,035) --
Net change in operating assets and liabilities 16,587 (49,529)
--------- ---------
Net cash provided (used) by operating activities 56,602 (14,632)
Cash Flows From Investing Activities
Capital expenditures (28,009) (19,464)
Acquisitions (15,747) --
Retirements of property, plant and
equipment, net 123 (147)
Proceeds from sale of assets, net -- 6,625
--------- ---------
Net cash used in investing activities (43,633) (12,986)
Cash Flows From Financing Activities
Net increase (decrease) in short-term debt 5,889 (102,446)
Cash dividends paid (12,072) (9,285)
Repayment of long-term debt (13,624) (7,893)
Issuance of common stock 4,360 3,379
Proceeds from equity offering, net -- 142,043
--------- ---------
Net cash provided (used) by financing activities (15,447) 25,798
--------- ---------
Net decrease in cash and cash equivalents (2,478) (1,820)
Cash and cash equivalents at beginning
of period 15,263 7,379
--------- ---------
Cash and cash equivalents at end
of period $ 12,785 $ 5,559
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements
4
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2001
1. Unaudited interim financial information
In the opinion of management, all material adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation have been made to
the unaudited interim period financial statements. Because of seasonal and other
factors, the results of operations for the three month period ended December 31,
2001 are not indicative of expected results of operations for the year ending
September 30, 2002. 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
in its Annual Report on Form 10-K for the fiscal year ended September 30, 2001.
Principles of consolidation - The accompanying condensed consolidated financial
statements include the accounts of Atmos Energy Corporation and its wholly-owned
subsidiaries. Intercompany transactions have been eliminated.
Prior to April 1, 2001, we owned a 45 percent interest in Woodward Marketing,
L.L.C. and accounted for that ownership using the equity method of accounting
for investments. Subsequent to April 1, 2001, we owned 100 percent of Woodward
Marketing and accounted for that ownership on a consolidated basis.
Common stock - As of December 31, 2001, we had 100,000,000 shares of common
stock, no par value (stated at $.005 per share), authorized and 41,027,472
shares outstanding. At September 30, 2001, we had 40,791,501 shares outstanding.
Goodwill - Total goodwill was $64.9 million and $64.7 million at December 31,
2001 and September 30, 2001. Goodwill applicable to the utility segment was
$36.9 million at December 31, 2001 and September 30, 2001. Goodwill applicable
to the non-regulated segment was $28.0 million and $27.8 million at December 31,
2001 and September 30, 2001. Goodwill applicable to the utility segment resulted
from the acquisition of the Louisiana Gas Service Company assets on July 1, 2001
and is not subject to amortization under the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Goodwill applicable to the non-regulated segment was amortized over 20 years
until September 30, 2001. Effective October 1, 2001, goodwill applicable to
the non-regulated segment will not be amortized under the provisions of
Statement of Financial Accounting Standards No. 142. The proforma effect on
goodwill amortization of adopting Statement of Financial Accounting Standards
No. 142 is not material.
5
Impairment of Intangible Assets - We periodically evaluate whether events or
circumstances have occurred that indicate that the value of intangible assets
may have been impaired. When such events or circumstances are present, we assess
the value of intangible assets by determining whether the carrying amount will
be recovered through the expected future cash flows. In the event the sum of the
expected future cash flows resulting from the use of the asset is less than the
carrying amount, an impairment loss equal to the excess of the asset's carrying
value over its fair value is recorded. To date, no such impairment has been
recognized.
Goodwill - Under the provisions of Statement of Financial Accounting Standard
No. 142, we evaluate our goodwill balance annually. The initial evaluation will
take place during the second quarter of our current fiscal year. We do not
anticipate any impairment of the goodwill balance.
Revenue recognition - Sales of natural gas are billed on a monthly cycle basis;
however, the billing cycle periods for certain classes of customers do not
necessarily coincide with accounting periods used for financial reporting
purposes. We follow the revenue accrual method of accounting for natural gas
revenues whereby revenues applicable to gas delivered to customers, but not yet
billed under the cycle billing method, are estimated and accrued and the related
costs are charged to expense. Estimated losses due to credit risk are reserved
at the time revenue is recognized.
Accounts receivable and allowance for doubtful accounts - Accounts receivable
consists of natural gas sales to residential, commercial, industrial,
agricultural and other customers. The allowance for doubtful accounts is
computed based on the aging of outstanding accounts receivable and historical
collections experience and represents in management's opinion, an adequate
allowance to provide for probable uncollectable accounts.
Risk management assets and liabilities, non-regulated segment - We use storage,
transportation and requirements contracts, forwards, over-the-counter and
exchange-traded options, futures and swap contracts to conduct our risk
management activities. We use the mark-to-market method to account for these
activities in accordance with Emerging Issues Task Force Issue No. 98-10,
"Accounting for Energy Trading and Risk Management Activities." Under this
method, the aforementioned contracts are reflected at fair value, inclusive of
future servicing costs and valuation adjustments, with resulting unrealized
gains and losses recorded as assets or liabilities from risk management
activities on the consolidated balance sheet. Current period changes in the
assets and liabilities from risk management activities are recognized as net
gains or losses on the condensed consolidated statement of income as gas trading
margin. Changes in the assets and liabilities from risk management activity
result primarily from changes in the valuation of the portfolio of contracts,
maturity and settlement of contracts and newly originated transactions. Market
prices and models used to value these transactions reflect our best estimate
considering various factors including closing exchange and over-the-counter
quotations, time value and volatility factors underlying the contracts. Values
are adjusted to reflect the potential impact of liquidating our positions in an
orderly manner over a reasonable period of time under present market conditions.
Changes in market prices directly affect our estimate of the fair value of these
transactions.
Risk management assets and liabilities, utility segment - Our business units
have entered into financial instruments for the 2001-2002 heating season. The
purpose of entering into these financial instruments is to protect us and our
customers from unusually large winter
6
period gas price increases. We use the mark-to-market method to account for
these activities as described above. In accordance with Financial Accounting
Standards No. 71 "Accounting for the Effects of Certain Types of Regulation",
current period changes in the assets and liabilities from risk management
activities are recorded as deferred gas costs on the condensed consolidated
balance sheet as these costs will ultimately be recovered from ratepayers.
Accordingly, there is no earnings impact as a result of the use of these
financial instruments. Upon maturity, the contracts are recognized in purchased
gas cost.
