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 March 31, 2002
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 May 1, 2002.
<Table>
<Caption>
Class Shares Outstanding
----- ------------------
No Par Value 41,294,762
</Table>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<Table>
<Caption>
March 31, September 30,
2002 2001
----------- -------------
(Unaudited)
ASSETS
Property, plant and equipment $ 2,178,997 $ 2,109,867
Less accumulated depreciation and amortization 810,193 774,469
----------- -----------
Net property, plant and equipment 1,368,804 1,335,398
Current assets
Cash and cash equivalents 3,113 15,263
Cash held on deposit in margin account 26,611 66,666
Accounts receivable, net 226,259 124,046
Inventories 5,420 6,041
Gas stored underground 55,906 89,555
Assets from risk management activities 11,311 95,968
Deferred gas cost -- 10,999
Other current assets and prepayments 5,271 15,713
----------- -----------
Total current assets 333,891 424,251
Intangible assets 11,423 12,125
Goodwill 65,228 64,745
Noncurrent assets from risk management activities 11,590 29,771
Deferred charges and other assets 169,466 169,890
----------- -----------
$ 1,960,402 $ 2,036,180
=========== ===========
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Common stock $ 206 $ 204
Additional paid-in capital 498,887 489,948
Retained earnings 132,945 95,132
Accumulated other comprehensive income (loss) (1,159) (1,420)
----------- -----------
Shareholders' equity 630,879 583,864
Long-term debt 678,985 692,399
----------- -----------
Total capitalization 1,309,864 1,276,263
Current liabilities
Current maturities of long-term debt 20,413 20,695
Short-term debt 42,561 201,247
Accounts payable and accrued liabilities 163,112 84,471
Taxes payable 47,387 11,620
Customers' deposits 31,760 32,351
Liabilities from risk management activities 10,129 119,484
Deferred gas cost 35,488 --
Other current liabilities 42,275 41,161
----------- -----------
Total current liabilities 393,125 511,029
Deferred income taxes 131,183 138,934
Noncurrent liabilities from risk management activities 6,682 7,412
Deferred credits and other liabilities 119,548 102,542
----------- -----------
$ 1,960,402 $ 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
March 31
-----------------------
2002 2001
--------- ---------
Operating revenues $ 379,481 $ 675,113
Purchased gas cost 229,598 536,789
--------- ---------
Gross profit 149,883 138,324
Gas trading margin 9,604 --
Operating expenses
Operation and maintenance 42,254 34,984
Depreciation and amortization 20,039 15,905
Taxes, other than income 10,861 13,544
--------- ---------
Total operating expenses 73,154 64,433
--------- ---------
Operating income 86,333 73,891
Equity in earnings of Woodward Marketing, L.L.C -- 6,022
Miscellaneous income (expense) (6,112) 317
Interest charges, net 14,489 9,817
--------- ---------
Income before income taxes 65,732 70,413
Income taxes 24,354 26,339
--------- ---------
Net income $ 41,378 $ 44,074
========= =========
Basic net income per share $ 1.01 $ 1.14
========= =========
Diluted net income per share $ 1.01 $ 1.13
========= =========
Cash dividends declared per share $ .295 $ .290
========= =========
Weighted average shares outstanding:
Basic 41,040 38,815
========= =========
Diluted 41,135 38,919
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements
3
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<Table>
<Caption>
Six months ended
March 31
---------------------------
2002 2001
----------- -----------
Operating revenues $ 650,823 $ 1,117,903
Purchased gas cost 391,575 869,631
----------- -----------
Gross profit 259,248 248,272
Gas trading margin 16,767 --
Operating expenses
Operation and maintenance 84,782 70,943
Depreciation and amortization 40,513 31,686
Taxes, other than income 20,941 22,811
----------- -----------
Total operating expenses 146,236 125,440
----------- -----------
Operating income 129,779 122,832
Equity in earnings of Woodward Marketing, L.L.C -- 8,062
Miscellaneous income (expense) (711) (2,070)
Interest charges, net 30,481 22,063
----------- -----------
Income before income taxes 98,587 106,761
Income taxes 36,576 39,715
----------- -----------
Net income $ 62,011 $ 67,046
=========== ===========
Basic net income per share $ 1.51 $ 1.87
=========== ===========
Diluted net income per share $ 1.51 $ 1.87
=========== ===========
Cash dividends declared per share $ .590 $ .580
=========== ===========
Weighted average shares outstanding:
Basic 40,937 35,780
=========== ===========
Diluted 41,032 35,879
=========== ===========
</Table>
See accompanying notes to condensed consolidated financial statements
4
ATMOS ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<Table>
<Caption>
Six months ended
March 31
-----------------------
2002 2001
--------- ---------
Cash Flows From Operating Activities
Net income $ 62,011 $ 67,046
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
Charged to depreciation and
amortization 40,513 31,686
Charged to other accounts 1,364 1,475
Deferred income taxes (benefit) (7,905) (31,018)
Other (1,115) --
Net assets/liabilities from risk management activities (5,229) --
Net change in operating assets and liabilities 163,212 45,839
--------- ---------
Net cash provided by operating activities 252,851 115,028
Cash Flows From Investing Activities
Capital expenditures (60,869) (42,507)
Acquisitions (15,747) --
Retirements of property, plant and
equipment, net (746) 745
Proceeds from sale of assets, net -- 6,625
--------- ---------
Net cash used in investing activities (77,362) (35,137)
Cash Flows From Financing Activities
Net decrease in short-term debt (158,686) (197,060)
Cash dividends paid (24,198) (20,567)
Repayment of long-term debt (13,696) (10,778)
Issuance of common stock 8,941 6,715
Proceeds from equity offering, net -- 142,043
--------- ---------
Net cash used by financing activities (187,639) (79,647)
--------- ---------
Net increase (decrease) in cash and cash equivalents (12,150) 244
Cash and cash equivalents at beginning
of period 15,263 7,379
--------- ---------
Cash and cash equivalents at end
of period $ 3,113 $ 7,623
========= =========
</Table>
See accompanying notes to condensed consolidated financial statements
5
ATMOS ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
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 six month period ended March 31, 2002
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. All material 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. Beginning April 1, 2001, we owned 100 percent of Woodward
Marketing and accounted for that ownership on a consolidated basis.