Comprehensive income - The following table presents the components of
comprehensive income, net of related tax, for the three-month period ended
December 31, 2001 and 2000:
<Table>
<Caption>
Three months ended
December 31
----------------------
2001 2000
-------- --------
(In thousands)
Net income $ 20,633 $ 22,972
Unrealized holding gains (losses) on investments 637 (1,522)
Unrealized losses on derivative financial instruments -- (3,634)
-------- --------
Comprehensive income $ 21,270 $ 17,816
======== ========
</Table>
The only components of accumulated other comprehensive income (loss), net of
related tax, relate to unrealized holding gains and losses associated with
certain available for sale investments and unrealized gains and losses
associated with derivative financial instruments.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recently issued accounting standards not yet adopted - In August 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The provisions of this Statement
are effective for financial statements issued for fiscal years beginning after
December 15, 2001. We are currently in the process of evaluating the impact the
adoption of this Statement will have on our financial condition, results of
operations or net cash flows.
Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year presentation.
7
2. Contingencies
Litigation
Greeley Gas Division
On September 23, 1999, a suit was filed in the District Court of Stevens County,
Kansas, by Quinque Operating Company, Tom Boles and Robert Ditto, against more
than 200 companies in the natural gas industry including us and our Greeley Gas
Division. The plaintiffs, who purport to represent a class consisting of gas
producers, royalty owners, overriding royalty owners, working interest owners
and state taxing authorities, accuse the defendants of underpaying royalties on
gas taken from wells situated on non-federal and non-Indian lands throughout the
United States and offshore waters predicated upon allegations that the
defendants' gas measurements are simply inaccurate and that the defendants
failed to comply with applicable regulations and industry standards over the
last 25 years. Although the plaintiffs do not specifically allege an amount of
damages, they contend that this suit is brought to recover billions of dollars
in revenues that the defendants have allegedly unlawfully diverted from the
plaintiffs to themselves. On April 10, 2000, this case was consolidated for
pre-trial proceedings with other similar pending litigation in federal court in
Wyoming in which we are also a defendant along with over 200 other defendants in
the case of In Re Natural Gas Royalties Quitam Litigation. In January 2001, the
federal court elected to remand this case back to the Kansas state court. A
reconsideration of remand was filed, but it was denied. The state court now has
jurisdiction over this proceeding and has issued a preliminary case management
order. We believe that the plaintiffs' claims are lacking in merit, and we
intend to vigorously defend this action. While the results of this litigation
cannot be predicted with certainty, we believe the final outcome of such
litigation will not have a material adverse effect on our financial condition,
results of operations or net cash flows because we believe that we have adequate
insurance and/or reserves to cover any damages that may ultimately be awarded.
Energas Division
On May 18, 2001, a suit was filed in the 99th District Court of Lubbock County,
Texas, by the City of Lubbock, Texas, and the West Texas Municipal Agency
against Stewart & Stevenson Energy Products, Inc., a division of GE Packaged
Power, Inc. ("GE") and our Energas Division. The action arises out of (i) the
construction and installation of a gas-fired electric generating facility
designed and installed by GE and (ii) the natural gas pipeline, which provides
natural gas to the facility, that was designed and installed by our Energas
Division. The plaintiffs allege that they incurred damages as a result of
certain corrosive products that were introduced into the facility's turbine that
damaged the turbine and necessitated repair costs of approximately $0.9 million
and consequential damages of approximately $4.7 million comprised of electric
power purchases made by the plaintiffs from other sources while the facility was
inoperative or operating below specifications. The causes of action asserted by
the plaintiffs against the Energas Division include breach of contract, breach
of warranty and negligence. We have denied
8
any liability and intend to vigorously defend against the plaintiffs' claims.
While the results of this litigation cannot be predicted with certainty, we
believe the final outcome of such litigation will not have a material adverse
effect on our financial condition, results of operations or net cash flows
because we believe that we have adequate insurance and/or reserves to cover any
damages that may ultimately be awarded.
Atmos Energy Louisiana Gas Division
Prior to our acquisition of the assets of Louisiana Gas Service Company, a
division of Citizens Communications Company on July 1, 2001, Louisiana Gas
Service Company was involved in a proceeding with the Louisiana Public Service
Commission relating to past costs associated with the purchase of gas that it
charged to its customers. Subsequent to our acquisition of the Louisiana Gas
assets on July 1, 2001, we have taken over the defense of this proceeding and
will have responsibility for administering and assuring the payment of refunds
and/or credits to ratepayers that may arise from Citizens Communications' past
activities with respect to the purchased gas costs. However, we
9
believe the outcome of this proceeding will not have a material adverse impact
on our financial condition, results of operations or net cash flows as Citizens
Communications has agreed to fully indemnify us for any liability that may arise
out of this proceeding.
United Cities Propane Gas, Inc.
United Cities Propane Gas, Inc., one of our wholly-owned subsidiaries, is a
party to an action filed in June 2000 which is pending in the Circuit Court of
Sevier County, Tennessee. The plaintiffs' claims arise out of injuries alleged
to have been caused by a low-level propane explosion. The plaintiffs seek to
recover damages of $13.0 million. Discovery activities have begun in this case.
We have denied any liability, and we intend to vigorously defend against the
plaintiffs' claims. While the results of this litigation cannot be predicted
with certainty, we believe the final outcome of such litigation will not have a
material adverse effect on our financial condition, results of operations or net
cash flows because we believe that we have adequate insurance and/or reserves to
cover any damages that may ultimately be awarded.
We are a party to other litigation and claims that arise out of our ordinary
business. While the results of such litigation and claims cannot be predicted
with certainty, we believe the final outcome of such litigation and claims will
not have a material adverse effect on our financial condition, results of
operations or net cash flows because we believe that we have adequate insurance
and/or reserves to cover any damages that may ultimately be awarded.
Environmental Matters
Manufactured Gas Plant Sites
The United Cities Gas Division is the owner or previous owner of manufactured
gas plant sites in Johnson City and Bristol, Tennessee and Hannibal, Missouri
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 our predecessors was an
acceptable and satisfactory process at the time such operations were being
conducted. Under current environmental protection laws and regulations, we may
be responsible for response actions with respect to such materials if response
actions are necessary.
United Cities Gas Company and the Tennessee Department of Environment and
Conservation entered into a consent order effective January 23, 1997, to
facilitate the investigation, removal and remediation of the Johnson City site.
United Cities Gas Company began the implementation of the consent order in the
first quarter of 1997 which continued through December 31, 2001. The
investigative phase of the work at the site has been completed. An interim
removal action was completed in June 2001. The Tennessee Regulatory Authority
granted United Cities Gas Company permission to defer, until its next rate case,
all costs incurred in Tennessee in connection with state and federally mandated
environmental control requirements.
10
On July 22, 1998, we entered into an Abatement Order on Consent with the
Missouri Department of Natural Resources addressing the former manufactured gas
plant located in Hannibal, Missouri. Through our United Cities Gas Division, we
agreed 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 field work was conducted in August 1999. A risk
assessment for the site is currently being performed. On March 9, 1999, the
Missouri Public Service Commission issued an Order authorizing us to defer the
costs associated with this site until March 9, 2001. A renewal of the Order has
been requested. The matter is still pending before the Commission.
As of December 31, 2001, we had incurred costs of approximately $0.9 million for
the investigations of the Johnson City and Bristol, Tennessee and Hannibal,
Missouri sites and had a remaining accrual relating to these sites of $0.8
million.
Mercury Contamination Sites
We have completed investigation and remediation activities pursuant to Consent
Orders between the Kansas Department of Health and Environment and United Cities
Gas Company. The Orders provided for the investigation and remediation of
mercury contamination at gas pipeline sites which utilize or formerly utilized
mercury meter equipment in Kansas. The Final Interim Characterization and
Remediation Report has been submitted to the Kansas Department of Health. We
have agreed to amendments of the Orders with the Kansas Department of Health to
include all mercury meters that belonged to our Greeley Gas Division before the
merger with United Cities Gas Company on July 31, 1997. These sites will be
investigated in 2002 and any necessary remediation will be performed. As of
December 31, 2001, we had incurred costs of $0.1 million for these sites and had
a remaining accrual of $0.3 million for recovery. The Kansas Corporation
Commission has authorized us to defer these costs and seek recovery in a future
rate case.
We are a party to other environmental matters and claims, including those
discussed above, that arise out of our ordinary business. While the ultimate
results of response actions to these environmental matters and claims cannot be
predicted with certainty, we believe the final outcome of such response actions
will not have a material adverse effect on our financial condition, results of
operations or net cash flows because we believe that the expenditures related to
such response actions will either be recovered through rates, shared with other
parties or covered by adequate insurance or reserves.
3. Short-term debt
At December 31, 2001, short-term debt was composed of $189.1 million of
commercial paper and $18.0 million outstanding under bank credit facilities.
11
Committed credit facilities
We have short-term committed credit facilities totaling $318.0 million. One
short-term unsecured credit facility is for $300.0 million with an option to
increase the amount by $100.0 million and serves as a backup liquidity facility
for our commercial paper program. Our commercial paper is rated A-2 by Standard
and Poor's and P-2 by Moody's. At December 31, 2001, $189.1 million of
commercial paper was outstanding. We have a second facility in place for $18.0
million. At December 31, 2001, $18.0 million was outstanding under this credit
facility. These credit facilities are negotiated at least annually and are used
for working capital purposes.
Uncommitted credit facilities
Our Woodward Marketing subsidiary has an uncommitted demand credit facility for
$125.0 million which is used for its non-regulated business. Atmos Energy
Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all
amounts outstanding under this facility. At December 31, 2001, no amount was
outstanding under this credit facility. Related letters of credit totaling $48.6
million reduced the amount available under this facility. This facility is used
for working capital purposes.
We also have unsecured short-term uncommitted credit lines from two banks
totaling $40.0 million. No amounts were outstanding under these credit
facilities at December 31, 2001. The uncommitted lines are renewed or
renegotiated at least annually with varying terms and we pay no fee for the
availability of the lines. Borrowings under these lines are made on a when- and
as-available basis at the discretion of the banks. These facilities are also
used for working capital purposes.
In addition, Woodward Marketing has up to $100.0 million of credit available
from Atmos for its non-regulated business. At December 31, 2001, $91.8 million
was outstanding. This intercompany facility is subordinated in terms of
repayment to the $125.0 million uncommitted demand credit facility described
above.
4. Earnings per share
Basic earnings per share has been computed by dividing net income for the period
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share has been computed by dividing net income for the
period by the weighted average number of common shares outstanding during the
period adjusted for the assumed exercise of restricted stock and other
contingently issuable shares of common stock. Net income for basic and diluted
earnings per share are the same, as there are no contingently issuable shares of
stock whose issuance would have impacted net income. A reconciliation between
basic and diluted weighted average common shares outstanding follows:
12
<Table>
<Caption>
For the three months ended
December 31
--------------------------
2001 2000
------ ------
Weighted average common shares - basic 40,837 32,810
Effect of dilutive securities:
Restricted stock 67 92
Stock options 18 6
------- -------
Weighted average common shares - assuming
dilution 40,922 32,908
======= =======
</Table>
5. Segment information
Our determination of reportable segments considers the strategic operating units
under which we manage sales of various products and services to customers in
differing regulatory environments. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies
included in Note 1 of notes to consolidated financial statements in our Annual
Report on Form 10-K for the year ended September 30, 2001. All intersegment
sales prices are market based. We evaluate performance based on net income or
loss of the respective operating units.
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", we have
identified the Utility and Non-regulated segments. For an expanded description
of these segments, please refer to Note 1 of notes to consolidated financial
statements in our Annual Report on Form 10-K for the year ended September 30,
2001. We consider each business unit within our utility segment to be a
reporting unit of the utility segment and not a reportable segment. Our chief
executive officer makes decisions about allocating resources to the utility
segment as a whole and not to individual reporting units. The individual
operations that comprise the non-regulated segment are not currently material to
our consolidated financial position or results of operations and therefore do
not require separate reporting. Prior to April 1, 2001, we owned a 45 percent
interest in Woodward Marketing and accounted for that ownership using the equity
method of accounting for investments. Subsequent to April 1, 2001, we own 100
percent of Woodward Marketing and account for that ownership on a consolidated
basis.
13
Summarized financial information concerning our reportable segments for the
three months ended December 31, 2001 and 2000 are shown in the following table:
<Table>
<Caption>
Non-
Utility Regulated Total
----------- ---------- -----------
(In thousands)
As of and for the three months ended
December 31, 2001:
Operating revenues for reportable
segments $ 265,156 $ 7,635 $ 272,791
Elimination of intersegment
revenues (639) (810) (1,449)
----------- ---------- -----------
Total operating revenues 264,517 6,825 271,342
Net income 16,834 3,799 20,633
Total assets 1,944,012 334,759 2,278,771
December 31, 2000:
Operating revenues for reportable
segments $ 428,462 $ 15,967 $ 444,429
Elimination of intersegment
revenues (753) (886) (1,639)
----------- ---------- -----------
Total operating revenues 427,709 15,081 442,790
Net income 22,838 134 22,972
Total assets 1,508,608 107,961 1,616,569
</Table>
A reconciliation of total assets for the reportable segments to total
consolidated assets for December 31, 2001 and 2000 is presented below:
<Table>
<Caption>
December 31
-----------------------------
2001 2000
----------- -----------
(In thousands)
Total assets for reportable segments $ 2,278,771 $ 1,616,569
Elimination of intercompany accounts (155,225) (16,555)
----------- -----------
Total consolidated assets $ 2,123,546 $ 1,600,014
=========== ===========
</Table>
6. Derivative Instruments and Hedging Activities
Effective October 1, 2000, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that all
derivative financial instruments be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
14
recognized periodically in income or as deferred gas costs, depending on the
classification of the derivative. Derivative instruments may be classified as
either fair value hedges or cash flow hedges. The cumulative effect of the
change in accounting for the adoption of this Statement did not have a material
impact on our financial position, results of operations or cash flows.