Common stock - As of March 31, 2002, we had 100,000,000 shares of common stock,
no par value (stated at $.005 per share), authorized and 41,241,912 shares
outstanding. At September 30, 2001, we had 40,791,501 shares outstanding.
Goodwill - Total goodwill was $65.2 million and $64.7 million at March 31, 2002
and September 30, 2001. Goodwill applicable to the utility segment was $36.9
million at March 31, 2002 and September 30, 2001. Goodwill applicable to the
non-regulated segment was $28.3 million and $27.8 million at March 31, 2002 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" ("SFAS No.
142"). 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 was not amortized under the provisions of SFAS No.
142. The proforma effect on goodwill amortization of adopting SFAS No. 142 is
not material.
Under the provisions of SFAS No. 142, we evaluate our goodwill balance annually
for impairment. The initial evaluation took place during the second quarter of
our current fiscal year. No impairment of our goodwill balance was indicated as
a result of this evaluation.
6
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.
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, in management's opinion, represents an adequate
allowance to provide for probable uncollectable accounts.
Risk management assets and liabilities, utility segment - Our business units
entered into financial instruments for the 2001-2002 heating season. The purpose
of entering into these financial instruments was to protect us and our customers
from unusually large winter period gas price increases. We use the
mark-to-market method to account for these activities in accordance with
Statement of Financial Accounting Standards No. 133. 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 were recorded as deferred gas costs on the condensed
consolidated balance sheet as these costs will ultimately be recovered from
ratepayers. Accordingly, there was no earnings impact as a result of the use of
these financial instruments. Upon maturity, the contracts were recognized in
purchased gas cost.
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
7
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
activities result primarily from changes in the valuation of the portfolio of
contracts, maturity and settlement of contracts and newly originated
transactions. Market prices 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. Current period changes in assets and
liabilities from risk management activities do not impact cash in the current
period. Cash is impacted when outstanding contracts are closed.
Comprehensive income - The following table presents the components of
comprehensive income, net of related tax, for the three-month and six-month
periods ended March 31, 2002 and 2001:
<Table>
<Caption>
Three months ended
March 31
---------------------
2002 2001
-------- --------
(In thousands)
Net income $ 41,378 $ 44,074
Unrealized holding losses on investments (376) (759)
Reclassification for losses on derivative financial
instruments included in net income -- 3,634
-------- --------
Comprehensive income $ 41,002 $ 46,949
======== ========
</Table>
<Table>
<Caption>
Six months ended
March 31
---------------------
2002 2001
-------- --------
(In thousands)
Net income $ 62,011 $ 67,046
Unrealized holding gains (losses) on investments 261 (2,281)
Derivative financial instruments:
Unrealized losses on derivative financial instruments -- (3,634)
Less: reclassification for losses included in
net income -- 3,634
-------- --------
Comprehensive income $ 62,272 $ 64,765
======== ========
</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.
8
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 and net cash flows.
Reclassifications - Certain prior year amounts have been reclassified to conform
with the current year presentation.
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 original plaintiffs have since withdrawn from the case and on
December 31, 2001, were substituted with Will Price, Stixon Petroleum Inc., Tom
Boles and The Cooper Clark Foundation as plaintiffs. 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
remanded this case back to the Kansas state court. A reconsideration of remand
was filed, but it was denied.
9
The Kansas 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 design and installation by our Energas
Division of the natural gas pipeline that provides natural gas to the facility.
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, as a result 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 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.
On February 13, 2002, an action was filed and is pending in the 287th District
Court of Parmer County by Anderson Brothers, a Partnership, against Atmos Energy
Corporation et al. The plaintiffs' claims arise out of an alleged breach of
contract by us and by a member of our divisions and subsidiaries concerning the
sale of natural gas used in irrigation activities since 1998 and an alleged
violation of the Texas Agricultural Gas Users Act of 1985. The plaintiffs seek
class action status and to recover unspecified damages plus attorney's fees. We
have denied any liability and intend to vigorously defend against the
plaintiffs' claims.
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 agreed to take responsibility for assuring the
payment of refunds and/or credits to ratepayers that
10
may arise from Citizens Communications' past activities with respect to
purchased gas costs. On April 10, 2002, the Louisiana Public Service Commission
issued a Report of Proceedings in which it approved a Stipulation and Agreement
between Citizens Communications, Atmos and the Commission Staff. This
Stipulation and Agreement resulted in no refunds being due to customers.
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 the ordinary
course of our 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
Our 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 become 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 began the implementation of the consent order in the first quarter
of 1997 which has continued through March 31, 2002. The investigative phase of
the work at the site has been completed. An interim removal action was completed
in June 2001. United Cities is in the process of conducting a risk assessment at
the site.
11
In February 2002, the Tennessee Department of Environment and Conservation
contacted our United Cities Gas Division concerning the former manufactured gas
plant in Bristol, Tennessee. In May 2002, our United Cities Gas Division
completed a preliminary assessment of this location to learn more about the
history and operation of the manufactured gas plant, including limited sampling
activities. Our United Cities Gas Division is in the process of identifying and
locating other potentially responsible parties and intends to contact them in an
effort to have them join in any future remedial activities at the site.
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 March 31, 2002, 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
March 31, 2002, 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 the ordinary course of our 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
12
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 March 31, 2002, short-term debt was comprised of $31.1 million of commercial
paper and $11.5 million outstanding under bank credit facilities.