Weather Hedges and Insurance
In July 2000, we entered into an agreement to purchase weather hedges for our
Texas and Louisiana operations effective for the 2000-2001 heating season. The
hedges were designed to help mitigate the effects of weather that was at least
seven percent warmer than normal in both Texas and Louisiana while preserving
any upside. The cost of the weather hedges was approximately $4.9 million which
was amortized over the 2000-2001 heating season. No income was recognized for
the 2000-2001 heating season for these weather hedges due to the colder than
normal weather.
In June 2001, we purchased a three year weather insurance policy with an option
to cancel in the third year if we obtain weather protection in our rate
structures. The policy is for our Texas and Louisiana operations and covers the
entire heating season of October to March beginning with the 2001-2002 heating
season. The cost of the three year policy was approximately $13.2 million which
was prepaid and will be amortized over the appropriate heating seasons based on
degree days. The insurance is designed to protect against weather that is at
least seven percent warmer than normal. During the quarter ended December 31,
2001, we recognized $5.9 million in income and $1.9 million in amortization
expense relating to this insurance policy.
Utility Hedging Activities
We have historically hedged 20 percent of our gas supply through the use of our
underground storage assets. For the 2001-2002 heating season, we covered
approximately 64 percent of our anticipated flowing gas requirements through
storage and futures and fixed forward contracts. This should provide protection
to us and our customers against sharp increases in the price of natural gas
during the 2001-2002 heating season.
In accordance with Financial Accounting Standards No. 71 "Accounting for the
Effects of Certain Types of Regulation", current period changes in the assets
and liabilities from risk management activities are recorded as deferred gas
costs on the condensed consolidated balance sheet as these costs will ultimately
be recovered from ratepayers. Accordingly, there is no earnings impact as a
result of the use of these financial instruments. Upon maturity, the contracts
are recognized in purchased gas cost.
Non-Regulated Hedging Activities
At December 31, 2001, we had 2,744 open contracts, representing 0.3 Bcf of
notional volumes with average contract maturities of less than two years. These
contracts were marked to market. The $4.3 million mark-to-market gain associated
with these positions was recorded as unrealized trading margin on the condensed
consolidated statement of income.
Effective April 1, 2001, natural gas sales from our natural gas trading
operations are netted against purchased gas costs and shown as gas trading
margin on the consolidated statements of income. For the three months ended
December 31, 2001, our gas trading
15
margin consisted of a $2.9 million realized trading gain and a $4.3 million
unrealized trading gain.
We acquired a 45 percent interest in Woodward Marketing, L.L.C. in 1997 as a
result of the merger of Atmos and United Cities Gas Company, which had acquired
that interest in 1995. In April 2001, we acquired the 55 percent interest that
we did not own from J.D. Woodward and others for 1,423,193 restricted shares of
our common stock. Immediately following the acquisition, Mr. Woodward was
elected as a Senior Vice President of Atmos in charge of all non-regulated
business activities, a position he has held since April 2001. Prior to that
time, Mr. Woodward had not been an officer or employee of Atmos.
The principal business of Woodward Marketing, including the activities of Trans
Louisiana Industrial Gas Company, Inc., is the overall management of natural gas
requirements for municipalities, local gas utility companies and industrial
customers located primarily in the Southwestern and Midwestern United States.
This business involves the sale of natural gas by Woodward Marketing to its
customers and the management of storage and transportation contracts for its
customers under contracts generally having one to two-year terms. At December
31, 2001, Woodward Marketing had a total of 78 municipal and local gas utility
customers and 296 industrial customers. Woodward Marketing also sells natural
gas to certain of its industrial customers on a delivered burner tip basis under
contract terms from 30 days to two years. In addition, Woodward Marketing
supplies us with a portion of our natural gas requirements on a competitive bid
basis.
In the management of natural gas requirements for municipal and other local
utilities, Woodward Marketing sells physical natural gas for future delivery and
hedges the associated price risk through the use of gas futures, including
forwards, over-the-counter and exchange-traded options, and swap contracts with
counterparties. These financial contracts are marked-to-market at the daily
close of business. Woodward Marketing links gas futures to physical delivery of
natural gas and balances its futures positions at the end of each trading day.
Over-the-counter swap agreements require Woodward Marketing to receive or make
payments based on the difference between a fixed price and the market price of
natural gas on the settlement date. Woodward Marketing uses these futures and
swaps to manage margins on offsetting fixed-price purchase or sale commitments
for physical quantities of natural gas, which are also carried on a mark to
market basis. Options held to hedge price risk provide the right, but not the
requirement, to buy or sell energy commodities at a fixed price. Woodward
Marketing uses options to manage margins and to limit overall price risk
exposure.
Energy related services provided by Woodward Marketing include the sale of
natural gas to its various customer classes and management of transportation and
storage assets and inventories. More specifically, energy services include
contract negotiation and administration, load forecasting, storage acquisition,
natural gas purchase and delivery and capacity utilization strategies. In
providing these services, Woodward Marketing generates income from its utility,
municipal and industrial customers through negotiated
16
prices based on the volume of gas supplied to the customer. Woodward Marketing
also generates income by taking advantage of the difference between near-term
gas prices and prices for future delivery as well as the daily movement of gas
prices by utilizing storage and transportation capacity that it controls.
Woodward Marketing also engages in limited speculative natural gas trading for
its own account, subject to a risk management policy established by us which
limits the level of trading loss in any fiscal year to a maximum of 25 percent
of the budgeted annual operating income of Woodward Marketing. Compliance with
such risk management policy is monitored on a daily basis. In addition, Woodward
Marketing's bank credit facility limits trading positions that are not closed at
the end of the day (open positions) to 2.5 Bcf of natural gas. At December 31,
2001, Woodward Marketing's open positions in its trading operations totaled 0.3
Bcf. In its speculative trading, Woodward Marketing's open trading positions are
monitored on a daily basis but are not required to be closed if they remain
within the limits set by the bank loan agreement. Woodward Marketing had an
unrealized trading gain of $4.3 million for the quarter ended December 31, 2001,
but there can be no assurance that Woodward Marketing will have any speculative
trading gain in the future. In some prior years, Woodward Marketing experienced
losses in its speculative trading business. The financial exposure that results
from the daily fluctuations of gas prices and the potential for daily price
movements constitutes a risk of loss since the price of natural gas purchased
for future delivery at the beginning of the day may not be hedged until later in
the day.
Financial instruments, which subject Woodward Marketing to counterparty risk,
consist primarily of financial instruments arising from trading and risk
management activities and overnight repurchase agreements that are not insured.
Counterparty risk is the risk of loss from nonperformance by financial
counterparties to a contract. Exchange-traded future and option contracts are
generally guaranteed by the exchanges.
Woodward Marketing's operations are concentrated in the natural gas industry,
and its customers and suppliers may be subject to economic risks affecting that
industry.
17
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, 2001 and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended December 31, 2001 and 2000. 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 auditing standards generally accepted in the United States,
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 referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the Untied States, the consolidated balance sheet of Atmos Energy
Corporation as of September 30, 2001, 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 2, 2001, 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, 2001 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
February 6, 2002
18
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 our Annual Report on
Form 10-K for the year ended September 30, 2001.
We distribute and sell natural gas to approximately 1.4 million residential,
commercial, industrial, agricultural and other customers. We operate through
five divisions in service areas located in Colorado, Georgia, Illinois, Iowa,
Kansas, Kentucky, Louisiana, Missouri, Tennessee, Texas and Virginia. Such
business is subject to regulation by state and/or local authorities in each of
the states in which we operate. In addition, our business is affected by
seasonal weather patterns, competitive factors within the energy industry and
economic conditions in the areas that we serve. We also transport natural gas
for others through our distribution system.
We provide natural gas storage services and own or hold an interest in natural
gas storage fields in Kansas, Kentucky and Louisiana to supplement natural gas
used by customers in Kansas, Kentucky, Tennessee, Louisiana and other states. We
also provide energy management and gas marketing services to industrial
customers, municipalities and other local distribution companies. We also
provide electrical power generation to meet peak load demands for a municipality
regulated by the Tennessee Valley Authority. In addition, we market natural gas
to industrial and agricultural customers primarily in West Texas and to
industrial customers in Louisiana.
Cautionary Statement for the Purposes of the Safe Harbor under the Private
Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Report are forward-looking statements made in good faith by 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 any other of the Company's 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 strategy,
operations, markets, services, rates, recovery of costs, availability of gas
supply and other factors. These risks and uncertainties include the following:
adverse weather conditions such as warmer or drier than normal weather in the
Company's service territories; national, regional and
19
local economic conditions; competition from other energy suppliers and
alternative forms of energy; recent national events, including the impact of any
future terrorist attacks; regulatory and business trends and decisions,
including the impact of pending rate and related proceedings before various
state regulatory commissions; successful completion, financing and integration
of acquisitions; inflation and the volatility of commodity prices for natural
gas; increased competition; further deregulation or "unbundling" of the natural
gas distribution industry; hedging and market risk activities and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company. A discussion of these risks and uncertainties
may be found in the Company's Form 10-K for the year ended September 30, 2001.
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. Further,
the Company undertakes no obligation to update or revise any of its
forward-looking statements whether as a result of new information, future events
or otherwise.
Weather and Seasonality
Our natural gas distribution business and irrigation sales business is seasonal
and dependent upon weather conditions in our service areas. Natural gas sales to
residential, commercial and public authority customers are affected by winter
heating season requirements. This generally results 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. Sales to industrial customers
are much less weather sensitive. Sales to agricultural customers, who typically
use natural gas to power irrigation pumps during the period from March through
September, are affected by rainfall amounts and the price of natural gas.
Weather, adjusted for service areas with weather normalized operations, for the
three months ended December 31, 2001 was 11% warmer than normal and 29% warmer
than weather in the corresponding period of the prior year.
The effects of weather that is above or below normal are partially offset in the
Tennessee and Georgia jurisdictions served by the United Cities Gas Division and
in the Kentucky jurisdiction served by the Western Kentucky Gas Division through
weather normalization adjustments. The Georgia Public Service Commission, the
Tennessee Regulatory Authority and the Kentucky Public Service Commission have
approved weather normalization adjustments. The weather normalization
adjustments, effective October through May each year in Georgia, and November
through April each year in Tennessee and Kentucky, allow the United Cities Gas
Division and Western Kentucky Gas Division to increase the base rate portion of
customers' bills when weather is warmer than normal and decrease the base rate
when weather is colder than normal. The net effect of the weather normalization
adjustments was an increase in revenues of approximately $2.8 million for the
three months ended December 31, 2001, as compared with a decrease of
approximately $1.4 million for the three months ended December 31, 2000.
Approximately 377,000 or 27 percent of our meters in service are located in
Georgia,
20
Tennessee and Kentucky. We did not have weather normalization adjustments in our
other service areas during the three months ended December 31, 2001.
In July 2000, we entered into an agreement to purchase weather hedges for our
Texas and Louisiana operations effective for the 2000-2001 heating season. The
hedges were designed to help mitigate the effects of weather that was at least
seven percent warmer than normal in both Texas and Louisiana while preserving
any upside. The cost of the weather hedges was approximately $4.9 million which
was amortized over the 2000-2001 heating season. The cost of the weather hedges
was more than offset by the positive effects of colder weather on our gross
profit.
In June 2001, we purchased a three year weather insurance policy with an option
to cancel in the third year if we obtain weather protection in our rate
structures. The policy is for our Texas and Louisiana operations and covers the
entire heating season of October to March beginning with the 2001-2002 heating
season. The cost of the three year policy was approximately $13.2 million which
was prepaid and will be amortized over the appropriate heating seasons based on
degree days. The insurance is designed to protect against weather that is at
least seven percent warmer than normal. During the quarter ended December 31,
2001, we recognized $5.9 million in income and $1.9 million in amortization
expense relating to this insurance policy.
We have historically hedged 20 percent of our gas supply through the use of our
underground storage assets. For the 2001-2002 heating season, we covered
approximately 64 percent of our anticipated flowing gas requirements through
storage and futures and fixed forward contracts. This should provide protection
to us and our customers against sharp increases in the price of natural gas
during the 2001-2002 heating season.
Status of Pending Acquisition
In September 2001, we entered into a definitive agreement to acquire Mississippi
Valley Gas Company, a privately held natural gas utility, for $150.0 million,
consisting of $75.0 million cash and $75.0 million of Atmos common stock. In
addition, we will assume outstanding debt of Mississippi Valley Gas, net of
working capital, of approximately $45.0 million. Mississippi Valley Gas provides
natural gas distribution service to more than 261,500 residential, commercial,
industrial and other customers located primarily in the northern and central
regions of Mississippi. The acquisition is subject to state and federal
regulatory approval. It is anticipated that the acquisition will be completed in
fiscal 2002.