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 March 31, 2002, $31.1 million of commercial
paper was outstanding. We have a second facility in place for $18.0 million. At
March 31, 2002, $11.5 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 March 31, 2002, no amount was
outstanding under this credit facility. Related letters of credit totaling $56.8
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 March 31, 2002. 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 Energy Marketing, LLC for its non-regulated business. At March 31,
2002, $28.5 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
13
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:
<Table>
<Caption>
For the three months ended
March 31
--------------------------
2002 2001
------ ------
(In thousands)
Weighted average common shares - basic 41,040 38,815
Effect of dilutive securities:
Restricted stock 67 92
Stock options 28 12
------ ------
Weighted average common shares - assuming
dilution 41,135 38,919
====== ======
</Table>
<Table>
<Caption>
For the six months ended
March 31
--------------------------
2002 2001
------ ------
(In thousands)
Weighted average common shares - basic 40,937 35,780
Effect of dilutive securities:
Restricted stock 67 92
Stock options 28 7
------ ------
Weighted average common shares - assuming
dilution 41,032 35,879
====== ======
</Table>
5. 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
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 net cash flows.
14
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 is being 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 first quarter of fiscal 2002,
we recognized $5.9 million in income and during the second quarter of fiscal
2002, we recognized $5.9 million in expense resulting in no income being
recognized for the 2001-2002 heating season on this insurance policy due to the
weather not being at least seven percent warmer than normal. Amortization
expense of $4.4 million was recognized during the 2001-2002 heating season
related to this policy.
Utility Hedging Activities
Historically we have effectively hedged 20 percent of the gas supply required
during our annual October through March hating season by utilizing 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.
In accordance with Statement of Financial Accounting Standards No. 133, we use
the mark-to-market method to account for our financial instruments discussed
previously. In accordance with Statement of 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 the close of business on March 31, 2002, we had outstanding contracts
representing (3.7) Bcf of net notional volumes with average contract maturities
of less than two years. These contracts were marked to market. Contracts
representing 75 percent of the fair value of these contracts are scheduled to
mature within one year. Contracts representing
15
27 percent of the remaining fair value are scheduled to mature within three
years. The $17.6 million mark-to-market loss associated with these positions was
recorded as unrealized trading margin on the condensed consolidated statement of
income for the six months ended March 31, 2002.
Effective April 1, 2001, natural gas sales from our natural gas trading
operations have been netted against purchased gas costs and shown as gas trading
margin on the consolidated statements of income. For the three months ended
March 31, 2002, our gas trading margin consisted of a $31.5 million realized
trading gain and a $21.9 million unrealized trading loss. For the six months
ended March 31, 2002, our gas trading margin consisted of a $34.4 million
realized trading gain and a $17.6 million unrealized trading loss.
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. On April 1, 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 1, 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 March 31,
2002, Woodward Marketing had a total of 94 municipal and local gas utility
customers and 297 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 to those customers 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 daily at the 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
16
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 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 5.0 Bcf of natural gas. At March 31,
2002, Woodward Marketing's net open positions in its trading operations totaled
(3.7) 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. 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. Effective in May 2002,
Woodward Marketing's trading for speculative purposes was discontinued.
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.
6. Segment Information
Our determination of reportable segments considers, in part, 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
17
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, 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. Beginning April 1, 2001, we own 100 percent of Woodward
Marketing and account for that ownership on a consolidated basis.
18
Summarized financial information concerning our reportable segments for the
three months and six months ended March 31, 2002 and 2001 are shown in the
following tables:
<Table>
<Caption>
Non-
Utility Regulated Total
----------- ----------- -----------
(In thousands)
For the three months ended
March 31, 2002:
- --------------
Operating revenues for reportable
segments $ 376,811 $ 9,664 $ 386,475
Elimination of intersegment
revenues (309) (6,685) (6,994)
----------- ----------- -----------
Total operating revenues 376,502 2,979 379,481
Net income 36,687 4,691 41,378
March 31, 2001:
- --------------
Operating revenues for reportable
segments $ 647,292 $ 28,945 $ 676,237
Elimination of intersegment
revenues (364) (760) (1,124)
----------- ----------- -----------
Total operating revenues 646,928 28,185 675,113
Net income 35,941 8,133 44,074
</Table>
<Table>
<Caption>
Non-
Utility Regulated Total
----------- ----------- -----------
(In thousands)
As of and for the six months ended
March 31, 2002:
- --------------
Operating revenues for reportable
segments $ 641,967 $ 17,299 $ 659,266
Elimination of intersegment
revenues (948) (7,495) (8,443)
----------- ----------- -----------
Total operating revenues 641,019 9,804 650,823
Net income 53,521 8,490 62,011
Total assets 1,833,446 284,172 2,117,618
March 31, 2001:
- --------------
Operating revenues for reportable
segments $ 1,075,754 $ 44,912 $ 1,120,666
Elimination of intersegment
revenues (1,117) (1,646) (2,763)
----------- ----------- -----------
Total operating revenues 1,074,637 43,266 1,117,903
Net income 58,779 8,267 67,046
Total assets 1,353,452 115,229 1,468,681
</Table>
A reconciliation of total assets for the reportable segments to total
consolidated assets for March 31, 2002 and 2001 is presented below:
<Table>
<Caption>
March 31
---------------------------
2002 2001
----------- -----------
(In thousands)
Total assets for reportable segments $ 2,117,618 $ 1,468,681
Elimination of intercompany accounts (157,216) (16,555)
----------- -----------
Total consolidated assets $ 1,960,402 $ 1,452,126
=========== ===========
</Table>
19
7. Supplemental Disclosures
The following supplemental condensed financial statements show Atmos Energy
Corporation, consisting of Atmos' regulated natural gas divisions; Atmos Energy
Holdings, consisting of Atmos' non-regulated subsidiaries; and the elimination
of material intercompany transactions. The following supplemental condensed
balance sheet is as of March 31, 2002.