21
FINANCIAL CONDITION
For the three months ended December 31, 2001, net cash provided by operating
activities totaled $56.6 million compared with net cash used by operating
activities of $14.6 million for the three months ended December 31, 2000. The
increase in net cash provided by operating activities from net cash used by
operating activities was primarily the result of a smaller increase in accounts
receivable, a decrease in cash held on deposit in margin accounts and a decrease
in deferred gas costs partially offset by an increase in gas stored underground
and decreases in net income, accounts payable and taxes payable. In addition, an
increase in depreciation and amortization and deferred income taxes added to the
increase in net cash provided by operating activities. These increases were
offset by the reduction in the net change in our assets/liabilities from risk
management activities. The decrease in net income was due primarily to higher
operating expenses and interest expense. These higher expenses were partially
offset by an increase in gas trading margin and miscellaneous income (expense).
For the three months ended December 31, 2001, net cash used in investing
activities totaled $43.6 million compared with $13.0 million for the three
months ended December 31, 2000. Major cash flows used in investing activities
for the three months ended December 31, 2001 included capital expenditures of
$28.0 million compared with $19.5 million for the three months ended December
31, 2000. The capital expenditures budget for fiscal 2002, excluding
acquisitions, is expected to be in the range of $121.0 million to $125.0 million
as compared with actual capital expenditures of $113.1 million for fiscal 2001.
Budgeted capital projects for fiscal 2002 include expenditures for additional
mains, services, meters and equipment. In fiscal 2002, we plan to complete the
Mississippi Valley Gas Company acquisition for $75.0 million cash, $75.0 million
of Atmos common stock and the assumption of approximately $45.0 million of
long-term debt. Capital expenditures and acquisitions for fiscal 2002 are
planned to be financed from internally generated funds and financing activities
as discussed below. For the three months ended December 31, 2001, investing
activities included $15.7 million for the acquisition of Kentucky-based market
area storage and associated pipeline facility assets and the gas marketing
assets of Innovative Gas Services, Inc. and common stock of Southern Resources,
Inc. For the three months ended December 31, 2000, we received net proceeds of
$6.6 million in connection with the sale of certain utility assets.
For the three months ended December 31, 2001, net cash used by financing
activities totaled $15.4 million compared with net cash provided by financing
activities of $25.8 million for the three months ended December 31, 2000. For
the three-month period ended December 31, 2001, short-term debt increased $5.9
million compared with a decrease of $102.4 million for the three months ended
December 31, 2000. The decrease for the three months ended December 31, 2000 was
due to the net proceeds of approximately $142.0 million from the equity offering
in December 2000 being used to reduce the amount of short-term debt outstanding.
Repayments of long-term debt totaled $13.6 million for the three months ended
December 31, 2001 compared with $7.9 million for the three months ended December
31, 2000. We paid $12.1 million in cash dividends during the three months ended
December 31, 2001 compared with dividends of $9.3
22
million during the three months ended December 31, 2000. This reflects increases
in the quarterly dividend rate and in the number of shares outstanding. During
the three months ended December 31, 2001, we issued 235,971 shares of common
stock.
The following table presents the number of shares issued for the three-month
periods ended December 31, 2001 and 2000:
<Table>
<Caption>
Three months ended
December 31
-----------------------
2001 2000
--------- ---------
Shares issued:
Employee Stock Ownership Plan 69,961 48,738
Direct Stock Purchase Plan 133,402 105,010
Outside Directors Stock-for-Fee Plan 577 605
Long-Term Incentive Plan 32,031 --
Equity Offering -- 6,741,500
--------- ----------
Total shares issued 235,971 6,895,853
========= ==========
</Table>
We believe that internally generated funds, our credit facilities, commercial
paper program and access to the public debt and equity capital markets will
provide necessary working capital and liquidity for capital expenditures and
other cash needs for the remainder of fiscal 2002.
We have short-term committed credit facilities totaling $318.0 million. One
short-term unsecured credit facility is for $300.0 million with an option to
increase the amount by $100.0 million and serves as a backup liquidity facility
for our commercial paper program. Our commercial paper is rated A-2 by Standard
and Poor's and P-2 by Moody's. At December 31, 2001, $189.1 million of
commercial paper was outstanding. We have a second facility in place for $18.0
million. At December 31, 2001, $18.0 million was outstanding under this credit
facility. These credit facilities are negotiated at least annually and are used
for working capital purposes.
Our Woodward Marketing subsidiary has an uncommitted demand credit facility for
$125.0 million which is used for its non-regulated business. Atmos Energy
Marketing, LLC, our wholly-owned subsidiary, is the sole guarantor of all
amounts outstanding under this facility. At December 31, 2001, no amount was
outstanding under this credit facility. Related letters of credit totaling $48.6
million reduced the amount available under this facility. This facility is used
for working capital purposes.
We also have unsecured short-term uncommitted credit lines from two banks
totaling $40.0 million. No amounts were outstanding under these credit
facilities at December 31, 2001. The uncommitted lines are renewed or
renegotiated at least annually with varying terms and we pay no fee for the
availability of the lines. Borrowings under these lines are made on a when- and
as-available basis at the discretion of the banks. These facilities are also
used for working capital purposes.
23
In addition, Woodward Marketing has up to $100.0 million of credit available
from Atmos for its non-regulated business. At December 31, 2001, $91.8 million
was outstanding. This intercompany facility is subordinated in terms of
repayment to the $125.0 million uncommitted demand credit facility described
above.
In December 2001, we filed a shelf registration statement with the Securities
and Exchange Commission to issue, from time to time, up to $600.0 million in new
common stock and/or debt. In connection with this filing, we are also in the
process of filing applications for approval to issue securities with five state
utility commissions. Obtaining all the required state regulatory approvals is
expected to take from three to six months. The registration statement was
declared effective by the Securities and Exchange Commission on January 30,
2002. Once it is approved by the various state utility commissions, we will be
authorized to "take securities off the shelf" and issue them to investors and
lenders. The proceeds are planned to be used for general corporate purposes,
including acquisitions, debt repayment and other business-related matters. The
shelf registration statement will provide us with greater flexibility in our
financing options.
The following tables provide information about contractual obligations and
commercial commitments at December 31, 2001.