<Table>
<Caption>
Atmos Energy Atmos Energy
Corporation Holdings Eliminations Consolidated
------------ ------------ ------------ ------------
(In thousands)
ASSETS
Property, plant and equipment, net $ 1,301,630 $ 67,174 $ -- $ 1,368,804
Investment in subsidiaries 114,817 (5,754) (109,063) --
Current assets
Cash and cash equivalents (5,575) 8,688 -- 3,113
Cash held on deposit in margin
account 11,710 14,901 -- 26,611
Accounts receivable, net 140,225 115,742 (29,708) 226,259
Inventories 5,154 266 -- 5,420
Gas stored underground 27,454 28,452 -- 55,906
Assets from risk management
activities -- 29,756 (18,445) 11,311
Other current assets and prepayments 3,508 1,763 -- 5,271
Intercompany receivables 64,247 (64,247) -- --
------------ ------------ ------------ ------------
Total current assets 246,723 135,321 (48,153) 333,891
Intangible assets -- 11,423 -- 11,423
Goodwill 36,880 28,348 -- 65,228
Noncurrent assets from risk
management activities -- 11,590 -- 11,590
Deferred charges and other assets 133,396 36,070 -- 169,466
------------ ------------ ------------ ------------
$ 1,833,446 $ 284,172 $ (157,216) $ 1,960,402
============ ============ ============ ============
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity $ 630,879 $ 114,817 $ (114,817) $ 630,879
Long-term debt 675,687 3,298 -- 678,985
------------ ------------ ------------ ------------
Total capitalization 1,306,566 118,115 (114,817) 1,309,864
Current liabilities
Current maturities of long-term debt 19,307 1,106 -- 20,413
Short-term debt 42,561 -- -- 42,561
Liabilities from risk management
activities -- 24,082 (13,953) 10,129
Deferred gas cost 34,100 1,388 -- 35,488
Other current liabilities 213,934 99,046 (28,446) 284,534
------------ ------------ ------------ ------------
Total current liabilities 309,902 125,622 (42,399) 393,125
Deferred income taxes 118,297 12,886 -- 131,183
Noncurrent liabilities from risk
management activities -- 6,682 -- 6,682
Deferred credits and other liabilities 98,681 20,867 -- 119,548
------------ ------------ ------------ ------------
$ 1,833,446 $ 284,172 $ (157,216) $ 1,960,402
============ ============ ============ ============
</Table>
20
The following supplemental condensed statement of income is for the three months
ended March 31, 2002.
<Table>
<Caption>
Atmos Energy Atmos Energy
Corporation Holdings Eliminations Consolidated
------------ ------------ ------------ ------------
(In thousands)
Operating revenues $ 376,811 $ 286,037 $ (283,367) $ 379,481
Purchased gas cost 231,668 251,322 (253,392) 229,598
------------ ------------ ------------ ------------
Gross profit 145,143 34,715 (29,975) 149,883
Gas trading margin -- (19,065) 28,669 9,604
Operating expenses 66,003 7,151 -- 73,154
------------ ------------ ------------ ------------
Operating income 79,140 8,499 (1,306) 86,333
Miscellaneous income (expense) (6,767) 1,756 (1,101) (6,112)
Interest charges, net (14,500) (1,090) 1,101 (14,489)
------------ ------------ ------------ ------------
Income before income taxes 57,873 9,165 (1,306) 65,732
Income taxes 21,186 3,623 (455) 24,354
------------ ------------ ------------ ------------
Net income $ 36,687 $ 5,542 $ (851) $ 41,378
============ ============ ============ ============
</Table>
The following supplemental condensed statement of income is for the six months
ended March 31, 2002.
<Table>
<Caption>
Atmos Energy Atmos Energy
Corporation Holdings Eliminations Consolidated
------------ ------------ ------------ ------------
(In thousands)
Operating revenues $ 641,967 $ 547,948 $ (539,092) $ 650,823
Purchased gas cost 391,605 501,520 (501,550) 391,575
------------ ------------ ------------ ------------
Gross profit 250,362 46,428 (37,542) 259,248
Gas trading margin -- (23,989) 40,756 16,767
Operating expenses 134,528 11,709 (1) 146,236
------------ ------------ ------------ ------------
Operating income 115,834 10,730 3,215 129,779
Miscellaneous income (expense) (845) 2,614 (2,480) (711)
Interest charges, net (30,389) (2,572) 2,480 (30,481)
------------ ------------ ------------ ------------
Income before income taxes 84,600 10,772 3,215 98,587
Income taxes 31,079 4,234 1,263 36,576
------------ ------------ ------------ ------------
Net income $ 53,521 $ 6,538 $ 1,952 $ 62,011
============ ============ ============ ============
</Table>
Organization - Atmos Energy Corporation distributes natural gas in 11 states
through its operating divisions - Atmos Energy Louisiana, Energas Company,
Greeley Gas Company, United Cities Gas Company and Western Kentucky Gas Company.
Our nonutility operations are organized under Atmos Energy Holdings, Inc., which
includes Atmos Energy Marketing, Atmos Pipeline and Storage, Atmos Power Systems
and an indirect equity interest in Heritage Propane Partners, L.P. Atmos Energy
Marketing includes the operations of Woodward Marketing.
Consolidating Financial Statements - The column headed "Atmos Energy
Corporation" includes operations of Atmos' five operating divisions. The column
headed "Atmos
21
Energy Holdings" comprises our nonutility operations. Operating revenues and
purchased gas costs from our natural gas marketing operations are shown on a
gross basis in the Atmos Energy Holdings column. Such natural gas marketing
activities are reclassified in the elimination column as gas trading margin.
Current and noncurrent assets and liabilities from risk management activities on
the supplemental condensed consolidated balance sheet consist of the fair value,
inclusive of future servicing costs and valuation adjustments, of our storage,
transportation and requirements contracts, forwards, over-the-counter and
exchange traded options, futures and swap contracts.
The gas trading margin on the supplemental condensed consolidated statement of
income consists primarily of the difference between revenue arising from Atmos
Energy Holdings' sale of physical natural gas to its customers less the cost to
purchase natural gas, and current period changes in assets and liabilities from
risk management activities.
Risk management assets and liabilities, Atmos Energy Holdings - 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" and EITF 00-17,
"Measuring the Fair Value of Energy-Related Contracts in Applying Issue No.
98-10." 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 condensed consolidated balance sheet. Current
period changes in the assets and liabilities from risk management activities are
recognized as gas trading margins on the condensed consolidated statement of
income. Changes in the mark-to-market valuation of assets and liabilities from
risk management activities 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.
Related Party - Included in purchased gas cost in the Atmos Energy Corporation
column are natural gas purchases from Woodward Marketing. These purchases were
made in a competitive open bidding process and reflect market prices. In
addition, we have entered into contracts with Woodward Marketing to manage a
significant portion of our underground storage facilities. Woodward Marketing
has acted as agent in placing financial instruments for the various business
units that protect us and our customers from unusually large winter period gas
price increases.
22
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 March 31, 2002 and the related condensed consolidated
statements of income and cash flows for the three-month periods and six-month
periods ended March 31, 2002 and 2001. 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 United 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
May 10, 2002
23
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 than normal weather in the Company's
service territories; national, regional and local
24
economic conditions, including competition from other energy suppliers as well
as alternative forms of energy; recent national events; regulatory approvals,
including the impact of rate proceedings before various state regulatory
commissions; successful completion and integration of pending acquisition;
inflation and increased gas costs, including their effect on 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
six months ended March 31, 2002 was 6 percent warmer than normal and 20 percent
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 $5.7 million for the
six months ended March 31, 2002, as compared with a decrease of approximately
$2.6 million for the six months ended March 31, 2001. Approximately 374,000 or
27 percent of our meters in service are located in Georgia, Tennessee and
Kentucky. We did not have weather normalization adjustments in our other service
areas during the six months ended March 31, 2002.
25
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 is being 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 first quarter of fiscal 2002,
we recognized $5.9 million in income and during the second quarter of fiscal
2002, we recognized $5.9 million in expense resulting in no income being
recognized for the 2001-2002 heating season on this insurance policy due to the
weather not being at least seven percent warmer than normal. Amortization
expense of $4.4 million was recognized during the 2001-2002 heating season
related to this policy.
Historically we have effectively hedged 20 percent of the gas supply required
during our annual October through March heating season by utilizing 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.
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 repay 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 by
the end of fiscal 2002.
Critical Accounting Policies and Estimates
General - Our condensed consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
Preparation of these financial statements required us to make estimates and
judgments that affected the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosures
26
of contingent assets and liabilities. We based our estimates on historical
experience and various other assumptions that we believed to be reasonable under
the circumstances. On an on-going basis, we evaluate our estimates, including
those related to risk management and trading activities, allowance for doubtful
accounts, deferred income tax assets, intangible assets and goodwill. Actual
results may differ from estimates.
Risk Management and Trading Activities - We use storage, transportation and
requirements contracts, forwards, over-the-counter and exchange-traded options,
futures and swap contracts to conduct our risk management and trading
activities. Changes in the assets and liabilities from risk management
activities result primarily from changes in the valuation of the portfolio of
contracts, maturity and settlement of contracts, and newly originated
transactions. The market prices and models used to value these transactions
reflect management's best estimate considering various factors including closing
exchange and over-the-counter quotations, the time value of money and volatility
factors underlying the contracts. We adjust the values 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 management's estimate of the fair value of these transactions.
Assumptions different from those used would impact these carrying values.
Allowance for Doubtful Accounts - For the majority of our receivables, we
establish an allowance for doubtful accounts based on an aging of those
receivable balances. We apply percentages to each aging category based on our
collections experience. On certain other receivables where we are aware of a
specific customer's inability or reluctance to pay its receivable balance, we
record an allowance for doubtful accounts against amounts due to reduce the net
receivable balance to the amount we reasonably expect to collect. We believe our
allowance for doubtful accounts is adequate. However, if circumstances change,
our estimate of the recoverability of accounts receivable could be different.
Deferred Income Tax Assets - We have deferred income tax assets consisting of
employee and retiree benefit liabilities not currently deductible, credit
carryforwards and other items treated as expenses for book purposes but not
currently deductible for tax purposes. We have not recorded any valuation
allowance for these deferred income tax assets because we believe that it is
more likely than not that our deferred income tax assets will be realized.
Realization of these assets is based on estimates of future taxable income.
Those estimates were prepared using the same assumptions used to prepare
internal forecasts. We estimate that the credit carryforwards will be utilized
before they expire. If our estimates of taxable income are reduced in the
future, a valuation allowance could be required.
Intangible Assets - We acquired intangible assets valued at approximately $12.0
million in fiscal year 2001. Those intangible assets relate to the value
assigned to relationships with certain of our industrial customers and are being
amortized over 10 years. If our assumptions of the useful lives of those assets
change, the amount of amortization expense would be impacted.
27
Goodwill - At March 31, 2002, we had $65.2 million of goodwill, $36.9 million of
which was attributable to our utility segment and $28.3 million was attributable
to our non-regulated segment. We evaluate our goodwill balances for impairment
each year during our second fiscal quarter. Our evaluation during the quarter
ended March 31, 2002 resulted in no impairment. If our projections of estimated
future cash flows change, those changes could result in a reduction in the
carrying value of our goodwill.
FINANCIAL CONDITION
For the six months ended March 31, 2002, net cash provided by operating
activities in the statement of cash flows totaled $252.9 million compared with
$115.0 million for the six months ended March 31, 2001. The increase in net cash
provided by operating activities was primarily the result of a smaller increase
in accounts receivable compared to the previous period, a decrease in cash held
on deposit in margin accounts, a decrease in deferred gas costs and a larger
increase in accounts payable and deferred credits and other liabilities compared
to the previous period. This increase was partially offset by a smaller increase
in taxes payable and a decrease in net income. In addition, an increase in
depreciation and amortization and a smaller deferred income tax benefit 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 gross profit as well as an increase in income from our
gas marketing activities.
For the six months ended March 31, 2002, net cash used in investing activities
totaled $77.4 million compared with $35.1 million for the six months ended March
31, 2001. Major cash flows used in investing activities for the six months ended
March 31, 2002 included capital expenditures of $60.9 million compared with
$42.5 million for the six months ended March 31, 2001. The revised capital
expenditures budget for fiscal 2002, excluding acquisitions, is expected to be
in the range of $125.0 million to $130.0 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 repayment 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
six months ended March 31, 2002, investing activities included $15.7 million, in
our non-regulated operations, 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 six months ended March 31, 2001, we received net proceeds of $6.6 million in
connection with the sale of certain utility assets.