<Table>
<Caption>
Payments Due by Period
---------------------------------------------------------------------
Less than After 5
Total 1 year 1-3 years 4-5 years years
--------- --------- --------- --------- ---------
(In thousands)
CONTRACTUAL OBLIGATIONS
Long Term Debt $ 699,470 $ 20,413 $ 36,774 $ 27,424 $ 614,859
Capital Lease Obligations 6,630 876 1,752 1,276 2,726
Operating Leases 66,467 9,250 16,713 15,624 24,880
--------- --------- --------- --------- ---------
Total Contractual
Obligations $ 772,567 $ 30,539 $ 55,239 $ 44,324 $ 642,465
========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
Payments Due by Period
---------------------------------------------------------------------
Less than After 5
Total 1 year 1-3 years 4-5 years years
--------- --------- --------- --------- ---------
(In thousands)
OTHER COMMERCIAL
COMMITMENTS
Lines of Credit $ 318,000 $ 318,000 $ -- $ -- $ --
</Table>
One short-term unsecured credit facility for $300.0 million included in the
total lines of credit above serves as a backup liquidity facility for our
commercial paper program. Any amounts outstanding on our commercial paper reduce
the amount available under this facility.
24
Risk Management and Trading Activities
We conduct our risk management activities through both our utility and
non-regulated segments. The following table shows our risk management assets and
liabilities by segment at December 31, 2001.
<Table>
<Caption>
Utility Non-Regulated Total
--------- ------------- ---------
(In thousands)
Assets from risk management
activities, current $ -- $ 69,601 $ 69,601
Assets from risk management
activities, noncurrent -- 30,374 30,374
Liabilities from risk management
activities, current (25,314) (56,244) (81,558)
Liabilities from risk management
activities, noncurrent -- (9,521) (9,521)
--------- --------- ---------
Net assets (liabilities) $ (25,314) $ 34,210 $ 8,896
========= ========= =========
</Table>
In accordance with Financial Accounting Standards No. 71 "Accounting for the
Effects of Certain Types of Regulation", current period changes in the assets
and liabilities from risk management activities are recorded as deferred gas
costs on the condensed consolidated balance sheet as these costs will ultimately
be recovered from ratepayers. Accordingly, there is no earnings impact as a
result of the use of these financial instruments. Upon maturity, the contracts
are recognized in purchased gas cost.
To conduct our risk management and trading activities, our non-regulated segment
uses natural gas storage, transportation and requirements contracts, forwards,
over-the-counter and exchange-traded options, futures and swap contracts.
The mark-to-market method is used to account for these activities, as prescribed
in EITF Issue No. 98-10 and EITF Issue 00-17. Under these methods, the
aforementioned contracts are reflected at fair value, inclusive of future
servicing costs and valuation adjustments, with resulting unrealized gains and
losses recorded as "Assets from risk management activities" and "Liabilities
from risk management activities" on the condensed consolidated balance sheet.
Current period changes in the assets and liabilities from risk management
activities are recognized as net gains or losses on the condensed consolidated
statement of income as gas trading margin. Changes in assets and liabilities
from risk management activities result primarily from changes in valuation of
the portfolio of contracts, maturity and settlement of contracts, and newly
originated transactions.
Market prices are primarily used to value these transactions. In addition, a
market price based model is used for valuing certain storage and transportation
contracts. These values reflect management's best estimate considering various
factors, including closing exchange and over-the-counter quotations, time value,
and volatility factors underlying the contracts. The values are adjusted to
reflect the potential impact of liquidating our position in an orderly manner
over a reasonable time frame under present market conditions. Changes in market
prices directly affect management's estimate of the fair value of these
transactions.
25
The following table reflects the reasons for the change in fair value of our
non-regulated energy trading contract activities for the quarter ending December
31, 2001 (in thousands).
<Table>
Fair value of contracts at September 30, 2001 $ 28,349
Contracts realized/settled 10,568
Fair value of new contracts 3,623
Changes in fair value in valuation
techniques/assumptions --
Other changes in value (8,330)
--------
Fair value of contracts at December 31, 2001 $ 34,210
========
</Table>
The fair value of our non-regulated energy trading contracts for the quarter
ending December 31, 2001, is segregated below, by time period and fair value
source.
<Table>
<Caption>
Fair Value of Contracts at December 31, 2001
----------------------------------------------------------------------
Maturity Maturity
Less than Maturity Maturity excess of Total Fair
1 year 1-3 years 4-5 years 5 years Value
---------- --------- --------- --------- -----------
(In thousands)
SOURCE OF FAIR VALUE
Prices actively quoted $ (40,066) $ (3,405) $ -- $ -- $ (43,471)
Prices provided by
other external sources 67,977 5,738 655 167 74,537
Prices based on models
and other valuation
methods (3,957) 6,995 106 -- 3,144
--------- -------- ------- ------- ---------
Total Fair Value $ 23,954 $ 9,328 $ 761 $ 167 $ 34,210
========= ======== ======= ======= =========
</Table>
26
RESULTS OF OPERATIONS
Three Months Ended December 31, 2001, Compared with Three Months Ended December
31, 2000
Operating revenues decreased by 39 percent to $271.3 million for the three
months ended December 31, 2001 from $442.8 million for the three months ended
December 31, 2000. The most significant factors contributing to the decrease in
operating revenues were a 23 percent decrease in average sales price due to the
decreased cost of gas and a 22 percent decrease in sales volumes due to warmer
weather. During the quarter ended December 2001, temperatures were 29 percent
warmer than in the corresponding quarter of the prior year and were 11 percent
warmer than the 30-year normal for the quarter, adjusted for service areas with
weather normalized operations. The total volume of gas sold for the three months
ended December 31, 2001 was 41.0 billion cubic feet compared with 52.5 billion
cubic feet for the three months ended December 31, 2000. However, the decrease
in sales volumes was partially offset by the additional sales volumes related to
the Louisiana Gas Service operations acquired in July 2001. The average sales
price per Mcf sold decreased $1.89 or 23 percent to $6.33 primarily due to a
decrease in the average cost of gas. The average cost of gas per Mcf sold
decreased 37 percent to $3.95 for the three months ended December 31, 2001 from
$6.29 for the three months ended December 31, 2000. However, the decrease in
operating revenues was partially offset by increased revenues from the Louisiana
Gas Service acquisition in July 2001 as well as the impact of rate increases in
Colorado and West Texas.
Gross profit decreased slightly to $109.4 million for the three months ended
December 31, 2001 from $109.9 million for the three months ended December 31,
2000. The decrease in gross profit was due to the decrease in volumes sold to
weather sensitive customers mostly offset by the additional gross profit from
the Louisiana Gas Service acquisition in July 2001 and the impact of rate
increases discussed previously. Changes
27
in the cost of gas do not directly affect gross profit because the fluctuations
in gas prices are passed through to the customer.
On April 1, 2001, we completed our acquisition of the remaining 55 percent
interest in Woodward Marketing, L.L.C. As a result of this acquisition, the
revenues and expenses of Woodward Marketing are now shown on a consolidated
basis. For the three months ended December 31, 2001, Woodward Marketing had
income of $7.2 million in gas trading margin.