For the six months ended March 31, 2002, net cash used by financing activities
totaled $187.6 million compared with $79.6 million for the six months ended
March 31, 2001. For the six-month period ended March 31, 2002, short-term debt
decreased $158.7
28
million compared with a decrease of $197.1 million for the six months ended
March 31, 2001. The decrease for the six months ended March 31, 2002 was due
primarily to more effective collection experience of customer accounts
receivable balances which increased the amount of cash available to repay
short-term debt. The decrease for the six months ended March 31, 2001 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 $13.7 million for the six months ended
March 31, 2002 compared with $10.8 million for the six months ended March 31,
2001. We paid $24.2 million in cash dividends during the six months ended March
31, 2002 compared with dividends paid of $20.6 million during the six months
ended March 31, 2001. This reflects increases in the quarterly dividend rate and
in the number of shares outstanding. During the six months ended March 31, 2002,
we issued 450,411 shares of common stock.
The following table presents the number of shares issued for the six-month
periods ended March 31, 2002 and 2001:
<Table>
<Caption>
Six months ended
March 31
----------------------
2002 2001
--------- ---------
Shares issued:
Employee Stock Ownership Plan 151,577 94,002
Direct Stock Purchase Plan 255,566 198,878
Outside Directors Stock-for-Fee Plan 1,237 1,117
United Cities Long-Term Stock Plan -- 3,700
Long-Term Incentive Plan 42,031 4,668
Equity Offering -- 6,741,500
--------- ---------
Total shares issued 450,411 7,043,865
========= =========
</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 March 31, 2002, $31.1 million of commercial
paper was outstanding. We have a second facility in place for $18.0 million. At
March 31, 2002, $11.5 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
29
under this facility. At March 31, 2002, no amount was outstanding under this
credit facility. Related letters of credit totaling $56.8 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 March 31, 2002. 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 Energy Marketing LLC. At March 31, 2002, $28.5 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 have filed
applications for approval to issue securities with five state utility
commissions. We expect to receive all required regulatory approvals by the end
of the fiscal third quarter. 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
issue securities 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 following tables provide information about contractual obligations and
commercial commitments at March 31, 2002.
<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 $ 699,398 $ 20,413 $ 36,733 $ 27,393 $ 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 $ 772,495 $ 30,539 $ 55,198 $ 44,293 $ 642,465
========= ========= ========= ========= =========
</Table>
30
<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.
Risk Management and Trading Activities
We conduct our risk management activities through both our utility and
non-regulated segments. See Note 5 to the consolidated financial statements for
a description of our risk management activities. The following table shows our
risk management assets and liabilities by segment at March 31, 2002.
<Table>
<Caption>
Utility Non-Regulated Total
-------- ------------- --------
(In thousands)
Assets from risk management
activities, current $ -- $11,311 $ 11,311
Assets from risk management
activities, noncurrent -- 11,590 11,590
Liabilities from risk management
activities, current -- (10,129) (10,129)
Liabilities from risk management
activities, noncurrent -- (6,682) (6,682)
-------- -------- --------
Net assets (liabilities) $ - $ 6,090 $ 6,090
======== ======== ========
</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 related to our utility segment
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, Atmos Energy Marketing, a
unit of 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
31
from risk management activities" and "Liabilities from risk management
activities" on the 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. Effective in May
2002, Woodward Marketing's trading for speculative purposes was discontinued.
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.
The following table reflects the reasons for the change in fair value of our
non-regulated energy trading contract activities for the three months ending
March 31, 2002 (in thousands).
<Table>
Fair value of contracts at December 31, 2001 $ 34,210
Contracts realized/settled (23,771)
Fair value of new contracts (8,503)
Changes in fair value in valuation
techniques/assumptions 8,698
Other changes in value (4,544)
--------
Fair value of contracts at March 31, 2002 $ 6,090
========
</Table>
The following table reflects the reasons for the change in fair value of our
non-regulated energy trading contract activities for the six months ending March
31, 2002 (in thousands).
<Table>
Fair value of contracts at September 30, 2001 $ 28,349
Contracts realized/settled (13,203)
Fair value of new contracts (4,880)
Changes in fair value in valuation
techniques/assumptions 8,698
Other changes in value (12,874)
--------
Fair value of contracts at March 31, 2002 $ 6,090
========
</Table>
32
The fair value of our non-regulated energy trading contracts at March 31, 2002,
is segregated below, by time period and fair value source.
<Table>
<Caption>
Fair Value of Contracts at March 31, 2002
--------------------------------------------------------------------
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 $ (15,415) $ (749) $ -- $ -- $ (16,164)
Prices provided by
other external sources 15,313 3,804 273 66 19,456
Prices based on models
and other valuation
methods 4,647 (1,416) (433) -- 2,798
---------- ---------- ---------- ---------- ----------
Total Fair Value $ 4,545 $ 1,639 $ (160) $ 66 $ 6,090
========== ========== ========== ========== ==========
</Table>
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002, Compared with Three Months Ended March 31,
2001
Operating revenues decreased by 44 percent to $379.5 million for the three
months ended March 31, 2002 from $675.1 million for the three months ended March
31, 2001. The most significant factors contributing to the decrease in operating
revenues were a 45 percent decrease in average sales price due to the decreased
cost of gas and a 11 percent decrease in sales volumes due to warmer weather,
excluding the additional sales volumes attributable to the Louisiana Gas Service
operations acquired in July 2001. During the quarter ended March 31, 2002,
temperatures were 12 percent warmer than in the corresponding quarter of the
prior year and were 2 percent warmer than the 30-year normal for the quarter,
adjusted for service areas with weather normalized operations. The total volume
of gas sold, excluding the Louisiana Gas Service volumes, for the three months
ended March 31, 2002 was 55.4 billion cubic feet compared with 62.0 billion
cubic feet for the three months ended March 31, 2001. However, the decrease in
sales volumes was offset by the additional sales volumes of 8.1 billion cubic
feet attributable to the Louisiana Gas Service operations acquired in July 2001.
The average sales price per Mcf sold decreased $4.74 or 45 percent to $5.74
primarily due to a decrease in the average cost of gas. The average cost of gas
per Mcf sold decreased 57 percent to $3.65 for the three months ended March 31,
2002 from $8.53 for the three months ended March 31, 2001. However, the decrease
in operating revenues was partially offset by increased revenues resulting from
the Louisiana Gas Service acquisition in July 2001.
Gross profit increased to $149.9 million for the three months ended March 31,
2002 from $138.3 million for the three months ended March 31, 2001. The increase
in gross profit was due primarily to the additional gross profit resulting from
the Louisiana Gas Service acquisition in July 2001 partially offset by a
decrease in volumes sold to weather
33
sensitive customers. Changes 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. that we did not already own. 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 March 31, 2002, Atmos
Energy Marketing, which includes the operations of Woodward Marketing, had
income of $9.6 million in gas trading margin.
Operating expenses increased to $73.2 million for the three months ended March
31, 2002 from $64.4 million for the three months ended March 31, 2001. Operation
and maintenance expense increased due primarily to the addition of $6.3 million
relating to the Louisiana Gas Service acquisition in July 2001 and an increase
of $3.1 million in pension costs. In addition, operation and maintenance expense
increased due to the full consolidation of Woodward Marketing's operations
beginning April 1, 2001. A decrease in the provision for doubtful accounts of
$3.9 million partially offset this increase. The decrease in the provision for
doubtful accounts was attributable to the lower gas commodity prices during the
second quarter of fiscal 2002 as well as our effective recovery of customer
receivable balances. Depreciation and amortization increased $4.1 million due to
the addition of the assets from the Louisiana Gas Service acquisition in July
2001.
Operating income increased 17 percent for the three months ended March 31, 2002
to $86.3 million from $73.9 million for the three months ended March 31, 2001.
The increase in operating income resulted primarily from the increase in gross
profit and the income from our gas trading margin described above partially
offset by an increase in operating expenses.
Miscellaneous income (expense) was $(6.1) million for the three months ended
March 31, 2002 compared to $0.3 million for the three months ended March 31,
2001. The $6.4 million change was due primarily to $5.9 million in expense
recognized as a result of the weather insurance policy covering our Texas and
Louisiana operations. Weather in our Texas and Louisiana operations was not at
least seven percent warmer than normal which is required to generate income from
the weather insurance coverage.
Interest expense increased $4.7 million, or 48 percent, for the three months
ended March 31, 2002 compared with the three months ended March 31, 2001 due
primarily to the interest expense on the $350.0 million debt offering in May
2001.
Net income decreased for the three months ended March 31, 2002 by $2.7 million
to $41.4 million from $44.1 million for the three months ended March 31, 2001.
This decrease in net income resulted primarily from the change in miscellaneous
income (expense) and the increase in interest expense discussed above partially
offset by the increase in operating income.
34
Six Months Ended March 31, 2002, Compared with Six Months Ended March 31, 2001
Operating revenues decreased by 42 percent to $650.8 million for the six months
ended March 31, 2002 from $1.1 billion for the six months ended March 31, 2001.
The most significant factors contributing to the decrease in operating revenues
were a 37 percent decrease in average sales price due to the decreased cost of
gas and a 19 percent decrease in sales volumes due to warmer weather, excluding
the additional sales volumes attributable to the Louisiana Gas Service
operations acquired in July 2001. During the six-month period ended March 2002,
temperatures were 20 percent warmer than in the corresponding period of the
prior year and were 6 percent warmer than the 30-year normal, adjusted for
service areas with weather normalized operations. The total volume of gas sold,
excluding the Louisiana Gas Service volumes, for the six months ended March 31,
2002 was 92.2 billion cubic feet compared with 114.5 billion cubic feet for the
six months ended March 31, 2001. However, the decrease in sales volumes was
partially offset by the additional sales volumes of 12.2 billion cubic feet
attributable to the Louisiana Gas Service operations acquired in July 2001. The
average sales price per Mcf sold decreased $3.47 or 37 percent to $5.97
primarily due to a decrease in the average cost of gas. The average cost of gas
per Mcf sold decreased 50 percent to $3.75 for the six months ended March 31,
2002 from $7.50 for the six months ended March 31, 2001. However, the decrease
in operating revenues was partially offset by increased revenues resulting from
the Louisiana Gas Service acquisition in July 2001.
Gross profit increased to $259.2 million for the six months ended March 31, 2002
from $248.3 million for the six months ended March 31, 2001. The increase in
gross profit was due primarily to the additional gross profit resulting from the
Louisiana Gas Service acquisition in July 2001 partially offset by a decrease in
volumes sold to weather sensitive customers. Changes 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. that we did not already own. As a result
of this acquisition, the revenues and expenses of Woodward Marketing are now
shown on a consolidated basis. For the six months ended March 31, 2002, Atmos
Energy Marketing, which includes the operations of Woodward Marketing, had
income of $16.8 million in gas trading margin.
Operating expenses increased to $146.2 million for the six months ended March
31, 2002 from $125.4 million for the six months ended March 31, 2001. Operation
and maintenance expense increased due primarily to the addition of $15.5 million
relating to the Louisiana Gas Service acquisition in July 2001 and an increase
of $6.2 million in pension costs. In addition, operation and maintenance expense
increased due to the full consolidation of Woodward Marketing's operations
beginning April 1, 2001. A decrease in the provision for doubtful accounts of
$11.1 million partially offset this increase. The decrease in the provision for
doubtful accounts was attributable to the lower gas commodity prices during the
first six months of fiscal 2002 as well as our effective recovery of customer
receivable balances. Depreciation and amortization increased $8.8 million due to
the addition of the assets from the Louisiana Gas Service acquisition in July
2001.
35
Operating income increased 6 percent for the six months ended March 31, 2002 to
$129.8 million from $122.8 million for the six months ended March 31, 2001. The
increase in operating income resulted primarily from the increase in gross
profit and the income from our gas trading margin described above partially
offset by an increase in operating expenses.
Miscellaneous expense decreased $1.4 million to $0.7 million for the six months
ended March 31, 2002 compared to $2.1 million for the six months ended March 31,
2001. The primary reason for the decrease was due to an increase of $0.7 million
in net recoveries related to our performance based-ratemaking mechanisms and the
recognition of $0.5 million related to a large industrial contract we received
in during 2002.