Operating expenses increased to $73.1 million for the three months ended
December 31, 2001 from $61.0 million for the three months ended December 31,
2000. Operation and maintenance expense increased due primarily to the addition
of $9.2 million relating to the Louisiana Gas Service acquisition in July 2001
and an increase of $3.2 million in pension costs. A decrease in the provision
for doubtful accounts of $7.1 million partially offset this increase.
Depreciation and amortization increased $4.7 million due to the addition of the
assets from the Louisiana Gas Service acquisition in July 2001.
Operating income decreased 11 percent for the three months ended December 31,
2001 to $43.4 million from $48.9 million for the three months ended December 31,
2000. The decrease in operating income resulted primarily from the increase in
operating expenses described above partially offset by income from our gas
trading margin.
Miscellaneous income (expense) increased $7.8 million to $5.4 million for the
three months ended December 31, 2001 compared to $(2.4) million for the three
months ended December 31, 2000. This increase was due to income of $5.9 million
recognized related to our weather insurance policy and an increase of $1.6
million in net recoveries related to our performance based-ratemaking
mechanisms.
Interest expense increased $3.7 million, or 31 percent, for the three months
ended December 31, 2001 compared with the three months ended December 31, 2000
due primarily to the interest expense on the $350.0 million debt offering in May
2001.
Net income decreased for the three months ended December 31, 2001 by $2.4
million to $20.6 million from $23.0 million for the three months ended December
31, 2000. This decrease in net income resulted primarily from the decrease in
operating income discussed above and the increase in interest expense partially
offset by an increase in miscellaneous income.
UTILITY AND NON-REGULATED OPERATING DATA
Our utility business is composed of our five regulated utility divisions: Atmos
Energy Louisiana Gas Division, Energas Division, Greeley Gas Division, United
Cities Gas Division, Western Kentucky Gas Division and Shared Services. The
non-regulated business includes gas marketing and energy management services,
operation of natural gas storage fields, construction and operation of
electrical power generating plants and associated facilities and non-regulated
industrial sales. The following table of operating statistics summarizes data of
the utility and non-regulated segments for the three-month periods ended
December 31, 2001 and 2000. For further information regarding operating results
of the segments, see Note 5 of notes to condensed consolidated financial
statements.
28
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
<Table>
<Caption>
Three months ended
December 31
-----------------------------
2001 2000
----------- -----------
METERS IN SERVICE, end of period
Residential 1,249,414 977,410
Commercial 123,286 105,375
Public authority and other 7,359 7,428
Industrial (including agricultural) 13,152 14,277
----------- -----------
Total meters 1,393,211 1,104,490
=========== ===========
HEATING DEGREE DAYS
Actual (weighted average) 1,215 1,713
Percent of normal 89% 126%
SALES VOLUMES - MMcf (1)
Residential 22,832 28,813
Commercial 11,018 13,266
Public authority and other 1,999 2,883
Industrial (including agricultural) 5,108 7,585
----------- -----------
Total 40,957 52,547
Transportation volumes - MMcf (1) 16,068 15,498
----------- -----------
Total throughput - MMcf (1) 57,025 68,045
=========== ===========
OPERATING REVENUES (000's)
Gas sales revenues
Residential $ 157,928 $ 249,834
Commercial 68,596 110,628
Public authority and other 11,154 22,080
Industrial (including agricultural) 21,621 49,320
----------- -----------
Total gas sales revenues 259,299 431,862
Transportation revenues 8,799 6,738
Other revenues 3,244 4,190
----------- -----------
Total operating revenues $ 271,342 $ 442,790
=========== ===========
Cost of gas $ 161,977 $ 330,820
=========== ===========
Average gas sales revenues per Mcf $ 6.33 $ 8.22
Average transportation revenue per Mcf $ .55 $ .43
Average cost of gas per Mcf sold $ 3.95 $ 6.29
</Table>
(1) Volumes are reported as metered in million cubic feet (MMcf).
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information provided in Item 7A of
our Annual Report on Form 10-K for the year ended September 30, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 2 of notes to condensed consolidated financial statements herein for a
description of legal proceedings.
Item 5. Other Information
On February 13, 2002, the Company and EquiServe Trust Company, N.A. as Rights
Agent executed the Second Amendment to the Rights Agreement, dated as of
November 12, 1997, between the Company and the Rights Agent. The purpose of this
amendment was to convert the Agreement from a full common share rights plan to a
fractional common share rights plan.
The amended Agreement provides that, under certain circumstances, each right
entitles the registered holder to purchase from the Company one-tenth of one
share of common stock at a purchase price of $8.00 per one-tenth of a share,
subject to adjustment. Under the Agreement before it was amended, under these
circumstances each right entitled the holder to purchase one share of common
stock at a purchase price of $80 per share, subject to adjustment. The amendment
to the Agreement does not impact the dilutive effect of the Rights Agreement.
For example, the Agreement still provides that upon the occurrence of certain
events, a holder would be entitled to purchase $160 worth of common stock for a
purchase price of $80.
This description of the Second Amendment to Rights Agreement is qualified in its
entirety by reference to the Second Amendment, a copy of which is attached
hereto as Exhibit 4.
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.
30
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 14, 2002 By: /s/ F.E. MEISENHEIMER
---------------------
F.E. Meisenheimer
Vice President and Controller
(Chief Accounting Officer
and duly authorized signatory)
31
EXHIBITS INDEX
Item 6(a)
<Table>
<Caption>
Exhibit
Number Description
------- -----------
4 Second Amendment to Rights Agreement dated as of February 13, 2002, between
the Company and EquiServe Trust Company, N.A., as Rights Agent
10.1(a) Seventh Amendment to Credit Agreement, effective as of September
30, 2001, among Woodward Marketing, L.L.C., Bank of America, N.A.,
BNP Paribas and Atmos Energy Marketing, LLC
10.1(b) Eighth Amendment to Credit Agreement, effective as of October 31,
2001, among Woodward Marketing, L.L.C., Bank of America, N.A., BNP
Paribas and Atmos Energy Marketing, LLC
10.2(a) Credit Agreement, dated to be effective as of December 1, 2001,
among Woodward Marketing, L.L.C., Fortis Capital Corp. and BNP
Paribas
10.2(b) Guaranty, effective as of December 1, 2001, by Atmos Energy
Marketing, LLC, in favor of Fortis Capital Corp.
10.2(c) First Amendment to Guaranty, effective as of January 31, 2002,
among Atmos Energy Marketing, LLC and Fortis Capital Corp.
12 Computation of ratio of earnings to fixed charges
15 Letter regarding unaudited interim financial information
</Table>