Interest expense increased $8.4 million, or 38 percent, for the six months ended
March 31, 2002 compared with the six months ended March 31, 2001 due primarily
to the interest expense on the $350.0 million debt offering in May 2001.
Net income decreased for the six months ended March 31, 2002 by $5.0 million to
$62.0 million from $67.0 million for the six months ended March 31, 2001. This
decrease in net income resulted primarily from the increase in interest expense
discussed above partially offset by the increase in operating 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 tables of operating statistics summarizes data
of the utility and non-regulated segments for the three-month and six month
periods ended March 31, 2002 and 2001. Heating degree days are presented as
adjusted for weather-normalized operations. Prior periods have been adjusted to
reflect current period presentation. For further information regarding operating
results of the segments, see Note 6 of notes to condensed consolidated financial
statements.
36
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
<Table>
<Caption>
Three months ended
March 31
---------------------
2002 2001
-------- --------
HEATING DEGREE DAYS
Actual, adjusted for WNA (weighted average) 1,877 2,136
Percent of normal 98% 111%
SALES VOLUMES - MMcf (1)
Residential 39,458 36,487
Commercial 15,722 15,252
Public authority and other 2,646 2,737
Industrial (including agricultural) 5,627 7,504
-------- --------
Total 63,453 61,980
Transportation volumes - MMcf (1) 19,183 17,403
-------- --------
Total throughput - MMcf (1) 82,636 79,383
======== ========
OPERATING REVENUES (000's)
Gas sales revenues
Residential $238,062 $394,270
Commercial 89,745 161,646
Public authority and other 13,208 26,790
Industrial (including agricultural) 23,233 66,890
-------- --------
Total gas sales revenues 364,248 649,596
Transportation revenues 11,294 8,378
Other revenues 3,939 17,139
-------- --------
Total operating revenues $379,481 $675,113
======== ========
Cost of gas (excluding non-regulated) $231,668 $528,564
======== ========
Average gas sales revenues per Mcf $ 5.74 $ 10.48
Average transportation revenue per Mcf $ .59 $ .48
Average cost of gas per Mcf sold $ 3.65 $ 8.53
</Table>
(1) Volumes are reported as metered in million cubic feet (MMcf).
37
ATMOS ENERGY CORPORATION
CONSOLIDATED OPERATING STATISTICS
<Table>
<Caption>
Six months ended
March 31
-------------------------
2002 2001
---------- ----------
METERS IN SERVICE, end of period
Residential 1,247,431 975,627
Commercial 122,885 105,581
Public authority and other 7,353 7,470
Industrial (including agricultural) 12,995 16,280
---------- ----------
Total meters 1,390,664 1,104,958
========== ==========
HEATING DEGREE DAYS
Actual, adjusted for WNA (weighted average) 3,092 3,849
Percent of normal 94% 117%
SALES VOLUMES - MMcf (1)
Residential 62,290 65,300
Commercial 26,740 28,518
Public authority and other 4,645 5,620
Industrial (including agricultural) 10,735 15,089
---------- ----------
Total 104,410 114,527
Transportation volumes - MMcf (1) 35,251 32,901
---------- ----------
Total throughput - MMcf (1) 139,661 147,428
========== ==========
OPERATING REVENUES (000's)
Gas sales revenues
Residential $ 395,990 $ 644,104
Commercial 158,341 272,274
Public authority and other 24,362 48,870
Industrial (including agricultural) 44,854 116,210
---------- ----------
Total gas sales revenues 623,547 1,081,458
Transportation revenues 20,093 15,116
Other revenues 7,183 21,329
---------- ----------
Total operating revenues $ 650,823 $1,117,903
========== ==========
Cost of gas (excluding non-regulated) $ 391,605 $ 859,384
========== ==========
Average gas sales revenues per Mcf $ 5.97 $ 9.44
Average transportation revenue per Mcf $ .57 $ .46
Average cost of gas per Mcf sold $ 3.75 $ 7.50
</Table>
(1) Volumes are reported as metered in million cubic feet (MMcf).
38
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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of Atmos Energy Corporation on February
13, 2002, 37,506,477 votes were cast as follows:
<Table>
<Caption>
VOTES VOTES
FOR WITHHELD
---------- ---------
Class I Directors:
Travis W. Bain II 35,587,658 1,918,819
Dan Busbee 35,599,976 1,906,501
Richard K. Gordon 34,741,702 2,764,775
Gene C. Koonce 34,769,582 2,736,895
</Table>
The other directors will continue to serve until the expiration of their terms.
The term of the Class II directors, Richard W. Cardin, Thomas C. Meredith, Carl
S. Quinn and Richard Ware II will expire in 2003. The term of the Class III
directors, Robert W. Best, Thomas J. Garland, Phillip E. Nichol and Charles K.
Vaughan will expire in 2004. The term of the Class I directors, listed above,
will expire in 2005.
Proposal to approve the amendment to the 1998 Long-Term Incentive Plan:
<Table>
<Caption>
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINING NON-VOTES
---------- ---------- ---------- ----------
21,583,813 10,328,659 726,247 4,867,758
</Table>
Proposal to approve the amendment to the Annual Incentive Plan for Management:
<Table>
<Caption>
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINING NON-VOTES
---------- ---------- ---------- ----------
31,920,949 4,766,872 818,656 --
</Table>
39
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.
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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: May 14, 2002 By: /s/ F.E. MEISENHEIMER
---------------------------
F.E. Meisenheimer
Vice President and Controller
(Chief Accounting Officer
and duly authorized signatory)
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EXHIBITS INDEX
Item 6(a)
<Table>
<Caption>
Exhibit Page
Number Description Number
- ------- ----------- ------
10.1 Atmos Energy Corporation 1998 Long-Term Incentive Plan
(as amended and restated February 14, 2002)
10.2 Atmos Energy Corporation Annual Incentive Plan for
Management (as amended and restated February 14, 2002)
12 Computation of ratio of earnings to fixed charges
15 Letter regarding unaudited interim financial information
</Table>
42